EXCELLENCE. DYNAMIC · PDF filethe pursuit of excellence is a driving force at petronas chemicals group berhad (pcg). ... financial performance but also the way we conduct our business

ANNUAL REPORT 2016 PETRONAS CHEMICALS GROUP BERHAD (459830-K)

EXCELLENCE. DYNAMIC GROWTH

E X C E L L E N C E . D Y N A M I C G R O W T H

T H E P U R S U I T O F E XC E L L E N C E I S A D R I V I N G F O R C E AT P E T R O N A S C H E M I CA L S G R O U P B E R H A D ( P C G ) .

I T S PA R K S O U R C R E AT I V I T Y, E M B E D S O U R C O M M I T M E N T TO S A F E T Y, A N D F U E L S A D E S I R E TO C R E AT E

VA L U E I N E V E RY T H I N G W E D O. T H I S A L L OW E D U S TO R I D E OV E R Y E T A N OT H E R C H A L L E N G I N G Y E A R .

F O C U S I N G O U R E N E R G I E S O N S T R E N GT H E N I N G O U R B A S I C P E T R O C H E M I CA L S B U S I N E S S , W H I L E

D I V E R S I F Y I N G I N TO D E R I VAT I V E S , S P E C I A LT Y C H E M I CA L S A N D S O L U T I O N S , W E N OT O N LY OV E R CA M E

M A R K E T U N C E R TA I N T I E S , W E S E T N E W B E N C H M A R K S I N 2 0 1 6 . O P E R AT I O N A L E XC E L L E N C E R E S U LT E D I N

9 6 % P L A N T U T I L I S AT I O N , S U R PA S S I N G WO R L D - C L A S S S TA N DA R D S . T H I S , C O M B I N E D W I T H C O M M E R C I A L

A N D I N N OVAT I O N E XC E L L E N C E , L E D TO O U R H I G H E S T E B I T DA M A R G I N S I N C E O U R L I S T I N G. L E V E R AG I N G

O N O U R U N D E R S TA N D I N G O F M A R K E T D E M A N D, W E H AV E I N T H E P I P E L I N E A N U M B E R O F G R OW T H

P R OJ E C T S T H AT D R I V E O U R S T R AT E G I C V I S I O N . W I T H T H E P E N G E R A N G I N T E G R AT E D C O M P L E X ( P I C ) A S

A K E Y CATA LYS T, T H E S E P R OJ E C T S W I L L C R E AT E G R E AT E R VA L U E F O R O U R C U S TO M E R S , S H A R E H O L D E R S ,

E M P L OY E E S , B U S I N E S S PA R T N E R S A N D C O M M U N I T I E S . T H E H E X AG O N S O N T H E C OV E R R E P R E S E N T

T H E M O L E C U L A R S T R U C T U R E O F T H E C H E M I CA L S W E P R O D U C E . T H E I R L I N K AG E D E P I C T S T H E M A N Y

R E L AT I O N S H I P S W E H AV E B U I LT W I T H O U R VA R I O U S S TA K E H O L D E R S W H I C H C O N T R I B U T E TO O U R O N G O I N G

DY N A M I C G R OW T H .

E X C E L L E N C E . D Y N A M I C G R O W T H

T H E P U R S U I T O F E XC E L L E N C E I S A D R I V I N G F O R C E AT P E T R O N A S C H E M I CA L S G R O U P B E R H A D ( P C G ) .

I T S PA R K S O U R C R E AT I V I T Y, E M B E D S O U R C O M M I T M E N T TO S A F E T Y, A N D F U E L S A D E S I R E TO C R E AT E

VA L U E I N E V E RY T H I N G W E D O. T H I S A L L OW E D U S TO R I D E OV E R Y E T A N OT H E R C H A L L E N G I N G Y E A R .

F O C U S I N G O U R E N E R G I E S O N S T R E N GT H E N I N G O U R B A S I C P E T R O C H E M I CA L S B U S I N E S S , W H I L E

D I V E R S I F Y I N G I N TO D E R I VAT I V E S , S P E C I A LT Y C H E M I CA L S A N D S O L U T I O N S , W E N OT O N LY OV E R CA M E

M A R K E T U N C E R TA I N T I E S , W E S E T N E W B E N C H M A R K S I N 2 0 1 6 . O P E R AT I O N A L E XC E L L E N C E R E S U LT E D I N

9 6 % P L A N T U T I L I S AT I O N , S U R PA S S I N G WO R L D - C L A S S S TA N DA R D S . T H I S , C O M B I N E D W I T H C O M M E R C I A L

A N D I N N OVAT I O N E XC E L L E N C E , L E D TO O U R H I G H E S T E B I T DA M A R G I N S I N C E O U R L I S T I N G. L E V E R AG I N G

O N O U R U N D E R S TA N D I N G O F M A R K E T D E M A N D, W E H AV E I N T H E P I P E L I N E A N U M B E R O F G R OW T H

P R OJ E C T S T H AT D R I V E O U R S T R AT E G I C V I S I O N . W I T H T H E P E N G E R A N G I N T E G R AT E D C O M P L E X ( P I C ) A S

A K E Y CATA LYS T, T H E S E P R OJ E C T S W I L L C R E AT E G R E AT E R VA L U E F O R O U R C U S TO M E R S , S H A R E H O L D E R S ,

E M P L OY E E S , B U S I N E S S PA R T N E R S A N D C O M M U N I T I E S . T H E H E X AG O N S O N T H E C OV E R R E P R E S E N T

T H E M O L E C U L A R S T R U C T U R E O F T H E C H E M I CA L S W E P R O D U C E . T H E I R L I N K AG E D E P I C T S T H E M A N Y

R E L AT I O N S H I P S W E H AV E B U I LT W I T H O U R VA R I O U S S TA K E H O L D E R S W H I C H C O N T R I B U T E TO O U R O N G O I N G

DY N A M I C G R OW T H .

E X C E L L E N C E . Efficiency, reliability and safety are at the heart of everything we do. Sound management

and the drive for excellence continues our pursuit for greater heights across all of our

operating units.

Customised value propositions and reliability are valuable differentiators to our success.

Leveraging on our marketing acumen, we are able to sustain as well as expand our

network and capabilities.

Innovation is an integral part of the company that differentiates and allows us to adapt

to changing market landscapes. We are able to connect the dots for our customers from

a wide range of industries and fortify our market position.

INNOVATIVE SOLUTIONS

• Connectwithourcustomers’specificbusinesschallengesandfortifyourmarket position through differentiation.

• Pursue collaborative efforts between customers and various innovation networks to deliver focused applications of products and process technologies.

INNOVATIVE CULTURE

• Cultivate innovation mindset to deliver breakthrough performance through establishment of ideas and innovation management platform accessible throughout the Group.

• Position innovation as a key leadership attribute.

PLANT RELIABILITY

• Performinternalreliabilityandefficiencyenhancementprogrammes.

• Invest in technical capabilities of our people.

• Maintain consistent top quartile world-class plant performance and Health, Safety & Environment (HSE) performance at all our operating units.

TURNAROUND MANAGEMENT

• Centralised our turnaround functions and installed tighter controls to deliver flawlessplantturnarounds;executedsafely,effectivelyandonschedule.

• Coordinate downtime plans of all our facilities at optimum level through centralised management.

SUPPLIER RELATIONSHIP MANAGEMENT

• Collaborate across the value chain through various improvement programmes resulting in higher feedstock volume and better feed composition from upstream with higher recovery and more reliable utilities supply.

CUSTOMER FOCUS

• Develop innovative customised solutions and channel towards high value applications.

• Offer effective technical support to serve our customers better.

SUSTAIN & ENHANCE MARKET POSITION

• FocusondomesticandkeymarketsintheAsiaPacificregionwherewehavegeographical advantage.

• Ensure unyielding reliability in delivery and product quality, as well as establish strategic collaborations with customers to develop solutions.

• Strengthen our regional presence with overseas marketing subsidiaries in Thailand, China and Indonesia.

CX CAPABILITIES

• Improve our market savviness capabilities with the right systems and tools to capture better value.

• Develop internal expertise to enhance our competitive edge and resilience.

O P E R A T I O N A L E X C E L L E N C E I N N O V A T I O N E X C E L L E N C E C O M M E R C I A L E X C E L L E N C E

H I G H LY R E AC T I V E

P O LY I S O B U T E N E

( H R - P I B )

D Y N A M I C G R O W T H

S A B A H A M M O N I A

U R E A ( S A M U R )

P E N G E R A N G

I N T E G R A T E D

C O M P L E X ( P I C )

INTEGRATED

AROMA

INGREDIENTS

COMPLEX

/LOCATION/

Sipitang, Sabah

/LOCATION/

Pengerang, Johor

/LOCATION/

Gebeng, Pahang

/LOCATION/

Gebeng, Pahang

/LOCATION/

Gebeng, Pahang

/CUMULATIVE CAPACITY/

5.1 million mtpa primarily contributed by SAMUR and PIC

/PRODUCT APPLICATION/

Granular urea fertiliser for agriculture and industrial applications such as adhesives and moulding powder


Polymers - Feedstock for manufacturing plastic products, including packaging films, wires, cables and ducting

Glycols - Feedstock for manufacturing polyester fibres, resins and oil & gas chemicals


Aroma ingredients are sold to the flavour and fragrance industry, mainly in home and personal care products and in the food industry as well as pharmaceutical applications


Chemical intermediate used as a compound, in the production of synthetic lubricants, as well as oil additives, functional fluids like automotive coolants and other applications in various industries


Intermediate product for the manufacturing of high-performance fuel and lubricant additives

/PROGRESS STATUS/

Successfully produced on-specification urea and in the process of ramping up for full commercial operations in 2017

/PROGRESS STATUS/

The project is progressing on schedule. Achieved the final investment decision (FID) for flexi polyethylene (Flexi PE) plant

/PROGRESS STATUS/

Within the range of start-up schedule and expect Citral production in 2017. The production units for Citronellol and L-Menthol will come on-stream in phases in 2017

/PROGRESS STATUS/

The plant came on-stream as planned with the successful production of on-specification 2-EHAcid in late 2016

/PROGRESS STATUS/

Construction underway and expected to start production in the fourth quarter of 2017

/POSITION/

PCG becomes second largest urea producer in Southeast Asia

/POSITION/

PCG becomes the largest glycols and polypropylene (PP) producer as well as the second largest HDPE producer in Southeast Asia

/POSITION/

First plant in Asia Pacific to produce intermediates for flavours and fragrances, marking PCG’s foray into derivatives, specialty chemicals and solutions

/POSITION/

The first and only 2-EHAcid plant in Southeast Asia paving the way for PCG to diversify into specialty chemicals

/POSITION/

The first and only HR-PIB plant in Southeast Asia allowing PCG to further diversify into specialty chemicals

/EMPLOYMENT OPPORTUNITIES/

Some 400 high-value direct jobs are created from this investment, in addition to spin-off opportunities for local support and services providers


An approximately 50,000 - 60,000 workers at peak project phase


Some 140 high-value direct jobs are expected to be created from these three investments, in addition to providing spin-off opportunities for over 1,000 local contractors

UREA 2-EHACIDPOLYMERS

& GLYCOLS

CITRAL,

CITRONELLOL

& L-MENTHOL

HR-PIBSAMUR PIC Integrated Aroma Ingredients Complex 2-EHAcid HR-PIB

2 - E T H Y L H E X A N O I C

AC I D ( 2 - E H AC I D )

OUR VISION

1

2

LOYALTY

INTEGRITY

SHAREDVALUES

3

4

PROFESSIONALISM

COHESIVENESS

The preferredCHEMICAL COMPANY

providing innovativecustomer solutions

PETRONAS CHEMICALS

GROUP BERHAD

AR16

1

Sectionone

02 THE LEADERSHIP

25 The Value Our Board Brings 26 ProfileofBoardMembers34 ManagementCommittee36 ProfileofManagementCommittee

OUR STRATEGIC PERFORMANCE 03

41 ManagementDiscussion&Analysis • ManagingDirector/CEO • ChiefFinancialOfficer • HeadofManufacturing • HeadofCommercial53 KeyGlobalMegatrends54 MarketOutlook56 StrategicIntent58 HowWeTreatRisks60 InvestorRelationsandSharePerformance63 FinancialCalendar64 OurAchievements66 PCGintheNews68 CalendarofEvents

01 ABOUT PETRONAS CHEMICALSGROUP BERHAD

3 AboutThisReport4 OurReportingSuite5 ALeadingChemicalPlayerintheRegion6 WhyInvestinUs8 OurPerformanceHighlights12 OurMilestones14 OurOperations16 OurReach18 GroupStructure20 CorporateInformation21 OrganisationalStructure22 ProductPortfolio

04 OUR RESPONSIBILITIES

75 SustainabilityatPETRONASChemicalsGroupBerhad • TheBoundariesatOurReporting • HowSustainabilityisGoverned • IdentifyingourSustainabilityFocusAreas • ReportingonOurFocusAreas • OurWayForward

05 HOW WE ARE GOVERNED

90 StatementonCorporateGovernance • BoardAuditCommitteeReport • NominationandRemunerationCommitteeReport116 StatementonRiskManagementandInternalControl

128 Directors’Report132 StatementbyDirectors133 StatutoryDeclaration134 StatementsofFinancialPosition135 StatementsofProfitorLossandOtherComprehensive

Income136 StatementsofChangesinEquity139 StatementsofCashFlows141 NotestotheFinancialStatements197 IndependentAuditors’Report201 ListofProperties205 AnalysisofShareholdings209 CorporateDirectory211 NoticeofAnnualGeneralMeeting(AGM)214 AdministrativeDetailsofPETRONASChemicals

GroupBerhad19thAGM• ProxyForm

06 OUR NUMBERS

WHAT’S INSIDE

T h i s s e c t i o n p r o v i d e s a c o m p r e h e n s i v e a c c o u n t o f

w h o w e a r e , h o w w e c r e a t e v a l u e f o r o u r v a r i o u s

s t a k e h o l d e r s , a n d t h e d o m a i n s w h e r e w e o p e r a t e .

I t a l s o e x p l a i n s w h a t w e i n t e n d t o a c c o m p l i s h

t h r o u g h t h i s a n n u a l r e p o r t a n d p r o v i d e s d e t a i l s

o f w h e r e s u p p l e m e n t a r y i n f o r m a t i o n o n t h e

C o m p a n y c a n b e f o u n d .

CONTENTS

3 AboutThisReport

4 OurReportingSuite

5 ALeadingChemicalPlayerintheRegion

6 WhyInvestinUs

8 OurPerformanceHighlights

12 OurMilestones

14 OurOperations

16 OurReach

18 GroupStructure

20 CorporateInformation

21 OrganisationalStructure

22 ProductPortfolio

*Thecross-referencingiconsreferreadersto

informationelsewhereinthisreport

ABOUT

PETRONAS

CHEMICALS

GROUP

BERHAD

PETRONAS CHEMICALS GROUP BERHAD

AR16

3

Sectionone

ABOUT THIS REPORT

AS THE LEADING INTEGRATED CHEMICALS PRODUCER IN MALAYSIA AND ONE

OF THE LARGEST IN SOUTHEAST ASIA, PCG HAS AN EXTENSIVE NUMBER OF

STAKEHOLDERS WHO ARE IMPACTED BY OUR BUSINESS, NOT ONLY BY OUR

FINANCIAL PERFORMANCE BUT ALSO THE WAY WE CONDUCT OUR BUSINESS.

WE APPRECIATE THAT THIS LARGE AND VARIED GROUP NEEDS TO UNDERSTAND

OUR COMMITMENTS AND POLICIES, OUR DIRECTIONS AND STRATEGIES, AND

OUR CURRENT AS WELL AS FUTURE PROSPECTS TO BE ABLE TO PLACE THEIR

TRUST IN US.

FORWARD-LOOKING STATEMENTS

Certain statements in this document are

forward-looking.Typically,theycontainwordssuch

as ‘anticipates’, ‘estimates’, ‘expects’, ‘projects’,

‘believes’,‘intends’,‘plans’,‘may’,‘will’and‘should’,

or similar expressions. Such statements relate

to the plans, objectives, goals, strategies, future

operationsandperformanceofPCG.Theyarenot

guarantees of future operating, financial or other

results and involve certain risks, uncertainties

and assumptions. Actual results and outcomes

may therefore differ materially from those

expressed or implied. We make no express or

impliedrepresentationorwarrantythattheresults

anticipated by such forward-looking statements

willbeachieved.Thesestatementsrepresentoneof

manypossiblescenariosandshouldnotbeviewed

asthemostlikelyorstandardscenario.Wearenot

obligated to update the historical information or

forward-lookingstatementsinthisdocument.

Althoughweprovidevariousreportsthroughouttheyear[see‘OurReportingSuite’onpage4],ourAnnualReport is intended topresentaclearandcomprehensivesummaryofthewayinwhichwehavecontinuedtocreatefinancialandnon-financialvalue forour stakeholdersover the12months.This year’sAnnualReportmarksasharpdeparture fromourpreviousreportsaswehavestrivedtocreategreatertransparencyinthecontentdisclosedaswellasthemannerinwhichitispresented.ThisisinlinebothwiththelatestreportingguidelinesforlistedcompaniesbyBursaMalaysiaSecuritiesBerhad(BursaMalaysia),aswellasourowndesiretoproduceareportthatisrelevant,readableandresponsible.

We have introduced a new section 'How We Treat Risks' see page 58 whichprovides an insight into our efforts to contain andmanage current risks.Wehave also restructured what was previously our Sustainability Report intodisclosureof‘OurResponsibilities’seepages75to88thatismorealignedwithourstakeholders’interests,focusingonareasthatarerelevanttothem.

Our financial statements, audited by KPMG PLT, have been prepared inaccordance with the Malaysian Financial Reporting Standards (MFRS),International Financial Reporting Standards (IFRS) and requirements of theCompanies Act, 1965 in Malaysia. Our non-financial statements reflect localandinternationalreportingguidelines,namelyMainMarketListingRequirement(MMLR)ofBursaMalaysia,theMalaysianCodeonCorporateGovernance2012(MCCG2012),BursaMalaysiaSustainabilityReportingGuidelines,InternationalIntegratedReportingFramework,aswellastheFTSE4Goodrecommendations.

WehavemadeeveryefforttoensurethisAnnualReportpresentsabalancedandaccessibleassessmentofourstrategy,performance,governanceandprospects.The issues and developments included were determined by quantitativeand qualitative considerations that have an impact on our current and futureperformance.

PETRONAS CHEMICALS

GROUP BERHAD

4

Sectionone

OUR REPORTING SUITE

Ourannualreportservesasthemostcomprehensivereportweproduceforourshareholdersandotherstakeholders.Inadditiontoprovidinganaccountofourfinancialperformance,italsodescribesthewayinwhichweupholdcorporategovernanceandsafeguardoursustainability.Itissupplementedwithonlinedisclosuresofourquarterlyfinancialresults,analystbriefings,Bursaannouncementsandmediareleases.

Report Reporting frameworks Assurance/Approval

ANNUAL REPORT

Ourprimaryreportforcommunicatingtoourshareholdersandotherstakeholders

� CompaniesAct,1965inMalaysia� MalaysianFinancialReportingStandards

(MFRS)� InternationalFinancialReporting

Standards(IFRS)� MainMarketListingRequirements(MMLR)

ofBursaMalaysia� MalaysianCodeonCorporateGovernance

2012(MCCG2012)� InternationalIntegratedReporting

Framework� BursaMalaysiaSustainabilityReporting

Guidelines� FTSE4Goodrecommendations

� Internalcontrolsandmanagementassurance

� Complianceandinternalauditreviews� ExternalauditbyKPMGPLTonfinancial

statements� Boardapprovalongovernanceand

financialinformation

QUARTERLY FINANCIAL STATEMENTS

Financialstatementsonourperformanceeveryquarter

� CompaniesAct,1965inMalaysia� MalaysianFinancialReportingStandards

(MFRS)� InternationalFinancialReporting

Standards(IFRS)� MainMarketListingRequirements(MMLR)

ofBursaMalaysia


� Complianceandinternalauditreviews� LimitedreviewbyKPMGPLTonfinancial information*� Boardapprovaluponendorsementbythe

BoardAuditCommittee

ANALYSTS AND STAKEHOLDERS BRIEFINGS

PresentationsontheGroup’sperformanceandkeyactivities


BURSA ANNOUNCEMENTS

AnnouncementsmadetoBursaMalaysiaonmaterialinformation

� MainMarketListingRequirements(MMLR)ofBursaMalaysia


� Boardapproval

MEDIA RELEASES

Announcementsmadetothemediaonkeycorporate,social,environmentalandfinancialeventsandactivities


Toaccessmoreinformationonourannouncements,logontowww.petronaschemicals.comorscantheQRcode

* ReportedtotheBoardanddoesnotcoverPartB,OtherExplanatoryNotesofQuarterlyReporttoBursaMalaysia

AR16

5

Sectionone

A LEADING CHEMICAL PLAYER IN THE REGION

PCG OPERATES A NUMBER OF WORLD-CLASS PRODUCTION SITES, WHICH ARE FULLY VERTICALLY INTEGRATED FROM FEEDSTOCK TO DOWNSTREAM END PRODUCTS.Withatotalcombinedproductioncapacityof10.8millionmetrictonnesperannum(mtpa),itisinvolvedprimarilyinmanufacturing,marketingandsellingadiversifiedrangeofchemicalproducts,includingolefins,polymers,fertilisers,methanolandotherbasicchemicalsandderivativeproducts.ListedonBursaMalaysiaandwiththreedecadesofexperienceinthechemicalsindustry,PCGisestablishedaspartofthePETRONASGrouptomaximisevaluefromMalaysia’snaturalgasresources.

PCGisoneofthetop10companiesintheFTSE4GoodBursaMalaysia(F4GBM)Index,outof200largestcompaniesrankedbymarketcapitalisation.ItiscommittedtoensuringthatitsbusinesspracticesareinlinewithgloballyrecognisedstandardsforEnvironment,Social&Governance(ESG)practices.

A TOTAL COMBINED PRODUCTION CAPACITY OF

10.8 MILLIONMETRIC TONNES PER ANNUM

THE LEADING INTEGRATED

CHEMICALSPRODUCER

IN MALAYSIA

OPERATES A NUMBER OF

WORLD-CLASS PRODUCTION SITES

DIVERSIFIED RANGE OF

CHEMICALPRODUCTS

OVER

THREE DECADESOF EXPERIENCE IN THECHEMICAL INDUSTRY 30

YEARS

PETRONAS CHEMICALS

GROUP BERHAD

6

Sectionone

WHY INVEST IN US

PCG IS THE INDUSTRY LEADER FOR HIGHLY ATTRACTIVE VALUE CREATION OPPORTUNITIES

FOR INVESTORS. WE HAVE MARKET LEADERSHIP ACROSS PRINCIPAL PRODUCTS BESIDES

GAS FEEDSTOCK ADVANTAGE AND FULLY INTEGRATED PRODUCTION FACILITIES. OUR CLOSE

PROXIMITY TO KEY GROWTH MARKETS HAS ENABLED US TO FORGE STRONG PARTNERSHIPS

WITH LEADING CHEMICALS AND ENERGY MAJORS.

BackedbytheparentageandsupportofPETRONASGroup,ourcompetitivestrengthsalsoincludeanattractivefinancialprofileandanexperiencedleadershipteam.

SECURE AND COMPETITIVE GAS BASED FEEDSTOCK SUPPLY

PC FERTILISER KEDAH, GURUNMethanebased KERTIH IPC

Ethane&methanebased

PC METHANOL, LABUANMethanebased

PC FERTILISER SABAH, SABAH Methanebased

ABF, BINTULUMethanebased

GEBENG IPCPropane&butanebased

PeninsularGasUtilisationpipelinenetwork

Gasfields

FULLY INTEGRATED FACILITIES AND INFRASTRUCTURE RESULTING IN LOWER COST, OPTIMUM YIELDS AND GREATER FLEXIBILITY

l Minimisemoleculeloss

l Maximisesproductionefficiency&margins

PCG VALUE CHAIN

Feedstock DerivativesBasicProducts

DownstreamDerivatives

IncreaseMarginCapture

AR16

7

Sectionone

Why Invest in Us (Cont’d)

MARKET LEADERSHIP WITH ATTRACTIVE GROWTH MARKETS AND RETURNS

3RD

1ST

2ND

MTBE, BUTANOL, BGE &ETHANOLAMINES PRODUCER IN SEA*

AMMONIA, UREA & BUTYL ACETATE PRODUCER IN SEA*

ETHOXYLATES, MEG & LDPE PRODUCER IN SEA*

LARGESTMETHANOL PRODUCERIN ASIA PACIFIC AND4TH LARGEST INTHE WORLD

CAPACITYGROWTHWITH WORLD-SCALE PLANTS

PORTFOLIOEXPANSIONWITH LEADING EDGE TECHNOLOGY

LARGE-SCALE ANDDIVERSIFIED PRODUCT PORTFOLIO LEADING TO ECONOMIES OF SCALE AND SPREADING MARKET RISKS

* by capacity

PROXIMITY TO KEY GROWTH MARKETS WHICH ENABLES US TO OPTIMISE INVENTORY AND HAVE COMPETITIVE STORAGE AND DISTRIBUTION

l Closetokeygrowth marketsinAsiaPacific

19days

6days

PETRONAS CHEMICALS

GROUP BERHAD

8

Sectionone

l HIGHEST PLANT UTILISATION OF 96% SINCELISTING

l IMPROVED PLANT RELIABILITY RESULTINGFROMEFFECTIVEASSETMANAGEMENT

l IMPROVEDFEEDSTOCKSUPPLYTHROUGHCLOSE RELATIONSHIP WITH SUPPLIERS

PLANT UTILISATION RATE

2014

2014

1.9

2015

2015

2.6

3.3

1.8

2013

2013

2016

2016

2012

2012

0.5

83%78% 80%

85%

CAPITAL EXPENDITURE ALLOCATED FOR EXISTING ASSETS AND FUTURE GROWTH

CapitalExpenditure(RMBillion) OPERATIONS CAPEX consistsofreliabilityandintegrityprojects,turnaroundactivities,valueimprovementprojectsandotheroperationalrequirements

GROWTH CAPEX mainlyforSAMUR,IntegratedAromaIngredientsComplex,2-EHAcid,HR-PIBandPIC

1.1

0.7 0.7

0.3

0.7

OUR PERFORMANCE HIGHLIGHTS

96%85%WORLDCLASS

REVENUE

billion

2016

RM13.9

EBITDA MARGIN

38%TOTAL DIVIDENDEBITDA

19senper ordinary share

RM5.3 billion

PROFIT AFTER TAX

RM3.2 billion

AR16

9

Sectionone

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ITEMS:

RMMillion(unlessotherwisestated)12monthsended

2012 2013 2014 2015 2016

Revenue 16,599 15,202 14,597 13,536 13,860

ProfitBeforeTax 4,550 4,547 3,551 3,833 4,110

ProfitBeforeTaxas%Revenue 27% 30% 24% 28% 30%

ProfitAfterTax 3,837 3,504 2,726 3,091 3,222

ProfitAfterTaxas%Revenue 23% 23% 19% 23% 23%

EarningsperShare(sen)-Basic 44.0 39.3 30.8 34.8 36.7

EBITDA 5,778 5,076 4,644 4,660 5,291

EBITDAMargin 35% 33% 32% 34% 38%

STATEMENT OF FINANCIAL POSITION ITEMS:

RMMillion(unlessotherwisestated)Asat31December

2012 2013 2014 2015 2016

TotalAssets 25,920 27,731 28,463 30,833 31,948

TotalEquity 21,906 23,389 24,477 26,590 28,313

TotalLiabilities 4,014 4,342 3,986 4,243 3,635

NetTangibleAssetperShare(RM) 2.54 2.72 2.84 3.10 3.38

Our Performance Highlights (Cont’d)

PETRONAS CHEMICALS

GROUP BERHAD

10

Sectionone


PROFIT (RM Million) & MARKET PRICE (USD/MT)

2012ProfitBeforeTax

12monthended

ProfitAfterTax AverageMarketPrice(USD/MT)2013 2014 2015 2016

4,550 4,547

3,5513,833

4,1103,837

3,504

2,7263,091 3,222

PROFIT AS % REVENUE

12monthended

2012 2013 2014 2015 2016

27%30% 30%

24%

28%

23% 23%

19%

23% 23%

ProfitBeforeTax ProfitAfterTax

REVENUE (RM Million)

16,599

2012 2013

15,202

2014

14,597

2015

13,53613,860

2016

12monthended

12monthended

EARNINGS PER SHARE-BASIC (SEN)

2012 2013 2014 2015

36.7

44.0

39.3

30.8

34.8

2016

REVENUE INCREMENT

comparedto2015

2016 2%+PROFIT AFTER TAX INCREMENT

comparedto2015

2016 4%+

809 820 759

557 467

AR16

11

Sectionone


TOTAL ASSETS (RM Million)

25,92027,731 28,463

30,83331,948

2012

Asat31December

2013 2014 2015 2016

Asat31December

TOTAL EQUITY (RM Million)

21,90623,389

24,47726,590

28,313

2012 2013 2014 2015 2016

TOTAL LIABILITIES (RM Million)

4,014

4,342

3,986

4,243

3,635

Asat31December

2012 2013 2014 2015 2016

NET TANGIBLE ASSETS PER SHARE (RM)

2.542.72

2.843.10

3.38

Asat31December

2012 2013 2014 2015 2016

TOTAL ASSETS INCREMENT

comparedto2015

2016 4%+TOTAL EQUITY INCREMENT

comparedto2015

2016 6%+

PETRONAS CHEMICALS

GROUP BERHAD

12

Sectionone

1992 Commencedproductionof

propylene,polypropyleneandMTBEatGebengComplex.

AcquisitionofmethanolplantinLabuan.

1999 Commencedproductionofurea,ammoniaandmethanolinGurun.

2004 ExpandedproductioncapacitiesofureaandammoniainBintulu.

2006 ExpandedproductioncapacitiesofureaandammoniainGurun.

2000 CommencedproductionofacrylicacidatBASFPETRONASChemicals

SdnBhd,Gebeng.Commencedproductionofbenzene,paraxylene,ammonia,vinylchloridemonomer,polyvinylchlorideandaceticacidat

KIPC.

1995 Commencedproductionofethyleneandpolyethyleneat

KertihIntegratedPetrochemicalComplex(KIPC).

2009 CommissioningofmegamethanolplantinLabuan.

AcquiredinterestinPETRONASChemicalsOlefinsSdnBhd,

PETRONASChemicalsGlycolsSdnBhdandPETRONAS

ChemicalsDerivativesSdnBhdfromDowChemicals.

2002 Commencedproductionof

olefins,glycolsandderivativesatKIPC.CommencedproductionofpolyvinylchlorideinBaria-Vung

Tau,Vietnam.

1997 CommencedproductionofstyrenemonomerinPasir

Gudang.

1985 Commencedproduction

ofureaandammoniain Bintulu.

OUR MILESTONES

AR16

13

Sectionone

Our Milestones (Cont’d)

2012 TookovermarketingofchemicalsandperformancechemicalsinIndonesiaandSingaporefromDowChemicals.Decisiontodiscontinuevinylbusiness.

2014 CompleteddivestmentofPhuMyPlastics&ChemicalsCoLtdpursuanttodecisiontodiscontinuevinylbusiness.

2016 Producedon-specificationureafor

SAMUR.Producedon-specification2-EHAcid

atBASFPETRONASChemicalsSdnBhd.

Sanctioneddevelopmentandconstruction

ofFlexiPEprojectatPRPCPolymersSdn

BhdinPengerang.Incorporatedoverseas

marketingsubsidiaryinIndonesia-PT

PCMKimiaIndonesia.

2014 SecuredlicenseforPETRONAS

ChemicalsMarketing(Labuan)LtdasLabuanInternationalCommodityTradingCompany.Incorporated

overseasmarketingsubsidiariesinThailand-PCM(Thailand)CoLtdand

China-PCM(China)CoLtd.

2015 Sanctioneddevelopmentand

constructionof2-EHAcidandHR-PIBprojectsatBASFPETRONASChemicalsSdnBhdinGebeng.Acquired100%equityinPRPCPolymersSdnBhd,PRPCGlycols

SdnBhdandPRPCElastomersSdnBhdwhichwillundertakepetrochemical

projectsaspartofPengerangIntegratedComplexin

Pengerang.

2013 SanctioneddevelopmentandconstructionofAsiaPacific'slargestIntegratedAroma

IngredientsComplexatBASFPETRONASChemicalsSdnBhd

inGebeng.

2010 AcquiredinterestinPETRONAS

ChemicalsEthyleneandPETRONASChemicals

PolyethylenefromBP.ListedonMainMarketofBursaMalaysia.

2011 Sanctioneddevelopmentandconstructionofanewworld-

scalefertiliserplantinSipitang,Sabah(SAMUR).

PETRONAS CHEMICALS

GROUP BERHAD

14

Sectionone

OUR OPERATIONS

FEDERAL TERRITORYOF LABUANFederal Territory of Labuan• Methanol

SABAHSipitang• Ammonia• Urea

SARAWAKBintulu• Ammonia• Urea

KEDAHGurun• Ammonia• Methanol• Urea• NPKFertilisers*

JOHORPasir Gudang• StyreneMonomer*

PAHANGGebeng IntegratedPetrochemical Complex• MethylTertiaryButylEther(MTBE)• n-Butane• Propylene• Acrylics*• Butanediol*• Oxo-alcohols*• 2-EHAcid*

TERENGGANU Kertih Integrated Petrochemical Complex• Ammonia• Benzene• Butanol• ButylAcetate• CarbonMonoxide• Ethanolamines• Ethoxylates

• Ethylene• EthyleneGlycols• GlycolEthers• Oxogas• Paraxylene• Polyethylene• Propylene• AceticAcid*

PETRONAS CHEMICALS GROUP is headquartered in the

PETRONAS TWIN TOWERSKualaLumpurCityCentre.TheGroupcomprises30subsidiaries,jointventuresandassociatecompanies,producingandmarketingawiderangeofchemicalproducts.

*Productsproducedbyjointventureandassociatecompanies

AR16

15

Sectionone

Our Operations (Cont’d)

4.9PRODUCTION OFOLEFINS & DERIVATIVESFROM

5.9PRODUCTION OFFERTILISER & METHANOL FROM 11 5PLANTS PLANTS

CURRENT TOTALPRODUCTION CAPACITY OF

MILLIONMETRIC TONNES PER ANNUM (MTPA)10.8

MILLIONMTPA

MILLIONMTPA

• PCMTBE• PCDerivatives• PCGlycols• PCPolyethylene• PCOlefins• PCEthylene• PCAromatics

• PCMethanol• ABF• PCFertiliserKedah• PCAmmonia• MalaysianNPKFertilizerSdnBhd

• PCLDPE• BASFPETRONAS ChemicalsSdnBhd• IdemitsuSM(Malaysia)SdnBhd

• BPPETRONASAcetylsSdnBhd

PETRONAS CHEMICALS

GROUP BERHAD

16

Sectionone

OUR REACH

WearephysicallypresentinThailand,China,Indonesia,India,VietnamandthePhilippinesthroughouroverseassubsidiariesandrepresentativeoffices.

Intotal,41%ofourvolumeissold inSoutheastAsia(excludingMalaysia)marketswhile30%isbeingconsumedbytheMalaysianmarket.TheremainingofourtotalvolumearebeingchanneledtootherkeygrowthchemicalmarketsinNortheastAsiasuchasChina,Japan,SouthKorea,TaiwanandHongKong.

WE MARKET A WIDE RANGE OF CHEMICAL

PRODUCTS TO CUSTOMERS IN 30 COUNTRIES

WORLDWIDE PARTICULARLY IN ASIA PACIFIC. BESIDES

MALAYSIA, OUR KEY MARKETS INCLUDE THAILAND,

INDONESIA, SINGAPORE, VIETNAM, THE PHILIPPINES,

NORTHEAST ASIA, INDIA SUBCONTINENT, NORTH

AMERICA AND AUSTRALASIA.

USA

AR16

17

Sectionone

OURREACH

Our Reach (Cont’d)

INDIA

THAILAND

MALAYSIA

SINGAPORE

INDONESIA

AUSTRALIA

NEWZEALAND

VIETNAM

PHILIPPINES

CHINA

SOUTHKOREA JAPAN

TAIWAN

PETRONAS CHEMICALS

GROUP BERHAD

18

Sectionone

Wholly-ownedsubsidiaries Majority-ownedsubsidiaries Jointventuresandassociates

* Wholly-ownedsubsidiaryasremainingshareholdingisheldthroughothersubsidiarieswithinPCG** SubsidiarypursuanttoMalaysianFinancialReportingStandard10

64.35%

100%PETRONASChemicalsMethanolSdn Bhd(PCMethanol)

100%PETRONASChemicalsMTBESdn Bhd (PCMTBE)

100%PETRONASChemicalsDerivativesSdn Bhd(PCDerivatives)

100%PETRONASChemicalsGlycolsSdn Bhd(PCGlycols)

100%PETRONASChemicalsPolyethyleneSdn Bhd(PCPolyethylene)

100%PETRONASChemicalsAmmoniaSdn Bhd(PCAmmonia)

100%PETRONASChemicalsFertiliserSabahSdn Bhd(PCFertiliserSabah)

20%MalaysianNPKFertilizerSdn Bhd


Manufacturing

GROUP STRUCTURE

88%PETRONASChemicalsOlefinsSdn Bhd(PCOlefins)

87.5%PETRONASChemicalsEthyleneSdn Bhd(PCEthylene)

70%PETRONASChemicalsAromaticsSdn Bhd(PCAromatics)

63.5%ASEANBintuluFertilizerSdn Bhd(ABF)

60%PETRONASChemicalsLDPESdn Bhd(PCLDPE)

100%PETRONASChemicalsFertiliserKedahSdn Bhd(PCFertiliserKedah)

AR16

19

Sectionone

100%PRPCPolymersSdn Bhd(PRPCPolymers)

100%PRPCElastomersSdn Bhd(PRPCElastomers)

100%PETRONASChemicalsMarketingSdn Bhd(PCMarketing)

100%KertihPortSdn Bhd(KPSB)

100%VinylChloride(Malaysia)Sdn Bhd(VCMSB)

100%PolypropyleneMalaysiaSdn Bhd(PPMSB)

0.01%PCMChemicalIndiaPrivateLimited**

100%PETRONASChemicalsMarketing(Labuan)Ltd(PCMarketingLabuan)

100%PCM(China)CompanyLimited(PCMarketing China)

99.99%*

PCM(Thailand)CompanyLimited(PCMarketing Thailand)

40%BASFPETRONASChemicalsSdn Bhd

30%IdemitsuSM(Malaysia)Sdn Bhd

30%BP PETRONASAcetylsSdn Bhd

40%KertihTerminalsSdn Bhd

Marketing & Sales Services

Group Structure (Cont’d)

99.67%*

PTPCMKimia(Indonesia)(PCMarketingIndonesia)

100%PRPCGlycolsSdn Bhd(PRPCGlycols)

PETRONAS CHEMICALS

GROUP BERHAD

20

Sectionone

CORPORATE INFORMATION

* BankingrequirementsaremanagedcentrallybyPETRONASIFSSCtoenablemoreefficientbankingmanagementfortheGroupandtheCompany

DIRECTORS

MD ARIF MAHMOOD

(Chairman)

DATUK SAZALI HAMZAH

(ManagingDirector/ChiefExecutiveOfficer)

VIMALA V.R. MENON

CHING YEW CHYE

DONG SOO KIM

DATUK TOH AH WAH

ZAKARIA KASAH

FREIDA AMAT

BOARD AUDIT COMMITTEE

Vimala V.R. Menon (Chairman)

Ching Yew Chye

Dong Soo Kim

Datuk Toh Ah Wah

Freida Amat

NOMINATION & REMUNERATION COMMITTEE

Ching Yew Chye (Chairman)

Vimala V.R. Menon

Dong Soo Kim

COMPANY SECRETARIES

Noor Lily Zuriati Abdullah

Kang Shew Meng

REGISTRAR

SymphonyShareRegistrarsSdnBhdLevel6,SymphonyHousePusatDaganganDana1JalanPJU1A/4647301PetalingJayaSelangor,DarulEhsanMalaysiaTel:(+603)78418000Fax:(+603)78418151

REGISTERED OFFICE

Tower 1PETRONASTwinTowersKualaLumpurCityCentre50088KualaLumpurMalaysiaTel:(+603)20515000Fax:(+603)23311747

BUSINESS ADDRESS

Level15,Tower1PETRONASTwinTowersKualaLumpurCityCentre50088KualaLumpurMalaysiaTel:(+603)20515000Fax:(+603)20513888

BANKING SERVICES PROVIDER

PETRONASIntegratedFinancialSharedServiceCentre(IFSSC)*

STOCK EXCHANGE LISTING

MainMarketofBursaMalaysiaSecuritiesBerhad

AUDITORS

KPMGPLT

WEBSITE

www.petronaschemicals.com

AR16

21

Sectionone

ORGANISATIONAL STRUCTURE


NOMINATION AND REMUNERATION COMMITTEE

COMPANY SECRETARY

BOARD OF DIRECTORS

CHAIRMAN

MANAGING DIRECTOR/CHIEF EXECUTIVE OFFICER

MANAGEMENT COMMITTEE

PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone

PRODUCT PORTFOLIO

Withinnovation,moreusesarebeingfoundforpetrochemicals

tomakelifebetter.Theykeepenrichingtheworldwelivein.And

weareproudtobeapartofthisevolution.

OUR PRODUCTS ARE ALL

AROUND YOU – IN AND OUT OF

YOUR HOME, IN THE OFFICE, THE

MALL AND CINEMA. BECAUSE

OF THEIR COMPOSITION AND

PROPERTIES, PETROCHEMICALS

HAVE APPLICATIONS IN A WIDE

RANGE OF ITEMS THAT WE USE

DAILY. THEY’RE FOUND IN WHAT

WE WEAR, OUR SKIN AND HAIR

PRODUCTS, AND IN ALMOST ALL

PACKAGING OF GOODS WE BUY.

AR16

23

Sectionone

OLEFINS,GLYCOLS & DERIVATIVES

AR OMATICS & MTBE

AMMONIA & FERT IL ISERS

POLYMERS

METHANOL

Product Portfolio (Cont’d)

PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone

PRODUCT PORTFOLIO

KEY PRODUCTS DESCRIPTION FEEDSTOCK APPLICATION

Ethylene A two carbon molecule colourless gas converted from natural gas

Ethane Feedstock for production of polyethylene, ethylene glycol, ethylene oxide (EO) and derivatives of EO

Propylene A three carbon moleculecolourless gas converted from natural gas

Propane Feedstock for the production of acrylic acids, acrylic esters and oxo-alcohols

MonoethyleneGlycol (MEG)

A colourless hygroscopic liquid derived from ethylene glycol

Ethylene Oxide

Feedstock for manufacturing polyester fibers, polyethylene terephthalate resins (PET) and an ingredient of antifreeze products

Diethylene Glycol (DEG)

A colourless hygroscopic liquid derived from ethylene glycol

Ethylene Oxide Ingredient in printing ink, pigments and dyes

PerformanceChemicals

Colourless liquids derived from ethylene oxide

Ethylene Oxide,Ammonia,Fatty Alcohol

Surfactants, gas treating solvents and personal care products

OLEFINS, GLYCOLS& DERIVATIVES

AR16

23

Sectionone


Petrochemicals are found in a wide range of cleaning agents, from shampoos and soaps to dishwashing liquids, and detergents used to wash your clothes. They remove grit and grime from your home, keep your clothes spotless, and your own body feeling fresh and clean.

WE KEEP YOU AND YOUR SURROUNDINGS CLEANPetrochemicals are found in a wide range of cleaning agents, from shampoos and soaps to dishwashing liquids, and detergents used to wash your clothes. They remove grit and grime from your home, keep your clothes spotless, and your own body feeling fresh and clean.

PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone

POLYMERSKEY PRODUCTS DESCRIPTION FEEDSTOCK APPLICATION

Polyethylene(LLDPE, HDPE,LDPE)

Solid resins produced from the polymerisation of ethylene

Ethylene Feedstock for manufacturing plasticproducts, including packaging films, wires, cables and ducting

AR OMATICSKEY PRODUCTS DESCRIPTION FEEDSTOCK APPLICATION

Paraxylene A six-carbon ring structure molecule, which is a colourless, flammable liquid

Naphtha Production of terephthalic acid, used in the manufacture of polyester for packaging applications, drink bottles and textiles

Benzene A six-carbon ring structure molecule, which is a colourless, flammable liquid

Naphtha Feedstock for manufacturing polystyrene used for packaging


Methyl TertiaryButyl Ether (MTBE)

A five-carbon molecule colourless liquid

Butane,Methanol

Gasoline additive to boost octane level to improve burning of fuels and reduce emissions

MTBE

PRODUCT PORTFOLIO

AR16

23

Sectionone

Not only do we produce fertilisers that enhance food production, our petrochemicals are also used in the manufacture of plastics and packaging materials that ensure fresh food maintains all its goodness until it reaches your table, and that cooked or processed food can be kept till needed.

WE MAKE SURE YOU HAVE FRESH, NOURISHING FOOD


PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone

PRODUCT PORTFOLIO

METHANOLKEY PRODUCTS DESCRIPTION FEEDSTOCK APPLICATION

Methanol Simplest organic alcohol and is a colourless flammable liquid

Methane Production of formaldehyde, acetic acid, chloromethanes and methyl methacrylate, which in turn are used in the production of resins, adhesives, paints, plastics, flavourings, silicones and plexiglass


Ammonia A nitrogen and hydrogencompound colourless gas with a characteristic pungent odour

Methane,Hydrogen,Nitrogen

Feedstock for the production of urea and other industrial applications, including use as refrigerant and latex anti-coagulant

Urea A high nitrogen-content organic solid

Ammonia,Carbon Dioxide

Fertiliser used for the supply of nitrogen to crops and raw material for manufacturing adhesives, moulding powders, varnishes and foams


AR16

23

Sectionone


WE ADD COLOURTO YOUR LIFE All the colours you see around you – the paint on walls and works of art; the interesting patterns on garments; hair dyes and even cosmetics – they contain petrochemical products that have been refined and are safe to use.

PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone


Acrylics Crude Acrylic Acid (CAA): Colourless liquid with a strong smell. It is flammable and corrosive

Glacial Acrylic Acid (GAA): Clear, colourless liquid with a pungent odour. It is corrosive and is flammable Butyl Acrylate (BA): Flammable, colourless liquid with a "fruity" smell 2-Ethylhexyl Acrylate (2-EHA): Clear, colourless liquid with a "fruity" smell

Propylene Primarily used in the production of superabsorbent polymers (SAP) used in diapers, in the production of acrylic esters and in the manufacturing of plastic resins, coatings and adhesives Primarily used in the production of superabsorbent polymers (SAP) used in diapers, in the production of acrylic esters and in the manufacturing of plastic resins, coatings and adhesives Mainly used in the manufacture of resins, coatings, adhesives and plastics

Mainly used in the manufacture of resins, coatings, adhesives and plastics

Oxo-Alcohols 2-Ethylhexanol (2-EH): Flammable, clear liquid with a distinctive smell n-Butanol (n-Bol): Flammable, colourless liquid with an alcoholic smell iso-Butanol (i-Bol): Flammable, colourless liquid with an alcoholic smell Iso-butyraldehyde (i-BA): Toxic, flammable, colourless to yellow liquid with a strong smell Oxo Oil: Flammable, yellowish liquid with pungent odour

Propylene Mainly used for the production of plasticisers

Mainly used as a solvent in the paint industry and for the production of PVC plasticisers

Mainly used as a solvent in the paint industry and for the production of PVC plasticisers Chemical intermediate or raw material used to make different types of solvents and resin intermediates for the paint and ink industries Mainly used as an auxiliary in floatation processes in the mining industry (coal, copper, silver, gold and phosphorus, etc) and as a defoamer in the aluminium industry

JOINT VENTURE & ASSOCIATE PRODUCTS

PRODUCT PORTFOLIO

AR16

23

Sectionone


Butanediol 1,4-Butanediol (BDO): Colourless and almost odourless liquid

Tetrahydrofuran (THF): Colourless, water-miscible liquid with an ether-like odour

gamma-Butyrolactone (GBL): An industrial chemical with excellent solvency, little toxicity and few environmental hazards

n-Butane Butanediol and its derivatives are used in a broad spectrum of applications in the chemical industry; amongst others in the manufacturing of technical plastics, polyurethanes, solvents, electronic chemicals and elastic fibres Mainly used in the production of a polymer used to manufacture elastomers and fibers. THF is also a versatile solvent with applications in areas such as adhesives, vinyl films and cellophanes, industrial resins, elastomers, coatings and printing inks Used in the production of clinical needs, for filtering beverages and cleaning auxiliaries. GBL is also used for applications in conductor wafer cleaning in the electronics industry or high-tech industry as well as an intermediate for the synthesis of other chemicals

2-EHAcid Colourless to yellow liquid with a faint odour

2-ethylhexenal (2-EHol)

Chemical intermediate used in esters for Polyvinylbutyral (PVB) film plasticisers and synthetic lubricants, in metal salts for paint dryers, in automotive coolants, PVC stabilisers, cosmetics and various other applications. In cosmetics, 2-EHAcid is used to produce emollients. Other applications include corrosion inhibitors in automotive coolants, catalyst for polymer production, raw material for acid chloride and fragrances

Styrene Monomer A clear, colourless, flammable liquid with a distinctive aromatic odour

Benzene,Ethylene

Production of polystyrene which is used in packaging containers and high impact plastic such as acrylonitrile butadiene styrene (ABS), latex paints and most synthetic rubber

Acetic Acid Chemical intermediate in theform of colourless liquid

Methanol,CarbonMonoxide

Precursor for making various vinyl acetate, metal acetate and cellulose acetate. Vinyl acetate is used for coatings and adhesives, metal acetate is used in printing, and cellulose acetate is used to make film for photography. Also used in the production of esters used as solvents in many commercial products, such as inks and paints

Various NPK Grades of Fertilisers

Clear colourless granules with a characteristic odour

Urea, Ammonia, Phosphates, Potassium

End fertilisers of high yield growth for paddy fields and oil palms


PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone

WE’RE ALL AROUND YOU

ENRICHING YOUR LIVESEVERYDAY, IN EVERY WAY

PRODUCT PORTFOLIO

AR16

23

Sectionone

ENRICHING YOUR LIVESEVERYDAY, IN EVERY WAY


PETRONAS CHEMICALS

GROUP BERHAD

22

Sectionone


PRODUCT PORTFOLIO

AR16

23

Sectionone

AR OMATICS & MTBE


POLYMERS

METHANOL


OLEFINS,GLYCOLS & DERIVATIVES

THE

LEADERSHIP


The Group is led by a s trong and highly exper ienced

management team with broad exper ience of var ious

aspects of the oi l and gas industr y. They are in turn guided

by a values-dr iven and diverse Board of Directors wi th

international industr y exper t ise as wel l as professional

exper ience in other corporate sectors .

CONTENTS

25 The Value Our Board Brings

26 ProfileofBoardMembers

34 ManagementCommittee

36 ProfileofManagementCommittee



THE VALUE OUR BOARD BRINGSOureightDirectorsonaveragerepresentmorethan30yearsofexperienceintheoilandgas

industry,coveringvariousengineeringdisciplines,operations,corporateplanningand

development,financial,globalpetrochemicalconsultancy,commercial,informationtechnology,

humanresourceandeconomics.Theirtop-levelmanagementandtechnicalskillscombined

withregionalaswellasinternationalcorporateexperienceservetheGroupwellaswestrivefor

dynamicgrowthtoachieveourvisionofbecomingthepreferredchemicalcompanyintheregion.

BOARD COMPOSITION

8 directors 4Independent Non-ExecutiveDirectors3

Non-Independent Non-ExecutiveDirectors1

ExecutiveDirector

EXPERIENCESKILLS MATRIX

KEY FEATURES OF OUR BOARD

• TheBoardcomprisesabalance of Independent Directors

• TheChairmanisaNon-Independent Non-Executive Director

• TheroleoftheChairmanandManagingDirector/ChiefExecutiveOfficeraredistinct

30*

YEARS OFEXPERIENCE

MORE THAN

*onaverage

Oil and Gas Industry Finance/Audit Econo mics Engineering Commercial/Marketing Op

erations

Corp

orat

e Pla

nnin

H

uman

Res

ourc

e

Info

rmat

ion

Tech

nology

Global Petroc

hemical

10skillsand D

evelopm

ent

Consultancy

26

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

MD ARIF MAHMOODMalaysian,age54,Male,MalayChairman, Non-Independent Non-Executive Director

Board Skills Matrix

Engineering

CorporatePlanningandDevelopment

Operations

Commercial/Marketing

IndustryExperience -OilandGas -Regional/International

Listed Entities:• PETRONASChemicalsGroup

Berhad• PETRONASDaganganBerhad

Other Public Company:• Nil

Directorships

Present Appointments:• Chairman,PETRONASChemicalsGroupBerhad• Chairman,PETRONASDaganganBerhad• ExecutiveVicePresidentandChiefExecutiveOfficeroftheDownstreamBusiness,PETRONAS• Member,PETRONASExecutiveLeadershipTeam• Member,PETRONASPeopleDevelopmentCommittee• Member,PETRONASTalentCouncil• Member,IndustryAdvisoryPanelofUniversitiTeknologiPETRONAS(UTP)• Chairman,variouscompanieswithinPETRONAS

Past Experiences:• Director,PETRONAS• SeniorVicePresidentofPETRONASCorporateStrategy• VicePresidentofPETRONASOilBusiness• ManagingDirector/ChiefExecutiveOfficerofASEANBintuluFertilizerSdnBhd• SeniorGeneralManagerofRetailBusinessDivision,PETRONASDaganganBerhad• GeneralManager(GasProcessingPlantB),PETRONASGasBerhad

Working Experience

• NofamilyrelationshipwithanyDirector/MajorShareholder• NoconflictofinterestwithPETRONASChemicalsGroupBerhad.Hehasneverbeenchargedfor

anyoffencewithinthepast5yearsotherthantrafficoffences,ifany

Declaration

• BachelorofScienceinElectricalEngineering(summacumlaude),BostonUniversity,USA

• MastersofBusinessAdministrationfromMassachusettsInstituteofTechnology,USA

Qualifications

PROFILE OF BOARD MEMBERS

MD ARIF MAHMOOD BRINGS TO THE BOARD EXTENSIVE EXPERIENCE IN THE OIL AND GAS INDUSTRY. HE HAS MORE THAN 30 YEARS OF ENGINEERING AND STRATEGIC MANAGEMENT EXPERIENCE IN VARIOUS COMPANIES WITHIN THE PETRONAS GROUP.

Date appointed to Board

1 May 2015

Number of Board meetings attended in 2016

6 out of 7

Length of service(as at 17 February 2017)

1 year and 10 months

AR16

27

Sectiontwo

Listed Entities:• PETRONAS Chemicals Group

Berhad


Directorships

Present Appointments:• ManagingDirector/ChiefExecutiveOfficer,PETRONASChemicalsGroupBerhad• VicePresident,PETRONAS• BoardofInstitutionofChemicalEngineersUK,Malaysianbranch• Chairman,variouscompanieswithinPETRONAS

Past Experiences:• ManagingDirector/ChiefExecutiveOfficer,PETRONASPenapisan(Melaka)SdnBhd• SeniorGeneralManager,GroupTechnologySolutionsPETRONAS• Head,ProjectManagementandDeliveryPETRONAS• Variousseniormanagementpositionsthroughrolesintherefineryandpetrochemicalbusiness

withinPETRONAS

Working Experience



Declaration

DATUK SAZALI HAMZAHMalaysian,age50,Male,MalayManaging Director/Chief Executive Officer

• Bachelor of Chemicals Engineering,LamarUniversity,USA

• Advanced Management Programme,TheWhartonSchool,UniversityofPensylvania,USA

• CharteredFellowoftheInstitution of Chemical Engineers(IChemE)

Qualifications

Board Skills Matrix

Engineering

Operations


Industrial Experience - Oil and Gas -Shipping/Logistics - Regional/International

Profile of Board Members (Cont’d)

DATUK SAZALI HAMZAH SPEARHEADS PCG'S OVERALL GROWTH AND EXPANSION STRATEGIES. HE OVERSEES AND ENSURES A GOOD BALANCE BETWEEN DRIVING CORE EXCELLENCES AND STRONG GOVERNANCE TO DELIVER SUSTAINABLE LONG TERM VALUE.


8 May 2014


7 out of 7


2 years and 2 months

28

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

Malaysian,age62,Female,IndianSenior Independent Director


VIMALA V.R. MENON

Finance/Audit

Corporate Planning and Development

InformationTechnology

Industrial Experience -BankingandFinance -Commercial/Marketing - Regional/International

Board Skills Matrix

Present Appointments:• Chairman,BoardAuditCommittee,PETRONASChemicalsGroupBerhad• Chairman,BoardAuditCommittee,PETRONASDaganganBerhad• Chairman,BoardAuditCommittee,Cycle&CarriageBintangBerhad• Member,AuditandRiskCommittee,Digi.ComBerhad• Member,NominationandRemunerationCommittee,PETRONASChemicalsGroupBerhad• Member,NominationCommittee,Cycle&CarriageBintangBerhad• Member,RemunerationCommitte,Cycle&CarriageBintangBerhad

Past Experiences:• Director,FinanceandCorporateAffairs,ProtonHoldingsBerhad• ExecutiveDirector,FinanceandCorporateServices,EdaranOtomobilNasionalBerhad• Director,EONBankBerhad• Director,JardineCycle&CarriageLimited• Director,PTAstraInternationalTbk,Indonesia• Deloitte KassimChan

Working Experience

• NofamilyrelationshipwithanyDirector/MajorShareholder• NoconflictofinterestwithPETRONASChemicalsGroupBerhad.Shehasneverbeenchargedfor


Declaration

Listed Entities:• PETRONAS Chemicals Group

Berhad• PETRONAS Dagangan Berhad• Cycle&CarriageBintangBerhad• DiGi.ComBerhad


Directorships

• FellowoftheInstituteofChartered Accountants in EnglandandWales

• MemberoftheMalaysianInstitute of Accountants

Qualifications

IN ADDITION TO MORE THAN 30 YEARS' EXPERIENCE IN FINANCIAL AND CORPORATE PLANNING, VIMALA V.R. MENON LEADS THE GROUP TO REFLECT AN UNWAVERING COMMITMENT TO PROMOTING GOVERNANCE AND DEMONSTRATING A CULTURE OF INTEGRITY.


13 August 2010


7 out of 7



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Sectiontwo

Malaysian,age63,Male,ChineseIndependent Non-Executive Director


CHING YEW CHYE



Finance/Audit

IndustrialExperience -BankingandFinance -Regional/International

Board Skills Matrix

• BachelorofScience(Honours),UniversityofLondon,UK

Qualifications


Berhad• GentingPlantationsBerhad

Other Public Company:• AIABerhad

Directorships

Present Appointments:• Chairman,NominationandRemunerationCommittee,PETRONASChemicalsGroupBerhad• Member,BoardAuditCommittee,PETRONASChemicalsGroupBerhad

Past Experiences:• ManagingPartnerfortheSouthAsiaRegion,AccenturePLC• GeographicCouncilChairman-Asia,AccenturePLC• ManagingPartneroftheFinancialServicesIndustryGroup-Asia,AccenturePLC• SciconConsultancy,UK

Working Experience



Declaration

AS A GLOBAL MANAGEMENT CONSULTANT WITH CLOSE TO 40 YEARS OF EXPERIENCE, CHING YEW CHYE ENRICHES THE BOARD'S COMPETITIVE EDGE, CONTRIBUTING HIS EXPERTISE IN CORPORATE STRATEGY AND ENHANCING BUSINESS PERFORMANCE.


13 August 2010


7 out of 7


6 year and 6 months

30

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

Korean,age70,Male,KoreanIndependent Non-Executive Director


DONG SOO KIM

Engineering

Operations


GlobalPetrochemicalConsultancy


Board Skills Matrix

• BachelorofScienceinChemicalEngineering,UniversityofCalifornia,USA

• MasterofScienceinChemicalEngineering,UniversityofIdaho,USA

Qualifications

Present Appointments:• Member,BoardAuditCommittee,PETRONASChemicalsGroupBerhad• Member,NominationandRemunerationCommittee,PETRONASChemicalsGroupBerhad• Advisor,SamsungSDICoLtd• Partner-Coach,KoreanCoachingManagementInstitute

Past Experiences:• Advisor/CoachtoPETRONASDownstreamBusiness• Advisor,DuPontAsiaPacific• President,DuPontAsiaPacific• VicePresidentandGeneralManager,GlobalNon-WovensBusiness,E.IDuPont• CorporateOfficerofE.IDuPont• GlobalFluoroproductOperationDirector,DuPontKorea• VariousseniormanagementpositionswithinDuPontKorea

Working Experience



Declaration


Berhad


Directorships

DONG SOO KIM'S MORE THAN 30 YEARS CAREER IN THE CHEMICALS INDUSTRY HAS BEEN NOTHING LESS THAN STERLING. THE CONVERGENCE OF HIS SKILLS, KNOWLEDGE AND EXPERIENCE IS WHAT LEADS THE BOARD TO STEP UP TO THE 'CALL TO ACTION' AND DRIVE OPERATIONAL EXCELLENCE.


13 August 2010


7 out of 7



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31

Sectiontwo

Malaysian,age59,Male,ChineseIndependent Non-Executive Director


DATUK TOH AH WAH



Finance/Audit

Economics

IndustrialExperience -Regional/International

Board Skills Matrix

• BachelorofCommerce,ConcordiaUniversity,Canada

Qualifications


Berhad• Tien Wah Press Holdings Berhad


Directorships

Present Appointments:• Member,BoardAuditCommittee,PETRONASChemicalsGroupBerhad• Chairman,Risk&FinanceCommittee,TienWahPressHoldingsBerhad• Member,BoardAuditCommittee,TienWahPressHoldingsBerhad• Member,BoardNominationCommittee,TienWahPressHoldingsBerhad• CouncilMember,BadmintonAssociationofMalaysia

Past Experiences:• ManagingDirector,BritishAmericanTobaccoMalaysiaBerhad• AreaDirectoroftheIndonesianClusterandtheRegionalProjectManagerofBritishAmerican

TobaccoAsiaPacificRegionLimited,HongKong.• ManagingDirector/ChiefExecutiveOfficer,PakistanTobaccoLimitedandAreaDirectorSouth

AsiaArea• ManagingDirector,BritishAmericanTobaccoNewZealand• BusinessDevelopmentDirectorChinaforBritishAmericanTobaccoAsiaPacificNorth• VariousseniormanagementpositionswithinRothmans

Working Experience



Declaration

DATUK TOH AH WAH CONTRIBUTES A HIGH LEVEL OF EXPERTISE IN MARKETING AND REGIONALISATION DERIVED FROM 32 YEARS' EXPERIENCE WITH BRITISH AMERICAN TOBACCO. HIS COMMERCIAL FINESSE HELPS TO NAVIGATE THE GROUP TOWARDS BUILDING GREATER SYNERGY WITH CUSTOMERS AND ACCELERATE PROFITIBALITY FOR LONG TERM GROWTH.


13 June 2014


7 out of 7


2 year and 8 months

32

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

Malaysian,age52,Male,MalayNon-Independent Non-Executive Director


ZAKARIA KASAH

Engineering

Operations



Board Skills Matrix

• BachelorofMechanicalEngineering,GeorgeWashingtonUniversity,USA

• LeadershipManagement,HenleyBusinessSchool,UK

Qualifications

Present Appointments:• VicePresident,PETRONASGroupDelivery,ProjectDelivery&Technology• Member,StudentDevelopmentAdvisoryCouncilforUniversitiTeknologiPETRONAS• Director,variouscompanieswithinPETRONAS

Past Experience:• VicePresident,PETRONASTechnology&Engineering,DownstreamBusiness• VicePresident,PETRONASUpstreamBusiness• ChiefExecutiveOfficer,MalaysiaLNGGroupofCompanies• VariousseniormanagementpositionsinPETRONASGasBerhad,EgyptianLNGandMalaysiaLNG

GroupofCompanies

Working Experience



Declaration


Berhad


Directorships

ZAKARIA KASAH'S ENGINEERING BACKGROUND AND EXTENSIVE PROJECT DELIVERY EXPERIENCE SET THE BOARD TOWARDS THE SUCCESSFUL DELIVERY OF OUR GROWTH STRATEGIES.


31 July 2015


6 out of 7



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33

Sectiontwo

Malaysian,age48,Female,MalayNon-Independent Non-Executive Director


FREIDA AMAT

Finance/Audit


IndustryExperience -OilandGas

Board Skills Matrix

• BachelorofScienceinAccountingandFinance,LondonSchoolofEconomics&PoliticalScience,UniversityofLondon,UK

• FellowoftheAssociationofCharteredCertifiedAccountants(ACCA)

Qualifications


Berhad


Directorships

Present Appointments:• Member,BoardAuditCommittee,PETRONASChemicalsGroupBerhad• SeniorGeneralManagerofFinance&AccountsServicesDepartment,PETRONAS• Director,variouscompanieswithinPETRONAS

Past Experience:• GeneralManager,CorporateFinanceDepartment• GeneralManager,Finance&AccountsServices,MalaysianInternationalTradingCorporationSdn.Bhd.• VariousseniormanagementpositionswithinPETRONAS

Working Experience

• NofamilyrelationshipwithanyDirector/MajorShareholder• NoconflictofinterestwithPETRONASChemicalsGroupBerhad.Shehasneverbeenchargedfor


Declaration

FREIDA AMAT LENDS THE BOARD A BROAD UNDERSTANDING OF CORPORATE FINANCE, FINANCIAL REPORTING AND TREASURY, STEERING THE GROUP TOWARDS EFFECTIVE CAPITAL MANAGEMENT AND EFFICIENCY.


31 July 2015


7 out of 7


1 year and 7 months

34

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD


from right to left: ABDUL AZIZ OTHMANHead of Strategic Planning&Ventures

AKBAR MD THAYOOBHead of Commercial

IR MOHD YUSRI MOHAMED YUSOFHead of Manufacturing

from right to left: DATUK SAZALI HAMZAHManaging Director/Chief Executive Officer

RASHIDAH ALIASChief Financial Officer

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35

Sectiontwo

Management Committee (Cont’d)

from right to left:

AHMAD ZAKI DAUDHeadofHealth,Safety&Environment

SITI AZLINA ABD LATIFHeadofCorporateAffairs&Administration

from right to left:

MOHAMAD ISKANDAR BAKERIHeadofProjectDirectorate

NOOR LILY ZURIATI ABDULLAHHeadofLegal&CorporateSecretariat

from right to left:

DATIN ZARINA ZAKARIA @ MOHAMADHead of Human Resource Management

DR ROSS FORREST GILMOURChiefInnovation&TechnologyOfficer

36

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

PROFILE OF MANAGEMENT COMMITTEE

DATUK SAZALI HAMZAHMalaysian, age 50, Male, MalayManaging Director/Chief Executive Officer

RASHIDAH ALIAS Malaysian, age 44, Female, MalayChief Financial Officer

Current role- Responsible for the management of all

financial and fiscal aspects of PCG and its subsidiariesaswellasriskmanagement,supply chain management, investorrelationsandinformationsystems

- Sits on the Board of several PETRONAS companies

Employment history1994 ArthurAndersen-Audit&advisory1998 PETRONAS - Various posts in areas

of corporate planning, accountingand shared services; and managing specialised assignments involving initial public offerings, corporatebond issuance, corporate strategyimplementation and groupwideprocess transformation

2010 PETRONAS-SeniorGeneralManager,Finance&AccountsServices

2013 PETRONAS-SeniorGeneralManager,GroupTreasury

Academic/Professional Qualifications- Bachelor of Commerce in Accounting,

UniversityofNewSouthWales,Australia- AdvancedManagementProgram,Harvard

Business School - Fellow of the Chartered Accountants

AustraliaandNewZealand- Member of the Malaysian Institute of

Accountants

Competency

TEC

HN

ICA

L S

KIL

LS A

ND

EX

PER

IEN

CE

Accounting

Corporate governance

Finance

Human Resource

Industryexperience

Law

Riskmanagement

Strategicmarketing

Strategydevelopmentandimplementation

Technology

Current role- Responsiblefortheoveralloperational,financialandsustainablemanagementofPCGand

itssubsidiaries- Sits on the Board of PCG and several PETRONAS Companies

Employment history1990 JoinedPETRONASasprocesstechnologistandprogressedthroughvariousroles in

therefineryandpetrochemicalbusiness.HeldseveralseniormanagementpositionsatPETRONASPenapisan(Terengganu)SdnBhd,PETRONASPenapisan(Melaka)SdnBhd,PETRONASGroupTechnologySolutions,andProjectManagementofTechnology&EngineeringDivisionofPETRONAS.Involvedintheimplementationandcommercialoperation of several major PETRONAS projects such as Kertih Aromatics Project,MelakaBaseOilPlant,MelakaRefineryRevamp,andCo-GenerationPowerPlant.

2003 Selected asmember of PETRONASCorporate Strategic Study and Implementation,and led a change programme that enhanced plant performance and operational excellence.

2010 Ledahighlyspecialisedteam,providingtechnicalservicesandsupporttoalloperatingplantsinPETRONAS,subsequentlyheadingProjectManagementDeliveryDivisionandoverseeingPETRONASdownstreamprojectsofhighcapitalvalue.

2012 AppointedasPETRONASPenapisan(Melaka)SdnBhd-ManagingDirector/CEO2014 AppointedasPresident/CEOofPETRONASChemicalsGroupBerhad2015 AppointedasResultManagerfortheTechnologyWorkstreamofPETRONAS’special

initiative,ProjectCACTUS2016 AppointedasPETRONASVPandPCGMD/CEO Academic/Professional Qualifications- BachelorofChemicalsEngineering,LamarUniversity,Texas,USA- AdvancedManagementProgram,TheWhartonSchool,UniversityofPennsylvania- CharteredFellowoftheInstitutionofChemicalEngineers(IChemE),UK

AR16

37

Sectiontwo

Profile of Management Committee (Cont’d)

IR MOHD YUSRI MOHAMED YUSOFMalaysian, age 50, Male, MalayHead of Manufacturing

Current role- ResponsibleforPCG'soveralloperational

excellance- SitsontheBoardofseveralPETRONAS

companies

Employment history

1989 PETRONAS-HSEexecutive1992 Ethylene&PolyethyleneMalaysia-

Variousrolesinproject,technicalandoperation

2004 DowChemicals(Pacific)Ltd,HongKong-Productionengineer

2006 OptimalGroupofCompanies-Manager,PlantTechnicalServices

2008 PETRONASGroupStrategicPlanning-ManagerofStrategyandPortfolio(OilBusiness)

2009 PETRONASChemicalsEthyleneSdnBhd-GeneralManager

2012 PETRONASChemicalsOlefinsSdnBhd, PETRONASChemicalsGlycolsSdnBhd, PETRONASChemicalsDerivativesSdnBhd-CEO

2014 PCG-HeadofManufacturing

Academic/Professional Qualifications

- BachelorofScienceinChemicalEngineering,OklahomaStateUniversity,USA

- AdvancedManagementProgram,TheWhartonSchool,UniversityofPennsylvania,USA

- CharteredFellow,InstitutionofChemicalEngineers(IChemE),UK

- RegisteredProfessionalEngineer,BoardofEngineersMalaysia

AKBAR MD THAYOOBMalaysian, age 53, Male, MalayHead of Commercial

Current role- ResponsibleforPCG‘soverall

commercialexcellence- CEOofPETRONASChemicalsMarketing

Sdn Bhd- CEOofPETRONASChemicalsMarketing

(Labuan)Ltd- SitsontheBoardofseveralPETRONAS

companies

Employment history1987 PETRONAS-Variousproject

engineeringandcorporateplanningroles

2004 PhuMyPlastics&ChemicalsCoLtd,Vietnam-GeneralDirector/CEO

2008 PETRONASChemicalsLDPESdnBhd-CEO

2010 PETRONASDownstreamBusiness-HeadoftheOfficeoftheExecutiveVicePresident

2012 PETRONASDaganganBerhad-HeadofRetailBusiness

2014 PCG-HeadofCommercial

Academic/Professional Qualifications- BachelorofScienceinCivilEngineering,

UniversityofWestVirginia,USA- PremierBusinessManagementProgram,

HarvardBusinessSchool

ABDUL AZIZ OTHMANMalaysian, age 51, Male, MalayHead of Strategic Planning & Ventures

Current role- ResponsibleforPCG'soverallstrategic

planning,businessdevelopmentandventuresmanagement

- SitsontheBoardofseveralPETRONAScompanies

Employment history1987 PETRONASGasBerhad-

Mechanicalengineer2000 PETRONAS-Head,

Strategy&BusinessPlanning,GasBusinessUnit

2005 PETRONASGasBerhad- GeneralManager(CentralisedUtilitiesFacilities)

2009 VinylChlorideMalaysiaSdnBhd-CEO

2011 PCG-HeadofStrategicPlanningandVentures

Academic/Professional Qualifications- BachelorofScienceinMechanical

Engineering,GeorgeWashingtonUniversity,USA

- SeniorExecutiveProgram,LondonBusinessSchool

38

Sectiontwo

PETRONAS CHEMICALS

GROUP BERHAD

NOOR LILY ZURIATI ABDULLAH Malaysian, age 58, Female, MalayHeadofLegalandCorporateSecretariat

Current role- ResponsibleforPCG'slegalaffairsand

companysecretarialservices- SitsontheBoardofseveralPETRONAS

companies

Employment history1991 PETRONAS-Legalservicescovering

jointventures,plantconstructions,projectfinancing,plantoperations,time-charterpartyandLNGsales

2002 PETRONASDaganganBerhad -SeniorLegalCounsel,Legaland

CorporateSecretariatServices2009 PETRONASInternational

CorporationLimited(Egypt)- Head,Legal&CorporateAffairs

2011 PETRONASGasBusinessUnit-HeadLegal(Project)

2014 PETRONASTechnology&EngineeringDivision-GeneralCounsel/HeadofLegalforTechnology,EngineeringServicesandIntellectualProperty

2016 PCG-GeneralCounsel/HeadLegal&CorporateSecretariat

Academic/Professional Qualifications- BachelorofLaws,UniversityofLondon,UK- SijilAmalanGuamanLembagaKelayakan

ProfessionUndang-Undang,Malaysia,- LicensedCompanySecretary


DR ROSS FORREST GILMOURAustralian, age 56, Male, CaucasianChiefInnovation&TechnologyOfficer

Current role- ResponsibleforPCG'sproduct

improvement,technicalsupport,regulatoryandstewardshipfunctionstodeliverinnovativecustomersolutions

- DirectorofPETRONASResearch Sdn Bhd

Employment history1985 DepartmentofAgriculture,Western

Australia-ResearchProgrammeLeader

1995 ForBioAsiaPtyLtd(Malaysia)-RegionalDirectorforSEAsia

2000 GrainsResearchandDevelopmentCorporation-InvestmentManager

2003 BSESLimited(Australia)-R&DManager

2009 E.IduPontdeNemoursandCompany,USA-ProgrammeLeader,AgriculturalBiotechnology

2013 PCG-ChiefInnovation&TechnologyOfficer

Academic/Professional Qualifications- BachelorofAgricultureinPlantBreeding

andGenetics,UniversityofQueensland,Australia

- PhDinAgriculturalScience,UniversityofQueensland,Australia

MOHAMAD ISKANDAR BAKERI Malaysian, age 50, Male, MalayHead of Project Directorate

Current role- Responsibleforthedeliveryand

executionofPCG’skeyprojects

Employment history1989 ASEANBintuluFertilizerSdnBhd - Heldvariouspositionsfrom

AreaEngineer,SeniorEngineerandSectionHeadinvariousdisciplinesofMachinery,Maintenance,Inspection,Reliability&IntegrityandPlantTurnaround.

2006PETRONASChemicalsFertiliser(Kedah)SdnBhd-SeniorManagerEngineering

2008 ASEANBintuluFertilizerSdnBhd-GeneralManager

2010 ASEANBintuluFertilizerSdnBhd-MD/CEO

2012 PETRONASChemicalsFertiliser(Sabah)SdnBhd- HeadPre-Operations/CEO

2016 PCG-HeadofProjectDirectorate

Academic/Professional Qualifications- BachelorofScienceinMechanical

Engineering,UniversityofArizona,USA- ManagementProgramme,INSEAD- RegisteredProfessionalEngineer,Board

ofEngineersMalaysia

AR16

39

Sectiontwo


DATIN ZARINA ZAKARIA @ MOHAMADMalaysian, age 49, Female, MalayHead of Human Resource Management

Current role- ResponsibleforPCG’speoplestrategies,

talentdevelopmentandmanagement,aswellashumanresourceservices

Employment history1992 PETRONASDaganganBerhad-

SystemAnalyst2008 PETRONAS-SeniorManagerof

PeopleStrategyDesignandPilot2009 PETRONASCarigaliSdnBhd-Head

ofPeopleStrategyandPlanning2012 PETRONASCarigaliSdnBhd-Head

ofHumanResourceManagement(MalaysiaOperation)

2014 PCG-HeadofHumanResourceManagement

Academic/Professional Qualifications- BachelorofScienceinBusiness

Administration,UniversityofSouthernCalifornia,USA

AHMAD ZAKI DAUDMalaysian, age 44, Male, MalayHeadofHealth,Safety&Environment

Current role- ResponsibleforPCG'soverallHSE

performance,processsafetyandsustainabledevelopment

Employment history1997 PETRONASSecondEthylene

CrackerProject-ElectricalMaintenanceEngineer

2001 PETRONASChemicalsDerivativesSdnBhd-ElectricalProductionEngineer

2009 PETRONASChemicalsDerivativesSdnBhd-UtilitiesManager

2012 PETRONASChemicalsGlycolsSdnBhd-HeadofEthyleneOxideGlycols

2014 PCG-HeadofOperationWorkProcess

2015 PCG-HeadofHSE

Academic/Professional Qualifications- BachelorofScience(Hons)inElectrical

Engineering,UniversityofBrighton,UK

SITI AZLINA ABD LATIFMalaysian, age 45, Female, MalayHeadofCorporateAffairs&Administration

Current role- Responsibleforplanning,development

andimplementationofallPCG’scorporatebranding,stakeholderandmediamanagement,communicationandreputationmanagement

Employment history1997 PETRONASDaganganBerhad

-Financeandaccounts,complementarybusiness,retailsalesandbrandcommunications

2007 PETRONASDaganganBerhad-HeadofBrandCommunications

2013 PCG-HeadofCorporateCommunications&Administration

2016 PCG-HeadofCorporateAffairs&Administration

Academic/Professional Qualifications- BachelorofArtsinAccounting,

UniversityofPortsmouth,UK- MastersofBusinessAdministration,

CardiffUniversity,UK

OUR

STRATEGIC

PERFORMANCE


W h a t i s t h e s t a t e o f t h e p e t r o c h e m i c a l s i n d u s t r y ?

W h a t a r e t h e c h a l l e n g e s a n d r i s k s f a c e d ? F i n d

o u t b y r e a d i n g t h i s s e c t i o n , a n d d i s c o v e r t h e

s t r a t e g i c d i r e c t i o n w e a r e t a k i n g t o l e v e r a g e o n

o u r s t r e n g t h s t o m a i n t a i n o u r l e a d i n g e d g e . I n

t h e f o l l o w i n g p a g e s , w e a l s o d i s c l o s e h o w w e l l

w e p e r f o r m e d d u r i n g t h e y e a r .

CONTENTS

41 ManagementDiscussion&Analysis

• ManagingDirector/CEO

• ChiefFinancialOfficer

• HeadofManufacturing

• HeadofCommercial

53 KeyGlobalMegatrends

54 MarketOutlook

56 StrategicIntent

58 HowWeTreatRisks

60 InvestorRelationsandSharePerformance

63 FinancialCalendar

64 OurAchievements

66 PCGintheNews

68 CalendarofEvents



AR16

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Sectionthree

MANAGEMENT DISCUSSION & ANALYSIS Managing Director/CEO

DEAR SHAREHOLDERS,

IT GIVES ME GREAT PLEASURE TO PRESENT AN OVERVIEW OF PCG’S PERFORMANCE FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2016. FOR THE PERIOD UNDER REVIEW, WE CONTINUED TO FOCUS INTENTLY ON OUR OPERATIONAL, COMMERCIAL AND INNOVATION EXCELLENCE, AND FORGED AHEAD WITH OUR GROWTH PLANS. THE END RESULTS HAVE BEEN VERY POSITIVE AS WE FURTHER CEMENTED OUR POSITION AS A LEADING PETROCHEMICALS PLAYER IN THE REGION, CREATING ADDED VALUE FOR YOU.

It is by no means the best of times for the petrochemicals industry, with low oil prices and soft global demand suppressing the margin of our products. Within this scenario, PCG continued to secure strategic markets in the Asia Pacific region with optimised cost. Combined with improved feedstock supply and enhanced plant reliability, we pulled together an impressive performance for the year.

PCG continued to focus on the Asia Pacific region to leverage on the benefits of reduced transport costs as well as hot spots of demand. The price of ethylene, a basic product which serves as a barometer of petrochemical commodities for Olefins and Derivatives (O&D) market, increased in the first half of the year due to several plant shutdowns and turnarounds in the region. However, upon completion of these turnarounds, ethylene flooded the market once again, pushing down prices towards year end. On average, the price of ethylene was 6% lower in 2016 than it was in 2015.

42

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Management Discussion & Analysis (Cont’d)Managing Director/CEO

DemandwasnoticeablysofterincomparisonwithsupplyintheFertilisersandMethanol(F&M)market.Theaccompanyingdecreaseinpriceofproductswasreflectedinthoseforureaandmethanolwhichdroppedby25%and16%respectivelyin2016comparedto2015.

Whilesuchmacro-economicfactorsandthedynamicsofsupplyanddemandarebeyondourcontrol,Iamproudthatinareaswherewecanmakeadifference,wehavedoneso.PCGcontinuedtoperseverewithourtwo-prongedstrategyofstrengtheningbasicpetrochemicalswhileselectivelydiversifyingintoderivatives,specialtychemicalsandsolutions.Underpinnedbyourfocusedeffortstoenhanceouroperationalandcommercialefficiencies,theresultsweregratifyingintermsofkeyfinancialandoperationalparameters.

Operationally,werecordedourhighestplantutilisationof96%sinceincorporation,surpassingworld-classbenchmarkof85%,thussettingasolidfoundationforourgrowth.Withrecordproductionandsalesvolumesaswellasvariousmeasurestoenhanceefficiencies,theGroup’srevenueincreased2%fromRM13.5billionin2015toRM13.9billion.Meanwhileearningsbeforeincometax,depreciationandamortisation(EBITDA)grewmarkedlyfromRM4.7billiontoRM5.3billion,providingusanEBITDAmarginof38%.Mostsignificantlyforourshareholders,werecordedaprofitaftertax(PAT)ofRM3.2billlionandahigherreturnonaveragecapitalemployed(ROACE)(3yearsaverage)of12%fortheyear.

ON TRACK IN OUR JOURNEY TO EXCELLENCE

Operationalexcellenceisimperativeforthesuccessofourbusiness.Oureffortstoachieveworld-classbenchmarkinplantperformancethrougheffective implementation of internal reliability and efficiency enhancement programmes, supportedby reliable feedstock andutilities supply,wererewardedwithexceptionalresults.Weachieved100%utilisationrateinthethirdquarterandaveraged96%fortheyear.Thiswasespeciallysignificantasincreasedcapacityglobally,combinedwithsubdueddemand,hasnegativelyimpactedtheutilisationrateofmanyplayers.

PCGcouldafford to runat itshighest capacity, secure in theknowledgeof a readymarket forourproducts, becauseof effective salesandmarketinginitiatives.Whilestrengtheningourrelationshipwithmorethan1,000existingcustomers,ourteamhasbeenproactiveinleveragingsaleschannelsforhigh-valueapplications,ridingonPCG’sestablishedreputation.Yearsoftrulyvaluingourcustomersandensuringwemeettheirexpectationsateverysingleopportunityhavegonealongwaytowardsopeningmanydoorsforus.

For further discussion on our fiscal policies and recognition of our financial risks please turn to pages 46 to 47.

PCMTBE

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Sectionthree


REVENUE EBITDA PROFIT AFTER TAX

RM

13.9 billion

RM

5.3 billion

RM

3.2 billion

Looking at things from our customers’ lens has enabled us to offer compelling value proposition ranging from innovative customised solutions to effective sales support in delivering the right customers experience. PCG has also been continuously improving our logistics efficiencies by using the most appropriate logistic arrangements to accommodate customers’ needs.

To further elevate our regional presence and increase understanding of our customers’ needs and requirements, we have incorporated a marketing subsidiary in Indonesia to add to our existing marketing subsidiaries in Thailand and China as well as regional representative offices in Vietnam and the Philippines. All these efforts have resulted in the achievement of our highest EBITDA margin and strong cash generation amidst a challenging market.

44

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD


HSE: ALWAYS A PRIORITY

In a competitive industry, achieving top numbers is a priority. But when it comes to HSE, PCG aims for zero. Zero incident and zero injury. We invest significantly in creating a strong HSE culture among all our employees and our contractors’ employees, and keep reinforcing safe behaviours via programmes, communiques and training.

Our HSE procedures are guided by global best practices and have been recognised with accolades from both local and international organisations such as Chemical Industry Council of Malaysia (CICM), Malaysian Society for Occupational Safety and Health (MSOSH) and Royal Society for the Prevention of Accidents (RoSPA).

The two fatalities during the year involving contractors’ workers at the Sabah Ammonia Urea (SAMUR) project were a stark reminder of the high level of risk that face personnel at our plants throughout an operating day. Although we have the best safety systems and processes, we recognise the need to keep reinforcing strict adherence to set procedures at every stage along the operational chain. We were deeply saddened by the incident, which was unacceptable, and have redoubled our HSE and risk management efforts to safeguard everyone at work and around the areas where we operate.

GROWING INTO A DYNAMIC FUTURE

Our two-pronged growth strategy focuses on strengthening basic petrochemicals to increase our volume-play advantage as a competitive regional player; and selectively diversifying into derivatives, specialty chemicals and solutions which in turn will allow us to harness value-play from higher margin products. With this in mind, PCG has invested in five key projects with a total CAPEX of RM10.1 billion, which will add 5.1 million mtpa to our nameplate capacity.

The investments include SAMUR, an ammonia and urea plant in Sipitang, Sabah, which will increase our current capacity of 10.8 million mtpa by 18%, establishing us firmly as a leading supplier of fertiliser in the region. We were very excited to see SAMUR successfully producing on-specification urea and we are now in the process of ramping up the plant for full commercial operations.

While SAMUR strengthens our basic petrochemicals portfolio, we are also deepening our footprints in the derivatives, specialty products and solutions portfolio. We are undertaking three projects with BASF through our associate company, BASF PETRONAS Chemicals Sdn Bhd, at its plant in Gebeng, Pahang. These projects will produce aroma ingredients, as well as 2-EHAcid and HR-PIB. Demand is expected to continue to increase in the long term driven by global economic growth, and increasing wealth in the Asia Pacific region. We are well within the range of start-up schedule and expect Citral production in 2017. The production units for Citronellol and L-Menthol will come

on-stream in phases in 2017. We also saw the successful production of on-specification 2-EHAcid in late 2016. Work on the production facility for HR-PIB is progressing well, and we expect this facility to be commissioned in 2017, as planned.

Finally, upon acquisition of PRPC Polymers and PRPC Glycols in November 2015, PCG is proud to be part of the Pengerang Integrated Complex (PIC) in Pengerang, Johor. Through the two plants, we will spearhead the petrochemicals component of PIC, enjoying the benefits of integrated feedstock supply from PRPC’s refinery and cracker, located within the same complex.

This project is progressing well whereby to date, we have awarded the engineering, procurement, construction and commissioning (EPCC) for the polypropylene (PP), ethylene oxide/ethylene glycol (EO/EG), and linear low-density polyethylene (LLDPE) plants. This year itself, we achieved the final investment decision (FID) and awarded EPCC for flexi polyethylene (Flexi PE) plant.

Once completed in 2019, our total production capacity will increase by a further 20%. Our investments in PIC provide us a solid foundation to diversify our feedstock source for business sustainability while pursuing our presence in the derivatives and specialty chemicals sectors. SERVING OUR PEOPLE & COMMUNITY

Our focus on growth is finely balanced by our commitments to the people whose lives we impact in ways that may not be directly related to our business, namely our employees and the larger communities in which we operate.

As an employer, PCG aims to create a dynamic work environment that truly engages our people and inspires them to develop their true potential, promoting a greater sense of well-being through a high level of job satisfaction. Our HR focuses on identifying individual talents and skills, and enhancing these for career advancement. Every employee

Find out more about our HSE practices in our Sustainability Statement from pages 82 to 84.

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Sectionthree

receives comprehensive on-the-job training which is supplementedby formal trainingprogrammes that include leadershipdevelopment.Atthesametime,werespecttheneedforgoodwork-lifebalanceandofferameasureofflexibility inworkinghoursandannual leavewhileprovidingourfemalestaffwithvariousfacilitiestohelpthemmanagetheirprofessionalandfamilycommitments.

Within our local communities, PCG is dedicated to developingmeaningful programmes thathaveasustainable impacton the liveswetouch.Mostofoureffortsarecentredonnarrowingtheeducationgapaswellaselevatingthewell-beingoftheunderprivileged.Throughone of our flagship initiatives, Program Sentuhan Ilmu PETRONAS(PSIP),weadoptschoolswherewehelptoimprovestudentcapabilitiesincoresubjectssuchasEnglish,ScienceandMathematics.Anothersignature outreach programme is Sentuhan Kasih, which serves toempowermarginalisedpocketsof thecommunity throughdonationsandactivities.

Aspartofourcorporatesocialresponsibility(CSR)wealsogetinvolvedwiththecommunitytoconservetheenvironment.Since2005,wehavebeen running an ecoCare programme together with the MalaysianNatureSociety(MNS)thatseekstocreateawarenessoftheimportanceofpreservingmangrovehabitats.Underthisprogramme,wehavesetupanecoCareEnvironmentalEducationCentre(ecoCareEEC)inKertihwhichrunsvariousactivitiestorehabilitatethemangroveecosystemalong the banks of Kertih River. To date, over 11,000 squaremetresof the mangrove forest have been replanted with more than 10,000seedlings.

These initiatives,whichstemfromadeepdesire tooperateethically,serve also to reinforce our sustainability by strengthening ourstakeholderrelationships.Itgivesmepridetoseeoureffortstosustainour financial performance with a healthy environmental, social andgovernance (ESG) scorecard gainmomentum. This year, as you willobserve from our Sustainability Statement, we are adopting a morestrategic approach in terms of engaging with our stakeholders andcreating greater transparency in our operations. We believe theseefforts, together with robust financial performance, will contributeto enhanced investors’ confidence. For a fuller account of our ESGconsiderations,pleaserefertoourSustainabilityStatementonpages75-88.IampleasedtosharethatourESGeffortshavebeenrecognisedwithPCGbeingnamedoneofthetop10companiesasrankedbymarketcapitalisationlistedintheFTSE4GoodBursaMalaysia(F4GBM)Index.

OUTLOOK

All indicatorspointtoanotherchallengingyearin2017.Althoughthepriceofoilandglobaleconomyareexpectedtopickup,theincreaseis forecast to be slight, and demand for petrochemicals is likely tocontinuetobedwarfedbysupply.Fromthenumberofprojectsplannedbetween2016and2020,worldethylenecapacityisanticipatedtogrowby3.7%annuallywhiledemandisexpectedtoaverage3.5%inthesameperiod.

Within this environment,we remainoptimistic of continuing to bringaddedvaluetoyou.Ourstrategicposition inthecentreofSoutheastAsia, oneof the fastest growing regions in theworld, aswell asourworld-class operational and commercial excellence,will stand us onastrong footing to face thesoftenvironment.Most important forusis to continue to focus on our growth planswhile strengthening ourfundamentals.ThesewillcontinuetobekeydrivingforcesatPCGandwillenableustofurtherenhanceour inherentvalue,andourvaluetoyou.

Oursteadyperformanceinthesetryingtimesisthecombinedresultofanumberofpeople,whomIwouldliketoacknowledge.TheyincludeourBoardofDirectors,particularlyourChairman,whohavecontinuedtoguidePCGwithgreat industry insightandentrepreneurialwisdom;mycolleagueson theManagementCommittee,manyofwhomhaveputintimebeyondtheircallofdutytoensureweachieveourgoals;andallouremployeeswhotrulyaretheengineofgrowthofPCG.ThankyouforyourcommitmentanddedicationtoPCG.

At the same time, I would like to thank our shareholders for yourcontinuedsupport;ourcustomers,fortheirtrustinourproducts;andallotherstakeholders forhelping tocreate thecompany thatwearetoday. All your contributions are highly valued and, on behalf of themanagement,wewouldliketosayacollective‘terimakasih’.


46

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

RASHIDAH ALIAS

CHIEF FINANCIAL OFFICER

Management Discussion & Analysis (Cont’d)Chief Financial Officer

IN THE CURRENT ENVIRONMENT OF LOW CRUDE OIL PRICES AND SUBDUED DEMAND FOR PETROCHEMICAL PRODUCTS, INDUSTRY PLAYERS HAVE HAD TO TIGHTEN THEIR BELTS, AND PCG HAS BEEN NO DIFFERENT.

We have had some significant successes on this score for 2016, thanks to various cost optimisation initiatives, not least of which has been our focus on operational excellence which has significantly increased our plant utilisation thus reducing our unit production cost. This has been further supported by reduced repair and maintenance expenses, efficiencies in our supply and distribution and a keen eye on optimising our day-to-day operating expenses.

Our plant utilisation hit a record level of 96%, up from 85% in 2015, due largely to improved ethane and methane supplies as well as a lower level of turnaround activity across the Group. Along with higher plant utilisation, we saw an increase in production and sales volumes. This, together with a stronger US Dollar against the Malaysian Ringgit, enabled us to record an increase in revenue despite lower prices of products on average. Our Group revenue surged by RM324 million or 2% to RM13.9 billion.

The efficiencies brought about by increased production volume and lower unit cost, together with a favourable foreign exchange environment, allowed us to mitigate the impact of thinner spreads to record 14% growth in earnings before income tax, depreciation and amortisation (EBITDA) by RM631 million to RM5.3 billion.

Accordingly, profit after tax (PAT) increased by 4%, or RM131 million, to RM3.2 billion. Excluding the assets write-off amounting to RM244 million (or USD59 million) due to cancellation of the elastomers project during the year, our PAT would have been RM3.5 billion, which is a 12% increase from the previous year.

SEGMENTAL REVIEW

Olefins and DerivativesWhile there were scheduled turnarounds undertaken at the propane dehydrogenation (PDH) and aromatic plants, we still achieved 100% utilisation rates in the Olefins and Derivatives segment, up from 93% in the previous year. This contributed to a 3% increase in revenue from RM9.5 billion to RM9.8 billion. Further supported by a strengthening US Dollar, EBITDA grew by RM596 million or 19% to RM3.8 billion. Segmental PAT grew by 8% to RM2.2 billion. Excluding the elastomers write-off, PAT for the segment would have amounted to RM2.4 billion, marking an increase of 21% from the RM2.0 billion achieved in 2015.

Fertilisers and MethanolPlant utilisation rate similarly grew in the Fertilisers and Methanol segment, from 80% to 93%, mainly due to better methane supply. The increase in production more than compensated for the price decrease of methanol due to lower demand for fuel additives, as well as that for urea and ammonia due to oversupply in the market from new capacity. Complemented by the strong US Dollar, the segment recorded slight increase of 1% in revenue.

Nevertheless, EBITDA and PAT were slightly lower by RM19 million or 1% to RM1.5 billion and RM60 million or 6% to RM999 million respectively on lower spreads.

FINANCIAL POSITION

Total AssetsDuring the year, our total assets grew by 4% from RM30.8 billion to RM31.9 billion along with an increase in our Property, Plant and Equipment (PPE). The value of our PPE grew by 12% to RM18.5 billion with RM3.0 billion in additions during the year under review, comprising RM1.8 billion for petrochemical projects under the PIC project, RM557 million for the SAMUR Project, and RM337 million for other plant operational CAPEX. Depreciation charges for the year, stood at RM1.3 billion.

Total LiabilitiesOur total liabilities decreased by 14% from RM4.2 billion to RM3.6 billion as a result of lower trade and other payables. The group has minimal borrowings as at 31 December 2016 of RM23 million relating to a facility taken for working capital purposes by one of its subsidiaries.

Cash FlowAlthough the Group’s cash and cash equivalents was lower by 15% from 2015, it remained at a very healthy RM7.4 billion. We incurred a higher cash outflow for financing due to higher dividends paid to shareholders and non-controlling interest. Cash flow from investing activities, meanwhile stood at RM2.8 billion mainly reflecting investments made for growth projects. Cash flow from operating activities for the year remains strong at close to RM4 billion.

AR16

47

Sectionthree


CASH FLOW GENERATION AND UTILISATION

We are rigorous in monitoring cash flow throughout the Group. Today, as we are gearing for growth, we strive to maintain optimal level of working capital at our subsidiaries to enable the repatriation of dividends to PCG as the holding company for ongoing and future projects. Based on their respective working capital needs, our subsidiaries prepare regular and robust cash flow forecasts which is then used to manage all receivables and payables including short term financing with overall direction and oversight at Group level.

CORPORATE FINANCIAL POLICY

The management of our cash flows, as well as other financial aspects of the Group’s operations that could pose a risk to our business, is guided by our Corporate Financial Policy. This serves as a foundation upon which our financial risk management is built and the resultant risk exposures identified, managed and mitigated. The policy promotes effective information flow for proactive and integrated financial risk management, and improves the quality of decision-making throughout the Group.

DIVIDEND POLICY The Group has a dividend policy that is subject to the discretion of the Board and final approval from the Shareholders. The policy takes into consideration a number of factors, which include, the Group's earnings, capital requirements, general financial condition, its distributable reserves and other factors considered relevant by the Board. The Board intends to adopt a policy of active capital management. The Board proposes payment of dividends through cash generated from the Group's operations after setting aside necessary funding for capital expenditure and working capital needs. As part of this policy, the Group targets a payout ratio of around 50% of its consolidated PAT under Malaysian GAAP in each calendar year, subject to the confirmation of the Board and to any applicable law, licence and contractual obligations and provided that such distribution would not be detrimental to the Group's cash needs or to any plans approved by the Board.

TOWARDS STRONGER GOVERNANCE During the year, we undertook a review of PCG's Group Limits of Authority to delegate greater responsibility to members of our senior management in terms of making operational decisions. This has the dual benefits of enhancing efficiencies in our decision-making process as well as enabling our Board to focus on more strategic and high-impact matters. As a result, we have been able to execute our plans more efficiently and quickly than we did previously whilst ensuring proper governance is in place. KEY FINANCIAL RISKS AND UNCERTAINTIES AFFECTINGOUR PERFORMANCE

Looking ahead, our mid-term goals will entail further enhancing our cash and liquidity management. This will ensure we are able to efficiently service our growth projects.

During the year, a total of RM3.3 billion was invested in five ongoing growth projects namely SAMUR, the polymers and glycols plants in PIC, and three further projects with our partners.

Our performance in 2016 was achieved in the midst of slower economic growth and financial market volatility. It attests to the resilience of our business, which is underpinned by multiple growth engines, a solid balance sheet and prudent cash management. With a sound foundation, we will be able to face 2017 from a position of strength.

RISKS HOW ARE WE MANAGING IT?

TAX RISKS The Group has adopted PETRONAS’ Corporate Financial Policy which details guidelines on tax administration in respect of tax compliance and planning. The guidelines cover corporate income tax, tax audit and investigation, withholding tax and indirect tax, transfer pricing and tax planning. The Group’s tax administration, as well as that of our subsidiaries, is monitored and reported to PETRONAS Group Tax Division.

FOREIGN EXCHANGE RISKS

We adhere to the foreign exchange (forex) management guidelines in PETRONAS’ Corporate Financial Policy, which help us identify, measure and manage our forex exposure. The guidelines encompass functional currency considerations, currency netting, currency matching and hedging. We also conduct forex exposure analysis prior to making decisions on any business with forex risk.

REGULATORY CHANGES

The Group keeps abreast of regulatory changes by PETRONAS and statutory bodies, and complies with these.

48

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Group Company

2015 2016 2015 2016

RMmil RMmil RMmil RMmilRevenue 13,536 13,860 2,796 4,401Purchaseofgoodsandservices (8,090) (7,708) (64) (70)Valueaddedbythecompanies 5,446 6,152 2,732 4,331OtherExpenses (391) (196) (6) (267)OtherIncome 733 289 346 860Financingcosts (11) 47 2 60Shareofprofitaftertaxofequityaccountedassociateandjointlycontrolledentity 87 17 - -

Valueaddedavailablefordistribution 5,864 6,309 3,074 4,984

DISTRIBUTION

Toemployees Employmentcosts 817 862 127 100

Togovernment Taxation 742 888 14 50

To shareholders Dividends 1,280 1,360 1,280 1,360 MinorityInterest 146 815

Retainedforreinvestmentandfuturegrowth Depreciation,amortisationandimpairment 1,279 1,337 3 3 Retainedprofit 1,600 1,047 1,650 3,471

5,864 6,309 3,074 4,984

14%

38%

14%

34%

2016GROUP

13%

14%

49%

24%

2015GROUP

• ToEmployees • ToGovernment • To Shareholders • RetainedforReinvestmentandFutureGrowth


Value Added Available for Distribution (RM Million)

AR16

49

Sectionthree

IT HAS BEEN A VERY ENCOURAGING YEAR FOR THE MANUFACTURING DIVISION. COLLABORATIVE EFFORTS TO ENHANCE OUR PERFORMANCE LED TO OUR HIGHEST EVER PRODUCTION VOLUME.

Management Discussion & Analysis (Cont’d)Head of Manufacturing

IR MOHD YUSRI MOHAMED YUSOF

HEADOFMANUFACTURING

Plantutilisationisdependentonanumberoffactors,keyamongstwhicharereliabilityoftheplantsandfeedstocksupplyaswellastheabilitytoconductturnaroundswithminimumdisruptiontooperations.IampleasedtosharethatPCGmademarked improvements in theseareasas a result of rigorousoperational excellencepracticesandmodusoperandithatfacilitatescollaboration,cooperation,andcollectivedecisionmakingacrossthevaluechain.

Improvement in asset management practices such as preventive maintenance and effective Bad Actormanagement,focusingonitemsthatimpactplantreliabilityensuresourplantsareavailablethroughouttheyear.Byengagingmorecloselywithsuppliersoffeedstockaswellasutilitiesinplanningandoperations,wewereabletoreapthebenefitsofgreatersecurityinthevolumesofmethaneandethanereceived,aswellasutilitiessupply.

Methane supplywas further secured by commissioning of the Dalak pipeline in the first quarter of the year,addingtosupplyfromKikeh.WithDalakfeedingmethanetoourmethanolfacilityinLabuan,totalproductionofthisplant increased45%comparedto2015.Atthesametime,ethyleneproductiongrewby15%asaresultofmorereliablegasplantsandcrackersperformancethroughouttheyear.

WITH DALAK FEEDING METHANE TO OUR

METHANOL FACILITY IN LABUAN, TOTAL

PRODUCTION OF THIS PLANT INCREASED

45% COMPARED TO 2015. AT THE SAME

TIME, ETHYLENE PRODUCTION GREW

BY 15%.

50

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Therewerethreescheduledturnarounds–atPCMTBE(PDHPlant)in Gebeng, Pahang; PC Aromatics in Kertih, Terengganu and ABFinBintulu, Sarawak–all ofwhichwereplanned in great detail andexecutedsystematically,withbettercoordinationamongthepartiesinvolved.Withthebenefitofexperience,ourinternalteamhasaclearunderstanding of running these programmes, and managing ourcontractors, to ensure theymeet expected levels of competency inallfunctionalareas,includingsafety.Asourturnaroundcompetencyincreases every year, we were able to shorten the duration of theprogrammes. In 2016, not only did we have more compressedturnaroundschedules,wealsoexceededourtargetsby7%.

Integral to our efforts to achieve operational excellence is tooptimise production at the lowest cost. This involves minimisingfeedstocklossandbeingenergyefficient.Asexamples,anyexcessethane fromGas Processing Kertih to PC Ethylene is re-routed toPC Olefins; while flaring of surplus fuel at PC Olefins during highplantloadingisreducedbyexportingthesurplusfueltosurroundingplants.Similarly,excesssteamgeneratedbytheplantisre-routedtoourbutanolplant.Theseinitiativeshelpedustooperateatahigherlevelofenergyefficiencyascomparedto2015.

Thepursuitofoperationalexcellenceencompasseshavingastrongfoundation on safety. Safety is our top priority and is reinforcedbyour leadership’s commitment tobuildonour safety framework,guided by PETRONAS’ HSE Policy. We ensure all our employees

Management Discussion & Analysis (Cont’d)Head of Manufacturing

adheretothestandardsandoperatingpracticesofthisPolicyandabidebyourZeroTolerance (ZeTo)Ruleswhichserve to inculcatesafebehaviorandcultivatethegenerativeHSEmindset.

During the year, we appointed ZeTo ambassadors to ensurecompliancewithallZeToRules.Wealsoplacednumerousbannersand buntings carrying safetymessages in strategic places at ourplants. I am pleased to share that these initiatives have had apositiveeffectintermsofcompliancewiththeZeTorules.

We also reinforced our process safety assurance by conductingvariousemergencyreadinessexercisesandupskillingouremployeestotherequiredtechnicalstandardsinmanagingourfireprotectionsystem.

Oursafetyculture isextended tocontractorswithwhomweshareourHSEexpectationsand requirements.Wealsoprovide trainingstotheirworkersonoursafetysystemsandtechnicalstandards,andcomplementthisbyregularbriefingsonsafeworkprocedures.Asalargenumberofcontractorsareinvolvedinourplantturnarounds,wecontinuouslystrengthenourHSEplanspecificallyforthis.Toensuresafety requirements are adhered to,members of themanagementteamregularlyconductwalkaboutsandaudits.

Looking ahead,wewill strive tomaintain existing plant utilisationbeyond theworld-classbenchmark, rampupoperationsatSAMURtofullcapacity,whilefocusingfurtheronoperationalefficiencies.

PCEPE

AR16

51

Sectionthree

AKBAR MD THAYOOB

HEAD OF COMMERCIAL

2016 WAS CERTAINLY A GOOD YEAR FOR THE COMMERCIAL DIVISION, AS WE CELEBRATED OUR HIGHEST SALES VOLUME TO DATE. IT IS PARTICULARLY GRATIFYING TO SEE OUR SALES AND MARKETING EFFORTS BEAR FRUIT AT A TIME WHEN THE MARKET WAS VERY CHALLENGING. THERE CAN BE NO DOUBT THAT THE 17% INCREASE IN SALES ACHIEVED WAS A DIRECT RESULT OF HARD WORK AND DETERMINATION BY THE ENTIRE TEAM TO ATTAIN OUR ‘GOLD STANDARD’ – COMMERCIAL EXCELLENCE – WHICH IS ONE OF THE THREE DRIVING FORCES OF PCG AS WE SEEK DYNAMIC GROWTH.

Management Discussion & Analysis (Cont’d)Head of Commercial

One of the key functions of the team is to monitor the global petrochemicals market and keep track of fluctuations in the supply demand situation. Last year, we were able to channel our additional volume into Southeast Asia where manufacturing activity was more intense than other regions, resulting in greater need for our products. We were also able to strategically shift some volume to a higher value market and increase our sales to end users by 4%. These efforts had contributed to a better overall commercial performance.

We further enhanced our profitability by optimising our cost-to-serve. Logistics cost is a significant component in our cost structure, especially for long distance deliveries. Our location at the heart of Southeast Asia gives us a natural edge, one which we are further enhancing by optimising effective vessel arrangements. Smaller vessels were deployed to Southeast Asia destinations that have limitation to accommodate large parcel size. Whenever possible, shipments were planned to utilise larger vessel to take advantage of co-loading or co-mingling opportunities to lower our logistics cost. Aided by efficient integrated delivery planning and channel management, we were able to shave off 11% from our cost-to-serve as compared to 2015.

Our company also created new sales channels during the year by incorporating a new subsidiary in Indonesia in August, while commencing full operations at our subsidiaries that had been set up earlier in Thailand and China. These establishments enable us to strengthen our relationships with key customers and enhance our presence in the focus markets.

We have more than 1,000 active customers around the world; and as an indicator of their loyalty, more than 80% of our business comes from customers who have been with us for more than 10 years. This has a strong basis on the fact that customers truly come first at PCG. We make an effort to understand our customers’ needs, and even greater effort to meet them.

AIDED BY EFFICIENT DELIVERY PLANNING

AND CHANNEL MANAGEMENT, WE

WERE ABLE TO SHAVE OFF 11% FROM OUR COST-TO-SERVE AS

COMPARED TO 2015.

52

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Recognising the importance of prompt and efficient deliveryto enable a smooth flow of customer operations, our companyconsistentlyachievedtopclassorderfulfilmentreliabilitythroughoutthe year. This was supported by an efficient management ofinventorywhichallowedus toconsistently keepanoptimum levelofstockandenhanceourreputationasareliablesupplier.Anotheruniquepropositionthatweareabletoofferistoadaptourproductspecificationstosuitcustomers’changingneeds.BackedupbytheInnovationandTechnologyteam,weworkcloselywithcustomerstodeterminethesolutionstheyrequireandareabletocommercialisetheseinnovativeproductstimely.

Duringtheyear,ourcompanyproducedtwonewsolutions,namelylow freezing grade glycol (LFG MEG) which serves as a hydrateinhibitorinoilandgasapplications,andaspecialchemicalblendforuseinbrakefluids.Bothsolutionshavebeenwellreceived,leadingto new applications to our product slate. To further reinforce ourrelationships,weengageregularlywithourcustomers,bothdomesticandinternational.Wealsoconductedaproductstewardshipsessionin thePhilippines,wherewehave just startedexportingglycols inbulkandcontainer.

Internally,ourcompanyisbuildingcapabilitiestoensureourpeoplehavetheknowledgeandskillstosupportbusinessexpansion.Thisis

beingachievedthroughenhancedprofessionaldevelopmenttrainingand programmes. During the year, we strenghtened our capabilitydevelopment efforts, and enhanced our Capability DevelopmentSteering Committee and Working Committee to spearhead ourtraining initiatives. Thus far, we have certified another 32 pricingsystemexpertsthisyearontopofthe20certifiedin2015.

Healthandsafetycontinuetobegiventoppriority.Underliningourcommitmenttoensurethehighestsafetystandardsinoursalesanddistributionactivities,wecollaboratecloselywithCICMtodevelopindustry guidelines for safe transportation of petrochemicals. Onour own effort, we gathered our transport providers for a safetyforuminPadangBesar,PerlisinMarch;andheldasimilareventinKertih,TerengganuinNovember.Atbothevents,theemphasiswason safe behaviours of the truck drivers to prevent road incidents.Our company also engages with vendors and third-party serviceproviders to increase awareness of our HSE requirements andprocedures.

Now that we have savoured ameasure of success from our hardwork, we are determined to keep the momentum going and haveoutlinedournextcourseofactiontoachieveour2017goals.WithCXasourguidingprinciple,ourmissionisnotmerelytosurvive,buttothriveindeliveringthebestvaluetoourstakeholders.


Open here

for more

AR16KEY GLOBAL MEGATRENDS

FORECASTING A SURGEIN THE GLOBAL MIDDLE CLASS

2005 2010 2015 2020 2025 2030

Billionof people

Poor

MiddleClass

Rich

Nor

th

Amer

ica

Euro

pe

Cent

ral &

So

uth

Amer

ica

Asia-Pacific

Sub-

Saha

ran

Afric

a

Mid

dle

East

&

Nor

th A

fric

a

Billionof people

Middle class: size and distribution (millions of people, global share)

Global rise in the middle class predominantly from Asia Pacific

18%

36%

10%

22%

7%

14%

10%8%

6%

28%

54%

2% 2% 2% 6%5%

5%

2010

2020

2030

WE HAVE ALIGNED OUR MID TO LONG-TERM STRATEGIES TO CAPITALISE ON MALAYSIA’S STRATEGIC LOCATION IN ASIA PACIFIC, WHICH PROVIDES US AN ADDED EDGE TO LEVERAGE ON GLOBAL MEGATRENDS.

MALAYSIA ISSTRATEGICALLYLOCATED IN ASIA PACIFICCentrally located within the region with:• more than 4 billion population• growing middle class

5

4

3

2

1

POPULATION GROWTH IN ASIA PACIFIC EXCEEDS OTHER REGIONS

1980 1990 2000 2010 2020 2030

Asia Pacific

Middle East & North Africa

EuropeLatin AmericaNorth AmericaCentral Africa

ASIA PACIFIC

MALAYSIA

Billion of people

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

ASIAPACIFIC

66%

54

9

8

7

6

5

4

3

2

1

0

52

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Recognising the importance of prompt and efficient deliveryto enable a smooth flow of customer operations, our companyconsistentlyachievedtopclassorderfulfilmentreliabilitythroughoutthe year. This was supported by an efficient management ofinventorywhichallowedus toconsistently keepanoptimum levelofstockandenhanceourreputationasareliablesupplier.Anotheruniquepropositionthatweareabletoofferistoadaptourproductspecificationstosuitcustomers’changingneeds.BackedupbytheInnovationandTechnologyteam,weworkcloselywithcustomerstodeterminethesolutionstheyrequireandareabletocommercialisetheseinnovativeproductstimely.

Duringtheyear,ourcompanyproducedtwonewsolutions,namelylow freezing grade glycol (LFG MEG) which serves as a hydrateinhibitorinoilandgasapplications,andaspecialchemicalblendforuseinbrakefluids.Bothsolutionshavebeenwellreceived,leadingto new applications to our product slate. To further reinforce ourrelationships,weengageregularlywithourcustomers,bothdomesticandinternational.Wealsoconductedaproductstewardshipsessionin thePhilippines,wherewehave just startedexportingglycols inbulkandcontainer.

Internally,ourcompanyisbuildingcapabilitiestoensureourpeoplehavetheknowledgeandskillstosupportbusinessexpansion.Thisis

beingachievedthroughenhancedprofessionaldevelopmenttrainingand programmes. During the year, we strenghtened our capabilitydevelopment efforts, and enhanced our Capability DevelopmentSteering Committee and Working Committee to spearhead ourtraining initiatives. Thus far, we have certified another 32 pricingsystemexpertsthisyearontopofthe20certifiedin2015.

Healthandsafetycontinuetobegiventoppriority.Underliningourcommitmenttoensurethehighestsafetystandardsinoursalesanddistributionactivities,wecollaboratecloselywithCICMtodevelopindustry guidelines for safe transportation of petrochemicals. Onour own effort, we gathered our transport providers for a safetyforuminPadangBesar,PerlisinMarch;andheldasimilareventinKertih,TerengganuinNovember.Atbothevents,theemphasiswason safe behaviours of the truck drivers to prevent road incidents.Our company also engages with vendors and third-party serviceproviders to increase awareness of our HSE requirements andprocedures.

Now that we have savoured ameasure of success from our hardwork, we are determined to keep the momentum going and haveoutlinedournextcourseofactiontoachieveour2017goals.WithCXasourguidingprinciple,ourmissionisnotmerelytosurvive,buttothriveindeliveringthebestvaluetoourstakeholders.


AR16

53

Sectionthree

Focusing on addressing globalKEY MEGATRENDS and CHALLENGES

Increasing global population and affluent consumers drive the demand for various manufactured goods

2010 2015 2020 2030

6.9 7.4 7.8 8.5

1.8 2.5 3.2 4.9

53 66 82 117

211 283 375 574

1,000 1,400 1,600 2,000

374 453 530 770

Middle ClassPopulation

(Bil)

PlasticPackaging Sales

(USD Bil)

Motor Vehicle Sales

(Mil Unit)

Personal Care Consumption

(USD Bil)

GlobalPopulation

(Bil)

PolyesterProduction

(Mil MT)

The growing population amidstdecreasing arable land andresources necessitates effectivefood production

Less arable LAND (hectares/capita)

0.45

1960 1980

0.33

2000

0.27

2050

0.19

Lower resources FRESHWATER Availability (m3/capita)

13,500

1960 1980

10,000

2000

7,000

2050

4,500

Higher AGRICULTURE WATER withdrawal (km3/year)

1,500

1960 1980

2,200

2000

2,600

2050

3,100

VSHigher Food Consumption (kcal/person/day)

2,100

1960 1980

2,400

2000

2,600

2050

3,000

Sources: Organization for Economic Cooperation and Development

The World Bank, PCI Wood Mackenzie, PlasticsToday, Platts, Euromonitor, World Resources Institute and Food and Agriculture Organization of the United Nations (FAO).

Key Global Megatrends (Cont’d)

...amidst less arable land and less resources

Increase in populationfrom

6.9 BILLIONpeople (2010) to

8.5BILLIONpeople (2030)

The world will face challenges....

Leading to higher demand for...

4.9BILLIONpeople (2030)

More middle class population...from

1.8BILLIONpeople (2010) to

FOOD

PERSONALCARE

PRODUCTS

EFFICIENTTRANSPORTATION

PACKAGING

54

Sectionthree

% change YoY (2017 vs. 2016) Down No Change Up

Latin America & CarribeanA

Real GDPIndustrial Production

1.2 0.3 2.6

A

B

C

United States Eurozone Asia PacificB D

Real GDP Real GDP

Chemical Production

Industrial Production

Industrial Production

1.5 1.5 1.2 4.7 4.3 4.8

Middle East & AfricaC


2.7 1.3 4.4

United Kingdom


1.4 1.3 0.0

India

Economic indicators point to another challenging year in 2017 particularly in Asia Pacific.

D

Chemical Production

Chemical Production


6.5 5.8 6.3

China

Chemical Production

Chemical Production

Chemical Production

Japan


1.1 2.7 -0.9Chemical Production


7.3 2.6 6.4Chemical Production


Chemical Production

2.3 1.5 3.3

PETRONAS CHEMICALS

GROUP BERHAD

MARKET OUTLOOK

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55

Sectionthree

Market Outlook (Cont’d)

Olefins Totals

MEG Totals

Polyolefins Totals

Methanol Totals

Paraxylene Totals

Urea Totals

9,534

1,047

6,641

2,831

1,429

11,104

13,983

2,183

12,241

3,236

2,379

9,304

2016Total

2016Total

2016Total

2016Total

2016Total

2016Total

2017Total

2017Total

2017Total

2017Total

2017Total

2017Total

Net Capacity Expansion by Region (in thousands of metric tonnes)

AsiaPacific Europe MiddleEast NorthAmerica

AsiaPacific

AsiaPacific Europe MiddleEast NorthAmerica

AsiaPacific Europe NorthAmerica

SouthAmerica

AsiaPacific MiddleEast NorthAmerica

Source: IHS and Fertecon

Global Chemical Production Outlook by Segment (% change YoY)

2016

2017

AgriculturalChemicals

BasicChemicals

BulkPetrochemicals& Organics

OtherChemicals(excludingpharmaceuticals)

Coatings

ConsumerProducts

Man-madeFibers

PlasticResins

Specialties

TotalChemicals

0 2 4

1.92.1

2.1 2.7

2.42.9

2.2 2.8

5,471

1,047

3,273

453

1,152

9,095

2,183

8,490

3,097

1,8212,0641,640

2,213

665

5,529

3,291

500

2,782

2,128

2,967

1,881

0

6650 0

120

2,656

1,360

146

6751,914

1,228

-39

157

2,232 2,391

-47

-11785500

204

0 0

40

1.5 2.6

1.7 3.0

3.03.1

2.42.7

2.6 3.3

2.2 2.9

Petrochemical market will continue to be challenging despite improving demand as capacity additions continue to be strong.

Africa AsiaPacific

Europe MiddleEast

NorthAmerica

SouthAmerica

56

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

STRATEGIC INTENT

ABDUL AZIZ OTHMANHEADOFSTRATEGICPLANNING&VENTURES

PETROCHEMICAL LANDSCAPE Thepetrochemicalindustryisagrowingindustrydrivenbyincreaseddemandforplastics, textiles,automotive,healthcare, foodandagriculture in tandemwith population growth and increasing affluence of developing nations.AccordingtotheWorldBank,worldpopulationisexpectedtoreach8.5billionby2030,andincreasefurtherto9.7billionby2050.Inlinewiththisgrowth,theglobalmiddleclasswillexpandfrom1.8billionin2010to3.2billionby2020and4.9billionby2030.MostofthisgrowthwillcomefromAsia,withtheregionrepresenting 66% of the global middle-class population by 2030. In Chinaalone,thenumberofuppermiddle-classandaffluenthouseholdsisforecasttodoubleto100millionby2020.Theresultisincreasingconsumptionoffoodpercapita.Thegrowingconsumptionoffoodamidstdecreasingarablelandand resourcesnecessitateseffective foodproduction.Furthermore, the riseofmiddleclass incomepopulation leadstohigherend-customerpreferencetowardshighqualityandluxuryproducts.

ACCORDING TO THE WORLDBANK, WORLD POPULATIONIS EXPECTEDTO REACH

8.5BILLIONBY 2030 ANDINCREASE FURTHER TO9.7 BILLION BY 2050

Saferanddurablepackagingduetothe increasinghealthconsciousness

Morevehiclesownershipduetoaffordabilityandhighermobilityrequirements

Changesinlifestyleandhealthtrendstowardshigherconsumptionofpersonalcare

UREAMETHANOL,

ETHANOLAMINES AND ETHOXYLATES

MTBEGLYCOLS AND PARAXYLENE

POLYMER

Inthefaceofincreasingshortageofarableland,ourureacontributestoincreasedcropyields

whichsupportsmoreefficientfoodproductionforthegrowingpopulation.

Ourmethanol,ethanolaminesandethoxylatescapturethehugedemandgrowthfromtheexpandingmiddleclassforcosmeticsandotherpersonalcareproducts.

OurMTBEcaterswelltotherapidriseintheautomotiveindustryfueledbytheincreasedaffluenceof

consumersinthisregion.

Ourglycolsandparaxyleneareusedintheproductionofpolyesterin

textilesindustrytocaterforincreasingurbanconsumers

preferenceforqualityclothes.

Ourpolymerscanbecustomisedtomeettherobustgrowthofautomotiveindustryandthegrowing higher

mobilityrequirementforlightandsmart

packaging.

Strengthenbasicpetrochemicals

Selectivelydiversifyingintoderivatives,specialtychemicalsandsolutions

OUR TWO-PRONGED STRATEGY Ourtwo-prongedstrategyisaboutfurthersolidifyingtheintent tomeet these needs. The growth projects underimplementation today will further cement our regionalmarket leadership position. Our strategy allows us toleverageon theeconomiesofscale from the increasedvolumeofbasicpetrochemicalsandenablesustoderivegreater margins from value-added products, which willalso serve as a buffer against market cyclicality andvolatility.

GLOBAL MIDDLE CLASSWILL EXPAND FROM

1.8 BILLION IN 2009 TO

3.2 BILLION BY 2020 AND

4.9BILLION

BY 2030

OUR UNIQUE STRATEGIC POSITIONING

BasicPetchem

DerivativesSpecialtyChemicals

Global

Regional

Local

CORPORATE VISIONThePreferredChemicalCompanyProvidingInnovativeCustomerSolutions

AR16

57

Sectionthree

Strategic Intent (Cont’d)

Operational Excellencehasreachedworld-classlevelsin2016.Movingforward,we look to sustain theutilisationof assets at 90%andabove, underpinnedbysustainable best practice of HSE Excellence. The continuous strengtheningandinternalisingofHSEvaluesamongstallouremployeesandcontractorsareprerequisiteinbuildingastrongHSEculture.

Our Commercial Excellence has enabled us to gain additional value byembarking on several initiatives such as optimizing product mix, logistics& inventory and focusing on higher value markets. We have successfullyoperationalised our overseas subsidiaries in Thailand and China and haverecentlyincorporatedasubsidiaryinIndonesia.

Thisispartofourstrategytobeclosertoourmarketsandgaininsightsinordertoenhanceourmarketposition.Movingforward,thekeyfocuswillbetoexecuteactivities,suchasroute-to-marketforchosenproductsfromPIC.Thiswillensurethatwestrengthenourmarketleadershipposition.

Integrated business model.

Provide synergy with our existingproducts with large scale for

commodity and niche for specialty chemicals. The potential product slate

will be selected to meet the trend as mentioned in the megatrends.

By 2019, upon completion of our sanctioned projects,PCGwilladdabout47%ofadditionalcapacitybringingPCGcapacitytoover15millionmtpa.ThecompletionoftheprojectswillalsofurtherstrengthenPCG'spositionasfollows:

Petrochemical projects in PIC will propel PCGto become the largest producer for monoethylene glycols (MEG) & polypropylene (PP) and 2nd largestproducerforHDPEinSoutheastAsia.

SAMUR will position PCG as the 2nd largest urea producerinSEA.

CollaborationwithBASFwilldiversifyPCG'sportfoliointonichespecialty chemicals.

LOOKING AHEAD We continue to explore other significant growthopportunities in the production of ethylene, propyleneand butadiene derivatives, and specialty chemicals atPIC, whilst taking into consideration the availability ofexcess ethylene, propylene and butadiene molecules.In addition, we are constantly assessing furtherdownstreamopportunitiesforourpolymersandglycolsthatnotonlywouldenhancePCG'sproductofferingsbutalsocomplementourexistingproductslates. TheseeffortsareinlinewithPCG'saspirationstopursuedynamic growth projects to keep ourselves at parwithour peers.With our strong cash generation, wewill beabletopursuegrowthopportunitiesinlinewithourtwo-prongedstrategy.

Fundamentaltoourtwo-prongedstrategyisthecontinuedeffortstostrengthenourOperationalExcellence,CommercialExcellenceandInnovationExcellence.

Since2013,wehaveconstantlypursuecollaborativeeffortswithourcustomersinviewofmeetingtheirneeds.Todate,wehavesuccessfullydevelopedten(10)Innovative Customer Solutions;

Echoing this success, we are continuously identifying and developing ourcustomers’ needs and requirements, especially in food and agriculture,automotiveandpersonalcare.

Innovation Excellencewillbekeytostrengtheningourcapabilitiesinviewofoffering tailor-madeapplicationsandsolutions tomeetourcustomers’needs.As we expand our innovation capabilities, we will be able to develop morespecialisedsolutions,thustrulysettingPCGapartintheindustry.

CF45Solarpanelcuttingfluid

CF S1Enhancementofsolarpanel

cuttingfluid

REMCOATInsulationforpipecoating

Tergitol 26L-1.6Non-ionicsurfactantforhousehold

&personalcareapplication

B-260 BFBrakefluidapplication

C170X enhancementExtrusioncoatinggrade

forpackaging&laminationapplication

C170XLDPEextrusioncoatinggradeforpackaging&laminationapplication

HD5301Processabilityimprovement

forblownfilmforcarrierbags&thincounterbags

HD5201Processabilityimprovementfor

blowmoldingjerrycanforpalmoilindustry

LFG MEG 90 & 95LowfreezinggradeMEGforoilfieldchemicalapplication

58

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

HOW WE TREAT RISKS

Wedetermineourrisksbasedontheconsiderationsofthecomplexities,hazardsandintegratednatureofourmanufacturingprocessesaswellastheexposurestothecyclicalnatureofthepetrochemicalindustrywithitsvolatilemarketandcompetitiveenvironment.

TheidentifiedrisksarecloselymonitoredandmanagedtoensureanyadverseimpactstoPCGbottomlineandgrowthstrategiesareminimised.

1

2

RISKS HOW DOES IT AFFECT US? HOW ARE WE MANAGING IT?

Disruptions

toplant

operations.

ThisriskisinherenttoPCGduetothe

complexityandintegratednatureofPCG

manufacturingprocess.Whilebeing

integratedinoperationprovidesadvantage

andsynergy,PCGisexposedtointerruptions

ofitsoperationsifoneormoreplantsinthe

integratedchainfailedtooperatereliably.

Interruptionstoplantoperationscanbe

causedbyseveralkeyfactorssuchasinherent

hardware/softwaredesigndeficiencies,

equipmentfailure,aswellasdisruptionin

feedstockandutilitiessupply.

Furtherenhanceoperationalexcellence

through:

• Structuredtechnicalcompetencies

programmes.

• AssetLifeManagementprogramto

maximiseassetavailabilityatminimumcost.

• TurnaroundManagement,wheretheplantis

shutdownforinspectionandoverhaulfora

plannedtimeframe.

• Regularplantmaintenanceandinspection

programmes.

• Relevantassuranceandauditprogrammes.

• Closecollaborationwithourfeedstockand

utilitiessupplierstoensurereliablesupplies

toourplants.

BusinessRecoveryPlan(BRP)andBusiness

ContinuityPlan(BCP)arealsoinplaceto

restoretheplanttonormaloperationsand

businesscontinuityrespectively,shoulda

prolongedinterruptionoccur.

MajorHSE

incidents

impacting

people,

environment

andassets.

Ouroperationsentailtheuseofcomplex

manufacturingprocessesandhandling

ofhazardouschemicals.Thus,majorHSE

incidentisaninherentriskforPCGplantsand

facilities.

ContinuouseffortstostrengthenHSEinPCG

areperformedthrough:

• FocusedexecutionofProcessSafety

Management(PSM).

• StrengthenedHSEgovernance.

• EnhancedHSEcommunicationtoallPCG

staffandcontractors,withtrackedaction

plans.

• Productstewardship.

AR16

59

Sectionthree

How We Treat Risks (Cont’d)

RISKS HOW DOES IT AFFECT US? HOW ARE WE MANAGING IT?

3

4

Cyclicalityof

petrochemical

industryand

volatilityof

productprices.

Cyclicalnatureofpetrochemicalindustryis

aninherentriskforPCG,influencedbymarket

demandandsupplyaswellasthestateofthe

globaleconomy.

Thedecliningofcrudeoilpricesoftensthe

pricesanddemandofseveralPCGproducts.

PCGoperatesinahighlycompetitivemarket,

againstcompetitorswithlargerscaleof

operations,greaterfinancialreservesandmore

operatingflexibility.Mostofourproductsare

commoditybasedandfacepricecompetition.

• Ensureoperationalexcellenceforcost

competitiveness.

• Ensureprudentfiscalmanagement.

• Continuouslystrengthenournetwork,

nurturerelationshipsandunderstand

customers’needs.

Inabilityto

realisegrowth

projects,

hinderingPCG

fromachieving

itsvisionand

aspirations.

Withseveralcapitalprojectscommitted,PCG

needstoensureitsprojectsarecompleted

attherightscopeandwithinscheduleand

budget,tocapturemaximumvalue.

Somecriticalfactorsthatcanensureproject

targetsaremetincludegoodperformance

bycontractorsandsub-contractors,effective

projectmanagement,effectiveoperation

readinessprogrammeandgoodcontrolofthe

joint-ventureprojectmanagement.

• Implementedseveralinitiativestostrengthen

projectandcontractormanagement.

• Ensurecompliancetotheprescribedproject

managementframeworkandguidelines.

• Projectmonitoringatvariouslevels,upto

Boardlevel.

• LeverageonPETRONAS'expertiseinproject

managementanddelivery.

60

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

INVESTOR RELATIONS AND SHARE PERFORMANCE

DevelopmentswithintheUS,UKandChinaaffectedemergingmarketssentiment.ReservationsfollowingPresident-electDonaldTrump’swinin early November and fears over an expected US rate hike as wellas changes in tradepolicy renewedpressure on regional currencies.Overall,theMalaysianRinggitcontinuedtodepreciate,althoughitwasbuoyed to an extent by the increase in crude oil price following theOrganisationofthePetroleumExportingCountries(OPEC)’sagreement.ItclosedtheyearatRM4.89againsttheUSDollar,down4.5%fromitsopeningofRM4.29.

TheFTSEBursaMalaysiaKualaLumpurCompositeIndex(FBMKLCI)wasverymuchimpactedbythemovementofbothcrudeoilpricesandtheMalaysianRinggitagainsttheUSDollar.Openingat1,693points,theindexplungedtoitslowestat1,601pointsinJanuarypulleddownbyoilandgasstocks.Theindexthenreacheditshighestat1,728pointsinmid-April,spurredbysignsofChina’seconomicrecovery,astabilisingRinggit and crude oil prices before easing slightly at the end of themonth. The followingmonths saw the index loseground, alongwithregionalpeers,uponanMSCI rebalancingexercise thatsaw reducedweightageonASEANmarketsinMay,andUK’ssurprisevotetoleavethe European Union in June. The index saw some support towardsthe end of the year, along with the OPEC agreement and improvedsentimentsovertheChineseeconomy.Atthetailendoftheyear,theFBMKLCIdeclined3%fromitsinitialopening,tocloseat1,642pointson31December.

PCG’s share pricewas on a downtrend in the early part of the year,affectedby thecrudeoilpriceandabearishmarket.OursharepricefelltoitslowestofRM6.22mid-yearintandemwiththeFBMKLCI,thenbegantomoveupfollowingtheannouncementofoursecondquarterresults,supportedbyourstrongoperationalandfinancialperformance.TheimprovementincrudeoilpriceslentfurthersupporttotheupwardmomentumasthestockoutperformedtheFBMKLCItocloseatRM6.98atyearend,just4%belowitsopeningofRM7.27.

Our Average Daily Traded Volume (ADTV) for 2016was 6.22millionunits,higherthanthe4.63millionrecordedin2015.

2017startedonapositivenote,withmostmajoreconomiesregisteringexpansionandgrowth.TheBrentcrudepricehasclimbedandremainedaboveUSD50perbarrel,supportedbytheOPECagreement.Thelocalboursehasseensomeactivetradealongsideregionalbourses,thoughacautioussentimentprevailswithcontinued focusandconcernsontheUSrate increaseand theoutcomesofnewpoliciesandchangesbeingimplementedbythenewadministration.Nonetheless,oursharepricehasremainedstrong,closingatRM7.50on17February2017andremainingamongthetop10countersoftheFBMKLCIwithamarketcapitalisationofRM60billion.

INVESTOR RELATIONS

2016 PROVED TO BE AN EVENTFUL YEAR, WITH LANDMARK DECISIONS AFFECTING THE GLOBAL ECONOMY AND, SUBSEQUENTLY, THE CAPITAL MARKET. UNCERTAINTIES SURROUNDING THE PRICE OF CRUDE OIL, ALWAYS A SIGNIFICANT ECONOMIC INDICATOR, CONTINUED TO AFFECT MAJOR MARKETS. THE BENCHMARK PRICE OF BRENT HIT ITS LOWEST AT USD26 PER BARREL IN JANUARY ON NEWS OF HIGH US STOCKPILE INVENTORY, FOLLOWING WHICH IT CLIMBED SLOWLY BASED ON PRODUCTION OUTAGES AND TALK OF REGULATING PRODUCTION TO MANAGE THE OVERSUPPLY. WITH THE COMMITMENT BY EXPORTING COUNTRIES TO CUT PRODUCTION ANNOUNCED IN NOVEMBER, BRENT CRUDE SURGED TO CLOSE AT USD57 PER BARREL BY END 2016, AVERAGING USD45 PER BARREL FOR THE YEAR.

PCGrecognisestheimportanceofhavinganeffectivecommunicationchannelbetweentheCompany,ourshareholdersandthegeneralpublic.Assuch,wehavestructuredourInvestorRelationsprogrammeinlinewithourInvestorRelationspolicy,thatservestopromotethesharingofaccurateinformationinatransparentandtimelymanner,inaccordancewithBursaMalaysia'srequirementsandguidelines.

AR16

61

Sectionthree

Wearecommittedtoprovidingrelevantinformationtoourshareholdersand stakeholders, while being mindful of the legal and regulatoryframework governing the release of material and price sensitiveinformation. The Investor Relations team strives continuously toimprovePCG’svisibilityinboththedomesticandinternationalcapitalmarkets,andaddressinvestorinterestsandconcernsinatimelyandappropriatemanner.

In 2016, PCG held about 100 engagement sessions with keyshareholders, analysts and fund managers, through face-to-facemeetings, conference calls, analyst briefings, investor events, plantvisits,participationinroadshowsandcorporateconferences.

QUARTERLY ANALYST BRIEFINGS

The timely release of financial results on a quarterly basis providesthecapitalmarketswithup-to-dateinformationandanalysisofPCG’sperformance and operations. In conjunction with the release of ourquarterlyfinancialannouncementstoBursaMalaysia,wehostanalystbriefings for both local and foreign participants via webcast andconferencecalls.This facilitates timelymanagementdiscussionandanalysisofthequarterlyresults,aswellasquestionsandanswersforthebriefingparticipants.

Presentation materials for the briefings are made available on ourcorporatewebsiteonthesameday,whilethetranscriptsareverifiedbyathirdpartybeforebeinguploaded.

INVESTOR ENGAGEMENTS AND CORPORATE EVENTS

Asoneof the largest public listed companies inMalaysia, PCG fullysupports events and initiatives organised by Bursa Malaysia in itsefforts toshowcaseMalaysiaasanattractivemarketplace.Assuch,Invest Malaysia conferences have always been among key eventson our calendars. In 2016, we participated in InvestMalaysia KualaLumpur,withaseriesofone-on-oneandgroupmeetingshostedbyourMD/CEOandCFO.

PLANT VISITS

We recognise the need for analysts and investors to appreciate thenatureofourbusiness,henceorganiseregularvisitstoourplants.Thisyear,wehostedourretailshareholdersatPCLDPE,situatedintheKIPC,where presentations on our business, plantmanagement and safetyprocesseswereconducted.Thevisitwaswellreceivedandenabledourshareholders to gain first-hand experience of a plant environment. ItalsoheightenedtheirawarenessofourcommitmenttoEnvironmental,SocialandGovernancepractices.

CAPITAL MARKET FEEDBACK

PCG is well covered with regular reports from around 20 researchhouses.Ourwebsitecontinuestoserveasanimportantlinkwithourinvestors.Interestedstakeholderscanaccessourquarterlyandannualreports, Bursa Malaysia announcements, corporate presentations,analyst briefing transcripts and other relevant corporate news andinformation on the website. We strive continuously to improve ourwebsitetoenhancetheuserexperiencewhilepromotingtransparencyofinformationinlinewithBursaMalaysia’srequirementsandguidelines.ShareholdersarewelcometoraisequeriesbycontactingtheCompanyatanytimethroughouttheyear.

InvestorRelationscanbecontactedat:•Email:[email protected]•Website:www.petronaschemicals.com

Investor Relations and Share Performance (Cont’d)

62

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

Investor Relations and Share Performance (Cont’d)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

50

45

40

35

30

25

20

15

10

5

0

1,800

1,750

1,700

1,650

1,600

1,550

1,500

1,450

1,400

PCGSharePrice(RM)

PCGTradedVolume

(Million)

FBMKLCI

ADTV(Million) PCGSharePrice(RM) FBMKLCI

Closing Price RM Date

High 7.55 8January2016

Low 6.11 9May2016

Average Daily Traded Volume (ADTV)

6,224,044

AR16

63

Sectionthree

FINANCIAL CALENDAR

20 FEBRUARY Announcementofunauditedquarterlyreportofconsolidatedresultsforthe4thQuarterEnded31December2016

7 MARCH Dateofentitlementofthe2ndinterimdividendforFinancialYearEnded31December2016

21 MARCH Dateofpaymentofthe2ndinterimdividendforFinancialYearEnded31December2016

23 FEBRUARYAnnouncementofunauditedquarterlyreportofconsolidatedresultsforthe4thQuarterEnded 31December2015

9 MARCHDateofentitlementofthe2ndinterimdividendforFinancialYearEnded31December2015

23 MARCHDateofpaymentofthe2ndinterimdividendforFinancialYearEnded31December2015

30 MARCHDateofNoticeofAnnualGeneralMeetinganddateofissuanceofAnnualReport2015

28 APRILDateof18thAnnualGeneralMeeting

9 MAYAnnouncementofunauditedquarterlyreportofconsolidatedresultsforthe1stQuarterEnded31March2016

9 AUGUSTAnnouncementofunauditedquarterlyreportofconsolidatedresultsforthe2ndQuarterEnded30June2016

24 AUGUSTDateofentitlementofthe1stinterimdividendforFinancialYearEnded31December2016

7 SEPTEMBERDateofpaymentofthe1stinterimdividendforFinancialYearEnded31December2016

2 NOVEMBERAnnouncementofunauditedquarterlyreportofconsolidatedresultsforthe3rdQuarterEnded 30September2016

28 MARCH DateofNoticeofAnnualGeneralMeetinganddateofissuanceofAnnualReport2016

26 APRIL Dateof19thAnnualGeneralMeeting

2016

2017

64

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

OUR ACHIEVEMENTS

AS A LEADING CHEMICALS PRODUCER,

PCG constantly strives to operate in a safe manner. In fact, we

strongly believe that something is worth doing only when it is done

in accordance to our HSE culture built on principles that safeguard

the wellbeing of our people as well as the communities and

environment where we operate.

AR16

65

Sectionthree

Our Achievements (Cont’d)

PETRONAS CHEMICALSGLYCOLS SDN BHD

PETRONAS CHEMICALSFERTILISER KEDAH SDN BHD

PETRONAS CHEMICALS METHANOL SDN BHD

PETRONAS CHEMICALS MTBE SDN BHD

• Laboratory Excellence Award (InstitutKimiaMalaysia)

• Gold Class 1 Award –Occupational,SafetyandHealth(MSOSH)

• Silver AwardinEmployeeHealth&Safety(CICMResponsibleCareAward)

• Merit AwardinProcessSafety(CICMResponsibleCareAward)

• Excellence AwardinPetroleumandPetroleumProduct,MonoethyleneGlycolsandPolyethylene(InstitutKimiaMalaysia)

• 4 Gold Medal AwardsinMiniConventionofUtilities,MNTC,Derivatives&Glycol(MPC)

• Innovative Circle & Creative (ICC) MudaTerbaikinMiniConventionofDerivatives(MPC)

• 6 Gold Medal AwardsinRegionalConventionofUtilities,MNTC,Derivatives,Glycol,Laboratories&Olefins(MPC)

• 3 Star Gold Medal Awards in AnnualProductivity&InnovationConferenceandExposition(APIC)

PETRONAS CHEMICALS ETHYLENE SDN BHD

ASEAN BINTULUFERTILIZER SDN BHD

PETRONAS CHEMICALSAMMONIA SDN BHD

PETRONAS CHEMICALS LDPE SDN BHD

• Gold AwardinDistributionCode(CICMResponsibleCareAward)

• Gold AwardinCommunityAwareness&EmergencyResponseCode(CICMResponsibleCareAward)

• Gold AwardinEmployeeHealth&SafetyCode(CICMResponsibleCareAward)

• Gold AwardinProductStewardshipCode(CICMResponsibleCareAward)

• Gold MeritinOccupational,SafetyandHealthAward(MSOSH)

• Gold AwardforHealthandSafety (RoSPA)

• Occupational Safety & Health Grand Award (MSOSH)

• Silver AwardinEmployeeHealth&SafetyCode(CICMResponsibleCareAward)

• Silver AwardinPollutionPreventionCode(CICMResponsibleCareAward)

• Silver AwardinProcessSafetyCode(CICMResponsibleCareAward)

• Silver AwardinCommunityAwareness&EmergencyResponseCode(CICMResponsibleCareAward)

• Silver AwardinDistributionCode(CICMResponsibleCareAward)

• Silver AwardinProductsStewardship(CICMResponsibleCareAward)

• Gold Merit –ExcellenceinOSHPerformance(MSOSH)


• Merit AwardinCommunityAwareness&EmergencyResponseCode;ProcessSafetyCode;EmployeeHealthandSafetyCode(CICMResponsibleCareAward)

• Gold Award–TeamExcellence Convention,Regional(MalaysianProductivityCorporation)

• Gold Award–InternationalConventiononQualityControlCircle(ICQCC)

• Laboratory Excellence Award (InstitutKimiaMalaysia)

• Gold Award–HealthandSafety(RoSPA)

• Gold Class 1 Award–Occupational,SafetyandHealth(MSOSH)



• Merit inCommunityAwareness&EmergencyResponseCode(CICMResponsibleCareAward)

• Highly Commended Award in ProcessSafetyFocusedLearning

• Laboratory Excellence Award in WaterandHydrocarbonAnalysis(InstitutKimiaMalaysia)

• Anugerah Sumbangsih 2015 (JabatanPendidikanNegeriKedah)

• Anugerah Sumbangsih 2015 (PejabatPendidikanDaerahKualaMuda/Yan)

• Silver AwardinCommunityAwarenessandEmergencyResponseCode(CICMResponsibleCareAward)


• Silver AwardinEmployeeHealthandSafetyCode(CICMResponsibleCareAward)

PCG in the newsPETRONAS CHEMICALS SAYS OIL SLUMP WON'T DERAIL SPENDING PLAN

Petronas Chemicals Bhd., a unit of Malaysia’s state energy company, willspend $4 billion over the next five years to mostly invest in a refinery andpetrochemicals complex spearheaded by its parent in Johor state, borderingSingapore.

Thecompanypredictsa “tougher”2016becauseofaplunge incrudeandanoversupply that’s pushed down product prices, Chief Executive Officer SazaliHamzahsaid inan interviewviae-mail.PetronasChemicals typicallybenefitsfrom higher oil which drives up petrochemical-product prices. The industry’soutlook this year is cloudedby volatility in theoilmarketandslowerChinesedemand,hesaid.

“Manycompanieswill tend tobackoff fromcapital investments,stoppingorshelvingsomeoftheirprojects,”Sazalisaid.“Withourstrongcashposition,wehavetheadvantagetofundourexistingprojectsandgrowthprojectsaswell.”PetroliamNasionalBhd.,theparentcompany,isproceedingwiththe$27billionintegratedrefineryandpetrochemicalscomplexevenasitdeferssomeotherprojects.Petronas,asthecompanyisknown,planstolowercapitalandoperatingexpenditurebyasmuchas20billionringgit($4.8billion)in2016.It joinsglobalpeerssuchasRoyalDutchShellPlc incuttingspendingastheindustrycontendswiththeworstcrudedownturninageneration.

SharesofPetronasChemicalsrose0.3percentto6.82ringgitonWednesday.Theyhaverisen24percentinthepastyear,comparedwitha7.4percentdeclineinthebenchmarkFTSEBursaMalaysiaKLCIIndex.

by Pooi Koon Chong

March 2, 2016, 7:00 AM

68

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD

18 CNY DINNER WITH VALUED

CUSTOMERS

JAN

15 PCG SIGNS AGREEMENT TO SUPPLY

METHANOL TO CELANESE SINGAPORE

FEB

16 & 17 PCG HOSTS CHINESE

MEDIA & BFM RADIO TO CNY DINNER

11 PCG SIGNS AGREEMENT TO SUPPLY

AMMONIA TO DAEWOO INTERNATIONAL

CORPORATION

5-7 PCG TAKES UTP STUDENTS ON AN

INDUSTRIAL TRIP TO ecoCare EEC & KIPC

MAR

CALENDAR OF EVENTS

23 VOLUNTEERS & LOCALS RID KERTIH

BEACH OF 2 TONNES OF RUBBISH

08 SABAH CHIEF MINISTER VISITS

SAMUR SITE

AR16

69

Sectionthree

28 PCG SIGNS THREE-YEAR UREA DEAL

WITH YVP FERTILIZER CO. LTD

23 PCM SIGNS MEG SUPPLY AND

DELIVERY CONTRACT WITH PETRONAS

CARIGALI SDN BHD

11March-9 April

VOLUNTEERS SPRUCE UP CHILDREN’S

HOME UNDER KEMBARA KEBAJIKAN

1MALAYSIAAPR

20 MEDIA NETWORKING WITH THE STAR

17 GROUNDBREAKING CEREMONY FOR

HR-PIB PLANT

31March-1April

TRANSPORTER FORUM TO ENSURE SAFE

TRANSPORT OF PETROCHEMICALS

Calendar of Events (Cont’d)

12 MEDIA VISITS SAMUR SITE BEFORE

COMMERCIAL OPERATIONS BEGIN

MAY

28 MORE THAN 1,000 SHAREHOLDERS

ATTEND PCG'S 18th AGM

70

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD


27 PCG HOSTS 600 STAKEHOLDERS AT

AIDILFITRI OPEN HOUSE

24 CELEBRATING AIDILFITRI WITH

SIPITANG MP AND COMMUNITY

JULY

24 PC FERTILISER KEDAH RECOGNISED

WITH THIRD ANUGERAH SUMBANGSIH

24 CELEBRATING GAWAI WITH THE

COMMUNITY IN BINTULU

27-28 ecoCare EEC TAKES

INSTITUT TEKNOLOGI PETRONAS

MANAGEMENT BACK TO NATURE

8 &10 PCG'S DIRECTORS GAIN

FIRST-HAND UNDERSTANDING OF SAMUR

JUN

28 HOSTING EAST COAST MEDIA TO

IFTAR IN KUANTAN

AR16

71

Sectionthree


06 GOLFING WITH REGIONAL

CUSTOMERS AND STAKEHOLDERS

AUGSEPT

21 AWARENESS PROGRAMME ON

RESPONSIBLE PLASTIC USAGE FOR PCG

STAFF

08 PCG PARTICIPATES IN BURSA BULL

CHARGE RUN 2016

25 SHAREHOLDERS TAKEN ON A TOUR

OF LDPE PLANT IN KERTIH

05 PC ETHYLENE/POLYETHYLENE

SWEEPS MSOSH GRAND AWARD

23 FOUR GOLD AWARDS FOR PCG AT

ICQCC, BANGKOK

17 MECHANICAL COMPLETION AND

PROJECT HANDOVER OF 2-EHACID PLANT

AT BASF PETRONAS CHEMICALS

72

Sectionthree

PETRONAS CHEMICALS

GROUP BERHAD


27-29 ENGAGEMENT WITH PCG'S

CUSTOMERS IN JAPAN

03 PREPARING LABUAN CHILDREN FOR

NEW ACADEMIC YEAR

NOV20 PCG PROMOTES ENVIRONMENTAL

AWARENESS TO SCHOOLCHILDREN

THROUGH ecoCare

14 MEDIA FAMILIARISATION TRIP TO

BASF PETRONAS CHEMICALS SDN BHD'S

PROJECT SITE

20 SCHOOL BASICS AND SCIENCE &

MATHS WORKSHOPS FOR KERTIH

PRIMARY KIDS

06 SCHOOL BASICS, AND SCIENCE

& MATHS WORKSHOPS FOR SIPITANG

PRIMARY KIDS

OCT

28 PCG PARTICIPATES AT CICM RUN

2016

AR16

73

Sectionthree

12 PROMOTING RIVER CONSERVATION

FOR KUANTAN COMMUNITY

17&18 ENGAGEMENT WITH PCG'S

CUSTOMERS IN CHINA

10&11 ENGAGEMENT WITH PCG'S

CUSTOMERS IN INDIA

30 BASF PETRONAS CHEMICALS

SDN BHD DELIVERS FIRST BATCH OF

2-EHACID TO CHINA CUSTOMER

09 PCG BAGS 24 AWARDS IN THE

PETROCHEMICALS CATEGORY AT THE CICM

RESPONSIBLE CARE AWARDS

DEC

03 PCG WINS SIX IChemE AWARDS


OUR

RESPONSIBILITIES


W e u n d e r s t a n d t h a t w e h a v e a m u c h w i d e r

r e s p o n s i b i l i t y t o o u r s t a k e h o l d e r s t h a n m e r e l y

t o m a k e p r o f i t s . I n d e e d , w e b e l i e v e t h a t c a r i n g

f o r o u r s t a k e h o l d e r s – a n d t h e e n v i r o n m e n t – i n

w a y s t h a t a r e n o t d i r e c t l y r e l a t e d t o o u r b u s i n e s s

m a k e s g o o d s u s t a i n a b l e s e n s e . H o w w e d o t h i s i s

o u t l i n e d i n t h i s s e c t i o n .

CONTENTS

75 SustainabilityatPETRONASChemicalsGroupBerhad

76 HowSustainabilityisGoverned

78 IdentifyingourSustainabilityFocusAreas

79 ReportingonOurFocusAreas

88 OurWayForward



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75

Sectionfour

SUSTAINABILITY TO US IS ABOUT CREATING VALUE FOR YOU, OUR STAKEHOLDERS. IT IS ABOUT UNDERSTANDING THE IMPACT WE HAVE ON THE PEOPLE WHOSE LIVES WE TOUCH AND ENSURING WE ACHIEVE OUR BUSINESS OBJECTIVES IN A MANNER THAT CREATES THE MOST POSITIVE OUTCOMES FOR EVERYONE. THIS INCLUDES LEAVING AS SMALL AS POSSIBLE AN ENVIRONMENTAL IMPRINT, AS OUR NATURAL SURROUNDINGS ARE CRITICAL TO THE WELL-BEING OF COMMUNITIES THAT LIVE AROUND US.

Sustainabilityhasalwaysbeenintegraltoourbusinessphilosophy.Bygrounding our financial success on ethical environmental and socialconsiderations,we implicitly put in place structures that allowus tomanage potential challenges and risks. Equally as important, ourefforts to engagewith stakeholders serve to build a strong networkofrelationshipsbasedontrust.Managingourconsumptionofnaturalresourcesfurtherprolongsthesustainabilityofourbusinessinthelongterm, while ensuring sufficient resources are conserved tomeet theneedsoffuturegenerations.

Steeredbyfirmprinciplesofcorporategovernance,andagenuinedesiretosecureapositivefutureforourlocalcommunitiesandsocieties,oursustainabilityeffortsgobeyondmerecompliancewithregulations.

Itensureswecreatethemostconduciveworkenvironmentthatallowsouremployeestorealisetheirtruepotential.Anditallowsustoempowerlocalcommunitiesviathecreationofemploymentopportunitiesaswellasthroughthesupportoflocalbusinesses.

Whilewehavealwaysbeendrivenbysoundprinciplesofsustainability,in 2016we adopted amore structured approach to our efforts. Thisyear’ssustainabilityreportingfulfillsBursaMalaysia’srecentlyreleasedsustainabilityframeworkandgoesfurthertofocusonindustryeffortsin sustainability through referencing IPIECA’s* ‘Oil and Gas IndustryGuidance on Voluntary Sustainability Reporting’. Essentially, theseelevatetheeffectivenessofsustainabilityreporting,furtherenhancingourtransparencyandallowingustopresenttoourstakeholdersaclearpictureofwhatwearedoinginmattersthatcount.

THE BOUNDARIES OF OUR REPORTING

This Report comprises sustainability information from subsidiarieswherePCGhasoperationalcontrol,namelycompaniesinwhichwehavemorethan50%ownership.Thesesubsidiariespractiseourapproachinmanagingsustainabledevelopmentissues.

SUSTAINABILITY AT PETRONAS CHEMICALS GROUP BERHAD

*IPIECAistheglobaloilandgasindustryassociationforenvironmentalandsocialissues

76

Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

Sustainability at PETRONAS Chemicals Group Berhad (Cont’d)

HOW SUSTAINABILITY IS GOVERNED

In early 2016, we set up a Sustainable DevelopmentWorking Committee (SDWC) to guide us on our new sustainability reporting strategy.Thecommittee isalso responsible foroverseeingvarioussystems implemented tomonitorand reportonoursustainabilityperformance,viarepresentationinalltherelevantdepartmentswithinPCG.Inaddition,SDWCmembersworkcloselywiththeircounterpartsateachsubsidiarytoensurestakeholders'valuecreationacrosstheGroup.AlldecisionsbytheSDWCarevettedandapprovedbyourManagementCommittee(MC)andBoardofDirectorswhich,ultimately,takesresponsibilityforthesustainabilityoftheorganisation.

OUR GOVERNANCE STRUCTURE FOR SUSTAINABLE DEVELOPMENT

STRUCTURE

BOARD OF DIRECTORS

SUSTAINABLE DEVELOPMENT WORKING COMMITTEE

SUBSIDIARIES

CHAIRMANHead of Health, Safety and Environment

SECRETARY Technical Professional

(Environmental Management)


MANUFACTURINGHeadofOperationsManagement

INNOVATION & TECHNOLOGYHeadofProductStewardship&RegulatoryAffairs

CORPORATE AFFAIRS & ADMINISTRATIONHeadofCorporateSocialResponsibility

HUMAN RESOURCE MANAGEMENTHeadofRemuneration&EmployeeRelations

FINANCE-SUPPLY CHAIN MANAGEMENTHeadofSupplyChainManagement

FINANCE-INVESTOR RELATIONSHeadofInvestorRelationsPerformanceManagement

COMMERCIALHeadofPerformancePlanning

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Sectionfour

OPERATIONAL EXCELLENCE MANAGEMENT SYSTEM

HEALTH, SAFETY & ENVIRONMENT POLICY

PCGhasadoptedasinglecommonmanagementsystem,knownas theOperationalExcellenceManagementSystem(OeXMS), todeliversustainableresultsforallouroperations.LeveragingonaPlan-Do-Check-Actcycle,OeXMScombinesourPeople,DocumentsandAssuranceProcessesintoanintegratedmanagementsystem.

Itsimplementationenablesthecontinuousimprovementofouroperationsbyensuring:• Relevantproceduresaredeveloped• Adequateresourcesareallocated• Activitiesareimplementedtoachievespecifiedobjectives• AuditsandinspectionsarecarriedouttoensurecompliancetoPCGrequirements• Managementreviewsareconductedonthesystem’seffectiveness

Inaddition,OeXMSallowsourmanufacturingsitestoattaininternationallyrecognisedmanagementsystemscertificationssuchastheISO9001(forQualityManagement),ISO14001(forEnvironmentalManagement)andOHSAS18001(forOccupationalSafetyandHealthManagement).Thelistofmanufacturingsiteswithsuchcertificationisshownonourwebsiteat:www.petronaschemicals.com.my/HSE/Pages/HSE-Certification.aspx

OurHealth,SafetyandEnvironment(HSE)PolicyoutlinesourHSEaspirationsandcommitments,whichformsasignificantcomponentofoursustainabilityefforts.Guidedbythispolicy,westrive tobe in thetopquartileofHSEperformanceglobally,aimingforzeroincidentsandzerooccupationalillnessorinjury.Thepolicycommitsusto:• ContinuouslyimproveourHSEperformance• Operateourbusinessaccordingtoindustrialbestpracticesandlegalrequirements• CommunicatewithourkeystakeholdersonHSEmatters• RecognisethatHSEiseveryone’sresponsibility

OurHSEPolicycanbeviewedinitsentiretyat:www.petronaschemicals.com.my/HSE/Pages/HSE-Policy.aspx


PETRONAS HSE MANDATORY CONTROL FRAMEWORK AND PETRONAS TECHNICAL STANDARDS

OurHSEmanagementisgovernedbyPETRONAS’HSEMandatoryControlFramework(MCF)whichspecifieskeyrequirementsthatmustbeimplementedinordertosafeguardourworkforce,thepublicandenvironment.WealsoleverageonPETRONASTechnicalStandards(PTS) tomanageHSEand issuesrelatedtosustainabledevelopment.PTSprovidesclearstandardsandguidelinesformanagingkeyactivities,includingthoserelatedtosustainabledevelopment.

Oursustainabledevelopmentisfurthersupportedbythefollowingsystems,policiesandrequirements:

78

Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

IDENTIFYING OUR SUSTAINABILITY FOCUS AREAS

KeytothedevelopmentofasustainabilityreportingstrategywastodeterminesustainabilityissuesthathavethegreatestimpactonbothPCGaswellasourstakeholders.TheSDWCundertookthetaskbyconductingamaterialityassessmentbasedonthefollowingstructuredapproach:

ITEM SUSTAINABILITY FOCUS AREAS FOCUS AREAS CATEGORIES

Energyuseandgreenhousegasemissions

EnvironmentFreshwaterconsumption

Emissionstoairandwater

Wastegeneration

Occupationalsafety&health

Health&SafetyProcesssafetyandspills

Productstewardship

Corporatesocialinvestment

SocietyAnti-corruption

Workforcediversityandinclusion

Workforcetraininganddevelopment


Our Sustainability Materiality Assessment Matrix

Sign

ificanc

etoStakeho

lders

SignificancetoPCG

Low

Low

Med

Med

High

High

STEP 1:Identification of Sustainability Issues

TheSDWCidentifiedsustainabilityissuesthatarerelevanttothepetrochemicalandoil&gasindustry.ThislistofissueswereobtainedfromIPIECA’s‘OilandGasIndustryGuidanceonVoluntarySustainabilityReporting’.

STEP 2:Assessing the Significance of Each Issue to Stakeholders

Eachsustainabilityissuewasassessedtodeterminetheirsignificancetoourstakeholders.Thiswasdonebyevaluatingeachissuebasedonvariouscriteria,including:

a) opinionsofexternalexperts;b) thelevelofstakeholder

interest;c) relevancetoourindustry;d) governmentalinterest.

STEP 3:Assessing the Significance of Each Issue to PCG

Subsequently,theissueswereassessedtodeterminetheirsignificancetoPCG.Thecriteriausedforthisassessmentinclude:

a) significanceoftheriskposedbytheissue;

b) importanceoftheissuetoourcompany’sgrowth;

c) ourabilitytocontributetotheissue;

d) alignmentwithourcompany’svalues,goalsandpolicies.

STEP 4:Prioritisation of Sustainability Focus Areas

Eachsustainabilityissuewasthenplottedonasustainabilitymaterialityassessmentmatrix.TheissuesthatfallwithintheshadedareasofthematrixwereprioritisedforinitialreportingastheyaresignificanttobothPCGandourstakeholders.

TheseissuesrepresentPCG’sSustainabilityFocusAreas,andaredescribedindetailinsubsequentsectionsofthisReport.

3

3

11

11

4

4

7

7

5

5

2

2

10

10

8

8

6

6

1

1

9

9

SustainabilityIssues

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79

Sectionfour


ENERGY USE AND GREENHOUSE GAS EMISSIONS

Our energy consumption is closely linked with our greenhouse gas(GHG)emissions.Morethan75%ofourtotalGHGemissionsoriginatesfromourfuel,steamandelectricityconsumption.Asthecostofenergyrisescontinuously,efficientenergymanagementhelpstooptimiseouroperatingcosts,whileconservingnaturalresourcesandmitigatingourimpactonclimatechange.Thisisalsoalignedwithincreasingglobalconcernonclimatechange.

Our energy consumption and GHG emissions are managed throughan Energy & Loss Management System (ELMS), which providesstandardisedrequirements,bestpracticesandworkprocessestailoredtotheenergyneedsofeachmanufacturingsite.Eachmanufacturingsitehasitsowntargetsandinitiativestoreduceitsenergyconsumption.ThesearemonitoredbydedicatedELMSengineers.

Our Energy Intensity andGHGEmissions Intensity improved in 2016from2015duetobetterplantutilisationsupportedbyongoingenergyefficiencyinitiatives.

ENVIRONMENT

REPORTING ON OUR FOCUS AREAS

Energy Efficiency at PC OlefinsAsuccessstoryinenergymanagementrecentlyhasbeenseenatPCOlefins.Beginningin2015,PCOlefinshassignificantlyimproveditsenergyefficiencybyimplementinginitiativestoconservefuelgasandsteam.

PCOlefinsgeneratesfuelgasaspartoftheolefinsmanufacturingprocess. Most of this fuel gas is consumed internally, whilethe excess is flared. To reduce flaring, PC Olefins conducted athorough evaluation of the overall fuel gas system, andmodifieditsplantprocessestoallowthesurplus fuelgas tobedistributedtosurroundingplants. Inaddition,excesssteamgeneratedbyPCOlefins is re-routed toPCDerivativeswhere it isused forprocessheating.

Theseenergymanagementstrategieshelpedtoreduceourenergyconsumption by 1,200,000 gigajoules (GJ) during the year underreview. It also reducedCO2 emissions by 81,000 tonnes,which isequivalenttoremoving17,000carsofftheroadsannually*.

* AscalculatedusingtheUnitedStatesEnvironmentalProtectionAgency’sGHGEquivalenciesCalculator.

2015 20162014

Whatitallmeans:i. Direct GHG Emissions:GHGemittedfromassetsthatare

ownedorcontrolledbyPCGii. Indirect GHG Emissions: GHG emitted to generate

electricityand/orsteampurchasedbyPCGiii. GHG Emission Intensity:TotalGHGemissionsperunitof

productioniv. CO2e:Carbondioxideequivalent

0.91 0.870.76

GREENHOUSE GAS EMISSION

DirectEmissions(MillionTonnesofCO2e)

IndirectEmissions(MillionTonnesofCO2e)

GHGIntensity(TonnesofCO2e pertonneofproduct)

1.35

4.39 4.60

1.32 1.31

4.54

ENERGY INTENSITY (GJ of Energy Consumed per Tonne of Product)

17.61 17.0615.91

2015 20162014

EMISSION REDUCTION

EQUIVALENT TO REMOVING

17,000 CARSOFF THE ROADS ANNUALLY

80

Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

FRESHWATER CONSUMPTION

We use significant amounts ofwater to generate steam required byourplantsaswellasforcoolingandcleaningpurposes.However,wecloselymonitor all activities involving water as we recognise it is avitalandlimitednaturalresource.Startingfrom2016,ourplantshaveadoptedPETRONAS’GuidelinesonWaterPracticeswhichdefinestheoperatingconditionsandmaintenancepracticesforefficientwateruse.

Ourwaterwithdrawalintensityimprovedin2016asaresultofincreasedplantutilisation.Thismeansweusedlesswaterpertonneofproductduringtheyearunderreview.


EMISSIONS TO AIR AND WATER

ThemanagementofourairandwateremissionsisguidedbyourHSEPolicy,whichcommitsustosafeguardtheenvironmentinareaswherewe operate.Wemanage our emissions by reducing them at source,andthroughtheuseofpollutioncontrolequipment.Wealsomonitortheambientairqualityandwaterqualityofsurroundingriversorseatoensurecompliancewithregulatorylimits.OureffortsareguidedbyPETRONASTechnicalStandards.

OneofourkeyairpollutantsareNOx,whicharegeneratedduringfuelcombustionforenergygeneration.NOxarealsogeneratedwhenwaste

Whatitallmeans:NOx:Nitrogenoxides,acommonairpollutantSOx:Sulphuroxides,acommonairpollutantAir Emission Intensity: Total emission of air pollutants (intonnesofNOxandSOx)perunitofproduction.

EMISSIONS TO AIR

14.54

0.12

2.33

1.84

2.30

0.13

15.46

0.28

13.87

2015 20162014

NOxEmissions(Thousand Tonnes)

SOxEmissions(Thousand Tonnes)

AirEmissionIntensity(TonnesofAirEmissions

perthousandTonnesof

Product)

Whatitallmeans:Freshwater:Non-brackishwater,includingpotablewaterandriverwater.Freshwater Withdrawal:ThevolumeoffreshwaterremovedfrommunicipalwatersuppliesandothersourcesbyPCG.Freshwater Withdrawal Intensity:Totalfreshwaterwithdrawnperunitofproduction.

FRESHWATER WITHDRAWAL

29.73

4.73

4.274.58

31.27 32.31

2015 20162014

QuantityofFreshwaterWithdrawn(MillionCubicMeter)

FreshwaterWithdrawalIntensity(CubicMeterperTonne

ofProduct)

Our air emissions intensity reduced in 2016 as a result of increasedplantutilisationandareductioninflaring.

gascontainingammoniagasisflared.OurSOxemissionsarerelativelylowbecauseweuseprocessedfuelgas,whichislowinsulphur.

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Sectionfour

WASTE GENERATION

Westrivetominimisehazardouswastegenerationatourmanufacturingsites,whilemaximisingopportunitiestorecycle,reuseorrecover(3R)wasteatoffsitefacilities.Forexample,someofourwasteisconvertedinto fuels and lubricants, while other forms of waste are sent tospecialisedfacilitieswherepreciousmetalsarerecoveredfromthem. We quantify, inventorise and store all hazardous waste in dedicatedareas within each manufacturing site. The waste is then sent togovernmentlicensedwastefacilitiesfor3Rordisposal.Properwastemanagement is integral toourefforts tominimise theenvironmentalimpact of our operations. Minimising waste generation conservesnatural resources and improves our bottom line, while 3R reducesconsumptionofnaturalresources.

In2016,wemaintainedouraveragewasterecyclingrateatabove80%.Movingforward,wewillcontinuetostrivetoreduce,reuse,recycleandrecoverourhazardouswaste.


WemonitortheChemicalOxygenDemand(COD)ofourwastewater,whichtellsushowmuchorganicmatterisreleasedintosurroundingwaters. Our COD discharges were higher in 2015 due to a minormethanolleakageatourmethanolplant,whichdidnotresult inanynoticeableenvironmental impact tocoastalwaterssurrounding theplant.Theleakwasrectifiedandadditionalpreventivemeasureswereimplemented,whichhelpedtonormaliseourCODdischargesin2016.

WASTEWATER DISCHARGES

852

0.14

2014

0.21

1,430

2015

0.12

924

2016

WastewaterDischarges(TonnesofCOD

Discharged)

CODDischargeIntensity(TonnesofCODper

ThousandTonnesof

product)

Whatitallmeans:Generated: Quantityofhazardouswasteproduced3R:Quantityofhazardouswastesentforrecycling,reuseorrecoveryFinal Disposal:Quantityofhazardouswastethatislandfilled,incineratedordisposedwithnofurtherbeneficialuse

HAZARDOUS WASTE

20162014 2015

Generated(ThousandTonnesofWaste)

FinalDisposal(ThousandTonnesofWaste)

3R(ThousandTonnesofWaste)

PercentageofWastesentfor3R

80.3%

24.920.0

4.5

22.0

4.4

21.3

5.0

81.3%

27.1

81.3%

26.2

Reducing Acid Waste GenerationABF, our urea manufacturing facility in Bintulu, embarked on aninitiative to reduce the hazardous waste generated during thecleaningofitsammoniastripper.Theammoniastripperisusedtoremove ammonia from ABF’s wastewater. Previously, hazardousacid waste was generated when the stripper was cleaned withhydrochloricacid.Thiswastewassubsequentlysenttoalicensedoffsitefacilityfordisposal.

In 2015, the hydrochloric acid was substituted with an acidicwastewaterproducedbyABF’sownoperations.ABFalsomodifieditsstrippertoreduceexposuretohazardouschemicalsduringthecleaningprocess.Oncethestripperisclean,theacidicwastewateristreatedinternallyatABF’sownwastewatertreatmentplant.

Thenewcleaningprocesseliminatesthegenerationofacidwaste,whichinthepastamountedto38.4tonnesperyear.

82

Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

HEALTH & SAFETY

OCCUPATIONAL SAFETY AND HEALTH

Because we value our workforce, we place the highest priority onoccupationalsafetyandhealth.GuidedbyourHSEPolicy,wetakeeveryreasonablesteptoeliminatetheriskofinjuryandprotectthewell-beingofourworkforceandthepublic.

Ourworkforcewhichcomprisesouremployeesaswellasthoseofourcontractorsreceiveallthenecessarytrainingsinorderforthemtocarryouttheirworksafely.Thisincludesspecifictrainingsonsafetysystemsrelated to chemical handling, working at height, energy isolation,excavationandconfinedspaceentry.

To maintain good HSE performance, we engage regularly with ourworkforce.Forexample,beforeanyspecificjobbeginsataworksite,weholdsafetymeetingscalledtoolboxtalks.Theseshortmeetingsfocusonpotentialhazardsofthejobandreinforcesafeworkpracticesamongourworkers.HSECommittees,comprisingemployeesandmanagementrepresentatives, are also established at all our manufacturing sites.Thesecommitteesdevelop,promoteandevaluatemeasurestoensurethesafetyandhealthofouremployees.

Unfortunately,wehad two fatalitiesduring theyearasa resultofanammonialeakageatSAMURduringtheproject'scommissioning.Havingidentifiedtherootcausesoftheleak,wehavefurtherstrengthenedthesafetyproceduresatallourplantstopreventanyrecurrenceofsimilarincidents.

Whatitallmeans:TRC: Total Recordable Case - refers to the number ofworkplaceinjuriesthatrequiremedicaltreatmentbeyondfirstaidTRCF:TotalRecordableCaseFrequency-thenumberofTRCspermillionman-hoursLTI:LostTimeInjury-thenumberofworkplaceinjuriesresultinginlossofproductiveworktimeLTIF:LostTime InjuryFrequency - thenumberofLTIspermillionman-hours

EMERGENCY EXERCISEWecarriedoutamajoremergencyresponseexerciseon22September2016 involving four plants in the KIPC. Simulating an explosion andfire resulting froman ethylenepipeline leak, the exercise enabled ustoevaluateour readiness tomanageemergencies. Italso testedourinternalcommunicationsaswellasourlinkswithrelevantgovernmentagenciessuchastheFireandRescueDepartment,PoliceDepartment,CivilDefenceForceandlocalmedicalfacilities.

WewereencouragedbytheefficientwayinwhichourCorporateCrisisManagementTeam,theplants’EmergencyManagementTeamsandallpartiesinvolvedcooperatedinthisexercise.Lessonslearnthavebeenusedtofurtherenhanceouremergencypreparedness.

In addition to this exercise, three other manufacturing sites alsoconductedfull-scaleemergencyexercisedrillsin2016.

OCCUPATIONAL SAFETY INCIDENTS - OPERATIONS

0.43

0.16

2015

0.60

0.11

2016

0.10

0.83

2014

OCCUPATIONAL SAFETY INCIDENTS - SAMUR

00

2015

0.65

0.39

2016

0.56

0

2014


1.5

* AverageTRCFforpetrochemicalcompaniesintheUSAwithmorethan1000employeesin2014 Source:USBureauofLaborStatistics

LTIF(LTIpermillionman-hours)

TRCF(TRCpermillionman-hours)

IndustrialBenchmark*

LTIF(LTIpermillionman-hours)

TRCF(TRCpermillionman-hours)

AR16

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Sectionfour

PROCESS SAFETY AND SPILLS

OurHSEPolicyextendstoensuringthesafetyofourplantprocesses.Byguardingagainstfire,explosionsormaterialreleases,wesafeguardourpeople,localcommunitiesandourassetswhilepreventingunplannedshutdowns.

In 2015we established aProcessSafety FocusGroup to spearheadourprocesssafetymanagementstrategy.ComprisingProcessSafetymanagers from the different manufacturing sites, the Focus Groupresolves any process safety challenges faced within PCG. It alsodevelops competency programmes to ensure our Process Safetypractitionerskeepsharpeningtheirskillsinthisfield.

TheFocusGroup is supportedby aPETRONAS-wideProcessSafetyCommunity of Practice (CoP), which continuously raises the bar inbest practices via knowledge sharing among CoPmembers, and bycoachingandmentoringjuniorstaff.

There was a reduction in process safety incidents in 2016, none ofwhichresultedinspillsthatcausedsignificantenvironmentalimpacts.

Whatitallmeans:Significant Process Safety Incidents: Unplanned release ofsignificantquantitiesofhazardousmaterialsfromaprocess


PRODUCT STEWARDSHIP

WeembraceProductStewardship,which is theactofsystematicallyassessing, controlling and communicating HSE and social impactsof all our products and packaging throughout their life cycle, whilemaximising theireconomicbenefits.Wehavemadeaconsciousandvoluntary decision to implement Product Stewardship programmes,knowing this has great impact on our stakeholders, includingemployees,suppliers,retailersandconsumers.

Our commitment to product HSE is codified through endorsementof the chemical industry’s Responsible Care® programme. We alsoengagewithprofessionalswithinthe industryandtradeassociationstokeepabreastwithtrends,andfeelprivilegedtobeabletoshareourknowledge with government agencies to help shape new laws andregulations.

OurProductStewardshipfocusesonthefollowingpriorityareas,whicharebasedonbusinessandindustryrequirements:

1.ProductRegulatoryCompliance• We meet all product regulatory requirements in the countrieswhereourproductsaremadeandsold,andareable to respondappropriatelytocustomerenquiries.

• This includes global chemical management, dangerous goodstransportation, banned/restricted chemical management andHalalAssuranceSystems.

2.ProductRiskCharacterisationandManagement• Weensurenewandexistingproductsaresafeforuseandhandlingthroughouttheentiresupplychain.

• Productrisksaremanagedappropriatelyduringbusinessplanning,R&D, product realisation, distribution, application, disposal andrecycling(ifany).

NUMBER OF SIGNIFICANT PROCESS SAFETY INCIDENTS

3

2015

1

2016

0

2014

84

Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

CORPORATE SOCIAL RESPONSIBILITY

OUR ACHIEVEMENTS TO DATE:

• We confirmed our polymer products – LDPE (5 grades),LLDPE(5grades)&HDPE(3grades)–complywiththeUSFood and Drug Administration Federal Regulations USFDA21CFR177.1520,CFR178.2010.

• WehavereceivedHalalcertificationformorethan80ofourproductsasof2016.

• WereportedourcomplianceunderKoreaREACHregulations&Taiwan-TCSCAregistrationforexports.

• Weconductedproductstewardshipsessionswithchemicalsbuyersinvariouscountries,mostrecentlyinthePhilippines.

• We committed to complete GPSS for selected products.Five of the summaries are accessible to the public onthe International Council of Chemical Association’s GPSChemicalsportal(http://icca.cefic.org/).

3.ProductSafetyDocumentation&Communication• ProductHSEinformationisprovidedtoallstakeholdersinvolvedin theentire lifecycleofourproducts.This includessafetydatasheets (SDS), labels, safe handling instructions, product safetysummaries,productdossiersanddeclarations.

• SDS,labelsandhazardclassificationaremanagedbyanefficientSAPsystemsupportedbyadedicatedtoxicologyteamandproducttesting.Wealsoengage regularlywithcustomers,suppliersanddistributorsbyorganisingsitevisits,seminarsandtrainings.

4.ProductSustainability• Productsustainabilityprogrammesprovideenvironmental,socialandeconomicbenefitswhilemanagingaproduct’sHSEimpactsthroughout its lifecycle, fromthesourcingof feedstockuntil itsfinal disposal. Awareness of safer chemicals substitution andcarbonfootprintanalysisarebeingconsideredforfutureaction.

OneofourkeyProductStewardshipprogrammesisthedevelopmentofGlobalProductSafetySummaries(GPSS)forselectedproducts.EachGPSS provides information on the typical applications of a product,its physical and chemical properties, and effects on health and the

SOCIETY


environment.Written foreasycomprehension, theseGPSSenableourcustomersandthepublictounderstandhowourproductscanbeusedinasafeandenvironmentallyresponsiblemanner.

We take pride in being able to share some of our success with thecommunitiesthatliveinthevicinityofouroperations.Overtheyears,we have developed some meaningful programmes that strive toempowerthecommunitieswhereweoperate.

OurCSRprogrammesfocusoneducation,communitywell-beingandtheenvironment.In2016,theseprogrammesincludedBack-to-School,Program Cintai SungaiandecoCare.

BACK-TO-SCHOOLThroughthisprogramme,wehelptoimprovetheacademicperformanceofruralschoolchildreninsubjectssuchasscienceandmathematics,in addition to providing them with school supplies. In 2016, weorganisedBack-to-SchoolprogrammesinSipitang,KertihandLabuanwhichsawusprovide1,175underprivilegedschoolchildrenwithbagsandstationerybeforethestartofthenewacademicyear.Forthefirsttime,wealsocollaboratedwithMalay-languagedaily,Berita Harian,torun science andmathematics workshops for students and teachersfrom44primaryschools.

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Sectionfour


PROGRAM CINTAI SUNGAIOursubsidiary,PCMTBE,runsanannualriverconservationinitiativecalledProgram Cintai Sungai.Thisyear,itwasorganisedatJetiNelayanKampungBalokPantaiinKuantan.Collaboratingwithlocalgovernmentauthoritiesandcommunityrepresentatives,weraisedawarenessamongthelocalcommunityandschoolchildrenoftheneedtokeepBalokRiverclean.Weworkedwiththecommunitytopickuprubbishfromtheriverbanksandrelease‘pollution-absorbingmudballs’into the river, inaddition tocarryingout fun-filledReduce,ReuseandRecycle (3R)activities.Wealsohelped localboatownerspaint theirboatsandgave themfreemedicalcheckups toenhancetheirlivelihoodandwell-being.

ecoCareecoCareisoursignatureenvironment-basedCSRprogramme,conductedincollaborationwiththeMalaysianNatureSociety.Nowinits11thyear,theprogrammeinvolvesreforestationandrehabilitationofmangrovehabitatsalongKertihRiver.Toincreasepublicawarenessoftheimportanceofmangroveconservation,in2013wesetupanecoCareEnvironmentalEducationCentre(EEC),whichhashelpedtogarnergreaterparticipationintheprogramme.Todate,250organisationsandschools,aswellas12,200individualshavevisitedthecentre.Intotal,10,469mangroveseedlingshavebeenplantedonalldegradedpatchesrehabilitatingmorethan11,000squaremetresofareaalongtheKertihRiver.

Thisyear, for thefirst time,weorganiseda two-dayecoCareCommunityProgramme inconjunctionwithMalaysianEnvironmentWeek2016.Duringtheprogramme,membersofthecommunity,students,localauthoritiesandPETRONASstafftookpartinplantingmangroveseedlings.TheyalsoattendedatalkonrecyclingandresponsibleusageofplasticsbytheMalaysianPlasticsManufacturersAssociation.

ecoCareEnvironmentalEducationCentre

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Sectionfour

PETRONAS CHEMICALS

GROUP BERHAD

WORKFORCE DIVERSITY AND INCLUSION

We value people fromdifferent backgrounds and age groups for thefresh perspectives and insights they bring to our company. This isespecially important as we operate in an increasingly globalisedenvironment. We therefore strive to bring together a diverse groupoftalentswhoarerecruitedbasedonmerit,andwhoaregivenequalopportunitiestogrowandcontributetoourdynamicteam.

Asanequalopportunityemployer,wecreateaworkenvironmentthatiswomen-friendly.Womenwithchildrencanavailofourflexibleworkinghourstobalancetheirjobcommitmentswithpersonalresponsibilities.Westrive toaccommodate requests fromwomen tomove from jobsinourplantstoanofficeenvironment, formoremanageableworkinghours.Withinourheadquartersandplants,wehaveallocateddedicatedroomswithconducivefacilitiesformothers.

Ourwomenexecutivesarefurtherencouragedto jointhePETRONASLeading Women Network to benefit from role-modelling for theirprofessionaldevelopment,andnetworkingopportunitieswith leadersandpeers.

Company-wide,femaleemployeesmakeup18%ofourtotalworkforce.Thisisinfluencedbythelargelymaledominatedrepresentationinourplants. At the seniormanagement level, gender balance is amplifiedwithwomenmakingup27%ofourManagementCommittee.

GENDER DIVERSITY - TOTAL

18.8%

81.2%

19.5%

80.5%

18.0%

82.0%

2015 20162014

Female

Male

GENDER DIVERSITY - BOARD OF DIRECTORS

2015 20162014

Female

Male20%

80%

20%

80%

20%

80%

Diversity is also reflected at the Board level. During the year, a newBoardDiversityPolicywasdevelopedwhichunderlinesitscommitmenttoensureasuitablemixofmembers’profilesastoachieveeffectivestewardship and management. The new policy also reiterates theBoard’saimtohaveatleast30%representationofwomendirectors.


To find out more about PETRONAS’ CoBE and Whistle-Blowing Policy please refer to pages 94, 107 and 124 in Our Governance section.

ANTI-CORRUPTION

WehavezerotoleranceforanyformofbriberyorcorruptionandingrainallouremployeeswithPETRONAS’CodeofConductandBusinessEthics(CoBE)toensureeveryoneupholdsahighlevelofprofessionalismandintegrity.

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Sectionfour


EMPLOYEE RETENTION & CONTRACT STAFF

Asaresultofincreasedfocusonempoweringourfull-timeemployeesandreducingourdependencyoncontractstaff,thenumberofthelatteratPCGdroppedfrom8.6%in2015to5.1%in2016.Atthesametime,ourturnoverratefor2016remainslowat1%.

2015 20162014

7.8%

8.6%

5.1%

PERCENTAGE OF STAFF THAT ARE ON CONTRACT

2015 20162014

EMPLOYEE TURNOVER RATE

1.8% 1.8%

1.0%

WORKFORCE TRAINING AND DEVELOPMENT

Our employees determine the effective execution of PCG’s businessstrategyandoperations.Toensuretheyhavethecapabilitiesrequired,we provide continuous training and development for everyone at alllevelsintheCompany.

LEADERSHIP DEVELOPMENT PROGRAMME

Leadership programmes at the entrance level are designed aroundhelpingindividualsdevelopleadershipskillsandcontinueuntilthelevelof leadingtheself, i.e.becomingcommittedtoowngoals,managingchallengesandrisks,andrecognisingownstrengthsanddevelopmentareas.

Toassistournewmanagersmakethetransitionintoleadershiproles,conditioning programmes are introduced to enhance self-awareness,

equipthemwithessentialknowledgeaswellaskeyskillstoeffectivelyleadthemselvesandotherstoeffectchangeinthebusiness.Ultimately,ourleadersaretrainedtomaketheefficienttransitionintostrategicimplementers.

CAPABILITY DEVELOPMENT PROGRAMMES

Ouremployeedevelopmentprogrammesarefocusedontechnicalandnon-technicalemployees,guidedbyPETRONAS’competencyframework.

Theleadershipteamisheavilyinvolvedinourtraininganddevelopmentprogrammestoensurewehaveapipelineofcompetentstaff.In2015, aspecialcommitteewassetuptosteerourcapabilitiesdevelopmentdirectionanditsexecution.

Variouscompetency-enhancingprogrammesandassessmentshavebeenimplemented,including:

1. DownstreamGroundingProgramme(DGP)thatprovidesnewtechnicalexecutivesandnon-executivesstructuredandsystematicon-the-job-trainingforanoverallperspectiveofthePETRONASDownstreambusiness.Throughtheprogramme–whichrunsforoneyearfortechnicalexecutivesandsixmonthsfornon-executives–theygainknowledgeandskillsinoperations,engineeringandtechnology.

2. AcceleratedCompetencyDevelopment (ACD) thatdevelops technicalexecutives inspecialiseddisciplines toensure targetedcompetencylevelsareachieved.Theyareassignedwithcoachesandprovidedon-the-jobaswellasclassroomtraining. In2016,about1,080technicalexecutives underwent ACD assessments conducted by certified assessors to identify their competency levels and to serve as input forindividualdevelopmentplans.

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PETRONAS CHEMICALS

GROUP BERHAD

EMPLOYEE TRAINING

8.7

10.512.0

6.1

2015

8.5

7.4

2016*2014

Training Investment(ThousandRMperEmployee)

Training Man-daysperEmployee

During the year, we spent more on training per employeealthoughtheaveragenumberofdaysspentontrainingdippedslightly from that in 2015. This was due to more efficientfocus on meeting individual needs and filling competencygaps,especiallyinspecialisedareas.

As part of our CSR, in 2016we provided industrial trainingopportunities in both technical and non-technical areasto approximately 275 undergraduates. The students wereassignedtoareasrelatedtotheiracademicbackgrounds.

OUR WAY FORWARD

PCGviewssustainabilityasanongoingjourney,whichrequiresourcontinuousimprovementtomeetfuturechallengesandopportunities.Movingforward,wewillcontinuetostrengthenoursustainabilitystrategyby:


3. DownstreamTechnicalManagersCapabilityAssessment(TMCA)whichassessesthefunctionalcapabilitiesoftechnicalmanagersincarryingouttheirroleinplants.Atotalof25technicalmanagerswereassessedin2016.

4. PETRONASCompetency-basedAssessmentSystem(PECAS)whichascertainsthecompetencyofournon-executivetechnicalemployees,whohavetoundergotheprogrammewithin2.5years.In2016,about1,200staffwereinvolvedinvariousphasesoftheprogramme;andbytheendoftheyear,about350staffhadcompletedit,80%ofwhomcompleteditwithinthe2.5-yeartimeframe.

5. A Capability Development Framework (CDF) for the Commercial teamwas established to provide a structured approach in developing aversatilecommercialteamwithoverallexposuretocriticalrolesinbusiness,leadershipandspecialisedareas.Meanwhile,afeasibilitystudyonaProfessionalCareerPathfortheMarketing&Salesteamwasconducted.

SUCCESSION MANAGEMENT

Successionplanningiscriticalforthecontinuityofourbusinessoperations,ensuringwehavereadyandcredibletalenttofillinleadershipgapsinatimelymanner.OurtalentpoolisnotlimitedtoPCG’sownworkforcebutextendstosuitableleaderswithinthePETRONASGroup.

Incorporating sustainability elements into more sections of PCG’s business

Further strengthening our governance and processes related to sustainability

Enhancing our stakeholder engagement process

Expanding our sustainability reporting to include additional sustainability issues

Periodically reviewing our sustainability materiality assessment

HOW WE ARE

GOVERNED


W e b e l i e v e i n o p e r a t i n g a t t h e h i g h e s t l e v e l o f

i n t e g r i t y a n d t r a n s p a r e n c y, a n d a r e g u i d e d t o d o

s o b y o u r p r i n c i p l e s o f c o r p o r a t e g o v e r n a n c e .

H e r e , w e p r o v i d e a t r a n s p a r e n t a c c o u n t o f w h a t

c o r p o r a t e g o v e r n a n c e m e a n s t o u s a n d h o w w e

e n h a n c e o u r v a l u e t o s t a k e h o l d e r s b y h a v i n g i n

p l a c e a s t r o n g s y s t e m o f c h e c k s a n d b a l a n c e s .

CONTENTS

90 StatementonCorporateGovernance

• BoardAuditCommitteeReport

• NominationandRemunerationCommitteeReport

116 StatementonRiskManagementandInternalControl



90

Sectionfive

PETRONAS CHEMICALS

GROUP BERHAD

STATEMENT ON CORPORATE GOVERNANCE

CHAIRMAN’S OVERVIEW

MD ARIF MAHMOOD

CHAIRMAN

DEAR SHAREHOLDERS,

EFFECTIVE CORPORATE GOVERNANCE IS INTEGRAL TO THE SUCCESSFUL DELIVERY OF BUSINESS GOALS FOR OUR MANY AND DIVERSE STAKEHOLDERS, HOW WE WORK IS AS IMPORTANT AS WHAT WE DO. PCG OPERATES UNDER A WELL-DEVELOPED GOVERNANCE FRAMEWORK DESIGNED TO FOSTER TRANSPARENCY, INTEGRITY AND AN INFORMED APPROACH TO RISK MANAGEMENT ACROSS OUR WORLDWIDE BUSINESS. WE HAVE CLEAR STANDARDS OF BEHAVIOUR WE EXPECT FROM EVERYONE WHO WORKS WITH US.

The Board’s role is to review and guide the strategyfor theGroup,appoint the right leadershipandensureeffective implementation whilst monitoring businessperformance and ensuring the timely and effectiveassessment and management of business risks. Ourgoal is to build an enduring and profitable businessadmired by customers and other stakeholders, whilstachievingstrongreturnsforourshareholders.Thiswasa year of excellence for PCG and the Board played aleadingroleinsteeringmajortransactionsdescribedintheManagementDiscussionandAnalysisonpages41to52.AstheGroup’sstrategycontinuestoevolve,theBoard is focused on ensuring that the Group remainson course in achieving its target and long term valuecreation.

IamfortunateasChairmantobeabletocallonabroadand diverse range of skills and perspectives aroundthe boardroom table. In its current composition, ourBoardconsistsofeightDirectors,withvastleadershipexperience across numerous industrial sectors. Withtwofemaledirectors, Iampleasedtosaythatwearewell on our way to achieving the nation's target of30% of Board roles held bywomen.Wewill continuethe pursuit of female directors to ensure continueddiversityintheBoard.

Whilst theBoard isconfident thatPCG iswell-placedto continue to reward shareholders for their supportfor our strategy, we expect operating conditions toremain challenging in a number of our key marketsovertheyearahead.Tothisend,wewillhavealinearfocus on ensuring the Group maintains a rigorousand analytical approach to the management of riskwhilstseekingtoencouragetheentrepreneurshipandinnovationnecessarytodriveperformanceexcellenceanddynamicgrowthacrosstheportfolio.

Md Arif MahmoodChairman

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Sectionfive

Statement on Corporate Governance (Cont’d)

OUR APPLICATION OF THE MALAYSIAN CODE ON CORPORATE GOVERNANCE 2012

ThetablebelowsetsouttheobservanceofPCGwiththeprinciplesandrecommendationsofMalaysianCodeonCorporateGovernance2012inrespectof2016.

Principle/Recommendation Page No. Remarks

Principle 1 – Establish Clear Roles and Responsibilities

1.1 TheBoardshouldestablishclearfunctionsreservedfortheBoardandthosedelegatedtomanagement.

94-96,104,118

1.2 TheBoardshouldestablishclearrolesandresponsibilitiesindischargingitsfiduciaryandleadershipfunctions.

95,114

1.3 TheBoardshouldformaliseethicalstandardsthroughacodeofconductandensureitscompliance.

94

1.4 TheBoardshouldensurethattheCompany’sstrategiespromotesustainability.

75-88

1.5 TheBoardshouldhaveprocedurestoallowitsmembersaccesstoinformationandadvice.

104

1.6 TheBoardshouldensureitissupportedbyasuitablyqualifiedandcompetentcompanysecretary.

104,115

1.7 TheBoardshouldformalise,periodicallyreviewandmakepublicitsBoardCharter.

95

Principle 2 – Strengthen Composition

2.1 TheBoardshouldestablishaNominatingCommitteewhichshouldcompriseexclusivelyNon-ExecutiveDirectors,amajorityofwhommustbeindependent.ThechairoftheNominatingCommitteeshouldbetheSeniorIndependentDirector.

111-113

TheNominationandRemunerationCommitteeischairedbyanIndependentDirector,ChingYewChye,whoisnottheSeniorIndependentDirectoridentifiedbytheBoard.TheSeniorIndependentDirector,VimalaV.R.Menon,iscurrentlytheChairmanoftheBoardAuditCommittee.TheCompanyelectstohavedifferentchairmanshipsinBoardAuditCommittee,andNominationandRemunerationCommitteesoastoleverageonthedifferentperspectivesanddynamicswhichemanatesfromsucharrangements,aswellastoensurethateachindependentdirectorhasequitablerolesandresponsibilitiesrespectively.TheCompanyintendstomaintainthecurrentarrangement.

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PETRONAS CHEMICALS

GROUP BERHAD



2.2 TheNominatingCommitteeshoulddevelop,maintainandreviewthecriteriatobeusedintherecruitmentprocessandannualassessmentofDirectors.

97, 104-105,

112

2.3 TheBoardshouldestablishformalandtransparentremunerationpoliciesandprocedurestoattractandretainDirectors.

101-102

ApolicyiscurrentlybeingdevelopedandwillbeputtotheBoardforapprovalinduecourse.AtpresentBoardremunerationremainscompetitiveandisbenchmarkedagainstindustrystandards.

Principle 3 – Reinforce Independence

3.1 TheBoardshouldundertakeanassessmentofitsIndependentDirectorsannually.

104-105,112

3.2 ThetenureofanIndependentDirectorshouldnotexceedacumulativetermofnineyears.Uponcompletionofthenineyears,anIndependentDirectormaycontinuetoserveontheBoardsubjecttotheDirector’sre-designationasaNon-IndependentDirector.

26-33,98

3.3 TheBoardmustjustifyandseekshareholders’approvalintheeventitretainsasanIndependentDirector,apersonwhohasservedinthatcapacityformorethannineyears.

98

3.4 ThepositionsofChairmanandChiefExecutiveOfficershouldbeheldbydifferentindividuals,andtheChairmanmustbeaNon-ExecutivememberoftheBoard.

26-27,96,114

3.5 TheBoardmustcompriseamajorityofIndependentDirectorswheretheChairmanoftheBoardisnotanIndependentDirector.

96

TheChairmanoftheCompanyiscurrentlyaNon-IndependentNon-ExecutiveDirector.ThisispremisedonthehighlevelofintegrationwithPETRONAS’business.TheBoardcurrentlyhasfourIndependentNon-ExecutiveDirectors,threeNon-IndependentNon-ExecutiveDirectorsandoneExecutiveDirector.ThecurrentBoardcompositionisbalancedandcomplieswithParagraph15.02oftheMMLR,as50%oftheBoardmembersareIndependentDirectors.TheCompanyintendstomaintainthecurrentBoardcomposition.

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Principle 4 – Foster Commitment

4.1 TheBoardshouldsetoutexpectationsontimecommitmentforitsmembersandprotocolsforacceptingnewdirectorships.

95,104

4.2 TheBoardshouldensureitsmembershaveaccesstoappropriatecontinuingeducationprogrammes.

98-99

Principle 5 – Uphold Integrity in Financial Reporting

5.1 TheAuditCommitteeshouldensurefinancialstatementscomplywiththeapplicablefinancialreportingstandards.

108-109

5.2 TheAuditCommitteeshouldhavepoliciesandprocedurestoassessthesuitabilityandindependenceofExternalAuditors.

-

ApolicyiscurrentlybeingdevelopedandwillbeputtotheBoardforapprovalinduecourse.AtpresenttheBoardAuditCommitteecontinuestoreviewandmonitorthesuitabilityandindependenceofexternalauditors.

Principle 6 – Recognise and Manage Risks

6.1 TheBoardshouldestablishasoundframeworktomanagerisks.

94, 116-121

6.2 TheBoardshouldestablishaninternalauditfunctionwhichreportsdirectlytotheAuditCommittee.

109-110

Principle 7 – Ensure the Timely and High Quality Disclosure

7.1 TheBoardshouldensuretheCompanyhasappropriatecorporatedisclosurepoliciesandprocedures.

106

7.2 TheBoardshouldencouragetheCompanytoleverageoninformationtechnologyforeffectivedisseminationofinformation.

104,106

Principle 8 – Strengthen Relationship between Company and Shareholders

8.1 TheBoardshouldtakereasonablestepstoencourageshareholderparticipationatgeneralmeetings.

106

8.2 TheBoardshouldencouragepollvoting.

106

Effective2017,generalmeetingswillbeconductedviae-polling.IndependentScrutineersandPollAdministratorwillbeappointedtoconductthepollingprocessandverifytheresultsofthepoll.

8.3 TheBoardshouldpromoteeffectivecommunicationandproactiveengagementswithshareholders.

106


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PETRONAS CHEMICALS

GROUP BERHAD

HOW WE APPROACH OUR GOVERNANCE

Webelieveeffectivegovernancebeginsatthetop.TheBoardprovidesguidanceandoversight,whilemanagementdefinesandexecutesstrategyandsimultaneouslymanagesrisks.SuccessattheBoardandmanagementlevelatPCGinvolvessettingtherightpriorities,havingtheappropriateteammembersinplace,evaluatingourselves,continuingoureducationandcommunicatingwithourstakeholders.

OUR GOVERNANCE FRAMEWORK

Goodcorporategovernanceenhances thecredibility and reputationof theCompany, aswell aspromotingandsafeguarding the interestsofshareholdersandotherstakeholders.MaintainingagoodandsolidframeworkofcorporategovernancehasbeenandremainsoneofPCG'stoppriorities.

WeuseaCorporateGovernanceFrameworktoidentifyallthekeyparticipantsingoodgovernance,thewaysinwhichtheyrelatetoeachotherandthecontributioneachmakestotheapplicationofeffectivegovernancepoliciesandprocesses.

Assurance providers:

InternalAudit

ExternalAuditBoard

AuditCommittee

ManagementCommittee

NominationandRemunerationCommittee

OUR ETHICS AND STANDARDS

TheGroupadopts andpractises thePETRONASCodeofConduct andBusinessEthics (CoBE)which emphasises andadvances theprinciplesofdiscipline,goodconduct,professionalism,loyalty, integrityandcohesivenessthatarecriticaltothesuccessandwell-beingoftheGroup.TheCoBEcontainsdetailedpolicy statementson thestandardsofbehaviourandethical conduct expectedof each individualof theGroup.TheGroupalsorequiresthatcontractors,sub-contractors,consultants,agentsandrepresentatives,andothersperformingworkorservicesfororonbehalfoftheGrouptocomplywiththerelevantpartsoftheCoBEwhenperformingsuchworkorservices.TheCoBEexpresslyprohibitsimpropersolicitation,briberyandothercorruptactivitiesnotonlybyemployeesanddirectorsbutalsobythirdpartiesperformingworkorservicesfororonbehalfofcompaniesintheGroup.

TheCoBEisaccessibletothepublicforreferenceontheCompany’sofficialwebsiteatwww.petronaschemicals.com.


Shareholders(viatheAGMandAnnualReport)

ManagingDirector/CEO

BoardofDirectors

RiskMan

agem

ent

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Sectionfive


BOARD OF DIRECTORS

The Board CharterTheBoardCharterassignsresponsibilityforstrategicdirectionandcontroloftheGrouptotheBoard.TheBoardexercisesthiscontrolbywayoftheGroup'sgovernanceframework,whichincludesdetailedreportingtotheBoardanditscommittees,andasystemofassurancesoninternalcontrols.TheBoardregularlyreviewstheBoardCharter,whichincludesthosemattersreservedforboarddecision-makingandapprovesthedelegationofauthority tomanagement inspecifiedmatters.Our lastBoardCharter review,heldon20February2017, resulted in theapprovalofaprovisionexplainingtherolesoftheChairman,ManagingDirector/CEO,Non-ExecutiveDirectorsandSeniorIndependentDirectorinadditiontothedutiesandresponsibilitiesoftheBoard,BoardaccountabilityandBoardprocesses.

TheBoardChartersetsoutthepracticesandprocessesadoptedtoenabletheBoardtodischargeitsresponsibilities.TheBoardCharterisavailableontheCompany’swebsite,www.petronaschemicals.comtogetherwiththetermsofreferenceofallitscommittees.TheBoardissatisfiedthatitfulfilledthesedutiesandobligationsduringtheyearunderreview.

The Board’s Responsibilities and DutiesTheBoardischargedwithpromotingthesuccessoftheGroupbydirectingandsupervisingitsaffairsinaresponsibleandeffectivemanner.EachDirectorhasadutytoactingoodfaithandinthebestinterestoftheCompany.TheDirectorsareawareoftheircollectiveandindividualresponsibilitiestoallshareholdersforthemannerinwhichtheaffairsoftheCompanyaremanaged,controlledandoperated.

ThediagrambelowshowsthekeyareasoffocusfortheBoardwhichappearasitemsontheBoard’sagendaatrelevanttimesthroughouttheyear.ConcentrateddiscussionoftheseitemsassiststheBoardinmakingtherightdecisionsbasedonthelong-termopportunitiesforthebusinessanditsstakeholders.

KEY AREAS OF FOCUS FOR THE BOARD

04EnsurethatthereisanappropriatesuccessionplanformembersoftheBoardandKeyPersonnel

05Reviewtheadequacyandintegrityofinternalcontrolsystemsandmanagementinformationsystems,includingsystemsforcompliancewithapplicablelaws,regulations,rules,directivesandguidelines

06Reviewandapprovefinancialstatements

01Review,approveandmonitorannualcorporateplan,

whichincludesoverallcorporatestrategy,operationalplan,marketingplan,humanresourcesplan,financialplan andbudget,riskmanagementplanandinformation

technologyplan

02Overseeandreviewtheperformanceofthebusiness,andto

evaluatewhetherbusinessisbeingproperlymanaged

03Identifyprincipalrisksandensuretheimplementationofappropriatesystemstomonitorandmanagetheserisks

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GROUP BERHAD

PROVIDING SOUND LEADERSHIP

Board Balance and CompositionThe Board comprises eight Directors as at 31December2016,ofwhomoneisanExecutiveDirectorandsevenareNon-ExecutiveDirectors.25%ofthedirectorsarewomen.

The Board has determined that four of theNon-Executive Directors are independent inaccordancewiththeMMLRofBursaMalaysia.TheBoardisoftheviewthatallNon-ExecutiveDirectors exercise independent judgement atalltimes.

TheNominationandRemunerationCommitteetakesintoaccountcorporateleadershipskills,experience and expertise required to advancethe strategic direction of the Company whenappointments to the Board are considered.TheBoardensuresthatithastherightbalanceof skills, experience, independence andbusiness knowledge necessary to dischargeitsresponsibilities inkeepingwiththehigheststandards of governance. In the Board’sassessment,allDirectorshavetheknowledge,skills and experience to make a meaningfulcontributiontothebusinessoftheCompany.

The positions of Chairman and ManagingDirector/CEO are held separately by MdArif Mahmood and Datuk Sazali Hamzahrespectively. This segregation ensures aclear distinction between the Chairman’sresponsibility to manage the Board andthe Managing Director/CEO’s responsibilityto manage the Company’s business. Therespective responsibilities of the ChairmanandManagingDirector/CEOaremorefullysetoutonpage114.TheManagingDirector/CEOisassistedby theManagementCommittee inmanagingthebusinessonaday-to-daybasis,whichheconsultsregularly.TheManagementCommitteeensureseffectivesystems,controlsandresourcesareinplacetoexecutebusinessstrategies and decisions taken by the Boardand/ortheManagingDirector/CEO.

Refer to pages 26 to 33 for the profiles of the Directors.

Attendance of Board and Board Committee meetings are provided on page 103.

Right balance of skills and experience to make a meaningful contributionto the business of the Company

BOARD SKILLS AND DIVERSITY

The Board consists of Directors with a diverse range of experience including oil and gas,engineering,financeandcommercial.

BOARD OF DIRECTORS

Non-Independent Non-Executive Director

• MdArifMahmood

• ZakariaKasah

• FreidaAmat

Executive Director

• DatukSazaliHamzah

Independent Non-Executive Director

• VimalaV.R.Menon

• ChingYewChye

• DongSooKim

• DatukTohAhWah

Oil and Gas Industry

Finance/Audit

Economics

Engineering


Operations

Corporate Planning and Development

Human Resource

Information Technology

Global Petrochemical Consultancy

SKILLS

TENURE4 to 7 years

2 to 4 years

0 to 2 years

3 Directors

2 Directors

3 Directors


Management CommitteeManagementstaffoftheCompanyaresecondedfromPETRONAS.Theirtrainingandsuccessionplanning are aligned to PETRONAS’ Human Resource Policies and Strategies. The BoardensuresthatonlyappropriatepersonnelwiththerelevantskillsandexperienceareappointedtomanagementpositionsoftheCompany.

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BOARD DIVERSITY POLICY

PCGhasadiversitypolicytoensurethatthemixandprofilesofourBoardmembers,intermsofage,ethnicityandgender,providethenecessaryrangeofperspectives,experienceandexpertiserequiredtoachieveeffectivestewardshipandmanagement.WebelievethatatrulydiverseandinclusiveBoardwill leveragedifferences in thought,perspective,knowledge,skill, regionaland industryexperience,culturalandgeographicalbackground,age,ethnicityandgenderwhichwillensurethattheCompanyretainsitscompetitiveadvantage.

Inthisregard,theNominationandRemunerationCommittee(NRC)isempoweredtoreviewandassessthecompositionandperformanceoftheBoardannually,aswellasidentifyingqualifiedcandidatestooccupyBoardpositions.AsforthecompositionoftheBoard,theNRCwilldeterminethebenefitsofdiversityinordertomaintainanoptimummixofskills,knowledgeandexperienceoftheBoard.

TheNRCwillcontinuetofocusondiversitywhenrecommendingnewcandidatesforBoardmemberships,aswellasevaluatingtheperformanceoftheBoardanditsindividualmembers.InconnectionwithitsefforttocreateandmaintainadiverseBoard,theNRCwill:

a) Adheretotherecruitmentandsourcingprocessthatseekstoincludediversecandidates,includingwomeninanydirectorsearch.

b) Assesstheappropriatemixofdiversityincludinggender,ethnicity,age,skills,experienceandexpertiserequiredontheBoardandaddressgaps,ifany.

• Male

• Female

• Male

• Female

• Male

• Female

• Oil&GasIndustry



Finance/Audit

Engineering

Operations

Economics

HumanResource


GlobalPetrochemicalConsultancy

Board Audit Committee

Skills Matrix

Gender

Nomination andRemuneration Committee

40%

60% 67%

33%

14% 20%

17%

11%11%

11%

6%

3%3%

3%

75%

25%

2016

2016

2016 2016

40-49

50-59

Above60

Age

2016 50%

12%

38%

Malay

Chinese

Indian

Korean

Ethnicity

201650%

24%

13%

13%

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PETRONAS CHEMICALS

GROUP BERHAD

c) Make recommendations to theBoard in relation to theappointmentsandmaintainanappropriatemixofdiversity, skills, experienceandexpertiseontheBoard.

d) PeriodicallyreviewandreporttotheBoardonrequirementsinrelationtodiversityontheBoard,ifany.

TheBoardsupportsthecountry’saspirationaltargetof30%representationofwomendirectors.

TheNRCwillreviewannuallythecompositionoftheBoardinrespecttogender,experience,skills,ageandknowledge.Atanygiventime,theBoardmayseektoimproveoneormoreaspectsofitsdiversityandmeasureprogressaccordingly.

RE-ELECTION OF DIRECTORS

UnderArticle93oftheConstitutionoftheCompany,ateveryAnnualGeneralMeeting(AGM),one-thirdoftheDirectorsshallretirefromofficebyrotationandmayofferthemselvesforre-election.TheConstitutionsoftheCompanyalsoprovidethatallDirectorsaresubjecttoretirementbyrotationatleastonceineverythreeyearsandshallbeeligibleforre-election.DirectorswhoareappointedbytheBoardduringtheyeararesubjecttore-electionbyshareholdersatthenextAGMheldfollowingtheirappointments.

AsperRecommendations3.2and3.3ofMCCG2012,thetenureofanindependentdirectorshouldnotexceedacumulativetermofnineyears.Uponcompletionofthenineyears,anindependentdirectormaycontinuetoserveontheboardsubjecttothedirectors’re-designationasanon-independentdirector.Theboardmustjustifyandseekshareholders’approvalintheeventitretainsthedirectorasanindependentdirector.

Currently,noneoftheIndependentNon-ExecutiveDirectorsoftheCompanyhasservedtheBoardformorethannineyears.

DIRECTORS' CONTINUING DEVELOPMENT PROGRAMME

AlltheDirectorshaveattendedtheMandatoryAccreditationProgrammeasrequiredundertheMMLRofBursaMalaysia.

TheDirectorsareregularlyupdatedontheGroup’sbusinessesandthecompetitiveandregulatoryenvironmentinwhichtheGroupoperates.AsanintegralpartoftheorientationprogrammefornewDirectors,theCompanyprovidescomprehensivebriefingsontheGroup’soperationsandfinancialperformanceaswellassitevisitstotheGroup’sfacilities.

TheDirectorsobservePrinciple4ofMCCG2012andrecognisetheimportanceandvalueofattendingconferences,trainingprogrammesandseminarsinordertokeepthemselvesabreastwiththedevelopmentandchangesintheindustriesinwhichtheGroupoperates,aswellastoupdatethemselvesonnewstatutoryandregulatoryrequirements.Duringtheyearunderreview,theDirectorshaveattendedandparticipatedinprogrammes,conferencesandforumsthatcoveredtheareasofcorporategovernance,financial,relevantindustryupdatesandglobalbusinessdevelopmentswhichtheyconsideredasusefulincontributingtotheeffectivedischargeoftheirdutiesasDirectors.TheDirectorsalsoparticipatedinfamiliarisationvisitstotheGroup’splants.

Duringtheyear,theDirectorsparticipatedinseminarsandtrainingprogrammesinvariouscapacitiessuchasdelegatesand/orspeakersasperdetailsbelow:

Directors Training/Conferences Date

MDARIFMAHMOOD •PETRONASDownstreamDigitalWorkshop•PETRONASDownstreamCommercialExcellence•BainSoutheastAsiaTransformationLeadersForum•PETRONASCulturalBeliefsWorkshop•OffshoreTechnologyConferenceAsia2016•VopakGlobalMindsConference•DownstreamOperationalExcellenceForumandAward

19-20January20165February20162March20168March201622March20165October201617October2016


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Directors Training/Conferences Date

DATUKSAZALIHAMZAH

•StrategicConversationWorkshop•DownstreamCommercialExellenceTransformation•PCGTownhall2016•AsiaRefiningTechnologyConference(ARTC)2016• 9thReliability,AssetManagementandSafetyAsia2016•VisittoPICProjectSite,Pengerang

12January201627January201611March201620April201625April20168August2016

VIMALAV.R.MENON

•NewAuditor'sReport-SharingtheUKExperience•CorporateGovernanceBreakfastSeries-ImprovingBoardRiskOversightEffectiveness

•EnsuringOrganisation'sSustainabilitythroughIntegratedStrategicCorporateRiskManagementPrograms

•SitevisittoPICProjectSite,Pengerang,Johor•BusinessSustainability•GeneralandDetailedSustainabilityStatementsinAnnualReport2017•BestPracticesforBoardExcellence• 5thPETRONASBoardAuditCommitteeForum

13January201626February2016

11July2016

23July201615July201625July20163August201616August2016

CHINGYEWCHYE •BursaMalaysia/MIA-MICPA-FutureofAuditorReporting:TheGameChangerforBoardroom

•McKinsey&CompanyLeadingtheDigitalandAnalyticsRevolution• ReviewofSecuritiesCommissionDraftMalaysianCodeofCorporateGovernance2016•VisittoPICProjectSite,Pengerang•MAICSA&BursaMalaysia:HowtoLeverageonAGMsforBetterEngagementwithShareholders

9March2016

2June20166June20168August201621November2016

DONGSOOKIM •WhatDoesItTaketoWininGlobalEnvironment?•LeadersMakeItHappenThroughPeople•ClimateChangeisReal:WhatistheRoleofaLeader?•LeadershipintheGlobalBusinessandImpacttotheCompetitiveness•VisittoPICProjectSite,Pengerang

6March20169April20165June201614July20168August2016

DATUKTOHAHWAH •VisittoPICProjectSite,Pengerang•EmbracingtheBoard’sRoleinCorporateTransformation

8August201612October2016

ZAKARIAKASAH •BestPracticesforBoardExcellence 3August2016

FREIDAAMAT •TheAGM-ThePracticalInsightandManagingShareholders’Expectation•VisittoPICProjectSite,Pengerang• 5thPETRONASBACForum•TheInsideStoryoftheAnnualReport:WhatDirectorsMustKnow

21June20168August201616August201623September2016


Aside from the attendance of training and conferences, during the year under review, the PCG Board had an independent sessionwith thecommercialteam,tofurtherunderstandcommercialexcellenceinitiativesandcommercialkeyoperationalactivities.

100

Sectionfive

PETRONAS CHEMICALS

GROUP BERHAD

Overview of various agenda items on the Board and Board Committees meetings 2016

• Q42015BusinessPerformanceandAuditedFinancialStatements

• FY2015AnnualReportStatements• Q42015InternalAuditStatusReport• BoardEffectivenessEvaluationFY2015• FY2016KPIsforManagingDirector/CEO

• Update/approvalonvariousPCGprojects

• ReviewStrategiesandImplementationProgressofCommercialExcellence

• Q12016BusinessPerformanceandQuarterlyResults• Q12016CorporateRiskProfileMonitoringUpdate• Q12016InternalAuditStatusReport• ProgressStatusofInternalAuditPlanFY2016• FY2016KPIsforHeadofInternalAuditDepartment• Update/approvalonvariousPCGprojects/

agreements• InternalSelectionCriteriaofIndependentBoard

Member

• Q22016BusinessPerformanceandQuarterlyResults• Q22016CorporateRiskProfileMonitoringUpdate• Q22016InternalAuditStatusReport• ProgressStatusofInternalAuditPlanFY2016• Update/approvalonvariousPCGprojects/agreements• FY2016PeriodicPerformanceReviewandDevelopment

PlanofPCGKeyPersonnel

• Update/approvalonvariousPCGprojects/agreements

• BoardDiversityPolicy&SeniorExecutivePolicy

JAN FEB MAR APR MAY JUNE

JUL AUG SEP OCT NOV DEC

BoardBoardAuditCommitteeNominationandRemuneration Committee

BoardBoardAuditCommitteeNominationandRemuneration Committee


• Q32016BusinessPerformanceandQuarterlyResults• Q32016CorporateRiskProfileMonitoringUpdate• Q32016InternalAuditStatusReport• ProgressStatusofInternalAuditPlanFY2016• Update/approvalonvariousPCGprojects/agreements• BusinessPlansandBudgetFY2017-2021• CorporateRiskProfileReviewforFY2017• SustainableDevelopmentStrategy• IndependentDirectors’Feedbackontheperformance ofPCGKeyPersonnel• Re-electionofDirectors• BoardSelectionCriteria• BoardSkillMatrix

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DIRECTORS' FEES

TheapproachtoDirectors'feesisalignedwithourstrategicobjectives,allowsustoattract,motivateandretainhighcalibertalent,andaspartof our risk framework, does not promote excessive risk-taking. Thedesignofourfeesarchitecturecomplieswithregulatoryrequirements,embraces market practices and trends, and provides attractive andbalancedrewards.

Non-Executive DirectorsOurfeesstructureforNon-ExecutiveDirectorsaredesignedtoattractandretainhighcaliberBoardmemberswhoareappropriatelypaidfortheirtimeandeffort.ThefeesstructureofNon-ExecutiveDirectorsoftheCompanyisasfollows:

• Fees for duties as Directors and additional fees for undertakingresponsibilitiesasChairmanoftheBoard;and

• Meetingallowancesforeachmeetingattended.

ThefeesforNon-ExecutiveDirectorsaredeterminedbytheBoardandsubjecttotheapprovaloftheshareholdersoftheCompanyattheAGM.MeetingallowancesforalltheNon-ExecutiveDirectorsaredeterminedby theBoard. The shareholders at theCompany’sAGMheld in 2013approvedfortheCompanytopayDirectors’ feesuptoRM1.5millionperannum.

TheDirectors’feesandmeetingallowancesforcertainNon-IndependentNon-Executive Directors who are also employees of PETRONAS andholding positions of Vice President and above are paid directly toPETRONAS. The presence and participation of the Non-IndependentNon-Executive Directors who are employees of PETRONAS give theBoardadeeperinsightintoPETRONAS'operations.

AnnualFees

Board - RM108,000(Chairman)- RM432,000(Non-ExecutiveIndependentDirectors)

- RM144,000(Non-ExecutiveNon-IndependentDirectors)

MeetingAllowances(BoardandallBoardCommittees)

Board - RM24,000(Chairman)- RM98,000(Non-ExecutiveIndependentDirectors)


BoardAuditCommittee - RM17,500(Chairman)- RM52,500(Non-ExecutiveIndependentDirectors)


NominationandRemunerationCommittee

- RM17,500(Chairman)- RM35,000(Non-ExecutiveIndependentDirectors)

AnnualGeneralMeeting - RM4,000(Chairman)- RM14,000(Non-ExecutiveIndependentDirectors)


TheCompanyalsoreimbursesallexpensesincurredbytheDirectors,whererelevant,inthecourseofcarryingouttheirdutiesasDirectors.

Executive DirectorTheremunerationpackagefortheExecutiveDirectoroftheCompanyis balanced between fixed and performance-linked elements. Aportionof theExecutiveDirector’scompensationpackage isvariableinnatureand isKPI-based,which includes theGroup’sperformance.AsanExecutiveDirector,heisnotentitledtoreceivedirectors’feesormeetingallowances.

DatukSazaliHamzah,ManagingDirector/CEOandanExecutiveDirectoroftheCompany,isanemployeeofPETRONASandissecondedtotheCompany.Inconsiderationforhisservice,theCompanyisrequiredtopay PETRONAS a fee to cover all payroll related costs and benefitsordinarilyincurredbyhiminthecourseofhisemployment.Duringtheyear, the Company paid RM1,164,000 for his services as ManagingDirector/CEOoftheCompany.


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PETRONAS CHEMICALS

GROUP BERHAD

Fortheyearunderreview,thebreakdownoftheDirectors’remunerationisasfollows:

Nominationand

Board Audit RemunerationBoard Committee Committee

Directors’ Meeting Meeting MeetingFee Allowance^ Allowance* Allowance* Total

Name of Directors (RM) (RM) (RM) (RM) (RM)

Executive Director

DatukSazaliHamzah Nil Nil Nil Nil Nil

Non-Executive Directors

MdArifMahmood 108,000 28,000 - - 136,000**

VimalaV.R.Menon 72,000 28,000 17,500 17,500 135,000

ChingYewChye 72,000 28,000 17,500 17,500 135,000

DongSooKim 216,000 28,000 17,500 17,500 279,000

DatukTohAhWah 72,000 28,000 17,500 - 117,500

ZakariaKasah 72,000 21,000 - - 93,000**

FreidaAmat 72,000 24,000 10,000 - 106,000

Total 684,000 185,000 80,000 52,500 1,001,500

^ IncludingAGM'sattendance* MeetingallowancespaidarebasedonthenumberofmeetingsattendedbytheDirectors**FeespaidtoPETRONAS

TheDirectors’remunerationisbroadlycategorisedintothefollowingbands:

Range of RemunerationNumber of Directors

Executive Non-Executive

RM50,000andbelow - -

RM50,001toRM100,000 - 1

RM100,001toRM150,000 - 5

RM150,001toRM300,000 - 1

RM700,000andabove 1^ -

^ ExecutiveDirector'spayrollrelatedcostsandbenefitspaidtoPETRONAS


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OUR GOVERNANCE PROCESSES

Board and Board Committee AttendancePCGBoardmeetsinpersonatleastquarterlyperannumandonotheroccasionswhenaBoarddecisionisrequiredonmajorissues.DetailsofDirectors’attendanceattheGeneralMeetings,BoardandBoardCommitteemeetingsheldin2016aresetoutinthefollowingtable.TheoverallattendancerateofDirectorsatBoardmeetingswas96%(2015:95%).

Directors Meetings Attended/Held

Name of Directors BoardBoard Audit Committee

Nomination & Remuneration

Committee AGM

Executive Director

DatukSazaliHamzah 7/7 - - 1/1

Non-Executive Directors

MdArifMahmood 6/7 - - 1/1

ZakariaKasah 6/7 - - 1/1

FreidaAmat 7/7 5/5 - 1/1

Independent Non-Executive Directors

VimalaV.R.Menon 7/7 5/5 5/5 1/1

ChingYewChye 7/7 5/5 5/5 1/1

DongSooKim 7/7 5/5 5/5 1/1

DatukTohAhWah 7/7 5/5 - 1/1


104

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PETRONAS CHEMICALS

GROUP BERHAD

KEEPING THE BOARD INFORMED

PriortoeachBoardmeeting,theagendaandasetofBoardpapersencompassingqualitativeandquantitativeinformationrelevanttothebusinessofthemeetingarecirculatedtoallDirectorsnotlessthanfivebusinessdaysbeforethemeetingdates.ThisenablestheDirectorstohavesufficienttimetoperusetheBoardpapersandseekclarificationsorfurtherdetailsfromthemanagementortheCompanySecretarybeforeeachmeetingtoensurepreparednessforthemeeting.AnyDirectormayrequestmatterstobeincludedintheagenda.Urgentpapersmaybepresentedandtabledatmeetingsundersupplementalagenda.Boardpaperspreparedarecomprehensiveandincludesobjectives,background,criticalissues,implications, risks,strategicfit (applicableonly for investmentdecisionpapers), recommendationsandotherpertinent information toenableinformeddecisionmakingbytheBoard.

Presentationsandbriefingsbythemanagementandrelevantexternalconsultants,whereapplicable,arealsoheldatBoardmeetingstoadvisetheBoardandfurnishrelevantinformationandclarificationfortheBoardtoarriveataconsidereddecision.

Access toBoardpapersandother relevant informationarecarriedoutonline throughacollaborativesoftwarewhichallows theDirectors tosecurelyaccessBoarddocumentsandcollaboratewithotherBoardmembersandtheCompanySecretaryelectronically.TheonlineaccessibilityfacilitatestheDirectorstoreadandreviewdocumentsorcommunicatewithothermembersduringtheBoardmeetingsoratanyothertime.

TheDirectorshavedirectaccesstotheSeniorManagementandhaveunrestrictedaccesstoanyinformationrelatingtotheGrouptoenablethemtodischargetheirduties.TheDirectorsalsohavedirectaccesstotheadviceandservicesoftheCompanySecretaryandareregularlyupdatedonnewstatutoryandregulatoryrequirementsrelatingtothedutiesandresponsibilitiesoftheDirectors.TheDirectors,whetherasafullboardorintheirindividualcapacity,mayseekindependentprofessionaladviceattheCompany’sexpenseinfurtheranceoftheirduties.

THE BOARD AND ITS COMMITTEES

ThefollowingchartexplainstheresponsibilitiesandtheworkthateachBoardCommitteeundertookonbehalfoftheBoardin2016uptothedateofthisreport(theperiod).ThetermsofreferenceandmembershipofallBoardCommitteesaredisclosedinfullonthewebsitesofPCG and Bursa Malaysia.TheyarealsoavailableinwritinguponrequesttotheCompanySecretary.

BOARD

BoardAuditCommittee

Nominationand RemunerationCommittee

DetailsoftheBoardAuditCommittee,includingitsmembershipandworkdoneduringtheperiodaresetoutintheBoardAuditCommitteeReportonpages108to110ofthisAnnualReport.

Details of the Nomination and Remuneration Committee, includingits membership and work done during the period are set out in theNominationandRemunerationCommitteeReportonpages111to113ofthisAnnualReport.

BOARD EFFECTIVENESS EVALUATION (BEE)

TheNRCisresponsibletoassisttheBoardtoassesstheeffectivenessofindividualDirectors,theBoardasawholeanditscommitteesandthecontributionofeachindividualDirectors.Thisisundertakenuponthecompletionofeveryfinancialyear.

SinceDecember2010,PCGhasbeenconductingeffectivenessevaluationsforitsBoardandSub-Committees.In2016,PCGappointedaconsultanttoassistintheBEE.TheevaluationscompriseaBoardEvaluation,aCommitteeEvaluation,BoardSkillsandExperienceMatrixandIndividualDirectorSelfandPeerEvaluation.ThepurposeoftheseevaluationsaretomeasuretheeffectivenessandperformanceoftheBoardandSub-CommitteesaswellasaddresstheareasforimprovementindischargingtheirroleasDirectorsoftheCompany.


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Thequestionnaireon theBEEareprepared incorporatingapplicablebestpractices.The indicators for theperformanceof theBoard includeamongotherstheBoard’scomposition,planning,process,conduct,communicationwiththemanagementandstakeholdersaswellasstrategyandplanningfortheCompany.TheperformanceindicatorsforindividualDirectorsincludetheDirectors’roles,leadershipandcontributiontotheCompany.

TheChairmanoftheNRCisactively involvedthroughouttheBEEprocess.TheChairmanoftheNRChasthe libertytoholddiscussionswithappointedconsultantandtheChairmanoftheBoard.


BOARD EFFECTIVENESS EVALUATION

OUR PROCESS

DISTRIBUTION OF QUESTIONNAIRE

INDIVIDUAL ENGAGEMENT

SUMMARY OBSERVATIONS AND CONCLUSIONS

GroupDynamicsandEffectiveness

StructureandComposition

Communication

NRC DISCUSSION

BOARD DISCUSSION

ACTION PLAN INITIATIVES

Fortheyearunderreview,theresultsweresatisfactoryandconformtoindustrybenchmarks.

106

Sectionfive

PETRONAS CHEMICALS

GROUP BERHAD


COMMUNICATING EFFECTIVELY WITH SHAREHOLDERS/INVESTORS

The Board understands the importance of effective dialogue withshareholdersand investors.Webelieve thatcommunicationwithourshareholdersisatwo-wayprocess.Welistencarefullytotheviewsandfeedbackwereceivefromallofourshareholders.Inthepastyear,theManagingDirector/CEOtogetherwiththeChiefFinancialOfficerandtheCompany’s InvestorRelationsUnit conducted regular dialogueswithits institutionalshareholdersandanalysts,andheldquarterlyanalystbriefingstofurtherexplaintheGroup’squarterlyfinancialresults.TheeffectofthisresultedinbetterunderstandingoftheGroup’sfinancialperformanceandoperations.Periodically,visitstotheGroup’sfacilitiesorplantsarealsoorganisedtofacilitatebetterappreciationandinsightintotheGroup’sbusinessesandoperations.

In addition, the Company actively updates its website (www.petronaschemicals.com) with the latest information on thecorporate and business aspects of the Group. Press releases,announcements to Bursa Malaysia, analyst briefings and quarterlyresultsof theGrouparealsomadeavailableonthewebsiteandthisserves to promote accessibility of information to the Company’sshareholders and all other market participants. Communicationand feedback from investors can also be directed to email [email protected] or alternatively, it can beaddressedto:

SAFARAH ZEBA M SALIMHeadofInvestorRelationsPerformanceManagement

PETRONAS CHEMICALS GROUP BERHAD Level14,Tower1,PETRONASTwinTowers,KualaLumpurCityCentre,50088KualaLumpur

Inaddition,mattersofconcerntotheGroupfromshareholdersorotherstakeholderscanbeaddressedtoSeniorIndependentDirectorwhoisalsotheChairmanoftheBoardAuditCommittee,VimalaV.R.Menonatvimala.menon@petronas.com.myordirectedtothefollowingaddress:

VIMALA V.R. MENONSeniorIndependentDirector

PETRONAS CHEMICALS GROUP BERHAD Level15,Tower1,PETRONASTwinTowers,KualaLumpurCityCentre,50088KualaLumpur

THE ANNUAL GENERAL MEETING (AGM)

TheAGM is the principal forumof open dialoguewith shareholders.The notice and agenda of AGM together with Forms of Proxy aregiven to shareholders at least 21 days before theAGM,which givesshareholderssufficienttimetopreparethemselvestoattendtheAGMortoappointproxiestoattendandvoteontheirbehalf.EachitemofspecialbusinessincludedinthenoticeoftheAGMwillbeaccompaniedbyanexplanatorystatementontheeffectsoftheproposedresolution.

At each AGM, shareholders are encouraged and given sufficientopportunityaswellastimebytheBoardtoraisequestionsonissuespertaining to theAnnualReport, resolutions being proposed and thebusiness of the Company or the Group in general prior to seekingapproval from members and proxies on the resolutions. The Board,seniormanagement,externalauditorsandotheradvisors,asapplicableare present at the AGM to provide answers and clarifications toshareholders.TheChairman informson theavailabilityofpoll votingby shareholders onmatters raised during the AGM. An independentscrutineer is appointed to oversee the AGM process. Starting from2017,allgeneralmeetings'resolutionswillbedecidedviaane-pollingplatform.

TheminutesoftheAGMareaccessibletothepublicforreferenceonPCG'sofficialwebsiteatwww.petronaschemicals.com.

ACCOUNTABILITY AND AUDIT

Financial ReportingThe Board is committed to provide a fair and objective assessmentof the financial position and prospects of theGroup in the quarterlyfinancial results,annualfinancialstatements,AnnualReportsandallother reports or statements to shareholders, investors and relevantregulatoryauthorities.

TheStatementofResponsibilitybyDirectorsinrespectofpreparationoftheannualauditedfinancialstatementsissetoutonpage132ofthisAnnualReport.

Related Party Transactions and Conflict of Interest SituationsTheCompanyhasestablishedpoliciesandproceduresonrelatedpartytransactions and conflict of interest situations, including recurrentrelatedpartytransactions,toensurethattheyareundertakenonnormalcommercial terms and are not to the detriment of the Company’sminorityshareholders.

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All related party transactions, except for recurrent related partytransactionswhicharewaivedbyBursaMalaysiafromcomplyingwiththerequirementofParagraph10.09oftheMMLR,arereviewedbytheBoardAuditCommitteeandapprovedbytheBoard.

The Statement on Risk Management and Internal Control includesan overview of the Group’s policies and procedures on related partytransactions,includingrecurrentrelatedpartytransactions,assetoutonpage124ofthisAnnualReport.

Whistleblowing PolicyTheCompanyhasadoptedthePETRONASWhistleblowingPolicywhichprovidesanavenuefortheGroupemployeesandmembersofthepublictodiscloseanyimproperconductinaccordancewiththeproceduresasprovidedunderthepolicy.

Under the Whistleblowing Policy, a whistleblower will be accordedwithprotectionofconfidentialityof identity, to theextent reasonablypracticable. An employee who whistleblows internally will also beprotectedagainstanyadverseanddetrimentalactionsfordisclosingany improper conduct committed or about to be committed withinthe Group, to the extent reasonably practicable, provided that thedisclosure ismadeingoodfaith.Suchprotectionisaccordedeveniftheinvestigationlaterrevealsthatthewhistleblowerismistakenastothe facts, rules and procedures involved. The process is undertakenbyPETRONAS'WhistleblowingCommittee.ThepolicyandproceduresareaccessibletothepublicforreferenceontheCompany'swebsiteatwww.petronaschemicals.com.

Risk Management and Internal ControlThe Board continues to maintain and review its risk managementprocessesand internalcontrolprocedurestoensureasoundsystemof riskmanagement and internal control to safeguard shareholders’investmentsandtheassetsoftheCompanyandtheGroup.

The Statement on Risk Management and Internal Control whichprovides an overview of the state of risk management and internalcontrolswithintheGroupissetoutonpages116to126ofthisAnnualReport.

Trading on Insider InformationTheBoardandprincipalofficersofPCGareprohibitedfromtradinginsecuritiesbasedonpricesensitiveinformationandknowledgeacquiredbyvirtueoftheirpositionswhichhasnotbeenpubliclyannounced.

NoticesontheclosedperiodfortradinginPCG’ssharesaresenttotheDirectorsandprincipalofficersonaquarterlybasisasareminderontheprohibitiontotradeduringtheidentifiedtimeframewhentheDirectorsandtheprincipalofficersareprohibitedfromdealinginPCG’sshares.

Duringtheyearunderreview,neithertheBoardnortheprincipleofficershavebreachedtheaboveruling.

Selection of VendorsPCG has adopted the PETRONAS tendering process and governingprinciples that are embedded in the PETRONAS Supply ChainManagementPolicyforvendors’selection.Generally,themainselectioncriteriaisbasedontechnicallyacceptableandcommerciallylowestbid.PCG has established Tender Committees to carry out independentassessmentonbidders’ proposalsand to ensure tenderingactivitiesarecarriedoutaspertheTenderCommittees’TermsofReference.

Thetenderingprocessisasfollows:


Tender Plan Approval

Technical Evaluation

Commercial Evaluation

Award Recommendation

108

Sectionfive

PETRONAS CHEMICALS

GROUP BERHAD

Senior Independent Director

VimalaV.R.Menon

Independent Non-Executive Directors

ChingYewChyeDongSooKim

DatukTohAhWah

Non-Independent Non-Executive

DirectorFreidaAmat

CompositionTheBoardhasestablishedtheBoardAuditCommitteewithmembersasfollows:

OURWORKCONTINUEDTOFOCUSONTHEINTEGRITYOFTHEGROUP’SFINANCIALREPORTING,THERIGOUROFTHEEXTERNALANDINTERNALAUDITPROCESSESASWELLASTHEEFFECTIVENESSOFTHEGROUP’SMANAGEMENTOFRISKANDINTERNALCONTROLS.

BOARD AUDIT COMMITTEE REPORT

Terms of ReferenceThe terms of reference sets out the authority, dutiesand responsibilities of the Board Audit Committee.The terms of reference, which can be found on www.petronaschemicals.com, are consistent with theMMLRofBursaMalaysiaand theMCCG2012.All therequirements under the terms of reference are fullycompliedwith.

The Committee and its WorkWearepleased topresentour report for thefinancialyearended31December2016incompliancewithParagraph15.15oftheMMLRofBursaMalaysia.

ThemembershipoftheCommitteehasbeenselectedwiththeaimofprovidingthe wide range of financial and commercial expertise necessary to meet itsresponsibilities. Additionally, in compliance with Paragraph 15.09 (1)(b) of theMMLR of BursaMalaysia and theMCCG 2012 all five Board Audit CommitteemembersareNon-ExecutiveDirectors includingfour IndependentDirectorswhofulfilthecriteriaofindependenceasdefinedintheMMLRofBursaMalaysia.NoneoftheIndependentDirectorshaveappointedalternatedirectors.

The Chairman of the Board Audit Committee, Vimala V.R. Menon and FreidaAmat are both qualified accountants. Vimala V.R. Menon is a Member of theMalaysianInstituteofAccountantsandalsoaFellowoftheInstituteofCharteredAccountants in England andWales (ICAEW) whilst Freida Amat is a Fellow ofthe Association of Chartered Certified Accountants (ACCA). In this regard, theCompanyisincompliancewithParagraph15.09(c)(i)undertheMMLRofBursaMalaysiawhichrequiresatleastonememberoftheBoardAuditCommitteetobeaqualifiedaccountant.

VimalaV.R.Menon,whosatisfiestheprescribedcriteriaofaSeniorIndependentDirector (SID), has been appointed as the SID to act as the representative oftheBoard towhomanyconcernspertaining to theGroupmaybeconveyedbyshareholdersandotherstakeholders.Since2011,shehasbeenthefocalchannelbetween the Independent Directors and the Chairman onmatters thatmay bedeemedtobesensitiveaswellasachannelfortheshareholdersandstakeholderstoconveytheirissuesandconcerns,ifany.

Under Paragraph 15.20 of the MMLR of Bursa Malaysia, the performance ofthe Board Audit Committee is assessed through an annual Board CommitteeEffectivenessEvaluation.

MeetingsTheBoardAuditCommitteemetfivetimesduring theyearended31December2016.DetailsofattendanceoftheBoardAuditCommitteemembersareasfollows:

Name of Members No. of meetings attended

VimalaV.R.Menon 5/5

ChingYewChye 5/5

DongSooKim 5/5

DatukTohAhWah 5/5

FreidaAmat 5/5

Byinvitation,theManagingDirector/CEO,ChiefFinancialOfficer,HeadofInternalAuditandexternalauditorsareinvitedtoattendBoardAuditCommitteemeetingstoappropriatelybriefandfurnishthemembersoftheBoardAuditCommitteewithrelevantinformationandclarificationtorelevantitemsontheagenda.

At the conclusion of each meeting, recommendations are made for themanagement to improve the internal controls, procedures and systems of theCompanyandtheGroup,whererelevant.

Statement on Corporate Governance (Cont’d)Board Audit Committee Report

VIMALA V.R. MENON

CHAIRMAN

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The Board Audit Committeemeets at least quarterly with additionalmeetings convened as andwhen necessary. BoardAudit Committeemeetings for 2016 were scheduled in November 2015 to allow theDirectors to plan ahead and fit the meetings into their respectiveschedules.

The agenda and a set of meeting papers encompassing qualitativeandquantitative information relevant to thebusinessof themeetingaredistributedviaelectronicapplicationtotheBoardAuditCommitteemembersnotlessthanfivebusinessdaysfromthemeetingdates.

AllproceedingsofBoardAuditCommitteemeetingsareduly recordedin theminutes of eachmeeting. Signedminutes of eachBoardAuditCommitteemeeting are properly kept by the Company Secretarywhoactsas theBoardAuditCommittee’sSecretary.ThedraftBoardAuditCommittee minutes are circulated to the Board Audit CommitteememberssubsequenttotheBoardAuditCommitteemeetingbutpriortotheBoardmeeting.ThisassiststheBoardAuditCommitteeChairmantoeffectivelyconveytotheBoardmattersdeliberatedattheBoardAuditCommitteemeeting.

During the year under review, the Board Audit Committee had twoprivatesessionswiththeexternalauditorswithoutthepresenceofthemanagement.

SUMMARY OF ACTIVITIES OF THE BOARD AUDIT COMMITTEE

Duringtheyearended31December2016,theBoardAuditCommitteecarried out the following activities in discharging its functions andduties:

External Audit»ReviewedandrecommendedthetermsofengagementandfeesofexternalauditorsfortheBoard’sapproval.

»Reviewedandapprovedtheexternalauditors'auditplanandscopefortheyearunderreview.

»Reviewedtheexternalauditreport.

»Reviewedtheindependenceandobjectivityoftheexternalauditorsandtheeffectivenessofservicesprovided.

During the financial year under review, PCG engaged KPMGPLT, theexternalauditors,fornon-auditservices.Totalfeespaidtotheexternalauditorsareasfollows:

Particulars RM Million

Totalstatutoryauditfees2016 775

Totalnon-auditfeesfor2016 582

Percentageofnon-auditfeesoverstatutoryauditfees 75%

Non-audit fees paid to the external auditorsmainly relate to limitedreviewsontheGroup'squarterlyfinancialresults.

Internal Audit »Reviewed and approved the annual internal audit plan to ensureadequacyofresources,competenciesandcoverageofentitiesbasedonriskassessment.

»Reviewedinternalauditreportsontheeffectivenessandadequacyof governance, risk management, operational and complianceprocesses.

»Reviewed the adequacy and effectiveness of agreed correctiveactions undertaken bymanagement on significant and secondaryissuesraised.

»Reviewed the adequacy of resources and competencies of staffwithin the Internal Audit Department to execute the internal auditplan.

»Reviewed thestatusofagreedcorrectiveactions for internalauditissuesonaquarterlybasis.

»Reviewed the Key Performance Indicators (KPIs) of the Head ofInternalAudit.

Financial Results»Reviewed thequarterlyfinancial resultsprior to theapprovalby theBoard, to ensure compliance to the MMLR of Bursa Malaysia, theapplicable financial reporting standards as well as other relevantlegal and regulatory requirements. The review and discussionwereconductedwith theManagingDirector/CEOand theChiefFinancialOfficeroftheCompany.

»ReviewedtheauditedfinancialstatementsfortheyearunderreviewpriortotheapprovalbytheBoard,toensurethattheywerepreparedin accordance with the provisions of the Companies Act, 1965 inMalaysiaandtheapplicablefinancialreportingstandards.ThereviewanddiscussionwereconductedwiththeManagingDirector/CEOandtheChiefFinancialOfficeroftheCompany.

» Reviewed and deliberated specific key areas affecting the Group’sfinancial results, and endorsed recommendations made byManagement.Thekeyareasdeliberatedincludeassessmentsonthefollowingareas:

a) Impairment indicators on property, plant and equipment anddetailedimpairmenttesting.

b) Recognitionofdeferredtaxassetsandtheprobabilityoffutureutilisation.

c) Recognition of provisions including provisions fordecommissioningandrestorationcosts.

d) Carryingvalueofinventoriesandanywrite-offsthereon.

e) Revenueandexpensesrecognition.

Corporate Governance»Reviewed the impact of relevant regulatory changes and ensuredcompliancebytheCompanyandtheGroup.

Related Party Transactions (RPT)/Recurrent Related Party Transactions (RRPT)»ReviewedRPTs/RRPTsforapprovalorendorsementbytheBoardtoensurecompliancetotheCompany’spoliciesandprocedures.

TheStatementonRiskManagementandInternalControlincludesanoverview of the Group’s policies and procedures on RPTs, includingRRPTs,assetoutonpage124oftheAnnualReport.

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e) AuditonplantmaintenancemanagementatPCOlefins,PCGlycolsandPCDerivatives.

f) AuditonmanagementofecoCareProgramme.g) AuditonlegalandcorporatesecretariatactivitiesfortheGroup.h) AuditoncashandbankmanagementatPCGsubsidiaries.i) AuditoninformationsecurityoftheprocesscontrolnetworkatPCG

plants.i) AuditonGoods&ServicesTaximplementationfortheGroup.j) AuditonplantmaintenancemanagementatPCAromatics.k) AuditonindirectandwithholdingtaxesmanagementfortheGroup.l) Audit on procurement, inventory and warehousemanagement at

PCGsubsidiaries.

Key control issues, positive observation, risks and relevantrecommendations for improvement, alongwith the agreed correctiveactions are highlighted to theBoardAudit Committee in the internalaudit reports.TheIADalsomonitorstheprogressofthesecorrectiveactions and reports the status to the Board Audit Committee on aquarterlybasis.

SubsequenttotheBoardAuditCommitteereview,theresultingreportsfromtheauditswereforwardedtothemanagement.Themanagementis responsible for ensuring that agreed corrective actions areimplementedwithintherequiredtimeframe.TheprogressandstatusofthesecorrectiveactionsarereportedtotheBoardAuditCommitteeonaquarterlybasis.

The Group continues its commitment to equip the internal auditorswith adequate knowledge and proficiencies to discharge theirduties and responsibilities. Annually, internal auditors go throughindividual functional competency assessment to determine learningand development programmes necessary to further enhance theircompetencies.ThefunctionalcompetencyassessmentadoptedbyIADispartofPETRONAScapabilitydevelopmentprogramme for internalauditors. The assessment takes into consideration the Institute ofInternal Auditors Global Internal Audit Competency DevelopmentFramework’scorecompetenciesincluding:

- Internalauditdelivery- Personalskills- Technicalexpertise- Internalauditmanagement- Professionalethics

ThetotalcostsincurredbytheinternalauditfunctionoftheCompanyandtheGroupforthefinancialyearwasRM4,200,000.

REPORTING TO THE EXCHANGE

The Board Audit Committee is of the view that the Group is not inbreachoftheMMLRofBursaMalaysiathatwarrantsreportingtoBursaMalaysia.

Vimala V.R. MenonChairmanBoardAuditCommittee

Risk Management»Reviewedandendorsedallpolicies,frameworks,guidelinesandotherkeycomponentsofriskmanagementforimplementationwithintheCompanyandthroughouttheGroup.

»ReviewedandendorsedthecorporateriskprofilefortheGroup.

»Reviewed the progress of ongoing risk management activities toidentify, evaluate, monitor and manage critical risks including theCompany’sBusinessContinuityManagementPolicyandFramework.

Annual Reporting»The Board Audit Committee reviewed the Board Audit CommitteeReportandStatementonRiskManagementandInternalControlforthefinancialyearended31December2016toensurethattheywereprepared in compliance with the relevant regulatory requirementsandguidelines.

Internal Audit FunctionThe Board Audit Committee is supported by an in-house internalaudit function, the InternalAuditDepartment (IAD), indischarging itsgovernance responsibilities stated in the Board Audit Committee’sTermsofReference.TheIADundertakesasystematicanddisciplinedapproachtoevaluateandimprovetheeffectivenessofgovernance,riskmanagementandcontrolprocesseswithintheGroup.

Zulaini Ahmad, the Head of IAD reports directly to the Board AuditCommittee. The Board Audit Committee approves the internal auditplan and the KPIs of Head of IAD and reviews IAD’s annual budgetandresourcerequirements.Quarterly,theHeadofIADcommunicatesthe results of internal audit engagements performed to the BoardAuditCommittee,aswellasreportsonIAD’sperformanceagainsttheapprovedinternalauditplan.

The IAD adopts the Institute of Internal Auditors’ InternationalProfessionalPracticesFramework(IPPF)whichincludestheDefinitionofInternalAuditing,theCodeofEthics,andtheInternationalStandardsfor the Professional Practice of Internal Auditing. In performing theaudit engagements, the internalauditorsadhere to IAD’sestablishedproceduresandguidelines,aswellasrelevantpoliciesandproceduresadoptedbytheGroup.

TheIADcontinuestoadoptarisk-basedapproachtoensurethattheauditplansareprioritisedbasedontheGroup’skey risks. Inderivingthe audit plan, inputs are gathered from various sources includingtheriskprofileoftheGroup,businessplansandstrategies,pastauditissues and feedback from external auditors, Board Audit CommitteeandManagement.

Duringtheyearunderreview,theIADperformedreviewsonvariouskeybusinessandriskareasoftheGroupaspertheapprovedinternalauditplan andpresented the reports for the followingaudits to theBoardAuditCommittee:a) Audit on the operations of international subsidiaries and

representativeoffices.b) AuditonsalesandmarketingactivitiesofCommercialDivision.c) Audit on plant operations and maintenance management at PC

FertiliserKedahd) AuditonbusinesscontinuitymanagementfortheGroup.


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MeetingsTheNomination andRemuneration Committeemet five times during the yearended 31 December 2016 and details of attendance of the members are asfollows:

Name of Members No. of meetings attended

ChingYewChye 5/5

VimalaV.R.Menon 5/5

DongSooKim 5/5

The Managing Director/CEO and Head of Human Resource Management areinvitedtoattendthemeetingstoappropriatelybriefandfurnishthemembersoftheNomination andRemunerationCommitteewith the necessary informationandclarificationtorelevantitemsontheagenda.

At a meeting of the Nomination and Remuneration Committee held on 25November2016whereperformanceofthekeymanagementpersonnelweredeliberated, Datuk Toh Ah Wah, an Independent Non-Executive Director whoisnotamemberof theNominationandRemunerationCommitteewas invitedto provide his input and views on the performance of the key managementpersonnel.

TheNominationandRemunerationCommitteemeetingsfor2016werescheduledinNovember2015tofacilitatetheDirectorstoplanaheadandfittheNominationandRemunerationCommitteemeetingsintotheirrespectiveschedules.Thisisalsotoprovidethememberswithamplenoticeofthemeetings.

Theagendaandasetofmeetingpapersrelevanttothebusinessofthemeetingaredistributedviaelectronicapplication to theNominationandRemunerationCommitteemembersnotlessthanfivebusinessdaysfromthemeetingdates.

AllproceedingsoftheNominationandRemunerationCommitteemeetingsaredulyrecordedintheminutesofeachmeeting.SignedminutesofeachNominationandRemunerationCommitteemeetingisproperlykeptbytheSecretarywhoactsastheNominationandRemunerationCommittee'sSecretary.Thedraftminutesof meetings are circulated to the Nomination and Remuneration CommitteememberssubsequenttoaCommitteemeetingbutpriortoBoardmeeting.Thisassists theNomination andRemunerationCommitteeChairman to effectivelyconveytotheBoard,mattersdeliberatedattheNominationandRemunerationCommittee meeting. The minutes of the Nomination and RemunerationCommitteemeetingsarealsodistributedtomembersoftheBoardofDirectorsfortheirnotation.

THENOMINATIONANDREMUNERATIONCOMMITTEECONTINUESITSWORKOFENSURINGTHEBOARDCOMPOSITIONISOPTIMUMANDTHATOURGOVERNANCEISEFFECTIVE.

NOMINATION AND REMUNERATION COMMITTEE REPORT

CompositionThe Board has established the Nomination andRemunerationCommitteewithmembersasfollows:

The composition of the Nomination and RemunerationCommitteecomplieswiththerequirementsof theMCCG2012where its members are exclusively non-executive directors.MCCG 2012 requires a majority to be independent. AllmembersoftheNominationandRemunerationCommitteeareindependentdirectorswhofulfilthecriteriaofindependenceasdefinedinParagraph15.08AoftheMMLRofBursaMalaysia.

Independent Non-Executive DirectorChingYewChyeDongSooKim

Terms of ReferenceThe summary terms of reference of the Nominationand Remuneration Committee as set out on www.petronaschemicals.com are consistent with theMMLRofBursaMalaysiaandtheMCCG2012.Alltherequirements under the terms of reference are fullycompliedwith.

Statement on Corporate Governance (Cont’d)Nomination and Remuneration Committee Report

CHING YEW CHYE

CHAIRMAN

Senior

IndependentDirector

VimalaV.R.Menon

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Board Appointment ProcessThe Company practises a formal and transparent procedure forappointmentofnewdirectors.NominationofdirectorstotheBoardismadeeitherbyPETRONASbeingthemajorityshareholderorthroughengagement of a professional recruitment firm to find suitablecandidates to fill the positions of the Independent Non-ExecutiveDirectors.

AllnomineestotheBoardarefirstconsideredbytheNominationandRemunerationCommittee,takingintoconsiderationthemixofskills,competencies, experience, integrity, time commitment and otherqualitiesrequiredtoeffectivelydischargehisorherroleasadirector.Boarddiversityisimportanttofacilitateoptimaldecisionmakingbyharnessingdifferentinsightsandperspectives.

Board Effectiveness EvaluationEvery year, under thepurviewof theNominationandRemunerationCommittee,aBoardEffectivenessEvaluationisundertakentoassesstheeffectivenessofthefollowing:

»TheBoardasawholeandthevariousBoardCommittees.

»Contributionofeachindividualdirector.»Independenceoftheindependentdirectors.

Pursuant to Paragraph 15.20 of the MMLR of Bursa Malaysia, theNomination and Remuneration Committee had at its meeting heldon25November2016,reviewedtheperformanceoftheBoardAuditCommitteeand is satisfied that theBoardAuditCommitteeand itsmembers discharged their functions, duties and responsibilities inaccordancewithitstermsofreference.

On15February2017,theNominationandRemunerationCommitteereviewedtheresultsofthelatestBoardEffectivenessEvaluationandnotedonareaswhichnecessitatefurtherimprovements.

Directors’ Re-ElectionThe Nomination and Remuneration Committee is responsible forrecommending to theBoard, directorswho are eligible to stand forre-electionattheAGMoftheCompany.Therecommendationisbasedonamongothers,theperformanceofthedirectors,contributiontotheBoard,skills,experience,qualities,levelofindependenceandabilitytoactinthebestinterestoftheCompany.

The directors may seek re-election at the AGM of the CompanypursuanttoArticle93andArticle99oftheCompany’sConstitution.

Article 93 of the Company's Constitution provides that one third ofthedirectorsoftheCompanyshallretirebyrotationattheAGMandbeingeligiblemayoffer themselves for re-election.With thecurrentcompositionofeightdirectors,twodirectorsaretoretireatthenextAGMpursuanttothisArticle.

TheNominationandRemunerationCommitteeatitsmeetingheldon25 November 2016, recommended the re-elections of the followingDirectorswhohadexpressedtheirintentiontoseekforre-electionattheforthcomingAGMforapprovaloftheBoard:

»ChingYewChye»DatukTohAhWah

There is no new appointment of Directors during the year underreview. Hence, the retirement of newly appointed director and re-electionthereonpursuanttoArticle99oftheCompany'sConstitutionisnotapplicable.


1

2

3

4

5

6

7

8

CircumstancesgivingrisetotheappointmentofDirectors

Deliberateselectioncriteriacombiningcompetenciesandattributesrequired

Searchforcandidates

Interviewcandidates

NRCendorsecandidateforBoardapproval

Boardapproval

Orientation/Induction

Continuoustrainingandannualperformanceassessment

TheprocessflowforBoardappointmentisdepictedbelow:

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SUMMARY OF ACTIVITIES OF THE NOMINATION AND REMUNERATION COMMITTEE

Duringtheyearended31December2016,theNominationandRemunerationCommitteecarriedoutthefollowingactivitiesindischargingitsfunctionsandduties:

» Board Effectiveness Evaluation• Assessed theperformanceof theBoardasawhole, itssub-committeesand itsmembers through theBoardEffectivenessEvaluationexercise.

» Board Membership• ReviewedtheBoardSkillsMatrixandcompetencyoftheBoardmembers.• RecommendedBoardmembersstandingforre-electionattheAGM.• RecommendedtheBoardselectionprocess.• ReviewedBoardSelectionCriteria.

» Performance Management• Reviewed2016PerformancePlanningandKeyPerformanceIndicatorsforManagingDirector/CEO.• Reviewed2016PerformancePlanning,KeyPerformanceIndicatorsandDevelopmentPlansforKeyPersonnel.• ReviewedtheDirectors’professionaldevelopment.

Ching Yew ChyeChairmanNominationandRemunerationCommittee


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THE DIVISION OF ROLES BETWEEN THE CHAIRMAN AND THE MANAGING DIRECTOR/CEO

ThereisacleardivisionofresponsibilitiesbetweentheChairmanandManagingDirector/CEO.

Roles of the ChairmanThe Chairman is primarily responsible for the orderly conduct andfunctionoftheBoardandensuresitseffectivenessonallaspectsofitsroles.

i) LeadingtheBoardinsettingthevaluesandethicalstandardsofPCG.

ii) ChairingtheBoardmeetingsandstimulatingdebatesonissuesandencouragingpositivecontributionsfromeachDirector.

iii) ConsultingwiththeCompanySecretaryinsettingtheagendaforBoardmeetingsandensuringthatallrelevantissuesareontheagenda.

iv) Maintaining a relationship of trust with and between theManagingDirector/CEOandNon-ExecutiveDirectors.

v) Ensuringtheprovisionofaccurate,timelyandclearinformationtoDirectors.

vi) Ensuring effective communication with shareholders andrelevantstakeholders.

vii) Conducting performance assessment of Board members, itsCommittees and individual Directors, including assessment oftheindependenceofIndependentDirectors.

viii) FacilitatingeffectivecontributionofNon-ExecutiveDirectorsandensuringconstructivediscussionsatBoardmeetings.

ix) Ensuring that all Directors are properly briefed on issuesarising at Boardmeetings and there is sufficient time allowedfor discussion on complex or contentious issues and whereappropriate, arranging for informal meetings beforehand toenablethoroughpreparations.

x) AllowingeveryBoardresolutiontobevotedonandensuringthewillofthemajorityprevails.

xi) Casting his/her votes in accordance with the prescribedCompany'sConstitution.

xii) EnsuringthatallBoardmembers,upontakinguptheiroffice,arefully-briefedonthetermsoftheirappointment,timecommitment,dutiesandresponsibilities,andthebusinessofPCG.

xiii) Acting as liaison between the Board and Management, andbetweentheBoardandtheManagingDirector/CEO.


Roles of the Senior Independent Director

TheSeniorIndependentDirectoractsasthepointofcontactbetweenthe Independent Directors and Chairman on sensitive issues andhasbeenidentifiedasadesignatedcontacttowhomshareholders’concerns or queriesmay be raised, as an alternative to the formalchannelofcommunicationwithshareholders.

Roles of the Managing Director/CEO

TheManagingDirector/CEOisresponsiblefortheoveralloperationsofthebusiness,organisationaleffectivenessandtheimplementationoftheGroup’sstrategiesandpolicies.HeisassistedbytheManagementCommittee inmanagingthebusinessonday-to-daybasis,whichheconsults regularlyandshallbesupportedby theBoardmembers inundertakingthefollowingresponsibilities:

i) TodevelopandrecommendtotheBoardthelong-termstrategyand vision for PCG that leads to the creation of long-termprosperityandstakeholdervalue.

ii) TodevelopandrecommendtotheBoardtheoperationalplanandbudgetthatsupportPCG'slong-termstrategy.

iii) To foster a corporate culture that promotes ethical practices,encourages individual integrity and the fulfillment of PCG’scorporatesocialresponsibilities.

iv) To maintain a positive and ethical working environment thatis conducive to attracting, retaining and motivating a diverseworkforceatalllevels.

v) To recommend suitable management structure and operatingauthority levelswhich includedelegationsof responsibilities totheManagement.

vi) To ensure an effective Management team and to develop anappropriatesuccessionplan.

vii) To formulate and oversee implementation of major corporatepolicies.

viii) TobeaccountabletotheBoardforthefinancialmanagementandreporting,includingforecastsandbudgetsofPCG.

ix) Tomake reports to theBoardperiodicallyonfinancialposition,KPIs,marketconditionsandbusinessdevelopment.

x) ToserveasspokespersonforPCG.xi) TorefertotheBoardCommitteesonmattersasrequested.

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COMPANY SECRETARY

Both Company Secretaries of PCG are qualified to act as companysecretaryunderSection235oftheCompaniesAct,2016.Oneofthemhasa legalqualificationand theother isaFellowof theMalaysianInstitute of Chartered Secretaries and Administrators. Both act asadvisors to the Board, particularly with regard to the Company'sConstitution,Boardpoliciesandprocedures,anditscompliancewithregulatoryrequirements,legislations,guidelinesandcodes. TheCompanySecretariesensurethatdiscussionsanddeliberationsat the Board and Board Committeemeetings arewell documented,and subsequently communicated to the Management Committeeforappropriateactions.TheCompanySecretariesupdatetheBoardon the follow-up of its decisions and recommendations by theManagementCommittee. TheCompanySecretariesconstantlykeepabreastwiththeevolvingregulatory changes and developments in corporate governancethrough continuous training. The Board is satisfied with theperformance and support rendered by the Company Secretaries indischargingtheirfunctions.

Relationship with External Auditors

TheCompanymaintainsaprofessionalandtransparentrelationshipwithitsexternalauditors,KPMGPLT.TheBoardAuditCommitteemettheexternalauditorseveryquartertoreviewthescopeandadequacyof the Group’s audit process, quarterly results, annual financialstatements and audit findings. In addition to regular quarterlymeetings, the Board Audit Committee held two separate meetingswith external auditors without the presence of the Management.At themeeting, theexternalauditorshighlighted to theBoardAuditCommitteeonmattersthatwarranttheCommittee’sattention.


The role of the Board Audit Committee in relation to the externalauditors isdescribed in theBoardAuditCommitteeReportonpage109ofthisAnnualReport.

Statement by the Board on Compliance

The Board has deliberated, reviewed and approved this Statement.The Board considers and is satisfied that the Group has fulfilledits obligations under the relevant chapters of the MMLR of BursaMalaysiaandtheMCCG2012oncorporategovernanceandapplicablelawsandregulationsthroughouttheyearended31December2016.

ThisstatementismadeinaccordancewiththeresolutionoftheBoarddated20February2017.

ADDITIONAL COMPLIANCE INFORMATION - MATERIAL CONTRACTS

TherewerenomaterialcontractsorloansenteredintobytheCompanyoritssubsidiariesinvolvingDirectors’ormajorshareholders’interests,either still subsisting at the end of the year ended 31 December2016orenteredintosincetheendofthepreviousperiod,exceptasdisclosedintheauditedfinancialstatements.

Md Arif MahmoodChairman

Datuk Sazali HamzahManagingDirector/CEO

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STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL

PCG HAS INTERNAL CONTROL SYSTEMS AND RISK MANAGEMENT FRAMEWORK IN PLACE TO ENSURE THE SMOOTH RUNNING OF THE BUSINESS. IT IS PCG’S AIM TO MANAGE RISK AND TO CONTROL ITS BUSINESS AND FINANCIAL AFFAIRS ECONOMICALLY, EFFICIENTLY AND EFFECTIVELY SO AS TO BE ABLE TO SEIZE PROFITABLE BUSINESS OPPORTUNITIES IN A DISCIPLINED WAY TO AVOID OR MITIGATE RISKS THAT CAN CAUSE LOSS, REPUTATIONAL DAMAGE OR BUSINESS FAILURE AND ENHANCE RESILIENCE TO EXTERNAL EVENTS. THE STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL IS MADE PURSUANT TO PARAGRAPH 15.26(B) OF THE MMLR OF BURSA MALAYSIA WHEREBY THE BOARD OF DIRECTORS OF PUBLIC COMPANIES ARE REQUIRED TO PUBLISH A STATEMENT ABOUT THE STATE OF THE INTERNAL CONTROL OF THE LISTED ISSUER AS A GROUP.

BOARD ACCOUNTABILITY

The Board acknowledges the importance of maintaining a soundinternal control system and a robust risk management practice forgood corporate governance with the objective of safeguarding theshareholders'investmentandtheGroup’sassets.TheBoardaffirmsitsoverallresponsibilityforreviewingtheadequacyandtheintegrityoftheGroup’s riskmanagementand internalcontrolsystemwhichensurescompliancewithapplicablelaws,regulationsandguidelines. The Group has established a process for identifying, evaluating,monitoringandmanagingsignificant risks thatmaymateriallyaffectthe achievement of corporate objectives. This process is beingimplemented throughout the Group and the Board will continue toreviewthisprocessperiodicallyandenhanceitwhererelevant.

RISK MANAGEMENT

As part of PCG's journey to become proactive and responsive inmanagingrisks,thePETRONASResiliencyModelwasadoptedtofocusonthreekeyfocusareas;namelyEnterpriseRiskManagement,CrisisManagement and Business Continuity Management to strengthenour approach in managing risks to ensure that PCG can effectivelysafeguard its business and respond to a crisis, regardless of itsmagnitude.

KEY FOCUS AREAS

Enterprise Risk Management (ERM)

Astructuredandholisticapproachtoidentify,assess,treat andmonitor risks. The aim is toREDUCE thelikelihoodandimpactofallidentifiedriskstoenhancethe organisation’s ability to achieve its strategicobjectives.

Crisis Management (CM)

A comprehensive set of processes that aims toprepare the organisation toRESPOND andmanagecrises in the risk areas to protect and save people,environment,assetandreputation.

Business Continuity Management (BCM)

A holistic management process that aims to buildthe capability of an organisation to RECOVER and continue delivery of products or services atacceptable predefined levels following a prolongeddisruptiveincident.

Riskisinherentinourbusinessandthemarketsinwhichweoperate.Thechallengeistoidentifyrisksandthenmanagethesesothattheycanbeminimised, accepted, transferredor avoided. This demandsaproactive approach to riskmanagement and an effective group-wideriskmanagementframework.

Our overall risk management process is overseen by the Board asan element of solid corporate governance. We recognise that riskmanagement is the responsibility of everyone within PCG. Ratherthan being a separate and standalone process, risk management isintegrated into business processes including strategy development,business planning, capital allocation, investment decisions, internalcontrolandday-to-dayoperations.

PCGconsidersthesecontrolsystemsareappropriateforthesize,diversityandcomplexityoftheGroup’soperations,andtheiradequacyandintegrity are being reviewed andmonitored by the Board Audit Committee to ensure their compliancewith applicable laws, regulations andguidelines. TheDirectorsrecognisethatsuchsystemscanonlyprovideareasonableandnotabsoluteassurancethatsignificantriskswhichimpacttheGroup’sstrategiesandobjectivesarewithinlevelsappropriatetotheGroup’sbusinessasapprovedbytheBoard.Thekeyelementsoftheprocessbywhichthesystemsofinternalcontrolandriskmanagementaremonitoredaresetoutbelow.

OUR RISK MANAGEMENT PHILOSOPHY

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Statement on Risk Management and Internal Control (Cont’d)

RISK MANAGEMENT FRAMEWORK

OurenhancedERMFrameworkandrelevantguidelinesaregenerallyalignedwithISO31000:2009,andstandardisedthroughoutPCG.

GOVERNANCE

RISKTREATMENT

CONTEXT SETTING

CONTINUALIMPROVEMENT

RISK ASSESSMENT

RISKMONITORING &

REVIEW

ERM FRAMEWORK

• RiskPolicy• RiskOrganisationandStructure• RolesandResponsibilities

• RiskTreatmentStrategy• RiskTreatmentPlan

• ExternalContext• InternalContext• RiskAppetite• RiskCriteria

• RiskIdentification• RiskAnalysis• RiskEvaluation

• RiskReportingandMonitoring• RiskInformationSystem

• Assurance• SystemMonitoringandReview• CapabilityBuilding

PCG Risk Policy

AllentitiesacrossPCGshalladoptandcommunicatethePCGRiskPolicy:

“PETRONASChemicalsGroupshalladoptandimplementriskmanagementbestpracticesbyidentifying,assessing,treatingandmonitoringrisksaswellaseffectivelyrespondingtocrises.

In theeventofprolongeddisruption,businesscontinuitypracticesshallbeadoptedto restoreandensurecontinuityofPETRONASChemicalsGroup’skeybusinessactivities.”

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PCG RISK OVERSIGHT STRUCTURE

BOARD OF DIRECTORS

Reviewandapproveannualcorporateplan,whichincludesoverallcorporatestrategy,operationalplan,marketingplan,humanresourcesplan,financialplanandbudget,riskmanagementplanandinformationtechnologyplan.

Identifyprincipalrisksandensuretheimplementationofappropriatesystemstomanagetheserisks.

BOARD COMMITTEE LEVEL


Toreviewtheadequacyandeffectivenessofriskmanagementpracticesandprocedures. ToreviewriskprofileoftheGrouponaquarterlybasis.

MANAGEMENT LEVEL RISK MANAGEMENT COMMITTEE

ResponsiblefortheoveralloversightoftheGroupriskmanagementactivities.

OPERATIONAL LEVEL MANUFACTURING

Responsiblefortheplantandfacilitiesriskmanagement.

COMMERCIAL

Responsibleforthecommercialriskmanagement.

SharebestpracticesandlessonslearnedwithPCGplantsandfacilitiesriskfraternities.

ReviewandendorsecredittermsforPCG’scustomersandsuppliers.

Sharebestpracticesandlessonslearnedoncommercialrisks.

RISK GOVERNANCE AND OVERSIGHT

Our riskgovernancestructure facilitates risk identificationandescalationwhilstprovidingassurance to theBoard. Itassignsclear rolesandresponsibilities,facilitatesimplementationwithguidelinesandtoolsaswellasconsistsofthedifferent layersofrolesandresponsibilitiesasexplainedbelow:

Inadditiontoourriskgovernancestructures,ourriskmanagementisbackedupbya3-lineDefenceModelthatdistinguishesthethreegroupswhichareinvolvedineffectiveriskmanagement.

1st LINE OF DEFENCE 2nd LINE OF DEFENCE 3rd LINE OF DEFENCE

BusinessLine(RiskOwner) RiskManagementUnitorFunctions InternalAudit

Toestablishtheidentification,assessment,treatmentandmonitoringofrisks

Toestablish,implementandreviewriskmanagementandcontrolsystems

Toprovideforindependentandobjectiveassuranceontheoveralladequacy,integrityandeffectivenessofriskmanagementandinternal

controlsystems

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RISK MANAGEMENT PROCESS

TheriskprofileoftheGrouphasbeenestablishedbasedonERMconcept.ThecriticalrisksidentifiedareregularlyreviewedwherebythestatusofkeyriskindicatorsandriskmitigationsofcriticalrisksaredeliberatedattheRiskManagementCommitteeandpresentedtotheBoardAuditCommitteeonaquarterlybasis.Eachcriticalriskhasadedicatedownerwhoisresponsiblefortheeffectiveimplementationofcontrolmeasures,monitoringandtrackingofkeyriskindicatorsperformance,identifyingadditionalriskmitigationsandimplementingthesemitigations.Therisksandmitigationsarecommunicatedtothelineonatimelybasistoensureawarenessatalllevels.

PCGsubscribestothefollowingstructuredriskmanagementsystemsandprocesseswhichareinlinewithPETRONAStoshowrigorouspracticesofriskmanagementarebeingappliedinvariousareas:

PETRONAS Health Safety Environment Management System (HSEMS)tomanageHSEriskandensurethatoperationsareintandemwithHSE

regulatoryrequirementsandindustrybestpractices.

Counterparty Risk Assessmenttoensuresystematicidentification,assessmentandmitigationtomanageriskassociatedwithcreditand

performancewhichisinlinewithPETRONASCorporateFinancialPolicyandPETRONASCreditGuidelines.Eachcounterpartiesareassignedwith

creditratingswhicheventuallyfacilitatethebusinessdecisionmaking.

Contractor Risk Assessment (CoRA)toensuresystematicidentification,assessmentandmitigationofcontractors’relatedriskswhicharecritical

totheirperformance.CoRAisundertakenaspartoftheprocurementprocesspriortoselectionofcontractor.

Turnaround Risk Assessment (TaRA) toensuresystematicidentification,assessmentandmitigationofrisksforturnaroundactivitieswhichare

criticalforsmoothexecution.

Project Risk Assessment (PRA) toensuresystematicidentification,assessmentandmitigationtomanageriskassociatedwithprojectswhichisin

linewithPETRONASProjectManagementSystemrequirements.


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GROUP BERHAD

COMPLIANCE UNDER OUR RISK MANAGEMENT FRAMEWORK

Theinculcationofcompliancecultureisakeyaspectofaneffectiveriskmanagement.Insupportingcomplianceculture,theGroupacknowledgestheimportanceofriskassuranceprogrammestoprovideassurancetostakeholdersthatthesystemsofriskmanagementandinternalcontrolsareimplementedandcompliedwith.Fortheyearunderreview,theGroupestablished its risk assurance programmes based on an annual riskassuranceplanthatwaspresentedtoPCGRiskManagementCommittee. TheGroupconductedtwoTier1self-assessmentsperyearwherebyallsubsidiariesarerequiredtoperformself-assessmentandvalidationontheircompliancetotherequirementsstipulatedunderERMFrameworkand proposes gap closure actions, if any. The Group also undertookTier 2 risk assurance programmes in which PCG Risk ManagementDepartment validates the implementation of ERM systems andeffectiveness of agreed riskmitigations at PCG subsidiaries. The riskManagementCommitteereviewstheriskassurancereportandmonitorstheappropriatecorrectiveactions tobeclosed timely. Inaddition, thestatusofriskassuranceprogressandgapclosuresarereportedtoRiskManagementCommitteeonquarterlybasis. Tomitigate any riskmanifesting and resulting in prolonged businessdisruption, the Group has established BCM Framework that providesasystematicapproach tocontinuedeliveryofproductsorservices tothecustomers. Theactivitieshavebeendetailedout intoaBusinessContinuityPlan(BCP)andBusinessRecoveryPlan(BRP)thatdescribethe organisation structure, roles and responsibilities of each parties,requiredresourcesandthespecificrecoverystrategies.TheGrouphasestablishedBCP for Product Supply to address abrupt and prolongedoutageofproductsupply,thatcouldaffectproductdeliverytocustomers.Additionally,theGrouphasdevelopedBCPforPETRONASTwinTowerstocater for inaccessibilityofworkplace, failureofcritical ICTsystemsandprolongedunavailabilityofkeypersonnel.


CONTROLENVIRONMENT

RISK ASSESSMENT

• Demonstratesacommitmentto integrityandethicalvalues

• The board of directors demonstrates

independence from management andexercises oversight of the development andperformanceofinternalcontrol

• Managementestablishes,withboardoversight,

structures, reporting lines, and appropriateauthorities and responsibilities in the pursuitofobjectives

• Demonstrates a commitment to attract,

develop, and retain competent individuals inalignmentwithobjectives

• Holdsindividualsaccountablefortheirinternal

control responsibilities in the pursuit ofobjectives

• Specifiesobjectiveswithsufficientclaritytoenabletheidentificationandassessmentofrisksrelatingtoobjectives

• Identifies risks to the achievement of its

objectives across the entity and analysesrisksasabasisfordetermininghowtherisksshouldbemanaged

• Considersthepotentialforfraudinassessing

riskstotheachievementofobjectives • Identifiesandassesseschanges thatcould

significantly impact the system of internalcontrol

INTERNAL CONTROL Management is primarily responsible for the design, implementationandmaintenanceof internalcontrols,while theBoardand theBoardAuditCommitteeoverseetheactionsofmanagementandmonitortheeffectivenessof thecontrols thathavebeenput inplace.TheGroupendeavourstoachievethe17principlesoftheCommitteeofSponsoringOrganisations of the Treadway Commission (COSO) Framework oneffectiveinternalcontrolsasillustratedbelow:

Operations, Reporting & Compliance

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SectionfiveCONTROL

ACTIVITIES

MONITORING ACTIVITIES

INFORMATION AND

COMMUNICATION

• Selects and develops control activities thatcontribute to the mitigation of risks to theachievementofobjectivestoacceptablelevels

• Selectsanddevelopsgeneralcontrolactivities

over technology tosupport theachievementofobjectives

• Deployscontrolactivitiesthroughpoliciesthatestablish what is expected and proceduresthatputpoliciesintoaction

• Selects, develops, and performs ongoingand/or separate evaluations to ascertainwhether thecomponentsof internalcontrolarepresentandfunctioning

• Evaluatesandcommunicatesinternalcontrol

deficiencies in a timely manner to thoseparties responsible for taking correctiveaction,includingseniormanagementandtheboardofdirectors,asappropriate

• Obtains or generates and uses relevant,qualityinformationtosupportthefunctioningofinternalcontrol

• Internallycommunicatesinformation,including

objectives and responsibilities for internalcontrol,necessarytosupportthefunctioningofinternalcontrol

• Communicateswithexternalpartiesregarding

matters affecting the functioning of internalcontrol


JointventureandassociatecompaniesarenotincludedinourGroupinternal controls as these companies fall under the purview of theirrespective majority shareholders. The interests of the Group aresafeguardedthroughGrouprepresentativestotherespectiveBoardsofjointventureandassociatecompanies,inadditiontotheregularreviewofmanagementaccounts.

INTERNAL AUDIT

Internal audits are undertaken to provide independent assessmentson theadequacy, efficiencyandeffectivenessof theGroup’s internalcontrols. The Group has its own dedicated internal audit functionthatprovidesasystematicanddisciplinedapproach toevaluateandimprovetheeffectivenessofcontrolandgovernanceprocesseswithintheGroup.Itmaintainsitsimpartiality,proficiencyanddueprofessionalcareandreportsdirectlytotheBoardAuditCommittee.

The Group’s internal audit function adopts the Institute of InternalAuditors’InternationalProfessionalPracticesFramework(IPPF)whichincludes the Definition of Internal Auditing, the Code of Ethics, andthe International Standards for the Professional Practice of InternalAuditing.

TheinternalauditfunctionreviewstheinternalcontrolsofselectedkeyactivitiesoftheGroup’sbusinessesbaseduponanannualinternalauditplanwhichispresentedtotheBoardAuditCommitteeforapproval.Theannual audit plan is established primarily on a risk based approach.TheBoardAuditCommittee reviewsaudit reportsand thenecessarycorrectiveactionsasadvisedbytheManagement.TheManagementis responsible for ensuring that corrective actions are implementedaccordingly.Inaddition,thestatusoftheclosuresofauditissuesarereportedtotheBoardAuditCommitteeonaquarterlybasis.

AUDIT COMPETENCIES In 2016, all internal audit activities were performed internally by ateam of 18 internal audit personnel from selected backgrounds andcompetencies,asfollows:

DISCIPLINENO. OF INTERNAL AUDIT

PERSONNEL%

Accounting&Finance 14 78

PlantOperations 3 16

SupplyDistributionOperations 1 6

Todate,fiveofourinternalauditpersonnelhavereceivedprofessionalcertificationfromvariousrecognisedprofessionalbodies.

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GROUP BERHAD

OTHER KEY ELEMENTS OF INTERNAL CONTROL SYSTEMS

InfurtherancetotheBoard’scommitmenttomaintainasoundsystemofinternalcontrol,theBoardcontinuestomaintainandimplementastrongcontrolstructureandenvironmentfortheproperconductoftheGroup’sbusinessoperationsasfollows:

» Board of Directors TheBoardmeetsatleastquarterlyandhassetascheduleofmatters,whichisrequiredtobebroughttoitsattentionfordiscussion,thusensuringthatitmaintainsfullandeffectivesupervisionoverappropriatecontrols.TheManagingDirector/CEOleadstheManagementinpresentationofboardpapersandensuresManagementprovidesdetailedexplanationofpertinentissues.InarrivingatanydecisionrequiringBoard’sapproval,assetoutintheLimitsofAuthoritymanual,thoroughdeliberationanddiscussionbytheBoardisaprerequisite.Inaddition,theBoardiskeptupdatedontheGroup’sactivitiesanditsoperationsonaregularbasis.

» Board Audit Committee TheBoardhasdelegatedthedutyofreviewingandmonitoringtheeffectivenessoftheGroup’ssystemofinternalcontrolstotheBoardAuditCommittee.

TheBoardAuditCommitteeassumestheoveralldutiesofreviewingwiththeexternalauditorstheirauditplan,auditreport,aswellastheirfindingsandrecommendationspursuanttotheyearendaudit.TheBoardAuditCommitteealsoevaluatestheadequacyandeffectivenessof theGroup’s riskmanagementand internalcontrolsystems through reviewsof internalcontrol issues identifiedby internalauditorsandManagement.Throughouttheyear,theBoardAuditCommitteewasupdatedondevelopmentsinMMLRofBursaMalaysia,MFRSaswellasnewlegalandregulatoryrequirements.

TheBoardAuditCommitteemeetsat leastquarterlyandhasfullandunimpededaccesstotheinternalandexternalauditorsaswellasallemployeesoftheGroup.

FurtherinformationrelatingtotheactivitiesoftheBoardAuditCommitteeissetoutintheBoardAuditCommittee’sreportaspresentedonpages108to110ofthisAnnualReport.

» Organisation Structure and Management Committee Anorganisationalstructure,which isaligned to thebusinessandoperational requirements,andwithclearlydefined linesof responsibility,accountabilityandlevelsofauthority,isinplacetoassistinimplementingtheGroup’sstrategiesandday-to-daybusinessactivities.

TheCompanyhasaManagementCommitteewhichservesinanadvisorycapacitytotheManagingDirector/CEOinaccomplishingthevision,strategiesandobjectivessetfortheGroup.

VariousfunctionalcommitteeshavealsobeenestablishedacrosstheGrouptoensuretheGroup’sactivitiesandoperationsareproperlyalignedtowardsachievingtheorganisationalgoalsandobjectives.


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» Financial Control Framework TheGrouphas implementedaFinancialControlFrameworktoensurekey internalcontrolsystemsareadequateandeffectiveatall times.Theframeworkmandatesstrictprocessestoimprovefinancialreportinganddisclosuresoastoprotectstakeholdersfromthepossibilityofinaccurateaccounting.KeycomponentsoftheFinancialControlFrameworkrequirementsare:


» Limits of Authority TheGrouphas establishedLimitsofAuthoritywhichdefine theappropriate approvingauthority to governandmanagebusinessdecisionprocess.TheLimitsofAuthoritysetsoutaclearlineofaccountabilityandresponsibilitywhichservesasareferenceinidentifyingtheapprovingauthorityforvarioustransactionsincludingmattersthatrequireBoard’sapproval.ItprovidesaframeworkofauthorityandaccountabilitywithintheGroupandfacilitatesdecisionmakingattheappropriatelevelintheGroup'shierarchy.

» Group Policies TheGrouphas inplacepolicieswhichgoverntheday-to-dayworkingsof thebusinesssuchasHSE,plantoperationsandhumanresourcemanagement.TheGrouphasalsoadoptedPETRONASCorporateFinancialPolicywhichsetsforththepolicyforfinancialmanagementactivitiesembeddingtheprinciplesoffinancialriskmanagement.TheCorporateFinancialPolicygovernsfinancialriskmanagementpracticesacrosstheGroup.Itprescribesaframeworkinwhichfinancialriskexposureisidentifiedandmanaged.

» Operating Procedures and Guidelines The Group has developed operating procedures and guidelines which covers business planning, capital expenditure, financial operation,performancereporting,HSE,plantoperations,marketingandsales,supplychainmanagement,humanresourcemanagementandinformationsystem.Thesedefinetheproceduresforday-to-dayoperationsandactasguidelinestothepropermeasurestobeundertakeninagivensetofcircumstances.Theproceduresandguidelinesarealsoreviewedonaregularbasistoensurecontinuingrelevanceandeffectiveness.

» Business Plan and Budget TheGroupundertakesanannualbudgetingandforecastingexercisewhichincludesdevelopmentofbusinessstrategiesforthenextfiveyearsandtheestablishmentofKPIsagainstwhichtheoverallperformanceoftheGroup,includingtherespectiveperformanceofbusinesssegmentsandcompanieswithintheGroup,canbemeasuredandevaluated.DetailedoperatingandcapitalexpenditurerequirementsaretabledtotheBoardforapprovalpriortothecommencementofanewfinancialyear.TheGroup’sperformancesarereportedinternallyonamonthlybasistotheManagementCommittee.TheGroup’squarterlyperformancesarealsopresentedtotheBoardwithcomparisontoapprovedplansaswellasagainstpriorperiods.TheGroup’sstrategicdirectionisalsoreviewedthrougharigorousassessmentprocesstakingintoaccountchangesinmarketconditionsandsignificantbusinessrisks.

Certificationontheaccuracyofthereportedfinancialstatementbyseniormanagement.

Establishmentofadequateinternalcontrolsandreportingmethodsaswellasproperdocumentationofallprocesses.

Mandatoryselfandinterdepartmentaltestofcontrols.

Identificationofthecontrolgapsandtherequiredmitigationaction.

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GROUP BERHAD

» Information and Communications Technology Informationandcommunicationstechnologyisextensivelydeployedin the Group to automate work processes, where possible and toefficientlycollectkeybusinessinformation.TheGroupcontinuestoenhance its information and communication systems in ensuringthat itcanactasanenabler to improvebusinessprocesses,workproductivity and decision making throughout the Group. Systemreviews are conducted periodically to confirm adequate controlsareinplacetoensureadherencetotheGroup’sbusinessobjectives,policiesandprocedures.

» Tender Committee Tender committee structure which comprises cross functionalrepresentativeshasbeenestablishedtoreviewallmajorpurchasesandcontracts.Thetendercommitteesprovidetheoversightfunctionon tendering matters prior to approval by the relevant approvingauthoritiesassetoutbytheLimitsofAuthority.

» Employees Performance Management The Group selects talents for employment through a structuredrecruitment process. The professionalism and competency ofstaff arecontinuously enhanced throughastructured traininganddevelopmentprogramme.AperformancemanagementsystemisinplacewhichmeasuresstaffperformanceagainstagreedKPIsonaperiodicbasis.

» Whistleblowing Policy TheGrouphasadoptedthePETRONASWhistleblowingPolicywhichprovides an avenue for theGroup employeesandmembers of thepublic to disclose any improper conduct in accordance with theproceduresasprovidedunderthepolicy.

Under theWhistleblowingPolicy, awhistleblowerwill be accordedwithprotectionofconfidentialityofidentity,totheextentreasonablypracticable. An employeewhowhistleblows internally will also beprotectedagainstanyadverseanddetrimentalactionsfordisclosingany improperconductcommittedorabout tobecommittedwithinthe Group, to the extent reasonably practicable, provided that thedisclosureismadeingoodfaith.Suchprotectionisaccordedevenif the investigation laterrevealsthatthewhistleblower ismistakenas to the facts, rules and procedures involved. The process isundertaken by PETRONAS' Whistleblowing Committee. The policyand procedures are accessible to the public for reference on theCompany'swebsiteatwww.petronaschemicals.com.

RELATED PARTY TRANSACTION (RPT) AND CONFLICT OF INTEREST (COI)

TheGrouphasestablishedpoliciesandprocedureswithregardstoRPTandCOItoensurefullcompliancetotheMMLRofBursaMalaysia.


DirectorsandofficersoftheCompanyanditsGroupshallnot enter into transactions with related parties unlessthesetransactionsarecarriedoutonnormalcommercialtermsandarenottothedetrimentoftheGroup’sminorityshareholders.

1

All sourcing and sales of PCG's products, generalmerchandise shared facilities shall be based on marketnegotiated pricing terms and conditions and/or pricingformulasquotedagainstinternationalpricebenchmarks.

2

Wheneverpracticable,atleasttwootherquotationsshouldbesought,withorganisationsofsimilarstanding.3

All RPTs except for RRPTs which are waived by BursaMalaysia from complying with the requirement ofParagraph 10.09 of the MMLR will be reviewed by theBoardAuditCommitteepriortotheapprovalbyeithertheBoardortheshareholders.

4

TheBoardAuditCommitteeisresponsibletoensurethatthepoliciesandprocedures relating toRPTs/RRPTsandCOI situations are sufficient to ensure thatRPTs/RRPTsarecarriedoutonnormalcommercialtermsandnottothedetrimentoftheGroup’sminorityshareholders.

5

On an annual basis, all Directors and any related partyoftheGroupwilldeclare inwritinganannualdeclarationform, designed to elicit information about potentialrelationshipsand/orCOIsituations,involvingtheirinterest,either directly or indirectly. All Directors and any relatedpartyoftheGroupshallalsonotifyinwritingofanyinterestinRPTorCOIsituationwhenitbecomesknowntothem.

6

The Group’s Legal and Corporate Secretariat performsreviewsonallcommercialcontracts.Systembasedrecordsare maintained to capture the RPTs/RRPTs which havebeen entered into. Processes concerning negotiations,tendering and analysis carried out for transactionsbetweenrelatedpartiesareappropriatelydocumentedandretained tosupportandevidence that such transactionshavebeencarriedoutonnormalcommercialtermsandarenotdetrimentaltotheGroup’sminorityshareholders.

7

The policies and standard operating procedures require the useof various methods to ensure that RPTs are conducted on normalcommercial terms, which are consistent with the Group’s normalbusinesspracticesandpolicies,andwillnotbetothedetrimentoftheGroup’sminorityshareholders.Suchmethods include the reviewanddisclosureproceduresasfollows:

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TheCompanyhasbeengrantedawaiverfromcomplyingwiththerequirementofParagraph10.09of theMMLRofBursaMalaysia includinghavingtoseekshareholders’approvalinrelationtothesupply,sale,purchase,provisionandusageofcertaingoods,servicesandfacilitieswhichformpartofPETRONASGroupintegratedoperations.

PCGformspartoftheintegratedoilandgasvaluechainofthePETRONASGroup.ThetransactionssuchasthesupplyofrawmaterialsarevitaltoPCG'soperations,andalternativesupplieswillnotbereadilyavailableasPETRONASGroupisamajorsupplierandattimes,thesolesupplierofsuchrawmaterials.DuetotheintegratednatureofPCG'sbusinessoperationswiththePETRONASGroup,thewaiverisofparticularsignificancetoensurePCGdoesnotexperienceanydisruptiontoitsoperations.

ThedetailsoftheRRPTsincurredduringtheyearthatwerewaivedbyBursaMalaysiaarepresentedonpage126ofthisAnnualReport.

MANAGEMENT’S ACCOUNTABILITY

ManagementisaccountabletotheBoardfortheimplementationoftheprocessesinidentifying,evaluating,monitoringandreportingofrisksandinternalcontrolasprescribedabove.TheManagingDirector/CEOhasprovidedtheBoardwithassurancethattheGroupriskmanagementandinternalcontrolsystemisoperatingadequatelyandeffectively,inallmaterialaspects,toensureachievementofcorporateobjectives.InprovidingtheaboveassurancebyManagingDirector/CEO,similarassuranceshavealsobeenobtainedfromManagementCommitteemembersconfirmingtheadequacyandeffectivenessofriskmanagementpracticeandinternalcontrolsystemwithintheirrespectiveareas.

CONCLUSION

Basedon theabove, theBoard isof theview that thesystemof internalcontrol instituted throughoutPCG issoundandprovidesa levelofconfidenceonwhichtheBoardreliesforassurance.Intheyearunderreview,therewasnosignificantcontrolfailureorweaknessthatwouldresultinmateriallosses,contingenciesoruncertaintiesrequiringseparatedisclosureinthisAnnualReport.

TheBoardandManagementwillcontinuetoreviewandstrengthentheGroup’sriskmanagementandinternalcontrolsystemtoensureongoingadequacyandeffectivenessofthesystemofinternalcontrolandriskmanagementpracticestomeetthechangingandchallengingoperatingenvironment.

REVIEW OF THE STATEMENT BY EXTERNAL AUDITORS

TheexternalauditorshavereviewedthisStatementonRiskManagementandInternalControlpursuanttothescopesetoutinRecommendedPracticeGuide(RPG)5(Revised2015),GuidanceforAuditorsonEngagementstoReportontheStatementonRiskManagementandInternalControlincludedintheAnnualReportissuedbytheMalaysianInstituteofAccountants(MIA)forinclusionintheannualreportoftheGroupfortheyearended31December2016,and reported to theBoard thatnothinghascometo theirattention thatcause themtobelieve that thestatementintendedtobeincludedintheannualreportoftheGroup,inallmaterialrespects:

(a) hasnotbeenpreparedinaccordancewiththedisclosuresrequiredbyparagraphs41and42oftheStatementonRiskManagementandInternalControl:GuidelinesforDirectorsofListedIssuers,or

(b) isfactuallyinaccurate.

RPG5 (Revised2015)doesnot require theexternalauditors toconsiderwhether theDirectors’StatementonRiskManagementand InternalControlcoversallrisksandcontrols,ortoformanopinionontheadequacyandeffectivenessoftheGroup’sriskmanagementandinternalcontrolsystemincludingtheassessmentandopinionbytheBoardofDirectorsandmanagementthereon.Theauditorsarealsonotrequiredtoconsiderwhethertheprocessesdescribedtodealwithmaterialinternalcontrolaspectsofanysignificantproblemsdisclosedintheannualreportwill,infact,remedytheproblems.

ThisStatementonRiskManagementandInternalControlismadeinaccordancewiththeresolutionoftheBoarddated20February2017.


Datuk Sazali HamzahManagingDirector/CEO

Md Arif Mahmood Chairman

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PETRONAS CHEMICALS

GROUP BERHAD


RecurrentRelatedPartyTransactionsthatwerewaivedbyBursaMalaysiafromcomplyingwiththerequirementofParagraph10.09oftheMMLR.

Transacting Parties Nature of transactions For Year Ended 31 December 2016

RM ‘000

Integrated Operations of Our Group

PCGGroupandPETRONASanditssubsidiaries(PETRONASGroup)

(i) Supplyoffuelandfeedstock(suchasethane,propane,butane,drygas,naphtha,naturalgas)byPETRONASGroup

4,758,556

(ii) Supplyofutilities,electricityandwaterbyPETRONASGroup 755,382

(iii) UpgradingandpipelineworksontheLabuanGasTerminalbyPETRONASChemicalsMethanol(Labuan)SdnBhd

Nil

(iv) GranttoPETRONASGroupfortherightofusageoffacilitiesandpassageofcommoditiestofacilitatethereceiptanddistributionofpetrochemicalsandrelatedproducts

539

(v) ProvisionofoperatingandmaintenanceservicesbyPETRONASGroup 1,594

(vi) PurchaseofmarinedieseloilfromPETRONASGroup 1,711

Services rendered within the PETRONAS Group

(vii) ProvisionofvesselscreeningservicesbyPETRONASMaritimeSdnBhd Nil

(viii) Provisionoffreight,transportationandwarehousingservicesbyMISCBerhadanditssubsidiaries(MISCGroup)

80,021

Others

(ix) SalesofpetrochemicalproductsandotherrelatedproductstoPETRONASGroup 880,821

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OUR

NUMBERS


T h e f i n a l p r o o f o f o u r p e r f o r m a n c e l i e s i n o u r

f i n a n c i a l r e s u l t s . I n t h e f o l l o w i n g p a g e s w e w i l l

p r e s e n t t o y o u a d e t a i l e d a c c o u n t o f h o w w e

h a v e i m p r o v e d i n a l l t h e k e y p a r a m e t e r s t h a t

c o u n t f r o m o u r r e v e n u e t o o u r p r o f i t m a r g i n s .

W e w i l l a l s o p r o v i d e i n f o r m a t i o n o n o u r a s s e t s ,

l i a b i l i t i e s a n d c a s h f l o w.

CONTENTS

128 Directors’ Report

132 Statement by Directors

133 Statutory Declaration

134 Statements of Financial Position

135 StatementsofProfitorLossandOther

ComprehensiveIncome

136 StatementsofChangesinEquity

139 StatementsofCashFlows

141 NotestotheFinancialStatements

197 IndependentAuditors’Report

201 ListofProperties

205 AnalysisofShareholdings

209 Corporate Directory

211 NoticeofAnnualGeneralMeeting(AGM)

214 AdministrativeDetailsofPETRONASChemicals

GroupBerhad19thAGM

• Proxy Form

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PETRONAS CHEMICALS

GROUP BERHAD

TheDirectorshavepleasureinsubmittingtheirreportandtheauditedfinancialstatementsoftheGroupandoftheCompanyforthefinancialyearended31December2016.

PRINCIPAL ACTIVITIES

TheprincipalactivityoftheCompanyinthecourseofthefinancialyearremainedunchangedasinvestmentholding.

Theprincipalactivitiesofsubsidiaries,jointventuresandassociatesarestatedinNote26toNote28tothefinancialstatements.

RESULTS

Group Company

RM Mil RM Mil

Profitfortheyear 3,222 4,831

Attributableto:

ShareholdersoftheCompany 2,932 4,831

Non-controllinginterests 290 -

DIVIDENDS

Duringthefinancialyear,theCompanypaid:

(i) asecondinterimdividendof10senperordinaryshareamountingtoRM800millioninrespectofthefinancialyearended31December2015on23March2016;and

(ii) afirstinterimdividendof7senperordinaryshareamountingtoRM560millioninrespectofthefinancialyearended31December2016on7September2016.

TheDirectorshavedeclaredasecondinterimdividendof12senperordinaryshareamountingtoRM960millioninrespectofthefinancialyearended31December2016whichispayableon21March2017.Thedividendwillberecognisedandaccountedforinequityasanappropriationofretainedprofitsinthesubsequentfinancialyear.

TheDirectorsdonotrecommendanyfinaldividendtobepaidforthefinancialyearunderreview.

RESERVES AND PROVISIONS

Therewerenomaterialmovements to and from reservesandprovisionsduring thefinancial year other thanasdisclosed in thefinancialstatements.

DIRECTORS’ REPORTfor the year ended 31 December 2016

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DIRECTORS OF THE COMPANY

Directorswhoservedsincethedateofthelastreportare:

MdArifbinMahmoodDatukSazalibinHamzahVimalaa/pV.R.MenonChingYewChyeDongSooKimDatukTohAhWahZakariabinKasahFreidabintiAmat

InaccordancewithArticle93oftheCompany’sArticlesofAssociation,ChingYewChyeandDatukTohAhWahretirebyrotationfromtheBoardattheforthcomingAnnualGeneralMeetingand,beingeligible,offerthemselvesforre-election.

DIRECTORS’ INTERESTS

TheDirectorsinofficeattheendofthefinancialyearwhohaveinterestsinthesharesoftheCompanyandofitsrelatedcorporationsotherthanwhollyownedsubsidiaries(includingtheinterestsofthespousesand/orchildrenoftheDirectorswhothemselvesarenotDirectorsoftheCompany)asrecordedintheRegisterofDirectors’Shareholdingsareasfollows:

Number of ordinary shares of RM0.10 each in the Company

Balance at Balance at

Name 1.1.2016 Bought Sold 31.12.2016

Direct interest

MdArifbinMahmood 20,000 - - 20,000

Vimalaa/pV.R.Menon 20,000 - - 20,000

ChingYewChye 20,000 - - 20,000

DongSooKim 20,000 - - 20,000

ZakariabinKasah 6,000 - - 6,000

FreidabintiAmat 6,000 - - 6,000

Number of ordinary shares of RM1.00 each in PETRONAS Gas Berhad

Balance at Balance at

1.1.2016 Bought Sold 31.12.2016

Indirect interest

FreidabintiAmat 1,0001 - - 1,000

1 Indirect interest in shares held through spouse by virtue of Section 134(12)(c) of the Companies Act, 1965.

NoneoftheotherDirectorsholdingofficeat31December2016hadanyinterestinthesharesoftheCompanyandofitsrelatedcorporationsduringthefinancialyear.

Directors’ Report (Cont’d)for the year ended 31 December 2016

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PETRONAS CHEMICALS

GROUP BERHAD

DIRECTORS’ BENEFITS

Sincetheendofthepreviousfinancialyear,noDirectoroftheCompanyhasreceivedorbecomeentitledtoreceiveanybenefit(otherthantheamountofemolumentsorbenefitsincludedintheaggregateamountreceivedordueandreceivablebytheDirectorsasshowninthefinancialstatementsorthefixedsalaryofafull timeemployeeoftheCompanyoroftherelatedcorporations)byreasonofacontractmadebytheCompanyorarelatedcorporationwiththeDirectororwithafirmofwhichtheDirectorisamember,orwithacompanyinwhichtheDirectorhasasubstantialfinancialinterest. TherewerenoarrangementsduringandattheendofthefinancialyearwhichhadtheobjectofenablingDirectorsoftheCompanytoacquirebenefitsbymeansoftheacquisitionofsharesinordebenturesoftheCompanyoranyotherbodycorporate.

ISSUE OF SHARES

Therewerenochangesintheauthorised,issuedandpaidupcapitaloftheCompanyduringthefinancialyear.

OPTIONS GRANTED OVER UNISSUED SHARES

NooptionsweregrantedtoanypersontotakeupunissuedsharesoftheCompanyduringthefinancialyear.

OTHER STATUTORY INFORMATION

BeforethefinancialstatementsoftheGroupandoftheCompanyweremadeout,theDirectorstookreasonablestepstoascertainthat:

i) allknownbaddebtshavebeenwrittenoffandadequateprovisionmadefordoubtfuldebts,and

ii) anycurrentassetswhichwereunlikelytoberealisedintheordinarycourseofbusinesshavebeenwrittendowntoanamountwhichtheymightbeexpectedsotorealise.

Atthedateofthisreport,theDirectorsarenotawareofanycircumstances:

i) thatwouldrendertheamountwrittenoffforbaddebts,ortheamountoftheprovisionfordoubtfuldebtsintheGrouporintheCompanyinadequatetoanysubstantialextent,or

ii) thatwouldrenderthevalueattributedtothecurrentassetsinthefinancialstatementsoftheGroupandoftheCompanymisleading,or

iii) whichhavearisenwhichrenderadherencetotheexistingmethodofvaluationofassetsorliabilitiesoftheGroupandoftheCompanymisleadingorinappropriate,or

iv) nototherwisedealtwithinthisreportorthefinancialstatementsthatwouldrenderanyamountstatedinthefinancialstatementsoftheGroupandoftheCompanymisleading.

Atthedateofthisreport,theredoesnotexist:

i) anychargeontheassetsoftheGrouporoftheCompanythathasarisensincetheendofthefinancialyearandwhichsecurestheliabilitiesofanyotherperson,or

ii) anycontingentliabilityinrespectoftheGrouporoftheCompanythathasarisensincetheendofthefinancialyear.


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Nocontingentliabilityorother liabilityofanycompanyintheGrouphasbecomeenforceable,or is likelytobecomeenforceablewithintheperiodoftwelvemonthsaftertheendofthefinancialyearwhich,intheopinionoftheDirectors,willormaysubstantiallyaffecttheabilityoftheGroupandoftheCompanytomeettheirobligationsasandwhentheyfalldue.

IntheopinionoftheDirectors,thefinancialperformanceoftheGroupandoftheCompanyforthefinancialyearended31December2016havenotbeensubstantiallyaffectedbyanyitem,transactionoreventofamaterialandunusualnaturenorhasanysuchitem,transactionoreventoccurredintheintervalbetweentheendofthatfinancialyearandthedateofthisreport.

AUDITORS

Theauditors,KPMGPLT(convertedfromaconventionalpartnership,KPMG,on27December2016),haveindicatedtheirwillingnesstoacceptre-appointment.

SignedonbehalfoftheBoardofDirectorsinaccordancewitharesolutionoftheDirectors:

MD ARIF BIN MAHMOOD DATUK SAZALI BIN HAMZAHDirector Director

KualaLumpur,Date:20February2017


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PETRONAS CHEMICALS

GROUP BERHAD

IntheopinionoftheDirectors,thefinancialstatementssetoutonpages134to195,aredrawnupinaccordancewithMalaysianFinancialReportingStandards,InternationalFinancialReportingStandardsandtherequirementsoftheCompaniesAct,1965inMalaysiasoastogiveatrueandfairviewofthefinancialpositionsoftheGroupandoftheCompanyasat31December2016andoftheirfinancialperformanceandcashflowsforthefinancialyearendedonthatdate.

IntheopinionoftheDirectors,theinformationsetoutinNote38onpage196tothefinancialstatementshasbeencompiledinaccordancewiththeGuidanceonSpecialMatterNo.1,Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant to Bursa Malaysia Securities Berhad Listing Requirements, issuedbytheMalaysianInstituteofAccountants,andpresentedbasedontheformatprescribedbyBursaMalaysiaSecuritiesBerhad.

SignedonbehalfoftheBoardofDirectorsinaccordancewitharesolutionoftheDirectors:

MD ARIF BIN MAHMOOD DATUK SAZALI BIN HAMZAHDirector Director

KualaLumpur,Date:20February2017

STATEMENT BY DIRECTORS

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STATUTORY DECLARATION

I, Rashidah binti Alias@Ahmad, the officer primarily responsible for the financialmanagement of PETRONASChemicalsGroupBerhad, dosolemnlyandsincerelydeclarethatthefinancialstatementssetoutonpages134to196,aretothebestofmyknowledgeandbelief,correctand Imakethissolemndeclarationconscientiouslybelievingthedeclarationtobetrue,andbyvirtueoftheStatutoryDeclarationsAct,1960.

SubscribedandsolemnlydeclaredbytheabovenamedRashidahbintiAlias@AhmadatKualaLumpurinWilayahPersekutuanon20February2017

BEFOREME:

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PETRONAS CHEMICALS

GROUP BERHAD

Group Company

2016 2015 2016 2015

Note RM Mil RM Mil RM Mil RM Mil

ASSETS

Property,plantandequipment 3 18,543 16,597 12 13

Investmentsinsubsidiaries 4 - - 16,881 16,188

Investmentsinjointventuresandassociates 5 1,363 1,280 1,159 1,075

Intangibleassets 6 3 5 - -

Longtermreceivables 7 83 8 7,011 -

Deferredtaxassets 8 462 389 - -

TOTAL NON-CURRENT ASSETS 20,454 18,279 25,063 17,276

Tradeandotherinventories 9 1,383 1,404 - -

Tradeandotherreceivables 10 2,639 1,692 553 4,381

Taxrecoverable 69 129 - 7

Fundinvestments 12 - 622 - 622

Cashandcashequivalents 13 7,403 8,707 1,254 1,793

TOTAL CURRENT ASSETS 11,494 12,554 1,807 6,803

TOTAL ASSETS 31,948 30,833 26,870 24,079

EQUITY

Sharecapital 14 800 800 800 800

Reserves 15 26,242 23,983 25,693 22,222

Total equity attributable to shareholders of the Company 27,042 24,783 26,493 23,022

Non-controlling interests 16 1,271 1,807 - -

TOTAL EQUITY 28,313 26,590 26,493 23,022

LIABILITIES

Deferredtaxliabilities 8 874 814 1 2

Otherlongtermliabilitiesandprovisions 17 308 355 76 165

TOTAL NON-CURRENT LIABILITIES 1,182 1,169 77 167

Borrowings 18 23 30 - -

Tradeandotherpayables 19 2,208 2,902 292 890

Current tax payables 180 142 8 -

Dividendpayable 42 - - -

TOTAL CURRENT LIABILITIES 2,453 3,074 300 890

TOTAL LIABILITIES 3,635 4,243 377 1,057

TOTAL EQUITY AND LIABILITIES 31,948 30,833 26,870 24,079

STATEMENTS OF FINANCIAL POSITION as at 31 December 2016

Thenotessetoutonpages141to196areanintegralpartofthesefinancialstatements.

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STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the year ended 31 December 2016

Group Company

2016 2015 2016 2015


Revenue 20 13,860 13,536 4,401 2,796

Costofrevenue (8,536) (8,989) - -

Gross profit 5,324 4,547 4,401 2,796

Sellinganddistributionexpenses (704) (615) - -

Administrationexpenses (667) (582) (173) (194)

Otherexpenses (196) (391) (267) (6)

Otherincome 289 798 860 346

Operating profit 21 4,046 3,757 4,821 2,942

Netfinancingincome/(costs) 22 47 (11) 60 2

Shareofprofitofequity-accountedjointventures andassociates,netoftax 17 87 - -

Profit before taxation 4,110 3,833 4,881 2,944

Taxexpense 23 (888) (742) (50) (14)

Profit for the year 3,222 3,091 4,831 2,930

Other comprehensive income

Items that may be reclassified subsequently to profit or loss

Foreigncurrencytranslationdifferences 641 362 - -

Shareofothercomprehensiveincomeof equity-accountedjointventuresandassociates 46 197 - -

Total other comprehensive income for the year 687 559 - -

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 3,909 3,650 4,831 2,930

Profit attributable to:

ShareholdersoftheCompany 2,932 2,782 4,831 2,930

Non-controllinginterests 290 309 - -

PROFIT FOR THE YEAR 3,222 3,091 4,831 2,930

Total comprehensive income attributable to:

ShareholdersoftheCompany 3,619 3,341 4,831 2,930

Non-controllinginterests 290 309 - -

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 3,909 3,650 4,831 2,930

Basicearningsperordinaryshare(sen) 24 36.7 34.8 - -


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STATEMENTS OF CHANGES IN EQUITY for the year ended 31 December 2016

Attributable to shareholders of the Company

Non-distributable Distributable

Group

Sharecapital

(Note 14)RM Mil

Sharepremium

RM Mil

Foreigncurrency

translationreserve

(Note 15)RM Mil

Mergerreserve

(Note 15)RM Mil

Otherreserves(Note 15)

RM Mil

RetainedprofitsRM Mil

TotalRM Mil

Non-controlling

interestsRM Mil

Totalequity

RM Mil

Balance at 1 January 2015 800 8,071 74 (204) 138 13,843 22,722 1,755 24,477

Foreigncurrency translationdifferences - - 362 - - - 362 - 362

Shareofothercomprehensiveincome ofequity-accounted

jointventuresandassociates - - - - 197 - 197 - 197

Totalothercomprehensiveincomefortheyear - - 362 - 197 - 559 - 559

Profitfortheyear - - - - - 2,782 2,782 309 3,091

Total comprehensive income for the year - - 362 - 197 2,782 3,341 309 3,650

Redemptionofredeemablepreferencesharesinsubsidiaries - - - - 152 (152) - (111) (111)

DividendstoshareholdersoftheCompany (Note25) - - - - - (1,280) (1,280) - (1,280)

Dividendsto non-controllinginterests - - - - - - - (146) (146)

Total transactions with equity holders of the Group - - - - 152 (1,432) (1,280) (257) (1,537)

Balance at 31 December 2015 800 8,071 436 (204) 487 15,193 24,783 1,807 26,590


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Group

Sharecapital

(Note 14)RM Mil

Sharepremium

RM Mil

Foreigncurrency

translationreserve

(Note 15)RM Mil

Mergerreserve

(Note 15)RM Mil

Otherreserves(Note 15)

RM Mil


TotalRM Mil

Non-controlling

interestsRM Mil

Totalequity

RM Mil

Balance at 1 January 2016 800 8,071 436 (204) 487 15,193 24,783 1,807 26,590

Foreigncurrency translationdifferences - - 641 - - - 641 - 641

Shareofothercomprehensiveincome ofequity-accounted

jointventuresandassociates - - - - 46 - 46 - 46

Totalothercomprehensiveincomefortheyear - - 641 - 46 - 687 - 687

Profitfortheyear - - - - - 2,932 2,932 290 3,222

Total comprehensive income for the year - - 641 - 46 2,932 3,619 290 3,909

Redemptionofredeemablepreferencesharesinsubsidiaries - - - - 17 (17) - (11) (11)

DividendstoshareholdersoftheCompany (Note25) - - - - - (1,360) (1,360) - (1,360)

Dividendsto non-controllinginterests - - - - - - - (815) (815)

Total transactions with equity holders of the Group - - - - 17 (1,377) (1,360) (826) (2,186)

Balance at 31 December 2016 800 8,071 1,077 (204) 550 16,748 27,042 1,271 28,313

Statements of Changes in Equity (Cont’d)for the year ended 31 December 2016


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Statements of Changes in Equity (Cont’d)for the year ended 31 December 2016



Company

Sharecapital

(Note 14)RM Mil

Sharepremium

RM Mil

Mergerrelief

(Note 15)RM Mil


Totalequity

RM Mil

Balance at 1 January 2015 800 8,071 7,176 5,325 21,372

Profitandtotalcomprehensiveincomefortheyear - - - 2,930 2,930

DividendstoshareholdersoftheCompany(Note25) - - - (1,280) (1,280)

Balance at 31 December 2015 800 8,071 7,176 6,975 23,022

Balance at 1 January 2016 800 8,071 7,176 6,975 23,022

Profitandtotalcomprehensiveincomefortheyear - - - 4,831 4,831

DividendstoshareholdersoftheCompany(Note25) - - - (1,360) (1,360)

Balance at 31 December 2016 800 8,071 7,176 10,446 26,493


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STATEMENTS OF CASH FLOWS for the year ended 31 December 2016

Group Company

2016 2015 2016 2015


CASH FLOWS FROM OPERATING ACTIVITIES

Cashreceiptsfromcustomers 13,443 13,591 90 140

Cashpaidtosuppliersandemployees (8,946) (8,883) (168) (104)

4,497 4,708 (78) 36

Interestincomereceived 260 350 75 91

Taxationpaid (799) (724) (36) (21)

Net cash generated from/(used in) operating activities 3,958 4,334 (39) 106

CASH FLOWS FROM INVESTING ACTIVITIES

Increaseininvestmentsinsubsidiaries - - (1,398) (662)

Increaseininvestmentsinanassociate (84) (284) (84) (284)

Financialassistancetoasubsidiary - - (24) (76)

Redemptionofpreferencesharesinsubsidiaries - - 460 309

Dividendsreceivedfrom:

-subsidiaries - - 4,043 2,642

-jointventuresandassociates 64 154 62 154

Purchaseofproperty,plantandequipment (3,428) (2,858) (5) (7)

Proceedsfromdisposalofproperty,plantandequipment 2 3 - -

Withdrawal/(Placement)ofIslamicdeposits 622 (622) 622 (622)

Net cash (used in)/generated from investing activities (2,824) (3,607) 3,676 1,454

CASH FLOWS FROM FINANCING ACTIVITIES

Dividendspaidto:

-PETRONAS (875) (824) (875) (824)

-others(thirdparties) (485) (456) (485) (456)

-non-controllinginterests (773) (146) - -

Paymenttonon-controllinginterestsonredemptionofsharesbyasubsidiary (11) (111) - -

Drawdownofrevolvingcreditfacility 8 30 - -

Balance carried forward (2,136) (1,507) (1,360) (1,280)


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Group Company

2016 2015 2016 2015


CASH FLOWS FROM FINANCING ACTIVITIES (continued)

Balancebroughtforward (2,136) (1,507) (1,360) (1,280)

Repaymentof:

-financeleaseliabilities (55) (55) - -

-revolvingcreditfacility (16) - - -

Loantoasubsidiary - - (2,481) (1,771)

Loanrepaymentbysubsidiaries - - - 7

Interestincomefromloanstosubsidiaries - - 220 108

Paymentforsettlementofforwardforeign exchangecontract (4,366) - (4,366) -

Proceedfromsettlementofforwardforeign exchangecontract 3,811 - 3,811 -

Net cash used in financing activities (2,762) (1,562) (4,176) (2,936)

Net cash flows from operating, investing and financing activities (1,628) (835) (539) (1,376)

Effectofforeigncurrencytranslationdifferences 294 (383) - -

NET DECREASE IN CASH AND CASH EQUIVALENTS (1,334) (1,218) (539) (1,376)

NET FOREIGN EXCHANGE DIFFERENCES ON CASH HELD 30 118 - -

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 8,707 9,807 1,793 3,169

CASH AND CASH EQUIVALENTS AT END OF THE YEAR 7,403 8,707 1,254 1,793

CASH AND CASH EQUIVALENTS

Cashandbankbalancesanddeposits 13 7,403 8,707 1,254 1,793

Statements of Cash Flows (Cont’d)for the year ended 31 December 2016


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NOTES TO THE FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

1.1 Statement of compliance

ThefinancialstatementsoftheGroupandoftheCompanyhavebeenpreparedinaccordancewithMalaysianFinancialReportingStandards(MFRS),InternationalFinancialReportingStandardsandtherequirementsoftheCompaniesAct,1965inMalaysia.

ThesefinancialstatementsalsocomplywiththeapplicabledisclosureprovisionsoftheListingRequirementsoftheBursaMalaysiaSecuritiesBerhad.

Asof1January2016,theGroupandtheCompanyhaveadoptedamendmentstoMFRSandICInterpretations(collectivelyreferredtoas“pronouncements”)thathavebeenissuedbytheMalaysianAccountingStandardsBoard(MASB)asdescribedfullyinNote33.

The adoption of these pronouncements does not have anymaterial impact to the financial statements of the Group and of theCompany.

MASBhasalsoissuednewandrevisedpronouncementswhicharenotyeteffectivefortheGroupandtheCompanyandtherefore,havenotbeenadoptedforinthesefinancialstatements.ThesepronouncementsincludingtheirimpactonthefinancialstatementsintheperiodofinitialapplicationsaresetoutinNote34.NewandrevisedpronouncementsthatarenotrelevanttotheoperationsoftheGroupandoftheCompanyaresetoutinNote35.

ThesefinancialstatementswereapprovedandauthorisedforissuebytheBoardofDirectorson20February2017.

1.2 Basis of measurement

ThefinancialstatementsoftheGroupandoftheCompanyhavebeenpreparedonhistoricalcostbasisexceptforcertainitemswhicharemeasuredatfairvalueasdisclosedinaccountingpoliciesbelow.

1.3 Functional and presentation currency

TheindividualfinancialstatementsofeachentityintheGrouparemeasuredusingthecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates(“thefunctionalcurrency”).TheGroup’sandtheCompany’sfinancialstatementsarepresentedinRinggitMalaysia(RM),whichistheCompany’sfunctionalcurrency.Allfinancialinformationhavebeenroundedtothenearestmillion,unlessotherwisestated.

1.4 Use of estimates and judgments

The preparation of financial statements in conformity with MFRS requires management to make judgments, estimates andassumptionsthataffecttheapplicationofaccountingpoliciesandthereportedamountsofassets,liabilities,incomeandexpenses.Actualresultsmaydifferfromtheseestimates.

Estimatesandunderlyingassumptionsarereviewedonanongoingbasis.Revisionstoaccountingestimatesarerecognisedinthe

yearinwhichtheestimatesarerevisedandinanyfutureyearsaffected.

Inparticular,informationaboutsignificantareasofestimationuncertaintyandcriticaljudgmentsinapplyingaccountingpoliciesthathavethemostsignificanteffectontheamountsrecognisedinthefinancialstatementsaredescribedinthefollowingnotes:

(i) Note3 : Property,plantandequipment;(ii) Note8 : Deferredtax;and(iii) Note17 : Otherlongtermliabilitiesandprovisions.

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Notes to the Financial Statements (Cont’d)

2. SIGNIFICANT ACCOUNTING POLICIES

TheaccountingpoliciessetoutbelowhavebeenappliedconsistentlytoallperiodspresentedinthesefinancialstatementsandhavebeenappliedconsistentlybytheGroupandtheCompany,unlessotherwisestated.

2.1 Basis of consolidation

(i) Subsidiaries

SubsidiariesareentitiescontrolledbytheCompany.TheGroupcontrolsanentitywhenitisexposedto,orhasrightsto,variablereturnsfromitsinvolvementwiththeentityandhastheabilitytoaffectthosereturnsthroughitspowerovertheentity.Potentialvotingrightsareconsideredwhenassessingcontrolonlywhensuchrightsaresubstantive.TheGroupconsidersithasdefactopoweroveraninvesteewhen,despitenothavingthemajorityofvotingrights,ithasthecurrentabilitytodirecttheactivitiesoftheinvesteethatsignificantlyaffecttheinvestee’sreturn.

ThefinancialstatementsofsubsidiariesareincludedintheconsolidatedfinancialstatementsoftheGroupfromthedatethatcontrolcommencesuntilthedatethatcontrolceases.

SubsidiariesthatwereacquiredfromPETRONASuponInitialPublicOffering(IPO)areconsolidatedusingthemergermethodofaccounting.Othersubsidiariesareconsolidatedusingtheacquisitionmethodofaccounting.

Underthemergermethodofaccounting,theresultsofentitiesorbusinessesundercommoncontrolareaccountedforasiftheacquisitionhadoccurredatthedatethatcommoncontrolwasestablished.Theassetsandliabilitiesacquiredarerecognisedatthecarryingamountsintheconsolidatedstatementsoffinancialposition.Thedifferencebetweenthecostofacquisitionandthenominalvalueofthesharesacquiredtogetherwiththesharepremiumaretakentomergerreserve(oradjustedagainstanysuitablereserveinthecaseofdebitdifferences).TheothercomponentsofequityoftheacquiredentitiesareaddedtothesamecomponentswithintheGroup.

All intercompany transactions are eliminated on consolidation and revenue and profits relate to external transactions only.

Unrealisedlossesresultingfromintercompanytransactionsarealsoeliminatedunlesscostcannotberecovered.

Business combinations

Abusinesscombinationisatransactionorothereventinwhichanacquirerobtainscontrolofoneormorebusinesses.Businesscombinationsareaccountedforusingtheacquisitionmethod.Theidentifiableassetsacquiredandtheliabilitiesassumedaremeasuredattheirfairvaluesattheacquisitiondate.Thecostoftheacquisitionismeasuredastheaggregateofthefairvalueoftheconsiderationtransferredandtheamountofanynon-controllinginterestintheacquiree.Non-controllinginterestsarestatedeitheratfairvalueorattheproportionateshareoftheacquiree’sidentifiablenetassetsattheacquisitiondate.

Whenabusinesscombinationisachievedinstages,theGroupremeasuresitspreviouslyheldnon-controllingequityinterestintheacquireeatfairvalueattheacquisitiondate,withanyresultinggainorlossrecognisedintheprofitorloss.IncreaseintheGroup’sownershipinterestinanexistingsubsidiaryisaccountedforasequitytransactionswithdifferencesbetweenthefairvalueofconsiderationpaidandtheGroup’sproportionateshareofnetassetsacquiredrecogniseddirectlyinequity.

TheGroupmeasuresgoodwillastheexcessofthecostofanacquisitionandthefairvaluesofanypreviouslyheldinterestintheacquireeoverthefairvalueoftheidentifiableassetsacquiredandliabilitiesassumedattheacquisitiondate.Whentheexcessisnegative,abargainpurchasegainisrecognisedimmediatelyinprofitorloss.

Transactioncosts,otherthanthoseassociatedwiththeissuanceofdebtorequitysecurities,thattheGroupincursinconnectionwithabusinesscombinationareexpensedasincurred.

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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

2.1 Basis of consolidation (continued)

(i) Subsidiaries (continued)

Non-controlling interests

Non-controllinginterestsattheendofreportingperiod,beingtheportionofthenetassetsofsubsidiariesattributabletoequityintereststhatarenotownedbytheCompany,whetherdirectlyorindirectlythroughsubsidiaries,arepresentedintheconsolidatedstatementsoffinancialpositionandstatementsofchanges inequitywithinequity,separatelyfromequityattributabletotheshareholdersoftheCompany.Non-controllinginterestsintheresultsoftheGrouparepresentedintheconsolidatedstatementsofprofitorlossandothercomprehensiveincomeasanallocationoftheprofitorlossandtotalcomprehensiveincomefortheyearbetweenthenon-controllinginterestsandshareholdersoftheCompany.

Lossesapplicabletothenon-controllinginterestsinasubsidiaryareallocatedtothenon-controllinginterestsevenifdoingsocausesthenon-controllingintereststohaveadeficitbalance.

TheGrouptreatsallchangesinitsownershipinterestinasubsidiarythatdonotresultinalossofcontrolasequitytransactionsbetweentheGroupanditsnon-controllinginterestholders.AnydifferencebetweentheGroup’sshareofnetassetsbeforeandafterthechange,andanyconsiderationreceivedorpaidisadjustedtooragainstGroupreserves.

Loss of control

Uponlossofcontrolofasubsidiary,theGroupderecognisestheassetsandliabilitiesoftheformersubsidiary,anynon-controllinginterestsand theothercomponentsofequity related to the formersubsidiary from theconsolidatedstatementsoffinancialposition.Anysurplusordeficitarisingonthelossofcontrolisrecognisedinprofitorloss.IftheGroupretainsanyinterestintheprevioussubsidiary,thensuchinterestismeasuredatfairvalueatthedatethatcontrolislost.Subsequently,itisaccountedforasanequity-accountedinvesteeorasanavailable-for-salefinancialassetdependingonthelevelofinfluenceretained.

(ii) Joint arrangements

JointarrangementsarearrangementsinwhichtheGrouphasjointcontrol,establishedbycontractsrequiringunanimousconsentfordecisionsabouttheactivitiesthatsignificantlyaffectthearrangements’returns.

Jointarrangementsareclassifiedaseitherjointoperationorjointventure.AjointarrangementisclassifiedasjointoperationwhentheGrouportheCompanyhasrightstotheassetsandobligationsfortheliabilitiesrelatingtoanarrangement.TheGroupandtheCompanyaccountforeachof itsshareoftheassets, liabilitiesandtransactions, including itsshareofthoseheldorincurredjointlywiththeotherinvestors,inrelationtothejointoperation.AjointarrangementisclassifiedasjointventurewhentheGrouportheCompanyhasrightsonlytothenetassetsofthearrangement.TheGroupaccountsforitsinterestinthejointventureusingtheequitymethodasdescribedinNote2.1(iii).

(iii) Associates

AssociatesareentitiesinwhichtheGrouphassignificantinfluenceincludingrepresentationontheBoardofDirectors,butnotcontrolorjointcontrol,overthefinancialandoperatingpoliciesoftheinvesteecompany.

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2.1 Basis of consolidation (continued)

(iii) Associates (continued)

Associates are accounted for in the consolidated financial statements using the equitymethod. The consolidated financialstatementsincludetheGroup’sshareofpost-acquisitionprofitorlossandothercomprehensiveincomeoftheequity-accountedassociates,afteradjustmentstoaligntheaccountingpolicieswiththoseoftheGroup,fromthedatethatsignificantinfluencecommencesuntilthedatethatsignificantinfluenceceases.

TheGroup’sshareofpost-acquisitionreservesandretainedprofitslesslossesisaddedtothecarryingvalueoftheinvestmentintheconsolidatedstatementsoffinancialposition.Theseamountsaretakenfromthelatestauditedfinancialstatementsormanagementfinancialstatementsoftheassociates.

WhentheGroup’sshareofpost-acquisitionlossesexceedsitsinterestinanequity-accountedassociate,thecarryingamountofthatinterest(includinganylongterminvestments)isreducedtonilandtherecognitionoffurtherlossesisdiscontinuedexcepttotheextentthattheGrouphasanobligationorhasmadepaymentsonbehalfoftheassociate.

WhentheGroupceasestohavesignificantinfluenceoveranassociate,itisaccountedforasadisposaloftheentireinterestinthatassociate,withtheresultinggainorlossbeingrecognisedinprofitorloss.Anyretainedinterestintheformerassociateatthedatewhensignificantinfluenceislostismeasuredatfairvalueandthisamountisregardedastheinitialcarryingamountofafinancialasset.

WhentheGroup’s interest inanassociatedecreasesbutdoesnotresult in lossofsignificant influence,anyretained interestisnot re-measured.Anygainor lossarising fromthedecrease in interest is recognised inprofitor loss.Anygainsor lossespreviouslyrecognisedinothercomprehensiveincomearealsoreclassifiedproportionatelytotheprofitorlossifthatgainorlosswouldberequiredtobereclassifiedtoprofitorlossonthedisposaloftherelatedassetsandliabilities.

UnrealisedprofitsarisingfromtransactionsbetweentheGroupanditsassociatesareeliminatedtotheextentoftheGroup’sinterestsintheassociates.Unrealisedlossesonsuchtransactionsarealsoeliminatedpartially,unlesscostcannotberecovered.

2.2 Property, plant and equipment and depreciation

Itemsofproperty,plantandequipmentarestatedatcostlessaccumulateddepreciationandaccumulatedimpairmentlosses,ifany.Projects-in-progressisstatedatcostlessaccumulatedimpairmentlosses,ifany,andisnotdepreciated.

Costincludesexpendituresthataredirectlyattributabletotheacquisitionoftheasset.Thecostofself-constructedassetsincludes

thecostsofmaterialsanddirect labour,anyothercostsdirectlyattributable tobringing theassets toworkingcondition for theirintendeduse,andthecostsofdismantlingandremovingtheassetsandrestoringthesiteonwhichtheyarelocated.Forqualifyingassets,borrowingcostsarecapitalised inaccordancewiththeaccountingpolicyonborrowingcosts.Purchasedsoftwarethat isintegraltothefunctionalityoftherelatedequipmentiscapitalisedaspartofthatequipment.

When significant components of an itemof property, plant and equipment have different useful lives, they are accounted for asseparateitems(majorcomponents)ofproperty,plantandequipment.

Thecostofreplacingacomponentofanitemofproperty,plantandequipmentisrecognisedinthecarryingamountoftheitemifitisprobablethatthefutureeconomicbenefitsembodiedwithinthecomponentwillflowtotheGrouportheCompanyanditscostcanbemeasuredreliably.Thecarryingamountofthereplaceditemofproperty,plantandequipmentisderecognisedwithanycorrespondinggain or loss recognised in profit or loss accordingly. The costs of the day-to-day servicing of property, plant and equipment arerecognisedinprofitorlossasincurred.

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2.2 Property, plant and equipment and depreciation (continued)

Depreciationforproperty,plantandequipmentotherthanprojects-in-progress, isrecognisedintheprofitor lossonastraight-linebasisovertheestimatedusefullivesofeachcomponentofanitemofproperty,plantandequipment.Property,plantandequipmentarenotdepreciateduntiltheassetsarereadyfortheirintendeduse.

Buildingsaredepreciatedovertheirusefullivesorovertheremaininglandleaseperiod,whicheverisshorter.

LeasedassetsaredepreciatedovertheshorteroftheleasetermandtheirusefullivesunlessitisreasonablycertainthattheGroupwillobtainownershipbytheendoftheleaseterm.

Theestimatedusefullivesofproperty,plantandequipmentforthecurrentandcomparativeyearsareasfollows:

Leaseholdland 30-99yearsBuildings 14-66yearsPlantandequipment 3-67yearsOfficeequipment,furnitureandfittings 5-7yearsComputersoftwareandhardware 5yearsMotorvehicles 3-5years

Thedepreciableamount isdeterminedafterdeducting residualvalue.The residualvalue,useful lifeanddepreciationmethodarereviewed at the end of each reporting period to ensure that the amount, period andmethod of depreciation are consistentwithpreviousestimatesandtheexpectedpatternofconsumptionofthefutureeconomicbenefitsembodiedintheitemsofproperty,plantandequipment.

Anitemofproperty,plantandequipmentisderecognisedupondisposalorwhennofutureeconomicbenefitsareexpectedfromitsuseordisposal.Thedifferencebetweenthenetdisposalproceeds,ifany,andthenetcarryingamountisrecognisedintheprofitorloss.

2.3 Leased assets

Aleasearrangementisaccountedforasfinanceoroperatingleaseinaccordancewiththeaccountingpolicyasstatedbelow.Whenthefulfilmentofanarrangementisdependentontheuseofaspecificassetandthearrangementconveysarighttousetheasset,itisaccountedforasaleaseinaccordancewiththeaccountingpolicybelowalthoughthearrangementdoesnottakethelegalformofalease.

(i) Finance lease

A lease is recognised as a finance lease if it transfers substantially to theGroup or theCompany all the risks and rewardsincidentaltoownership.Uponinitialrecognition,theleasedassetismeasuredatanamountequaltothelowerofitsfairvalueandthepresentvalueoftheminimumleasepayments.Subsequenttoinitialrecognition,theassetisaccountedforinaccordancewiththeaccountingpolicyapplicabletothatasset.Thecorrespondingliabilityisincludedinthestatementsoffinancialpositionaslongtermliabilitiesandotherpayables.

Minimum lease payments made under finance leases are apportioned between the finance costs and the reduction of theoutstandingliability.Financecosts,whichrepresentthedifferencebetweenthetotalleasingcommitmentsandthefairvalueoftheassetsacquired,arerecognisedintheprofitorlossandallocatedovertheleasetermsoastoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachaccountingperiod.

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2.3 Leased assets (continued)

(i) Finance lease (continued)

Contingentleasepayments,ifany,areaccountedforbyrevisingtheminimumleasepaymentsovertheremainingtermoftheleasewhentheleaseadjustmentisconfirmed.

Leaseholdlandwhichinsubstanceisafinanceleaseisclassifiedasproperty,plantandequipment.

(ii) Operating lease

All leases thatdonot transfersubstantially to theGroupand theCompanyall the risksand rewards incidental toownershipareclassifiedasoperatingleases,andtheleasedassetsarenotrecognisedontheGroup’sandtheCompany’sstatementsoffinancialposition.

Paymentsmadeunderoperatingleasesarerecognisedasanexpenseintheprofitorlossonastraight-linebasisoverthetermofthelease.Leaseincentivesreceivedarerecognisedasareductionofrentalexpenseovertheleasetermonastraight-linebasis.

Leaseholdlandwhichinsubstanceisanoperatingleaseisclassifiedasprepaidleasepayments.

2.4 Investments

Longterminvestmentsinsubsidiaries,jointventuresandassociatesarestatedatcostlessimpairmentlosses,ifany,intheCompany’sfinancialstatements,unlesstheinvestmentsareclassifiedasheldforsaleordistribution.Thecostofinvestmentsincludestransactioncosts.

Thecarryingamountoftheseinvestmentsincludesfairvalueadjustmentsonshareholder’sloansandadvances,ifany(Note2.6(i)).

2.5 Intangible asset

Intangibleasset,whichcomprisesalicenseobtainedfromathirdparty,ismeasuredoninitialrecognitionatcost.

Following initial recognition, intangible asset is carried at cost less accumulated amortisation and any accumulated impairmentlosses.

Amortisationforintangibleassetisrecognisedintheprofitorlossonastraight-linebasisovertheestimatedeconomicusefullife.Theamortisationmethodandtheusefullifeforintangibleassetarereviewedateachreportingdate.Intangibleassetisassessedforimpairmentwheneverthereisanindicationthatitmaybeimpaired.

Theestimatedusefullifeforthecurrentandcomparativeyearsis10years.

Subsequent expenditure on intangible asset is capitalised onlywhen it increases the future economic benefits embodied in thespecificassettowhichitrelates.Allotherexpendituresarerecognisedinprofitorlossasincurred.

2.6 Financial instruments

Afinancialinstrumentisrecognisedinthestatementsoffinancialpositionwhen,andonlywhen,theGrouportheCompanybecomesapartytothecontractualprovisionsoftheinstrument.

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2.6 Financial instruments (continued)

(i) Financial assets

Initial recognition

Financialassetsareclassifiedasfinancialassetsatfairvaluethroughprofitorloss,orloansandreceivables,asappropriate.TheGroupandtheCompanydeterminetheclassificationoffinancialassetsatinitialrecognition.

Financialassetsarerecognisedinitiallyatfairvalue,normallybeingthetransactionpriceplus,inthecaseoffinancialassetsnotatfairvaluethroughprofitorloss,anytransactioncoststhataredirectlyattributabletotheacquisitionorissueofthefinancialinstrument.

Purchasesorsalesunderacontractwhichtermsrequiredeliveryoffinancialassetswithinatimeframeestablishedbyregulationorconvention inthemarketplaceconcerned(“regularwaypurchases”)arerecognisedonthetradedate i.e. thedatethattheGrouportheCompanycommitstopurchaseorsellthefinancialasset.

Fair value adjustments on shareholder’s loans and advances at initial recognition, if any, are added to the carrying value ofinvestmentsintheCompany’sfinancialstatements.

TheGroup’sandtheCompany’sfinancialassetsincludecashandcashequivalents,fundinvestments,tradeandotherreceivables,loansandadvances,andderivativefinancialinstruments.

Subsequent measurement

Thesubsequentmeasurementoffinancialassetsdependsontheirclassificationasfollows:

Financialassetsatfairvaluethroughprofitorloss

Fairvaluethroughprofitorlosscategorycomprisesfinancialassetsthatareheldfortrading,includingderivatives(exceptforaderivativethatisafinancialguaranteecontractoradesignatedandeffectivehedginginstrument)andfinancialassetsthatarespecificallydesignatedintothiscategoryuponinitialrecognition.

Financialassetscategorisedasfairvaluethroughprofitorlossaresubsequentlymeasuredattheirfairvaluewithgainsorlossesrecognisedintheprofitorloss.ThemethodsusedtomeasurefairvaluearestatedinNote2.7.

Loans and receivables

Loans and receivables category comprises debt instruments that are not quoted in an activemarket. Subsequent to initialrecognition,financialassetscategorisedasloansandreceivablesaremeasuredatamortisedcostusingtheeffectiveinterestmethod(Note2.6(v)).

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(ii) Financial liabilities

Initial recognition

Financial liabilitiesareclassifiedasfinancial liabilitiesat fair value throughprofitor loss,orfinancial liabilitiesmeasuredatamortisedcost,asappropriate.TheGroupandtheCompanydeterminetheclassificationoffinancialliabilitiesatinitialrecognition.

Financial liabilities are recognised initially at fair value less, in the case of loans and borrowings, any directly attributabletransactioncosts.

The Group’s and the Company’s financial liabilities include borrowings, trade and other payables, and derivative financialinstruments.

Subsequent measurement

Thesubsequentmeasurementoffinancialliabilitiesdependsontheirclassificationasfollows:

Financialliabilitiesatfairvaluethroughprofitorloss

Fairvalue throughprofitor losscategorycomprisesfinancial liabilities thatarederivativesfinancial instrument (except foraderivativethatisafinancialguaranteecontractoradesignatedandeffectivehedginginstrument)andfinancialliabilitiesthatarespecificallydesignatedintothiscategoryuponinitialrecognition.

Financialliabilitiescategorisedasfairvaluethroughprofitorlossaresubsequentlymeasuredattheirfairvaluewithgainsorlossesrecognisedintheprofitorloss.

Financial liabilities measured at amortised cost

Subsequentto initial recognition,financial liabilitiesaremeasuredatamortisedcostusingtheeffective interestmethod(seeNote2.6(v)).

Gainsandlossesarerecognisedintheprofitorlosswhentheliabilitiesarederecognisedaswellasthroughtheamortisationprocess.

(iii) Derivative financial instruments

TheGroupusesderivativefinancialinstrumentssuchasforwardratecontractstomanagecertainexposurestofluctuationsinforeigncurrencyexchangerates.

Derivativefinancialinstrumentsareinitiallyrecognisedatfairvalueonthedateonwhichaderivativecontractisenteredintoandaresubsequentlyremeasuredatfairvalue.Derivativesfinancialinstrumentsarecarriedasfinancialassetswhenthefairvalueispositiveandasfinancialliabilitieswhenthefairvalueisnegative.

Anygainsorlossesarisingfromchangesinfairvalueonderivativesfinancialinstrumentsduringtheyeararerecognisedintheprofitorloss.

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(iii) Derivative financial instruments (continued)

Anembeddedderivativeisrecognisedseparatelyfromthehostcontractandaccountedforasaderivativeif,andonlyif,itisnotcloselyrelatedtotheeconomiccharacteristicsandrisksofthehostcontractandthehostcontractisnotcategorisedasfairvaluethroughprofitorloss.Thehostcontract,intheeventanembeddedderivativeisrecognisedseparately,isaccountedforinaccordancewiththepolicyapplicabletothenatureofthehostcontract.

Ingeneral,contractstosellorpurchasenon-financialitemstomeetexpectedownuserequirementsarenotaccountedforasfinancial instruments. However, contracts to sell or purchase commodities that can be net settled orwhich containwrittenoptionsarerequiredtoberecognisedatfairvalue,withgainsandlossesrecognisedintheprofitorloss.

(iv) Offsetting of financial instruments Financialassetsandfinancialliabilitiesareoffsetandthenetamountisreportedinthestatementsoffinancialpositionif,and

onlyif,thereisacurrentlyenforceablelegalrighttooffsettherecognisedamountsandthereisanintentiontosettleonanetbasisortorealisetheassetsandsettletheliabilitiessimultaneously.

(v) Amortised cost of financial instruments

Amortisedcostiscomputedusingtheeffectiveinterestmethod.Thismethoduseseffectiveinterestratethatexactlydiscountsestimatedfuturecashreceiptsorpaymentsthroughtheexpectedlifeofthefinancialinstrumenttothenetcarryingamountofthefinancialinstrument.Amortisedcosttakesintoaccountanytransactioncostsandanydiscountorpremiumonsettlement.

(vi) Derecognition of financial instruments

Financial assets

Afinancialassetisderecognisedwhentherightstoreceivecashflowsfromtheassethaveexpiredor,theGrouportheCompanyhastransferreditsrightstoreceivecashflowsfromtheassetorhasassumedanobligationtopaythereceivedcashflowsinfullwithoutmaterialdelaytoathirdpartyundera“pass-through”arrangementwithoutretainingcontroloftheassetorsubstantiallyalltherisksandrewardsoftheasset.

Onderecognitionofafinancialasset, thedifferencebetweenthecarryingamountandthesumoftheconsiderationreceived(includinganynewassetobtainedlessanynewliabilityassumed)andanycumulativegainorlossthathadbeenrecognisedinequityisrecognisedintheprofitorloss.

Financial liabilities

Afinancialliabilityisderecognisedwhentheobligationundertheliabilityisdischarged,cancelledorexpired.Onderecognitionofafinancialliability,thedifferencebetweenthecarryingamountofthefinancialliabilitiesextinguishedortransferredtoanotherpartyandtheconsiderationpaid,includinganynon-cashassetstransferredorliabilitiesassumed,isrecognisedintheprofitorloss.

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2.7 Fair value measurements

Fairvalueofanassetoraliability,exceptforleasetransactions,isdeterminedasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Themeasurementassumesthatthetransactiontoselltheassetortransfertheliabilitytakesplaceeitherintheprincipalmarketorintheabsenceofaprincipalmarket,inthemostadvantageousmarket.

Thefairvalueoffinancialinstrumentsthatareactivelytradedinorganisedfinancialmarketsisdeterminedbyreferencetoquotedmarketbidpricesatthecloseofbusinessattheendofreportingdate.Forfinancialinstrumentswherethereisnoactivemarket,fairvalueisdeterminedusingvaluationtechniques.Suchtechniquesmayincludeusingrecentarm’slengthmarkettransactions,referencetothecurrentfairvalueofanotherinstrumentthatissubstantiallythesame,discountedcashflowanalysisorothervaluationmodels.Wherefairvaluecannotbereliablyestimated,assetsarecarriedatcostlessimpairmentlosses,ifany.

Fornon-financialasset,thefairvaluemeasurementtakesintoaccountamarketparticipant’sabilitytogenerateeconomicbenefitsbyusingtheassetinitshighestandbestuseorbysellingittoanothermarketparticipantthatwouldusetheassetinitshighestandbestuse.

Whenmeasuringthefairvalueofanassetoraliability,theGrouportheCompanyusesobservablemarketdataasfaraspossible.Fairvaluesarecategorisedintodifferentlevelsinafairvaluehierarchybasedontheinputusedinthevaluationtechniqueasfollows:• Level1 – Quotedprices(unadjusted)inactivemarketsforidentifiableassetsorliabilities.• Level2 – Inputs other than quoted prices includedwithin Level 1 that are observable for the asset or liability, either directly (i.e.asprices)orindirectly(i.e.derivedfromprices).

• Level3 – Inputsfortheassetorliabilitythatarenotbasedonobservablemarketdata(unobservableinput).

The Group and the Company recognise transfer between levels of fair value hierarchy as of the date of the event or change incircumstancesthatcausedthetransfers.

2.8 Impairment

(i) Financial assets

Allfinancialassets(exceptforfinancialassetscategorisedasfairvaluethroughprofitorloss,andinvestmentsinsubsidiaries,joint ventures andassociates) are assessedat each reportingdate to determinewhether there is anyobjective evidenceofimpairmentasa resultofoneormoreeventshavingan impactontheestimatedfuturecashflowsof theasset. Ifanysuchobjective evidence exists, then the financial asset’s recoverable amount is estimated. Losses expected as a result of futureevents,nomatterhowlikely,arenotrecognised.

Animpairmentlossinrespectofloansandreceivablesisrecognisedinprofitorlossandismeasuredasthedifferencebetweentheasset’scarryingamountandthepresentvalueofestimatedfuturecashflowsdiscountedattheasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccount.

If,inasubsequentperiod,thefairvalueofadebtinstrumentincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognisedinprofitorloss,theimpairmentlossisreversed,totheextentthattheasset’scarryingamountdoesnotexceedwhatthecarryingamountwouldhavebeenhadtheimpairmentnotbeenrecognisedatthedatetheimpairmentisreversed.Theamountofthereversalisrecognisedinprofitorloss.

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2.8 Impairment (continued)

(ii) Other assets

The carrying amounts of other assets, other than inventories anddeferred tax assets, are reviewedat each reportingdatetodeterminewhetherthereisanyindicationof impairment.Thecarryingamountsarereviewedmorefrequentlyifeventsorchangesincircumstancesindicatethatthecarryingvaluemaybeimpaired,asdescribedintherespectiveassets’accountingpolicies.

Ifanysuch indicationexists, theasset’s recoverableamount isestimated.An impairment loss is recognised if thecarryingamountofanassetor thecash-generatingunit towhich itbelongsexceeds its recoverableamount. Impairment lossesarerecognisedintheprofitorloss.

Acash-generatingunitisthesmallestidentifiableassetgroupthatgeneratescashflowsfromcontinuingusethatarelargelyindependentfromotherassetsandgroups.Animpairmentlossrecognisedinrespectofacash-generatingunitisallocatedfirsttoreducethecarryingamountofanygoodwillallocatedtotheunitandthentoreducethecarryingamountsoftheotherassetsintheunitonapro-ratabasis.

Therecoverableamountisthegreateroftheasset’sfairvaluelesscostsofdisposalanditsvalueinuse.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.Foranassetthatdoesnotgeneratelargelyindependentcashinflows,therecoverableamountisdeterminedforthecash-generatingunittowhichtheassetbelongs.

An impairment loss in respectofgoodwill isnot reversed in thesubsequentperiod. In respectofotherassets, impairmentlossesare reversed if therehasbeenachange in theestimatesusedtodetermine the recoverableamount.An impairmentlossisreversedonlytotheextentthattheasset’scarryingamountdoesnotexceedthecarryingamountthatwouldhavebeendetermined,netofdepreciationoramortisation,ifnoimpairmentlosshadbeenrecognised.

Reversalsofimpairmentlossesarecreditedtotheprofitorlossintheyearinwhichthereversalsarerecognised.

2.9 Inventories

Inventoriesarestatedatthelowerofcostandnetrealisablevalue.Costincludesrawmaterialcostsandproductionoverheadsandisdeterminedonaweightedaveragebasis.

Netrealisablevalueistheestimatedsellingpriceintheordinarycourseofbusiness,lesstheestimatedcostsofcompletionandthe

estimatedcostsnecessarytomakethesale.

Costofstores,sparesandothersconsistsoftheinvoicedvaluefromsuppliersandimportdutychargesandisdeterminedonaweightedaveragebasis.

2.10 Cash and cash equivalents

Cashandcashequivalentsconsistofcashonhandandbankbalances,depositswithlicensedfinancialinstitutionsandhighlyliquidinvestmentswhichhaveaninsignificantriskofchangesinfairvaluewithoriginalmaturitiesofthreemonthsorless,andareusedbytheGroupandtheCompanyinthemanagementoftheirshorttermcommitments.Forthepurposeofthestatementsofcashflows,cashandcashequivalentsarepresentednetofbankoverdraftsanddepositsrestricted,ifany.

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2.11 Provisions

Aprovisionisrecognisedif,asaresultofapastevent,theGrouportheCompanyhasapresentlegalorconstructiveobligationthatcanbeestimatedreliably,andit isprobablethatanoutflowofeconomicbenefitswillberequiredtosettletheobligation.Futureoperatinglossesarenotprovidedfor.Provisionsaredeterminedbydiscountingtheexpectedfuturenetcashflowsatapre-taxratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheliability.Wherediscountingisused,theaccretionintheprovisionduetothepassageoftimeisrecognisedasfinancecost.

Theamountrecognisedasaprovisionisthebestestimateofthenetexpenditurerequiredtosettlethepresentobligationatthereportingdate.Provisionsarereviewedateachreportingdateandadjustedtoreflectthecurrentbestestimate.

Possibleobligations,whoseexistencewillonlybeconfirmedby theoccurrenceornon-occurrenceofoneormore futureeventsnotwhollywithinthecontroloftheGroup,arenotrecognisedinthefinancialstatementsbutaredisclosedascontingentliabilitiesunlessthepossibilityofanoutflowofeconomicresourcesisconsideredremote.

2.12 Employee benefits

(i) Short term employee benefits

Wagesandsalaries,bonusesandsocialsecuritycontributionsarerecognisedasanexpenseintheyearinwhichtheassociatedservicesarerenderedbyemployeesoftheGroupandtheCompany.

(ii) Defined contribution plans

Asrequiredbylaw,companiesinMalaysiamakecontributionstothestatepensionscheme,theEmployeesProvidentFund(EPF).Suchcontributionsarerecognisedasanexpenseinprofitorlossasincurred.

2.13 Taxation

Taxontheprofitorlossforthefinancialyearcomprisescurrentanddeferredtax.Incometaxisrecognisedintheprofitorloss.

(i) Current tax

Currenttaxexpenseistheexpectedtaxpayableonthetaxableincomeforthefinancialyear,usingthestatutorytaxratesatthereportingdate,andanyadjustmenttotaxpayableinrespectofpreviousfinancialyears.

(ii) Deferred tax

Deferredtaxisprovidedfor,usingtheliabilitymethod,ontemporarydifferencesatthereportingdatebetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsinthefinancialstatements.Inprinciple,deferredtaxliabilitiesarerecognisedfor all taxable temporary differences and deferred tax assets are recognised for all deductible temporary differences,unabsorbedcapitalallowances,unusedreinvestmentallowances,unusedinvestmenttaxallowances,unusedtaxlossesandotherunusedtaxcreditstotheextentthatitisprobablethatfuturetaxableprofitwillbeavailableagainstwhichthedeductibletemporarydifferences,unabsorbedcapitalallowances,unusedreinvestmentallowances,unusedinvestmenttaxallowances,unusedtaxlossesandotherunusedtaxcreditscanbeutilised.

Deferred tax isnot recognised for the initial recognitionofgoodwill and the initial recognitionofanassetor liability inatransactionwhichisnotabusinesscombinationandthataffectsneitheraccountingnortaxableprofitnorloss.

Deferredtaxismeasuredatthetaxratesthatareexpectedtoapplyintheperiodwhentheassetisrealisedortheliabilityissettled,basedonthelawsthathavebeenenactedorsubstantivelyenactedbytheendofthereportingperiod.

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2.13 Taxation (continued)

(ii) Deferred tax (continued)

Deferredtaxassetsandliabilitiesareoffsetifthereisalegallyenforceablerighttooffsetcurrenttaxliabilitiesandassets,andtheyrelatetoincometaxesleviedbythesametaxauthorityonthesametaxableentity,orondifferenttaxentities,wheretheyintendtosettlecurrenttaxliabilitiesandassetsonanetbasisortheirtaxassetsandliabilitieswillberealisedsimultaneously.

Deferredtaxassetisreviewedattheendofeachreportingdateandisreducedtotheextentthatitisnolongerprobablethatthefuturetaxableprofitwillbeavailableagainstwhichtherelatedtaxbenefitcanberealised.

2.14 Foreign currency transactions

InpreparingthefinancialstatementsofindividualentitiesintheGroup,transactionsincurrenciesotherthantheentity’sfunctionalcurrency(foreigncurrencies)aretranslatedtothefunctionalcurrenciesatratesofexchangerulingonthetransactiondates.

Monetaryassetsand liabilitiesdenominated in foreigncurrenciesat the reportingdatehavebeenretranslatedto the functionalcurrencyatratesrulingonthereportingdate.

Non-monetaryassetsand liabilitiesdenominated in foreigncurrencieswhicharemeasuredat fair valueare retranslated to the

functionalcurrencyattheforeignexchangeratesrulingatthedatewhenthefairvaluewasdetermined.Non-monetaryitemsthataremeasuredintermsofhistoricalcostinforeigncurrencyarenotretranslatedatthereportingdate.

Gainsandlossesonexchangearisingfromretranslationarerecognisedintheprofitorloss,exceptfordifferencesarisingontheretranslationofavailable-for-saleequityinstruments,whicharerecognisedinequity.

Onconsolidation,theassetsandliabilitiesofsubsidiarieswithfunctionalcurrenciesotherthanRinggitMalaysiaaretranslatedintoRinggitMalaysiaattheexchangeratesrulingatreportingdate.

Theincomeandexpensesaretranslatedattheexchangeratesatthedatesofthetransactionsoranaverageratethatapproximatesthoserates.Allresultingexchangedifferencesaretakentotheforeigncurrencytranslationreservewithinequity.

In theconsolidatedfinancialstatements,whensettlementofamonetary itemreceivable fromorpayable to theGroup’s foreignoperationisneitherplannednorlikelyintheforeseeablefuture,foreignexchangegainsandlossesarisingfromsuchamonetaryitemareconsideredto formpartofanet investment ina foreignoperationandare reclassifiedtoothercomprehensive incomeand presented under foreign currency translation reserve in equity. Upon disposal of the investment, the cumulative exchangedifferencespreviouslyrecordedinequityarereclassifiedtotheconsolidatedprofitorloss.

2.15 Revenue

Revenuefromthesaleofpetrochemicalproductsandtheirrelatedproductsinthecourseofordinaryactivitiesismeasuredatfairvalue of the consideration receivedor receivable, net of returns and allowances, tradediscounts and volume rebates.Revenueisrecognisedwhenpersuasiveevidenceexists,usually intheformofanexecutedsalesagreement,thatthesignificantriskandrewardsofownershiphavebeentransferredtothecustomer,recoveryoftheconsiderationisprobable,theassociatedcostsandpossiblereturnofgoodscanbeestimatedreliably,thereisnocontinuingmanagementinvolvementwiththegoods,andtheamountofrevenuecanbemeasuredreliably.Ifitisprobablethatdiscountswillbegrantedandtheamountcanbemeasuredreliably,thenthediscountisrecognisedasareductionofrevenueasthesalesarerecognised.

Dividendincomeisrecognisedintheprofitorlossonthedatetherighttoreceivepaymentisestablished.

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2.15 Revenue (continued)

Revenuefromservicesrenderedisrecognisedintheprofitorlossbasedontheactualandestimatedthroughputvolumeandportcharges.

2.16 Interest income

Incomearisingfromassetsyieldinginterestarerecognisedonatimeproportionbasisthattakesintoaccounttheeffectiveyieldontheassets.

2.17 Financing costs

Finance costs comprise interest payable on borrowings and profit sharemargin on Islamic financing facilities, as well as anyaccretioninprovisionduetothepassageoftime.

All interestandothercosts incurred inconnectionwithborrowingsareexpensedas incurred,otherthanborrowingcostdirectlyattributabletotheacquisition,constructionorproductionofqualifyingassets(assetsthatnecessarilytakeasubstantialperiodoftimetogetreadyfortheirintendeduseorsale),whicharecapitalisedaspartofthecostofthoseassets.

Thecapitalisationofborrowingcostsaspartofthecostofaqualifyingassetcommenceswhenexpenditurefortheassetsisbeingincurred,borrowingcostsarebeingincurredandactivitiesthatarenecessarytopreparetheassetforitsintendeduseorsaleareinprogress.Capitalisationofborrowingcostsissuspendedorceaseswhensubstantiallyalltheactivitiesnecessarytopreparethequalifyingassetforitsintendeduseorsaleareinterruptedorcompleted.

Investmentincomeearnedonthetemporaryinvestmentofspecificborrowingspendingtheirexpenditureonqualifyingassetsisdeductedfromtheborrowingcostseligibleforcapitalisation.

2.18 Equity instruments

Instrumentsclassifiedasequityaremeasuredatcostoninitialrecognitionandarenotremeasuredsubsequently.

(i) Issue expenses

Costsdirectlyattributabletotheissueofinstrumentsclassifiedasequityarerecognisedasadeductionfromequity.

(ii) Ordinary shares

Ordinarysharesareclassifiedasequity.

2.19 Basic earnings per ordinary share

TheGrouppresentsbasicearningspersharedataforitsordinaryshares. BasicearningspershareiscalculatedbydividingtheprofitorlossattributabletoordinaryshareholdersoftheGroupbytheweighted

averagenumberofordinarysharesoutstandingduringtheyear.

2.20 Operating segment

AnoperatingsegmentisacomponentoftheGroupthatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses(includingrevenuesandexpensesthat relatetotransactionswithanyof thecomponentsof theGroup,andforwhichdiscretefinancial information isavailable)whoseoperatingresultsarereviewedregularlybythechiefoperatingdecisionmaker,whichinthiscaseistheManagingDirector/ChiefExecutiveOfficer(MD/CEO),tomakedecisionsaboutresourcestobeallocatedtothesegmentsandtoassesstheperformanceoftheGroup.

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3. PROPERTY, PLANT AND EQUIPMENT

Group2016

At 1.1.2016

RM MilAdditions

RM Mil

Disposals/write-offs

RM MilTransfers

RM Mil

Translationexchange

differenceRM Mil

At 31.12.2016

RM Mil

At cost:

Leaseholdland 291 - - - - 291

Buildings 1,396 1 - 47 2 1,446

Plantandequipment 22,159 42 (20) 552 2 22,735

Officeequipment,furnitureandfittings 102 1 (1) 13 1 116

Computersoftwareandhardware 276 2 (1) 29 2 308

Motorvehicles 41 1 (1) 3 - 44

Projects-in-progress 7,193 2,996 (244) (644) 484 9,785

31,458 3,043 (267)^ - 491 34,725

^ Includedindisposals/write-offsofprojects-in-progressarewrite-offsrelatingtothecancellationofelastomersprojectwhichwaspartoftheRefineryandPetrochemicalsIntegratedDevelopment(RAPID)projectinPengerang,JohoramountingtoRM244million.

At 1.1.2016

RM Mil

Chargefor the year

RM Mil


RM Mil

Impairmentloss

RM MilTransfers

RM Mil

Translationexchange

differenceRM Mil

At 31.12.2016

RM Mil

Accumulated depreciation and impairment losses:

Leaseholdland 77 4 - - - - 81

Buildings 582 30 - - - - 612

Plantandequipment 13,906 1,265 (15) 5 - - 15,161

Officeequipment,furnitureandfittings 78 8 (1) - - - 85

Computersoftwareandhardware 183 26 (1) - - - 208

Motorvehicles 35 2 (2) - - - 35

14,861 1,335 (19) 5 - - 16,182

Includedintheaccumulateddepreciationandimpairmentlossesofproperty,plantandequipmentareimpairmentlossescarriedforwardofRM271million.

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3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

Group2015

At 1.1.2015

RM MilAdditions

RM Mil


RM MilTransfers

RM Mil

Translationexchange

differenceRM Mil

At 31.12.2015

RM Mil

At cost:

Leaseholdland 291 - - - - 291

Buildings 1,396 1 (9) 8 - 1,396

Plantandequipment 21,445 121 (42) 635 - 22,159

Officeequipment,furnitureandfittings 91 2 (1) 10 - 102

Computersoftwareandhardware 243 4 (5) 34 - 276

Motorvehicles 36 6 (1) - - 41

Projects-in-progress 4,376 2,760 (1) (687) 745 7,193

27,878 2,894 (59) - 745 31,458

At 1.1.2015

RM Mil

Chargefor the year

RM Mil


RM MilTransfers

RM Mil

Translationexchange

differenceRM Mil

At 31.12.2015

RM Mil


Leaseholdland 73 4 - - - 77

Buildings 553 32 (3) - - 582

Plantandequipment 12,728 1,207 (29) - - 13,906

Officeequipment,furnitureandfittings 69 10 (1) - - 78

Computersoftwareandhardware 165 23 (5) - - 183

Motorvehicles 35 1 (1) - - 35

13,623 1,277 (39) - - 14,861

Includedintheaccumulateddepreciationandimpairmentlossesofproperty,plantandequipmentwereimpairmentlossescarriedforwardofRM266million.

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2016 2015

Group RM Mil RM Mil

Carrying amount:

Leaseholdland

-withunexpiredleaseperiodofmorethan50years 77 78

-withunexpiredleaseperiodoflessthan50years 133 136

210 214

Buildings 834 814

Plantandequipment 7,574 8,253

Officeequipment,furnitureandfittings 31 24

Computersoftwareandhardware 100 93

Motorvehicles 9 6

Projects-in-progress 9,785 7,193

18,543 16,597

Includedintheproperty,plantandequipmentoftheGroupareplantandequipmentwithcarryingamountofRM128million(2015:RM162million)underfinanceleasearrangements.

Impairment review

Duringtheyear,duetothedeclineinsalepricesofproducts,animpairmenttestwasperformedononeoftheGroup’smethanevaluechainwhichcomprisesaplantcurrentlyundercommissioningandclassifiedasprojects-in-progresswithacarryingvalueamountingtoRM6,893million(2015:RM6,108million).Therecoverablevalueofthisplantwasarrivedatusingvalue-in-usemethod,determinedbydiscountingfuturecashflowsprojectedtobegeneratedbytheplantbasedonvariousassumptions.Whiletheestimatedrecoverablevalueishigherthanthecarryingvalueoftheplant,thereareinherentuncertaintiesovertheassumptionssincetheplantiscurrentlyatcommissioningstage.

Theassumptionsincludeprojectedproductionandsalesvolume,andpricewhichareparticularlysensitive,uncertainorrequiresignificant

judgmentandhence,havesignificantriskswhichcouldresultinanimpairmentlosstothecarryingamountoftheplantwithinthenextfinancialyear.Inparticular:

i. Adeclineofmorethan13%oftheprojectedsalesvolumewouldtriggeranimpairmentloss;and

ii. Adeclineofmorethan13%oftheprojectedpricewouldtriggeranimpairmentloss.

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Company2016

At 1.1.2016

RM 000Additions

RM 000


RM 000Transfers

RM 000

At 31.12.2016

RM 000

At cost:

Officeequipment,furnitureandfittings 996 43 - 29 1,068

Computersoftwareandhardware 13,801 213 - 103 14,117

Motorvehicles 369 - - - 369

Projects-in-progress 3,554 3,995 (3,155) (132) 4,262

18,720 4,251 (3,155) - 19,816

At 1.1.2016

RM 000

Charge forthe yearRM 000


RM 000Transfers

RM 000

At 31.12.2016

RM 000


Officeequipment,furnitureandfittings 148 208 - - 356

Computersoftwareandhardware 4,786 2,798 - - 7,584


5,303 3,006 - - 8,309

2015

At 1.1.2015

RM 000Additions

RM 000


RM 000Transfers

RM 000

At 31.12.2015

RM 000

At cost:

Officeequipment,furnitureandfittings 27 59 - 910 996

Computersoftwareandhardware 12,485 - - 1,316 13,801


Projects-in-progress 3,518 12,098 (9,836) (2,226) 3,554

16,399 12,157 (9,836) - 18,720

At 1.1.2015

RM 000

Charge forthe yearRM 000


RM 000Transfers

RM 000

At 31.12.2015

RM 000


Officeequipment,furnitureandfittings 1 147 - - 148

Computersoftwareandhardware 2,142 2,644 - - 4,786

Motorvehicles 323 46 - - 369

2,466 2,837 - - 5,303

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2016 2015

Company RM 000 RM 000

Carrying amount:

Officeequipment,furnitureandfittings 712 848

Computersoftwareandhardware 6,533 9,015

Motorvehicles - -

Projects-in-progress 4,262 3,554

11,507 13,417

4. INVESTMENTS IN SUBSIDIARIES

2016 2015

Company RM Mil RM Mil

Investmentsinunquotedshares,atcost 17,402 16,430

Less:Impairmentlosses (521) (242)

16,881 16,188

Duringtheyear,theGroupcancelledanelastomersprojectwhichwastobeundertakenbyasubsidiaryaspartoftheRAPIDprojectinPengerang,Johor.Consequently,theCompanyhasimpairedthetotalinvestmentinthesubsidiaryamountingtoRM255million.

Summarisedfinancialinformationofnon-controllinginterestshasnotbeenincludedasthenon-controllinginterestsofthesubsidiariesarenotindividuallymaterialtotheGroup.

DetailsofsubsidiariesarestatedinNote26tothefinancialstatements.

5. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES

Group Company

2016 2015 2016 2015

RM Mil RM Mil RM Mil RM Mil

Investmentsinunquotedshares,atcost 1,028 944 1,159 1,075

Shareofpost-acquisitionprofitsandreserves 335 336 - -

1,363 1,280 1,159 1,075

SummarisedfinancialinformationhasnotbeenincludedasthejointventuresandassociatesarenotindividuallymaterialtotheGroup.

DetailsofjointventuresandassociatesarestatedinNote27andNote28tothefinancialstatementsrespectively.

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6. INTANGIBLE ASSET

Group

At 1.1.2015

RM Mil

Addition/charge for

the yearRM Mil

At 31.12.2015/

1.1.2016RM Mil

Addition/charge for

the yearRM Mil

At 31.12.2016

RM Mil

Licence:

-Atcost 23 - 23 - 23

-Accumulatedamortisation 16 2 18 2 20

2016 2015

RM Mil RM Mil

Carryingamount 3 5

7. LONG TERM RECEIVABLES

Group Company

2016 2015 2016 2015


Prepayments 83 8 - -

Loansduefromsubsidiaries - - 7,011 -

83 8 7,011 -

IncludedintheCompany’sloansduefromsubsidiariesareloansamountingtoRM7,011millionorUSD1,563million(2015:Nil),whichbearinterestratesrangingfrom1.74%to4.52%(2015:Nil)perannum.Settlementoftheloansisnotexpectedwithinthenexttwelvemonths.

8. DEFERRED TAX

Deferred tax liabilitiesandassetsareoffsetwhen there isa legallyenforceable right tosetoffcurrent taxassetsagainstcurrent taxliabilitiesandwhenthedeferredtaxesrelatetothesametaxationauthority.Theamountsdeterminedafterappropriateoffsettingareasfollows:

2016 2015

Group RM Mil RM Mil

Deferred tax assets

Deferredtaxliabilities 456 408

Deferredtaxassets (918) (797)

(462) (389)

Deferred tax liabilities

Deferredtaxliabilities 1,310 1,387

Deferredtaxassets (436) (573)

874 814

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8. DEFERRED TAX (CONTINUED)

Thecomponentsandmovementsofdeferredtaxliabilitiesandassetsduringtheyearpriortooffsettingareasfollows:

Group2016

At 1.1.2016

RM Mil

Charged/(Credited) toprofit or loss

(Note 23)RM Mil

Translationexchange

differenceRM Mil

At 31.12.2016

RM Mil


Property,plantandequipment 1,795 (30) - 1,765

Others - 1 - 1

1,795 (29) - 1,766

Deferred tax assets

Property,plantandequipment (67) 4 - (63)

Unusedreinvestmentallowances (8) 1 - (7)

Unusedinvestmenttaxallowances (1,043) 123 - (920)

Unusedtaxlosses (116) 1 - (115)

Unabsorbedcapitalallowances - (6) - (6)

Pre-commencement expenses (45) (100) (10) (155)

Others (91) 3 - (88)

(1,370) 26 (10) (1,354)

425 (3) (10) 412

IncludedintheabovenetdeferredtaxassetisanamountofRM251million(2015:RM252million)whichhasbeenrecognisedbasedontheassumptionthatcertainsubsidiarieswillgeneratesufficientprofitsupontheimplementationoftollingarrangementswithintheGroup’sintegratedvaluechain.

Thedeferred taxassetsonpre-commencementexpensesare in relation to taxbenefitswhichhavebeenapprovedby theMinistryofFinance.

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8. DEFERRED TAX (CONTINUED)

Group2015

At 1.1.2015

RM Mil

Charged/(Credited)to profit or loss

(Note 23)RM Mil

Translationexchange

differenceRM Mil

At 31.12.2015

RM Mil


Property,plantandequipment 1,867 (72) - 1,795

Others 2 (2) - -

1,869 (74) - 1,795

Deferred tax assets

Property,plantandequipment (68) 1 - (67)

Unusedreinvestmentallowances (8) - - (8)

Unusedinvestmenttaxallowances (1,078) 35 - (1,043)

Unusedtaxlosses (160) 44 - (116)

Unabsorbedcapitalallowances (15) 15 - -

Pre-commencement expenses - (41) (4) (45)

Others (74) (17) - (91)

(1,403) 37 (4) (1,370)

466 (37) (4) 425

Unrecognised deferred tax assets

Nodeferredtaxhasbeenrecognisedforthefollowingitems(statedatgross):

2016 2015

Group RM Mil RM Mil

Unusedtaxlosses 603 492

Unusedinvestmenttaxallowances 115 38

Unabsorbedcapitalallowance 21 -

739 530

Theunusedtaxlosses,unusedinvestmenttaxandcapitalallowancesdonotexpireunderthecurrenttaxlegislation.Deferredtaxassetshavenotbeenrecognisedinrespectoftheseitemsbecauseitisnotprobablethatfuturetaxableprofitwillbeavailableagainstwhichthesubsidiariescanutilisethebenefits.

Company2016

At1.1.2016

RM Mil


(Note 23)RM Mil

At31.12.2016

RM Mil


Others 2 (1) 1

2015

At 1.1.2015

RM Mil


(Note 23)RM Mil

At 31.12.2015

RM Mil


Others 2 - 2

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9. TRADE AND OTHER INVENTORIES

2016 2015

Group RM Mil RM Mil

Petrochemicalproducts:

Rawmaterials 19 14

Finishedgoods 574 530

Stores,sparesandothers 790 860

1,383 1,404

10. TRADE AND OTHER RECEIVABLES

Group Company

2016 2015 2016 2015


Tradereceivables 10.1 1,475 1,220 - -

AmountduefromPETRONAS 10.2

-Non-trade 40 108 3 1

Amountduefromsubsidiaries 10.3

-Non-trade - - 140 81

-Loansandadvances 11 - - - 4,215

-Dividendreceivable - - 296 -

Amountduefromjointventuresandassociates 10.3

-Trade 184 83 - -

-Non-trade 2 2 - 1

Amountduefromrelatedcompanies 10.3

-Trade 152 103 - -

-Non-trade 106 6 99 1

Otherreceivables,depositsandprepayments 665 162 14 82

Derivativeassets 11 15 9 1 -

2,639 1,693 553 4,381

Less:Impairmentlosses

-Otherreceivables,depositsandprepayments - (1) - -

2,639 1,692 553 4,381

10.1 IncludedintradereceivablesisanamountduefromcorporateshareholderofasubsidiaryofRM61million(2015:RM55million).

10.2 IncludedinamountduefromPETRONASisGSTrecoverableofRM22million(2015:RM61million)fortheGroupandRM3million(2015:RM1million)fortheCompany.

10.3 Tradeamountisunsecuredandundernormaltradeterms.Non-tradeamountisunsecuredandrepayableondemand.

Therewerenotradereceivablesandtradepayablesthatweresetoffforpresentationpurposes.

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11. DERIVATIVE ASSETS/(LIABILITIES)

Group Company

2016 2015 2016 2015


Derivative assets

Current

Forwardforeignexchangecontracts 15 9 1 -

Included within:

Tradeandotherreceivables 10 15 9 1 -

Derivative liabilities

Current

Forwardforeignexchangecontracts (17) (720) (1) (715)

Included within:

Tradeandotherpayables 19 (17) (720) (1) (715)

Inthepreviousyear, includedintheGroup’sandtheCompany’sderivative liabilitiesareforwardforeignexchangecontractsenteredinrelationtoaloanduefromasubsidiaryamountingtoRM4,215million(Note10).

Inthenormalcourseofbusiness,theGroupandtheCompanyenterintoderivativefinancialinstrumentstomanageitsnormalbusinessexposuresinrelationtoforeigncurrencyexchangeratesinaccordancewiththeGroup’sandtheCompany’sriskmanagementpoliciesandobjectives.

12. FUND INVESTMENTS

Group Company

2016 2015 2016 2015


Loans and receivables

Islamicdepositswithlicensedfinancialinstitutions - 622 - 622

Inthepreviousyear,fundinvestmentsarosefromplacementswithgovernmentrelatedfinancial institutionswithoriginalmaturitiesofmorethanthreemonths.

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13. CASH AND CASH EQUIVALENTS

Group Company

2016 2015 2016 2015


Islamicdepositswithlicensedfinancialinstitutions - 309 - 309

CashwithPETRONASIntegratedFinancialSharedService Centre(IFSSC) 7,230 8,368 1,254 1,484

Cashandbankbalances 173 30 - -

7,403 8,707 1,254 1,793

TheGroup’sandtheCompany’scashandbankbalancesareheldinanIn-HouseAccount(IHA)managedbyPETRONASIFSSCtoenablemoreefficientcashmanagementfortheGroupandfortheCompany.

Included in cashwith PETRONAS IFSSC and cash and bank balances for the Group and the Company are interest-bearing balancesamountingtoRM7,331million(2015:RM8,395million)andRM1,254million(2015:RM1,484million)respectively.

14. SHARE CAPITAL

Group and Company

2016 2015

RM Mil RM Mil

Authorised:

15,000,000,000ordinarysharesofRM0.10each 1,500 1,500

Issued and fully paid:

8,000,000,000ordinarysharesofRM0.10each 800 800

15. RESERVES

Merger reserve

Group

Merger reserve arose fromdifferences between the nominal value and share premiumof ordinary shares issued by the Company asconsideration for the acquisitionof companies that are accountedusing themergermethodof accountingand thenominal valueofordinarysharesandsharepremiumofthecompanies.

Company

MergerreliefoftheCompanyispremiumarisingfromissuanceofsharesfortheacquisitionofsubsidiariesthatfulfilledtheconditionsofSection60(4)oftheCompaniesAct,1965inMalaysia.

Foreign currency translation reserve

ForeigncurrencytranslationreservecomprisesallforeigncurrencydifferencesarisingfromthetranslationofthefinancialstatementsofsubsidiarieswhosefunctionalcurrenciesarenotRinggitMalaysia,andtheGroup’snetinvestmentinforeignoperations.

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15. RESERVES (CONTINUED)

Other reserves

Otherreservescompriseprimarilycapitalredemptionreservecreateduponredemptionofpreferenceshares,andtheGroup’sshareofitsjointventureandassociatecompanies’reserves.

16. NON-CONTROLLING INTERESTS

Thisconsistsofthenon-controllinginterests’proportionofequityandreservesofpartly-ownedsubsidiaries.

17. OTHER LONG TERM LIABILITIES AND PROVISIONS

Group Company

2016 2015 2016 2015


Finance lease liabilities 17.1 137 183 - -

Provisions 17.2 162 162 76 165

Otherpayables 9 10 - -

308 355 76 165

17.1 Finance lease liabilities

Group

2016 2015

Note

Minimum leasepayments

RM MilInterestRM Mil

PrincipalRM Mil

Minimum leasepayments

RM MilInterestRM Mil

PrincipalRM Mil

Lessthan1year 19.1 55 9 46 55 11 44

Between1to2years 55 7 48 55 9 46

Between2to5years 95 6 89 142 13 129

Morethan5years - - - 8 - 8

205 22 183 260 33 227

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17. OTHER LONG TERM LIABILITIES AND PROVISIONS (CONTINUED)

17.2 Provisions

2016 2015

Group Note RM Mil RM Mil

Non-current 162 162

Current 19 38 45

200 207

Themovementofprovisionsisasfollows:

RM Mil

At 1.1.2016 207

Provisionsmade 87

Provisionsreversed (63)

Provisionsutilised (41)

Unwindingofdiscountfactor 10

At 31.12.2016 200

TheGroup’sprovisionscomprise:

i. Provisions fordecommissioningactivitiesandonerouscontracts in relation to thediscontinuationof theGroup’svinylandpolypropylenebusinesses.

Provision for decommissioning activities includes dismantling/demolishing and removal of equipment, structures andfoundation,aswellassiteremediation.

Provisionforonerouscontractsisinrelationtoterminationofcontractualobligationwithcommittedcharges.

Theprovisionshavebeenmadebasedonpresent valueofestimateddecommissioningamountandnegotiatedsettlementamountpayableoveraperiodrangingfrom2to5years(2015:2to6years)usingadiscountrateof8.6%(2015:8.6%).

ii. Provisionfordecommissioningofproperty,plantandequipmentinrelationtoasubsidiary’sobligationtodecommissionandremove all property, plant and equipment, and to restore land subleased to its original condition upon expiry in 2040. Thecorrespondingassetof anamount equivalent to theprovision is alsocreatedandwill bedepreciatedover the termof thesublease.

Theprovisionhasbeenmadebasedonpresentvalueofestimateddecommissioningamountusingadiscountrateof4.8%.

2016 2015

Company Note RM Mil RM Mil

Non-current 76 165

Current 19 32 32

108 197

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17. OTHER LONG TERM LIABILITIES AND PROVISIONS (CONTINUED)

17.2 Provisions (continued)

Themovementofprovisionsisasfollows:

RM Mil

At 1.1.2016 197

Provisionsreversed (74)

Provisionsutilised (24)

Unwindingofdiscountfactor 9

At 31.12.2016 108

TheCompany’sprovisioncomprisesprovisionforfinancialassistanceinrelationtoissuanceofredeemablepreferenceshares(RPS)tomeetasubsidiary’sobligationinrespectofdecommissioningactivitiesandotherrelatedexpenses.Theprovisionhasbeenmadebasedonpresentvalueofestimatedfundingrequirementsfordecommissioningcostsandsettlementofonerouscontractsoveraperiodof5years(2015:6years)usingadiscountrateof8.6%(2015:8.6%).

18. BORROWINGS

2016 2015

Group RM Mil RM Mil

Revolvingcreditfacility-unsecured 23 30

Revolvingcreditfacilityrelatestoafacilitygrantedbyalicensedfinancialinstitutiontoasubsidiary,whichbearsinterestatanaveragerateof4.36%(2015:4.45%)perannum.

19. TRADE AND OTHER PAYABLES

Group Company

2016 2015 2016 2015


Tradepayables 66 155 - -

Otherpayables 19.1 1,112 956 128 43

AmountduetoPETRONAS 19.2

-Trade 345 288 - -

-Non-trade 118 240 19 58

Amountduetosubsidiaries 19.2

-Non-trade - - 111 37

Amountduetorelatedcompanies 19.2

-Trade 329 258 - -

-Non-trade 183 240 1 5

Provisions 17.2 38 45 32 32

Derivativeliabilities 11 17 720 1 715

2,208 2,902 292 890

AR16

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19. TRADE AND OTHER PAYABLES (CONTINUED)

19.1 IncludedinotherpayablesfortheGroupisthecurrentportionoffinanceleaseliabilitiesamountingtoRM46million(2015:RM44million).

19.2 Tradeamountisunsecuredandundernormaltradeterms.Non-tradeamountisunsecuredandrepayableondemand.

20. REVENUE

Group Company

2016 2015 2016 2015


Salesofpetrochemicalproducts,net 13,808 13,490 - -

Dividendincome - - 4,401 2,796

Others 52 46 - -

13,860 13,536 4,401 2,796

21. OPERATING PROFIT

Group Company

2016 2015 2016 2015


Includedinoperatingprofitarethefollowingcharges:

Auditors’remuneration* 2 3 1 1

Amortisationofintangibleassets 6 2 2 - -

Depreciationofproperty,plantandequipment 3 1,335 1,277 3 3

Lossonforeignexchange:

-realised - 374 3 6

-unrealised 2 67 - -

Lossondisposalofproperty,plantandequipment 4 13 - -

Rentalof:

-plant,machinery,equipmentandmotorvehicles 49 50 3 2

-landandbuildings 43 49 15 15

Staffcosts:

-wages,salariesandothers 758 714 84 109

-contributionstoEmployeesProvidentFund 104 103 16 18

Impairmentlosseson:

-property,plantandequipment 3 5 - - -

-investmentsinsubsidiaries - - 255 -

Inventorieswrittendowntonetrealisablevalue 2 21 - -

Property,plantandequipmentwrittenoff 3 244 5 - -

Provisionforplantdecommissioning 17 4 - - -

170

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21. OPERATING PROFIT (CONTINUED)

Group Company

2016 2015 2016 2015


andcredits:

Gainonforeignexchange:

- realised 17 361 - -

- unrealised - 36 416 2

Dividendincome:

- subsidiaries - - 4,339 2,642

- jointventuresandassociates - - 62 154

Interestincome:

- others 261 360 64 101

- subsidiaries - - 220 108

Managementfee - - 77 66

Reversalof:

- impairmentlossesoninvestmentinasubsidiary - - - 40

- provisionsforplantdecommissioning andonerouscontracts 17 63 65 - -

- provisionforfinancialassistancetoasubsidiary 17 - - 74 29

Gainondisposalofproperty,plantandequipment - 2 - -

Gainonderivativefinancialinstruments - 5 - -

* Theauditors’remunerationincludesthefollowing:

Group Company

2016 2015 2016 2015

RM 000 RM 000 RM 000 RM 000

Statutoryaudit

KPMG 775 761 150 150

Otherauditors 616 497 - -

Non-auditfees

KPMG 582 650 540 650

Otherauditors 140 1,000 118 103

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22. NET FINANCING (INCOME)/COSTS

Group Company

2016 2015 2016 2015


Unwindingofdiscountfactorforotherlongtermliabilitiesandprovisions 21 29 9 16

Unrealisedlossonforwardforeignexchangecontract - 618 - 618

Netrealisedgainonforwardforeignexchangecontract (160) - (160) -

Unrealisedforeignexchangegainonloantoasubsidiary - (636) - (636)

Realisedforeignexchangelossonloantoasubsidiary 91 - 91 -

Interestonrevolvingcreditfacility 1 - - -

(47) 11 (60) (2)

Unrealisedand realisedgainor losson forward foreignexchangecontractarose from forward foreignexchangecontractsentered inrelationtoloanduefromasubsidiary.

23. TAX EXPENSE

Group Company

2016 2015 2016 2015


Current tax expenses

Current year 913 841 52 28

Overprovisioninprioryear (22) (62) (1) (14)

891 779 51 14

Deferred tax expenses

Originationandreversaloftemporarydifferences (64) (74) (1) -

Underprovisioninprioryear 61 37 - -

(3) (37) (1) -

888 742 50 14

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23. TAX EXPENSE (CONTINUED)

Areconciliationofincometaxapplicabletoprofitbeforetaxationatthestatutoryincometaxratetoincometaxexpenseattheeffectiveincometaxrateisasfollows:

2016 2015

Group % RM Mil % RM Mil

Profitbeforetaxation 4,110 3,833

TaxationatMalaysianstatutorytaxrate 24 986 25 958

Non-deductibleexpenses,netofnon-assessableincome 1 60 2 61

Taxexemptincomeandincentives (1) (61) (2) (83)

Effectofchangesintaxrates* - - - (5)

EffectoflowertaxrateunderGlobalIncentiveforTrading(GIFT) (4) (170) (3) (114)

Effectofnetdeferredtaxbenefitsnotrecognised 1 50 - 3

Recognitionofpreviouslyunrecognisedtaxlosses (1) (60) (1) (27)

Others 1 44 (1) (26)

21 849 20 767

Under/(over)provisioninprioryears,net 39 (25)

Taxexpense 888 742

* Inthepreviousyear,effectofchangesintaxratesarosefromthedifferencebetweencorporateincometaxrateof25%anddeferredtaxrateof24%beingtheratesubstantivelyenactedbytheGovernmentinBudget2014announcement.

2016 2015

Company % RM Mil % RM Mil

Profitbeforetaxation 4,881 2,944

TaxationatMalaysianstatutorytaxrate 24 1,171 25 736

Non-deductibleexpenses,netofnon-assessableincome (2) (122) - 8

Taxexemptincome (20) (998) (24) (716)

2 51 1 28

Overprovisioninprioryears (1) (14)

Taxexpense 50 14

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24. BASIC EARNINGS PER ORDINARY SHARE

Basic earnings per ordinary share

Thecalculationofbasicearningsperordinaryshareforyearended31December2016wasbasedontheprofitattributabletoshareholdersoftheCompanyandnumberofordinarysharesoftheCompanyasfollows:

Group 2016 2015

In RM million

ProfitfortheyearattributabletoshareholdersoftheCompany 2,932 2,782

In millions of shares

Numberofsharesissuedat31December 8,000 8,000

In sen

Basicearningsperordinaryshare 36.7 34.8

Diluted earnings per ordinary share

Nodilutedearningspershareisdisclosedinthesefinancialstatementsasthereisnodilutivepotentialordinaryshare.

25. DIVIDENDS

Sen per share Total amount Date of payment

Group and Company RM Mil

2016

Secondinterimordinaryforfinancialyearended31December2015 10 800 23 March 2016

Firstinterimordinaryforfinancialyearended31December2016 7 560 7 September 2016

1,360

2015

Secondinterimordinaryforfinancialyearended31December2014 8 640 24March2015

Firstinterimordinaryforfinancialyearended31December2015 8 640 9 September 2015

1,280

Afterthefinancialyearend,thefollowingdividendwasapprovedbytheDirectors:

Sen per share Total amount

RM Mil

Secondinterimordinaryforfinancialyearended31December2016 12 960 Thedividendwillberecognisedandaccountedforinequityasanappropriationofretainedprofitsinthesubsequentfinancialyear.

TheDirectorsdonotrecommendanyfinaldividendtobepaidforthefinancialyearunderreview.

174

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26. SUBSIDIARIES AND ACTIVITIES

TheGroupincludesthefollowingsubsidiaries:

Name of companyEffective ownership

interest (%)Country of

incorporation Principal activities2016 2015

PETRONASChemicalsAmmonia Sdn.Bhd.*

100 100 Malaysia Productionandsaleofammonia,syngasandcarbonmonoxide.

PETRONASChemicalsDerivativesSdn.Bhd.*

100 100 Malaysia Production and sale of ethylene oxide derivatives,propylenederivativesandrelatedchemicalproducts.

PETRONASChemicalsFertiliserKedahSdn.Bhd.*

100 100 Malaysia Productionandsaleofurea,ammoniaandmethanol.

PETRONASChemicalsFertiliserSabahSdn.Bhd.

100 100 Malaysia Production and sale of ammonia and urea. Thecompanyiscurrentlycommissioningitsplant.

PETRONASChemicalsGlycols Sdn.Bhd.*

100 100 Malaysia Productionandsaleofethyleneoxide,ethyleneglycolandotherrelatedby-products.

PETRONASChemicalsMarketing Sdn.Bhd.

100 100 Malaysia Marketingofpetrochemicalproducts.

PETRONASChemicalsMarketing(Labuan)Ltd.

100 100 Malaysia Marketingofpetrochemicalproducts.

PCM(Thailand)CompanyLimited* 100 100 Thailand Marketingofpetrochemicalproducts.

PCM(China)CompanyLimited** 100 100 China Marketingofpetrochemicalproducts.

PETRONASChemicalsMethanol Sdn.Bhd.

100 100 Malaysia Productionandsaleofmethanol.

PETRONASChemicalsMTBE Sdn.Bhd.

100 100 Malaysia Production and sale of methyl tertiary butyl ether(MTBE),propyleneandn-butane.

PETRONASChemicalsPolyethyleneSdn.Bhd.

100 100 Malaysia Processingofethyleneintopolyethylene.

KertihPortSdn.Bhd.* 100 100 Malaysia Owning, operating and managing Kertih MarineFacilities.

PolypropyleneMalaysiaSdn.Bhd. 100 100 Malaysia Production and sale of polypropylene and itsderivatives.Thecompanyhasceasedproduction.

VinylChloride(Malaysia)Sdn.Bhd.* 100 100 Malaysia Productionandsaleofvinylchloridemonomer(VCM)and polyvinyl chloride (PVC). The company hasceasedproduction.

AR16

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26. SUBSIDIARIES AND ACTIVITIES (CONTINUED)



incorporation Principal activities2016 2015

PRPCGlycolsSdn.Bhd. 100 100 Malaysia Thecompanyhastransferreditsassetsandliabilitiesto a related company and remained dormantthereafter.

PRPCPolymersSdn.Bhd. 100 100 Malaysia Productionandsaleofproductswithinethane,propanechainsandethanederivatives.Thecompanyhasyettoconstructitsplant.

PRPCElastomersSdn.Bhd. 100 100 Malaysia The company has ceased operation and remaineddormantthereafter.

PTPCMKimiaIndonesia 100 - Indonesia Marketing of petrochemical products. The companyhasnotcommencedoperationduringtheyear.

PETRONASChemicalsOlefins Sdn.Bhd.*

88 88 Malaysia Productionandsaleofethylene,propyleneandotherhydrocarbonby-products.

PETRONASChemicalsEthylene Sdn.Bhd.

87.50 87.50 Malaysia Processingofethaneintoethylene.

PETRONASChemicalsAromatics Sdn.Bhd.

70 70 Malaysia Productionandsaleofparaxylene,benzeneandotherby-products.

ASEANBintuluFertilizerSdn.Bhd. 63.47 63.47 Malaysia Processingofnaturalgasintoureaandammonia.

PETRONASChemicalsLDPESdn.Bhd.*

60 60 Malaysia Production and sale of low-density polyethylenepellets(LDPE).

PCMChemicalIndiaPrivateLimited* 0.01 0.01 India Marketingandbusinesspromotionalservices.

* AuditedbyfirmsofauditorsotherthanKPMG.** AuditedbyamemberfirmofKPMGInternational.

Duringtheyear,theCompany,viaitswholly-ownedsubsidiary,PETRONASChemicalsMarketingSdn.Bhd.,incorporatedawholly-ownedsubsidiary,PTPCMKimiaIndonesia(PCMI)inIndonesia.

During the year,PETRONASChemicalsEthyleneSdn.Bhd. andPETRONASChemicalsPolyethyleneSdn.Bhd. changed their principalactivitiesfromproductionandsalesofethylenetoprocessingofethaneintoethylene,andfromproductionandsalesofpolyethylenetoprocessingofethyleneintopolyethylenerespectively.

176

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27. JOINT VENTURES AND ACTIVITIES

TheGroupincludesthefollowingjointventures:



incorporation Nature of relationship2016 2015

KertihTerminalsSdn.Bhd. 40 40 Malaysia ProvidesbulkchemicalstorageandhandlingservicestotheGroup.

BPPETRONASAcetylsSdn.Bhd. 30 30 Malaysia PurchasescarbonmonoxidefeedstockfromtheGroupforproductionandsaleofaceticacid.

28. ASSOCIATES AND ACTIVITIES

TheGroupincludesthefollowingassociates:



incorporation Nature of relationship2016 2015

BASFPETRONASChemicalsSdn.Bhd. 40 40 Malaysia Purchasespropyleneandn-butanefeedstockfromtheGroupforproduction,marketingandsaleofacrylic,oxoandbutanediolproducts.

IdemitsuSM(Malaysia)Sdn.Bhd. 30 30 Malaysia Purchases ethylene feedstock from the Group forproduction,marketingandsaleofstyrenemonomer.

MalaysianNPKFertilizerSdn.Bhd. 20 20 Malaysia PurchasesureafeedstockandutilitiesfromtheGroupforproductionandsaleofNPKfertiliserproducts.

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29. CAPITAL COMMITMENTS

Outstandingcommitmentsinrespectofcapitalexpenditurenotprovidedforintheconsolidatedfinancialstatementsattheendofthereportingyearare:

2016 2015

Group RM Mil RM Mil

Property, plant and equipment

Approvedandcontractedfor 6,216 7,843

Approvedbutnotcontractedfor 4,719 9,401

10,935 17,244

IncludedinthecapitalcommitmentsareRM9,302million(2015:RM14,666million)relatingtodevelopmentofpetrochemicalplantswhicharepartoftheRAPIDprojectinPengerang,JohorandRM864million(2015:RM1,458million)forthenewworldscalefertiliserplantinSipitang,Sabah.

30. RELATED PARTIES DISCLOSURES For thepurposesof thesefinancialstatements,partiesareconsidered tobe related to theGroupor theCompany if theGroupor the

Companyhastheability,directlyorindirectly,tocontrolorjointlycontrolthepartyorexercisesignificantinfluenceoverthepartyinmakingfinancialandoperatingdecisions,orviceversa,orwheretheGrouportheCompanyandthepartyaresubjecttocommoncontrol.Relatedpartiesmaybeindividualsorotherentities.

Relatedpartiesalsoincludekeymanagementpersonneldefinedasthosepersonshavingauthorityandresponsibilityforplanning,directingandcontrollingtheactivitiesoftheGroupeitherdirectlyorindirectly.ThekeymanagementpersonnelincludealltheDirectorsoftheGroup,andcertainmembersofseniormanagementoftheGroup.

TheGroup’sandtheCompany’srelatedpartiesincludesubsidiaries,jointventures,associatesaswellastheGovernmentofMalaysiaanditsrelatedentities.

(a) Key management personnel compensation

2016 2015

Group and Company RM 000 RM 000

Directors remuneration:

- Fees 773 718

TheCompanypaidmanagementfeestotheholdingcompanyinrelationtoservicesofkeymanagementpersonneloftheCompanyasdisclosedinNote30(b).

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30. RELATED PARTIES DISCLOSURES (CONTINUED)

(b) Significant transactions with related parties

Inadditiontothetransactionsdetailedelsewhereintheconsolidatedfinancialstatements,theGrouphadthefollowingtransactionswithrelatedpartiesduringtheyear:

Group Note2016

RM Mil2015

RM Mil

PETRONAS:

Purchaseofprocessedgasandnaturalgas (3,176) (3,075)

Managementfees 30.1 (9) (10)

Centralisedmanagementservices (39) (39)

Securitycharges (17) (16)

Information,communicationandtechnologycharges (73) (61)

Rentalofofficespace (21) (22)

InterestincomefromPETRONASIFSSC 250 328

Projectexpenses (20) (401)

Subsidiaries of PETRONAS:

Salesofpetrochemicalproducts 881 1,037

Purchaseofheavynaphtha (1,458) (1,706)

Purchaseofprocessedgasandnaturalgas (125) (82)

Purchaseofutilitiesandmaterialsandsupplies (755) (663)

Traininganddevelopmentrelatedcosts (20) (28)

Purchaseofwarehouseandtransportationservices (80) (76)

Provisionofoperatingandmaintenanceservices 2 3

Purchaseofmarinediesel (2) (5)

Technicalretainerfee (56) (61)

Projectexpenses (355) (273)

Joint ventures and associates of the Group:

Salesofpetrochemicalproducts 1,312 1,316

Renderingofservices 17 14

Purchaseofpetrochemicalproducts (28) (34)

Purchaseofwarehouseandtransportationservices (161) (144)

Corporate shareholder of the Group: 30.2

Salesofpetrochemicalproducts 552 594

Purchaseofpetrochemicalproducts - (10)

Managementfees (1) (1)

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Sectionsix



(b) Significant transactions with related parties (continued)

Group2016

RM Mil2015

RM MilNote

Government related entities:

Salesofpetrochemicalproducts 94 104

Interestincome 16 13

Purchaseofelectricity (105) (100)

30.1ManagementfeespaidtoholdingcompanyrelatetopaymentforservicesofcertainkeymanagementpersonneloftheGroup.

30.2 Alltheamountsoutstandingareunsecuredandexpectedtobesettledwithcash.Thebalancesmayalsobesubjectedtointerestrateat8.15%(2015:8.35%)perannum.

Company Note2016

RM 0002015

RM 000

PETRONAS:

FeesforrepresentationontheBoardofDirectors 30.3 (229) (229)

Managementfees 30.4 (1,282) (1,513)

Centralisedmanagementservices (2,495) (753)

Information,communicationandtechnologycharges (7,377) (5,682)

Rentalofofficespace (14,847) (14,307)

InterestincomefromPETRONASIFSSC 55,151 68,168

Subsidiaries:

Interestincome 219,906 107,920

Dividendincome 4,338,772 2,642,570

Managementfeeincome 77,435 66,350

Loanandadvances (2,480,573) (1,771,119)

Joint ventures and associates:

Dividendincome 62,081 153,699

Government related entities:

Interestincome 15,581 13,359

180

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GROUP BERHAD



(b) Significant transactions with related parties (continued)

30.3 FeesforrepresentationontheBoardofDirectorspaiddirectlytoholdingcompanyrelatetopaymentoffeesforDirectorswhoareappointeesoftheholdingcompany.

30.4 ManagementfeespaidtoholdingcompanyrelatetopaymentforservicesofcertainkeymanagementpersonneloftheCompany.

Informationregardingoutstandingbalancesarisingfromrelatedpartytransactionsasat31December2016isdisclosedinNotes10,13,17and19.

TheDirectorsoftheCompanyareoftheopinionthattheabovetransactionshavebeenenteredintointhenormalcourseofbusinessandhavebeenestablishedonacommercialbasis.

OtherrelatedpartytransactionshavenotbeenincludedasthetransactionsarenotsignificanttotheGroup.

31. OPERATING SEGMENTS

Formanagementpurposes,theGrouphastworeportablesegments,asdescribedbelow,whicharetheGroup’sstrategicbusinessunits.Thestrategicbusinessunitsofferdifferentproductsandservices,andaremanagedseparatelybecausetheyrequiredifferenttechnologyandmarketingstrategies.ThefollowingsummarydescribestheoperationsineachoftheGroup’sreportablesegments:

• OlefinsandDerivatives–activitiesincludemanufacturingandmarketingofawiderangeofolefinandpolymerproducts,whichareusedasbasicfeedstockforotherproducts,tointermediateproductsincludingbasicandhighperformancechemicals.

• FertilisersandMethanol–activitiesincludemanufacturingandmarketingmethanolandarangeofnitrogen,phosphateandcompoundfertilisers.

Managementmonitorstheoperatingresultsofthebusinessunitsseparatelyforthepurposeofmakingdecisionsaboutresourceallocationandperformanceassessment.Segmentperformanceisevaluatedbasedonoperatingprofitor lossandismeasuredconsistentlywithoperatingprofitorlossintheconsolidatedfinancialstatements.

Performance ismeasuredbasedonsegmentprofitafter taxas included in the internalmanagement reports thatare reviewedby theMD/CEO,whoistheGroup’schiefoperatingdecisionmaker.Segmentprofit isusedtomeasureperformanceasmanagementbelievesthatsuchinformationisthemostrelevantinevaluatingtheresultsofthesegmentsrelativetootherentitiesthatoperatewithintheseindustries.

Transferpricesbetweenoperatingsegmentsareestablishedinamannersimilartotransactionswiththirdparties.

Other non-reportable segment comprisesoperations related to investmentholding companyandport serviceswhichprovideproductdistributioninfrastructuretotheGroup,whichonlycontributes0.4%(2015:0.3%)oftheGroup’srevenueandrepresents13.0%(2015:9.0%)oftheGroup’sassets.

Segment assets

Thetotalofsegmentassetsaremeasuredbasedonallassetsofasegment,as included inthe internalmanagementreportsthatarereviewedbytheMD/CEO.Segmenttotalassetisusedtomeasurethereturnofassetsofeachsegment.

Segment liabilities

TheGroupsegmentliabilitiesaremeasuredandmanagedonagroupbasisandarenotallocatedtooperatingsegments.

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31. OPERATING SEGMENTS (CONTINUED)

Group

Olefins and Derivatives

RM Mil

Fertilisers and Methanol

RM MilOthersRM Mil

Elimination and adjustment

RM MilTotal

RM Mil

2016

Segment profit 2,159 999 64 - 3,222

Includedinthemeasureofsegmentprofitare:

Revenuefromexternalcustomers 9,744 4,063 53 - 13,860

Inter-segmentrevenue 13 165 45 (223) -

Depreciationandamortisation (804) (514) (19) - (1,337)

Property,plantandequipmentwrittenoff (244) - - - (244)

Interestincome 148 46 287 (220) 261

Financing(costs)/income (19) (3) 69 - 47

Shareof(loss)/profitofjointventuresandassociates (30) 15 32 - 17

Taxexpense (754) (71) (63) - (888)

Segment assets 13,752 13,923 4,293 (20) 31,948

Included in the measure of segment assetsare:

Investmentsinjointventuresandassociates 1,152 119 92 - 1,363

Additionstonon-currentassetsotherthanfinancialinstrumentsanddeferredtaxassets 2,089 801 153 - 3,043

2015

Segment profit 1,993 1,059 39 - 3,091

Includedinthemeasureofsegmentprofitare:

Revenuefromexternalcustomers 9,495 3,995 46 - 13,536

Inter-segmentrevenue 12 192 40 (244) -

Depreciationandamortisation (800) (459) (20) - (1,279)

Property,plantandequipmentwrittenoff - - (5) - (5)

Interestincome 158 98 212 (108) 360

Financing(costs)/income (25) (4) 18 - (11)

Shareof(loss)/profitofjointventuresandassociates 32 13 42 - 87

Taxexpense (645) (75) (22) - (742)

Segment assets 14,808 13,279 2,780 (34) 30,833

Included in the measure of segment assetsare:

Investmentsinjointventuresandassociates 1,072 110 98 - 1,280

Additionstonon-currentassetsotherthanfinancialinstrumentsanddeferredtaxassets 896 1,985 13 - 2,894

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31. OPERATING SEGMENTS (CONTINUED)

Geographical information

Geographical revenue isdeterminedbasedon locationofcustomers.Theamountspresentedfornon-currentassetsarebasedonthegeographicallocationoftheassetsanddonotincludefinancialinstruments(includinglongtermreceivables,investmentinjointventuresandassociates)anddeferredtaxassets.

GroupRevenue

RM Mil

Non-current assetsRM Mil

2016

Malaysia 4,530 18,543

Asia:

-China 3,010 1

-Indonesia 1,895 -

-Thailand 1,388 2

-Others 2,778 -

Restoftheworld 259 -

13,860 18,546

2015

Malaysia 4,989 16,599

Asia:

-China 2,179 2

-Indonesia 1,599 -

-Thailand 1,261 1

-Others 3,111 -

Restoftheworld 397 -

13,536 16,602

Major customers

Noneofthecustomersindividuallycontributestomorethan10%oftheGroup’srevenue.

32. FINANCIAL INSTRUMENTS

Categories of financial instruments

Thefollowingtablesprovideananalysisoffinancialinstrumentscategorisedasfollows:

(i) Loansandreceivables(L&R);(ii) Fairvaluethroughprofitorloss(FVTPL)

-Heldfortrading(HFT);and(iii) Financialliabilitiesmeasuredatamortisedcost(FL).

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32. FINANCIAL INSTRUMENTS (CONTINUED)

Categories of financial instruments (continued)

2016 2015

Group Note

L&R/(FL)

RM Mil

FVTPL- HFT

RM Mil

TotalcarryingamountRM Mil

L&R/(FL)

RM Mil

FVTPL- HFT

RM Mil


Financial assets

Tradeandotherreceivables* 10 2,092 15 2,107 1,576 9 1,585

Fundinvestments 12 - - - 622 - 622

Cashandcashequivalents 13 7,403 - 7,403 8,707 - 8,707

9,495 15 9,510 10,905 9 10,914


Otherlongtermliabilities* 17 (216) - (216) (345) - (345)

Borrowings 18 (23) - (23) (30) - (30)

Tradeandotherpayables* 19 (2,175) (17) (2,192) (2,146) (720) (2,866)

Dividendpayable (42) - (42) - - -

(2,456) (17) (2,473) (2,521) (720) (3,241)

*ThesebalancesexcludebalanceswhicharenotwithinthescopeofMFRS139,Financial Instruments: Recognition and Measurement.

2016 2015

Company Note

L&R/(FL)

RM Mil

FVTPL- HFT

RM Mil


L&R/(FL)

RM Mil

FVTPL- HFT

RM Mil


Financial assets

Longtermreceivables 7 7,011 - 7,011 - - -

Tradeandotherreceivables* 10 552 1 553 4,298 - 4,298

Fundinvestments 12 - - - 622 - 622

Cashandcashequivalents 13 1,254 - 1,254 1,793 - 1,793

8,817 1 8,818 6,713 - 6,713


Tradeandotherpayables* 19 (259) (1) (260) (143) (715) (858)

*ThesebalancesexcludebalanceswhicharenotwithinthescopeofMFRS139,Financial Instruments: Recognition and Measurement.

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Financial risk management

TheGroupandtheCompanyareexposedtovariousfinancialrisksthatareparticulartoitscorebusinessofpetrochemical.Theserisks,whichariseinthenormalcourseoftheGroup’sandtheCompany’sbusiness,comprisecreditrisk,liquidityriskandmarketriskrelatingtointerestrates,foreigncurrencyexchangeratesandprices.

The Group adopts PETRONAS Group RiskManagement Framework and Guideline that sets the foundation for the establishment ofeffectiveriskmanagementacrosstheGroup.

Risk taking activities are undertakenwithin acceptable level of risk or risk appetite,whereby the risk appetite level reflects businessconsiderations and capacity to assume such risks. The risk appetite is established at Board level, where relevant, based on definedmethodologyandtranslatedintooperationalthresholds.

TheGroup’sandtheCompany’sgoal in riskmanagement is toensure that themanagementunderstands,measuresandmonitors the

variousrisksthatariseinconnectionwiththeiroperations.Policiesandguidelineshavebeendevelopedtoidentify,analyse,appraiseandmonitorthedynamicrisksfacingtheGroupandtheCompany.Basedonthisassessment,eachbusinessunit/Companyadoptsappropriatemeasurestomitigatetheserisksinaccordancewiththebusinessunit’s/Company’sviewofthebalancebetweenriskandreward.

Credit risk

CreditriskisthepotentialexposureoftheGroupandtheCompanytolossesintheeventofnon-performancebycounterparties.TheGroup’sandtheCompany’sexposurestocreditriskariseprincipallyfromitsreceivablesfromcustomersandintercompanyloansandadvances.CreditrisksarecontrolledbyindividualoperatingunitsinlinewithPETRONASGroupRiskManagementFrameworkandGuideline.

Intercompany loans and advances

TheCompanyprovidesunsecuredloansandadvancestosubsidiaries.TheCompanymonitorstheresultsofthesubsidiariesregularly.Asattheendofthereportingperiod,themaximumexposuretocreditriskisrepresentedbytheircarryingamountsinthestatementsoffinancialposition.

Receivables

TheGroupminimisescreditriskbyensuringthatallpotentialcounterpartiesaresubjecttocreditassessmentandapprovalpriortoanytransactionbeingconcluded.Existingcounterpartiesarealsosubjecttoregularreviews,includingre-appraisalandapprovalofgrantedlimits.Thecreditworthinessofcounterpartiesisassessedbasedonananalysisofallavailablequantitativeandqualitativedataregardingbusinessrisksandfinancialstanding,togetherwiththereviewofanyrelevantthirdpartyandmarketinformation.ReportsarepreparedandpresentedtothemanagementthatcovertheGroup’sandtheCompany’soverallcreditexposureagainstlimitsandsecurities,exposurebysegmentandoverallqualityoftheportfolio.

Dependingonthetypesoftransactionsandcounterpartycreditworthiness,theGroupfurthermitigatesandlimitsrisksrelatedtocreditbyrequiringcollateralorothercreditenhancementssuchascashdeposits,letterofcreditorbankguarantees.

Exposuretolossesincreaseswithconcentrationsofcreditriskwhichmayexistwhenanumberofcounterpartiesareinvolvedinsimilaractivitiesoroperate inthesameindustrysectororgeographicalarea,whichmayresult intheirabilitytomeetcontractualobligationsbeingimpactedbychangesineconomic,politicalorotherconditions.

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Credit risk (continued)

Receivables (continued)

TheGroup’ssignificantconcentrationofcreditriskforreceivablesattheendofthereportingdatebysegmentisasfollows:

Group2016

RM Mil2015

RM Mil

OlefinsandDerivatives 1,525 1,133

FertilisersandMethanol 522 349

Others 45 94

2,092 1,576

Asattheendofthereportingyear,themaximumexposuretocreditriskarisingfromreceivablesisequaltothecarryingamount.TheGroupusesageinganalysistomonitorthecreditqualityoftradereceivables.TheGrouphastakenreasonablestepstoensurethatreceivablesthatareneitherpastduenorimpairedarestatedattheirrealisablevalues.

TheageingoftradereceivablesandamountduefromPETRONAS,relatedcompaniesandassociateswhicharetradeinnatureasattheendofthereportingyearisanalysedbelow:

Group2016

RM Mil2015

RM Mil

At net

Current 1,809 1,406

Pastdue1to30days 2 -

1,811 1,406

WithrespecttotheGroup’stradereceivables,therearenoindicationsasofthereportingdatethatthedebtorswillnotmeettheirpaymentobligations,otherthanthosethatareimpaired.

Liquidity risk

LiquidityriskistheriskthattheGroupandtheCompanywillnotbeabletomeetitsfinancialobligationasastheyfalldue.TheGroup’sandtheCompany’sexposuretoliquidityriskarisesprincipallyfromitstradeandotherpayablesandborrowings.Inmanagingitsliquidityrisk,theGroupmonitorsandmaintainsalevelofcashandcashequivalentsdeemedadequatebymanagementtofinancetheGroup’sandtheCompany’soperationsandtomitigatetheeffectsoffluctuationsincashflows.

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Liquidity risk (continued)

Maturity analysis

The table belowsummarises thematurity profile of theGroup’s andCompany’s financial liabilities as at the reporting date basedonundiscountedcontractualpayments:

Group

CarryingamountRM Mil

Contractualinterest rates

per annum%

Contractualcash flows

RM Mil

Within1 year

RM Mil1-2 years

RM Mil2-5 years

RM Mil

More than5 yearsRM Mil

2016


Finance lease liabilities 183 5.00 205 55 55 95 -

Provisions 117 - 132 37 67 28 -

Borrowings 23 4.36 23 23 - - -

Tradeandotherpayables 2,091 - 2,091 2,091 - - -

Dividendpayable 42 - 42 42 - - -

Derivativeliabilities 17 - 17 17 - - -

2,473 2,510 2,265 122 123 -

2015


Finance lease liabilities 227 5.00 260 55 55 142 8

Provisions 207 - 236 46 131 45 14

Borrowings 30 4.45 31 31 - - -

Tradeandotherpayables 2,057 - 2,057 2,057 - - -

Derivativeliabilities 720 - 720 720 - - -

3,241 3,304 2,909 186 187 22

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Liquidity risk (continued)

Maturity analysis (continued)

Company

CarryingamountRM Mil

Contractualinterest rates

per annum%

Contractualcash flows

RM Mil

Within1 year

RM Mil

2016


Tradeandotherpayables 259 - 259 259

Derivativeliabilities 1 - 1 1

260 260 260

2015


Tradeandotherpayables 143 - 143 143

Derivativeliabilities 715 - 715 715

858 858 858

Market risk

Marketrisk istheriskoruncertaintyarisingfromchanges inmarketpricesandtheir impactontheperformanceof thebusiness.Themarketprice changesarising fromfinancial instruments that theGroupand theCompanyare exposed to includes interest ratesandforeigncurrencyexchange rates thatcouldadverselyaffect thevalueof theGroup’sand theCompany’sfinancialassets, liabilitiesorexpectedfuturecashflows.

Interest rate risk

TheGroup’sandtheCompany’svariablerateinstrumentsareexposedtoariskofchangeincashflowsduetochangesininterestrateswhilstfixedrateinstrumentsareexposedtoariskofchangeintheirfairvalueduetochangesininterestrates.Shorttermreceivablesandpayablesarenotsignificantlyexposedtointerestraterisk.

Inmanaginginterestraterisk,theGroupandtheCompanymaintainabalancedportfoliooffixedandfloatingrateinstruments.AllinterestrateexposuresaremonitoredandmanagedproactivelybasedonadoptedPETRONASGroupRiskManagementFrameworkandGuideline.

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Market risk (continued)

Interest rate risk (continued)

TheinterestrateprofileoftheGroup’sandtheCompany’sinterest-bearingfinancialinstrumentsbasedoncarryingamountasatreportingdateisasfollows:

Group Company

2016 2015 2016 2015


Fixed rate instruments

Financial assets 101 958 5,527 5,146

Financial liabilities (183) (227) - -

(82) 731 5,527 5,146

Floating rate instruments

Financial assets 7,230 8,368 2,738 1,484

Financial liabilities (23) (30) - -

7,207 8,338 2,738 1,484

TheGroup’sandtheCompany’sfinancialassetsandliabilitiesaremeasuredatamortisedcost,anyreasonablepossiblechangeininterestrateisnotexpectedtohavematerialimpactontheGroup’sandtheCompany’sprofitorloss.

Foreign exchange risk

The Group and the Company are exposed to varying levels of foreign exchange risk when they enter into transactions that are notdenominatedintherespectivecompanies’functionalcurrenciesandwhenforeigncurrencymonetaryassetsandliabilitiesaretranslatedatthereportingdate.ThemainunderlyingeconomiccurrenciesoftheGroup’sandtheCompany’scashflowsareRinggitMalaysiaandUSDollar.

TheGroup’sandtheCompany’sforeignexchangemanagementpoliciesaretominimiseeconomicandsignificanttransactionalexposuresarisingfromcurrencymovements.TheGroupmainlyreliesonthenaturalhedgegeneratedbythefactthatsomeoftheir revenueandexpensesaredenominatedinUSDollar.Inaddition,theGroup,whereapplicable,hedgeusingderivativeinstrumentsinrespectofcurrentandforecastedtransactions.

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Foreign exchange risk (continued)

TheGroup’sandtheCompany’ssignificantexposuretoforeigncurrencyrisk,basedoncarryingamountsasatthereportingdateisasfollows:

Group

Denominated in

USDRM Mil

EURORM Mil

JPYRM Mil

2016

Financial assets

Tradeandotherreceivables 633 - -

Cashandcashequivalents 16 - -

649 - -


Tradeandotherpayables (30) (14) -

Derivativeassets/liabilitiesatnominalvalue (561) - -

Net exposure 58 (14) -

2015

Financial assets

Tradeandotherreceivables* 5,373 - -

Cashandcashequivalents 5 - -

5,378 - -


Tradeandotherpayables* (558) (7) (4)

Derivativeassets/liabilitiesatnominalvalue (4,751) - -

Net exposure 69 (7) (4)

*Theseamountsincludeforeigncurrencyriskexposurearisingfromintra-groupbalances.

Most of theGroup’s foreign denominated financial currency financial instruments are inUSDollar and since the net exposure is notmaterial,anyreasonablepossiblechangeintheexchangerateinUSDollarisnotexpectedtohaveamaterialimpactontheGroup’sprofitorloss.

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Foreign exchange risk (continued)

Company

Denominated in USD

2016RM Mil

2015RM Mil

Financial assets

Longtermreceivables 7,011 -

Tradeandotherreceivables 9 4,215

7,020 4,215


Tradeandotherpayables (10) -

Derivativeliabilitiesatnominalvalue - (4,215)

Net exposure 7,010 -

Thefollowingtabledemonstratestheindicativepre-taxeffectsontheprofitorlossofapplyingreasonableforeseeablemarketmovementsonthenetexposureatthereportingdateinthefollowingcurrencyexchangerate:

2016Appreciation in foreign currency rate

%Profit/(Loss)

RM Mil

USD 10 701

A decrease in change in currency rate abovewould have had equal but opposite effect, on the basis that all other variables remainconstant.

Price risk

TheGroupisexposedtopricerisksthatincludefeedstockandproductpriceriskandbasisriskwhichmayaffectthevalueoftheGroup’sassets,liabilitiesorexpectedfuturecashflows.Priceriskistheriskoffinanciallossduetofluctuationandvolatilityoffeedstockpricesonpurchasesandproductpricesontrades.Basisrisk,ontheotherhand,istheriskoffinanciallossasaresultofdifferentpricingtermoftrades.

TheGroupisguidedbyindustrypracticesandminimisesitspriceriskexposurebyproactivelyandcontinuouslyidentifying,measuring,monitoring,mitigatingandreportingpriceriskwithinthecontextofacomprehensiveriskmanagementframework.

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Fair value information

Thecarryingamountsofcashandcashequivalents,andshorttermreceivablesandpayablesreasonablyapproximatetheirfairvaluesduetotherelativelyshorttermnatureofthesefinancialinstruments.

Thefollowingtableanalysesfinancialinstrumentscarriedatfairvalueandthosenotcarriedatfairvalueforwhichfairvalueisdisclosed,togetherwiththeirfairvaluesandcarryingamountsshowninthestatementsoffinancialposition.

Fair value of financial instruments carried at fair value

Fair value of financial instruments

not carried at fair valueCarrying amount

GroupLevel 2RM Mil

TotalRM Mil

Level 3RM Mil

TotalRM Mil

TotalRM Mil

2016

Financial assets

Forwardforeignexchangecontracts 15 15 - - 15


Forwardforeignexchangecontracts (17) (17) - - (17)

Finance lease liabilities - - (136) (136) (137)

(17) (17) (136) (136) (154)

2015

Financial assets




Finance lease liabilities - - (183) (183) (183)

(720) (720) (183) (183) (903)

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Fair value information (continued)

Fair value of financial instruments carried at fair value

Fair value of financial instruments

not carried at fair valueCarrying amount

CompanyLevel 2RM Mil

TotalRM Mil

Level 3RM Mil

TotalRM Mil

TotalRM Mil

2016

Financial assets

Longtermreceivables - - 7,011 7,011 7,011


1 1 7,011 7,011 7,012



2015



Forward foreign exchange contracts

The fair value of forward foreign exchange contracts is based on the fair value difference between forward exchange rates and thecontractedrates.

Finance lease liabilities

Thefairvalueoffinanceleaseliabilitieswhichisdeterminedfordisclosurepurposesiscalculatedbasedonthepresentvalueoffutureprincipalandinterestcashflows,discountedatthemarketrateofinterestattheendofthereportingperiod.

Long term receivables

Thefairvalueoflongtermreceivablesiscalculatedbasedonthepresentvalueoftheprojectedrepaymentofloans,discountedatthemarketrateofinterestattheendofthereportingperiod.

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Income/(expense), net gains and losses arising from financial instruments

2016 2015

Group

Interest incomeRM Mil

Interest expense

RM MilOthersRM Mil

TotalRM Mil


Interest expense

RM MilOthersRM Mil

TotalRM Mil

Loansandreceivables 261 - (47) 214 360 - 707 1,067

Financial instruments atfairvaluethroughprofitorloss -Heldfortrading - - 93 93 - - (608) (608)

Financial liabilities measuredat amortisedcost - (1) 38 37 - - (120) (120)

261 (1) 84 344 360 - (21) 339

2016 2015

Company


Interest expense

RM MilOthersRM Mil

TotalRM Mil


Interest expense

RM MilOthersRM Mil

TotalRM Mil

Loansandreceivables 284 - 325 609 209 - 636 845

Financial instruments atfairvaluethroughprofitorloss -Heldfortrading - - 150 150 - - (618) (618)

Financial liabilities measuredat amortisedcost - - 7 7 - - (4) (4)

284 - 482 766 209 - 14 223

Othersrelatetogainsandlossesarisingfromfinancialinstrumentssuchasimpairmentloss,realisedandunrealisedforeignexchangegainsorlosses,andfairvaluegainsorlosses.

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33. ADOPTION OF NEW AND REVISED PRONOUNCEMENTS

Asof1January2016,theGroupandtheCompanyadoptedthefollowingpronouncementsthatareapplicableandhavebeenissuedbyMASBaslistedbelow:

Effective for annual periods beginning on or after 1 January 2016

AmendmentstoMFRS5 Non-current Assets Held for Sale and Discontinued Operations (Annual Improvements 2012-2014 Cycle) AmendmentstoMFRS11 Joint Arrangements – Accounting for Acquisitions of Interests in Joint Operations AmendmentstoMFRS101 Presentation of Financial Statements – Disclosure Initiative AmendmentstoMFRS119 Employee Benefits (Annual Improvements 2012-2014 Cycle) AmendmentstoMFRS127 Separate Financial Statements: Equity Method in Separate Financial Statements AmendmentstoMFRS134 Interim Financial Reporting (Annual Improvements 2012-2014 Cycle)

TheinitialapplicationoftheabovementionedpronouncementsdonothaveanymaterialimpacttothefinancialstatementsoftheGroupandtheCompany.

34. NEW AND REVISED PRONOUNCEMENTS YET IN EFFECT

ThefollowingpronouncementsthathavebeenissuedbytheMASBwillbecomeeffectiveinfuturefinancialreportingperiodsandhavenotbeenadoptedbytheGroupand/ortheCompanyinthesefinancialstatements:


AmendmentstoMFRS12 Disclosure of Interests in Other Entities (Annual Improvements 2014 – 2016 Cycle) AmendmentstoMFRS107 Statement of Cash Flows: Disclosure Initiative AmendmentstoMFRS112 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses


MFRS9 Financial Instruments (2014) MFRS15 Revenue from Contracts with Customers AmendmentstoMFRS15 Revenue from Contracts with Customers: Clarifications ICInterpretation22 Foreign Currency Transactions and Advance Consideration


MFRS16 Leases The Group and the Company are expected to apply the abovementioned pronouncements beginning from the respective dates the

pronouncementsbecomeeffective.TheinitialapplicationoftheabovementionedpronouncementsarenotexpectedtohaveanymaterialimpacttothefinancialstatementsoftheGroupandtheCompanyexceptasmentionedbelow:

i. MFRS 9 Financial Instruments MFRS9replacestheguidanceinMFRS139Financial Instruments: Recognition and Measurementontheclassificationandmeasurement

offinancialassets.

ii. MFRS 15 Revenue from Contracts with Customers MFRS 15 replaces the guidance in MFRS 111 Construction Contracts, MFRS 118 Revenue, IC Interpretation 13 Customer Loyalty

Programmes, ICInterpretation15Agreements for Construction of Real Estate, ICInterpretation18Transfers of Assets from Customers andICInterpretation131Revenue – Barter Transactions Involving Advertising Services.

iii. MFRS 16 Leases MFRS16replacesexistingleasesguidanceinMFRS117Leases,ICInterpretation4Determining whether an Arrangement contains a

Lease,ICInterpretation115Operating Leases – Incentives,andICInterpretation127Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

TheGroupandtheCompanyarecurrentlyassessingtheimpactofadoptingtheabovepronouncements.

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35. NEW PRONOUNCEMENTS NOT APPLICABLE TO THE GROUP AND THE COMPANY

TheMASBhasissuedpronouncementswhicharenotyeteffective,butforwhicharenotrelevanttotheoperationsoftheGroupandtheCompanyandhence,nofurtherdisclosureiswarranted.


AmendmentstoMFRS1 First-time Application of Malaysian Financial Reporting Standards (Annual Improvements 2014 – 2016 Cycle) AmendmentstoMFRS2 Share-based Payment: Classification and Measurement of Share-based Payment Transactions AmendmentstoMFRS4 Insurance Contracts: Applying MFRS 9 Financial Instruments with MFRS 4 Insurance Contracts AmendmentstoMFRS128 Investments in Associates and Joint Ventures (Annual Improvements 2014 – 2016 Cycle) AmendmentstoMFRS140 Investment Property: Transfer of Investment Property

Effectiveforannualperiodsbeginningonorafteradateyettobeconfirmed

AmendmentstoMFRS10and MFRS128 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

36. CAPITAL MANAGEMENT

TheGroupdefinescapitalasthetotalequityanddebtoftheGroup.TheobjectiveoftheGroup’sandtheCompany’scapitalmanagementistomaintainanoptimalcapitalstructureandensuringavailabilityoffundsinordertosupportitsbusinessandrelatedshareholdersvalue.AsasubsidiaryofPETRONAS,theGroupadoptsPETRONASGroupCorporateFinancialPolicyinmanagingitscapital.

TheGroupmonitorsandmaintainsaprudentleveloftotaldebttototalassetsratiotooptimiseshareholdersvalueandtoensurecompliancewithcovenants.

TherewerenochangesintheGroup’sandtheCompany’sapproachtocapitalmanagementduringtheyear.

UndertherequirementofBursaMalaysiaPracticeNoteNo.17/2005,theGroupisrequiredtomaintainconsolidatedshareholders’equityequaltoornotlessthan25%oftheissuedandpaid-upcapitalandsuchshareholders’equityisnotlessthanRM40million.TheGrouphascompliedwiththisrequirement.

37. HOLDING COMPANY

TheimmediateandultimateholdingcompanyisPetroliamNasionalBerhad(PETRONAS),acompanyincorporatedinMalaysia.

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38. SUPPLEMENTARY FINANCIAL INFORMATION ON THE BREAKDOWN OF REALISED AND UNREALISED PROFITS OR LOSSES

ThebreakdownoftheretainedearningsoftheGroupandoftheCompanyasat31December2016intorealisedandunrealisedprofits,pursuanttoParagraphs2.06and2.23ofMainMarketListingRequirementsofBursaMalaysiaSecuritiesBerhad,isasfollows:

Group Company

2016 2015 2016 2015


Totalretainedprofits/(losses)oftheCompanyanditssubsidiaries:

- realised 20,774 19,348 10,031 6,977

- unrealised (492) (518) 415 (2)

20,282 18,830 10,446 6,975

Totalretainedprofits/(losses)fromjointventuresandassociates:

- realised 155 199 - -

- unrealised (26) (19) - -

129 180 - -

Totalrealisedandunrealised 20,411 19,010 10,446 6,975

Less:Consolidationadjustments (3,663) (3,817) - -

TotalGroupretainedprofitsasperconsolidatedaccounts 16,748 15,193 10,446 6,975

The determination of realised and unrealised profits is based on the Guidance on SpecialMatter No.1,Determination of Realised and Unrealised Profits or Losses in the Context of Disclosures Pursuant to Bursa Malaysia Securities Berhad Listing Requirements, issued byMalaysianInstituteofAccountantson20December2010.

ThedisclosureofrealisedandunrealisedprofitsaboveissolelyforcomplyingwiththedisclosurerequirementsstipulatedinthedirectiveofBursaMalaysiaandshouldnotbeappliedforanyotherpurposes.

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INDEPENDENT AUDITORS’ REPORT to the members of PETRONAS Chemicals Group Berhad

(Company No. 459830-K)

(Incorporated in Malaysia)

Report on the Audit of the Financial Statements

Opinion

WehaveauditedthefinancialstatementsofPETRONASChemicalsGroupBerhad(“PCG”),whichcomprisethestatementsoffinancialpositionasat31December2016oftheGroupandtheCompany,andthestatementsofprofitorlossandothercomprehensiveincome,changesinequityandcashflowsoftheGroupandtheCompanyfortheyearthenended,andnotestothefinancialstatements,includingasummaryofsignificantaccountingpolicies,assetoutonpages141to196. Inouropinion,thefinancialstatementsgiveatrueandfairviewofthefinancialpositionoftheGroupandtheCompanyasat31December2016andoftheirfinancialperformanceandtheircashflowsfortheyearthenendedinaccordancewithMalaysianFinancialReportingStandards,InternationalFinancialReportingStandardsandtherequirementsoftheCompaniesAct,1965inMalaysia.

Basis for Opinion

We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditors’ Responsibilities for the Audit of the Financial Statements section ofthisreport.Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.

Independence and Other Ethical Responsibilities

Weare independentof theGroupandof theCompany inaccordancewith theBy-Laws (on Professional Ethics, Conduct and Practice)of theMalaysianInstituteofAccountants(“By-Laws”)andtheInternationalEthicsStandardsBoardforAccountants’Code of Ethics for Professional Accountants (“IESBACode”),andwehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeBy-LawsandtheIESBACode.

Key Audit Matters

Keyauditmattersarethosemattersthat,inourprofessionaljudgment,wereofmostsignificanceinourauditofthefinancialstatementsoftheGroupandoftheCompanyforthecurrentfinancialyear.ThesematterswereaddressedinthecontextofourauditofthefinancialstatementsoftheGroupandtheCompanyasawhole,andinformingouropinionthereon,andwedonotprovideaseparateopiniononthesematters.

Property, plant and equipment

Refertonote2.2(accountingpolicy)andnote3ofthefinancialstatements.

ThereisariskofimpairmentoftheGroup’sproperty,plantandequipmentasaresultofdecliningpricesofseveralproducts,that,inturnreducestheprofitmargins.Therecoverabilityofthecarryingamountsofproperty,plantandequipmentofthecashgeneratingunitsaredependentupontherecoverablevalues(determinedusingthenetcashflows)ofthecashgeneratingunitsoftheaffectedplants.Thisisoneoftheareasthatourauditfocusesonbecausethereareinherentuncertaintiesandsignificantmanagementjudgmentinvolvedinforecastinganddiscountingfuturecashflowsoftheaffectedcashgeneratingunitstoarriveattherecoverablevalues.Theinherentuncertaintiesamongstothersincludeappropriatenessofsignificantassumptionsanddiscountrates.

Inthisarea,ourauditproceduresincluded,amongstothers:

• evaluatedtheimpairmenttestmodelbycomparingitwiththerequirementsoffinancialreportingstandards;

• assessedtheappropriatenessofthediscountratesusedbycomparingthesewithourexpectationsbasedonourknowledgeoftheindustryinwhichtheGroupoperates;

• assessedthosesignificantandhighlysensitiveassumptions,suchasthelongtermoutlookofpricesforfinishedproductsandrawmaterials,todeterminethatthesewereappropriateandsupportablebycomparingthemwithinternalandexternalsources;

• readthereportofandinterviewedaspecialistengagedbytheGroupinvalidatingtherecoverablevalueofoneofthecashgeneratingunitsoftheaffectedplant;and

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GROUP BERHAD

Independent Auditors’ Report (Cont’d)to the members of PETRONAS Chemicals Group Berhad



• consideredtheadequacyofthedisclosuresontheimpairmentassessmentforthecashgeneratingunitsofwhichtheassumptionsappliedwereparticularly sensitive, uncertain or required significant judgment andhence, hada significant riskwhich could result in amaterialadjustmenttothecarryingamountoftheplantswithinthenextfinancialyear.

Deferred tax assets

Refertonote2.13(ii)(accountingpolicy)andnote8ofthefinancialstatements.

Wheredeferredtaxassetsarerecognised,managementjudgmentisrequiredtoassesstheutilisationofthebalancebyreferencetoprojectionsoffuturetaxableincome.Theperiodsoverwhichthedeferredtaxassetsareexpectedtoberecoveredcanbeextensive.Thisisoneoftheareasthatourauditfocusesonbecausethereareinherentuncertaintiesinvolvedinprojectingfuturetaxableincome,inparticular,whenthedeferredtaxassetsarerecognisedbysubsidiarieswhichcontinuetobelossmaking. Inthisarea,theauditproceduresincluded,amongstothers:

• assessedtheadequacyoftheauditproceduresperformedbythecomponentauditorstoreviewtherecogniseddeferredtaxassetastwoofthesubsidiariesintheGroupthathadrecognisedsignificantdeferredtaxassetsareauditedbyanotherfirmofauditors;and

• evaluated the likelihood of successful implementation of the proposed tolling arrangements within the Group’s integrated value chaininvolvingtheaforesaidtwosubsidiariesandtheappropriatenessoftheGroup’sassessmentthatitisprobablethatsufficienttaxableincomewouldbegeneratedtoutilisethedeferredtaxassets.

Provision for financial assistance

Refertonote2.11(accountingpolicy)andnote17ofthefinancialstatements.

TheCompanymadeaprovisiontoprovidefinancialassistancetooneofitssubsidiaries.Thisisoneoftheareasthatourauditfocusesonbecausethereareinherentuncertaintiesandsignificantjudgmentinvolvedinforecastinganddiscountingfuturecashflowsoftheobligationtoprovidefinancialassistancetothesaidsubsidiary.

Inthisarea,theauditproceduresincluded,amongstothers:

• assessed those significant assumptions, the extent of the constructive and contractual obligation that is needed to be fulfilled by thesubsidiary,todeterminethatthesewereappropriateandjustifiedbycomparingthemwithinternalandexternalsources;and

• determined theadequacyof theprovisionby reading thefinancialstatementsof thesubsidiaryandassessed itssolvencyandfinancialstanding.

Information Other than the Financial Statements and Auditors’ Report Thereon

TheDirectorsof theCompanyare responsible for theother information. Theother information comprises the information included in theDirectors’ReportandStatementonRiskManagementandInternalControl(butdoesnotincludethefinancialstatementsoftheGroupandoftheCompanyandourauditors’reportthereon),whichweobtainedpriortothedateofthisauditors’report,andtheremainingpartsoftheAnnualReport,whichareexpectedtobemadeavailabletousaftertheauditors’reportdate.

OuropiniononthefinancialstatementsoftheGroupandoftheCompanydoesnotcovertheother informationandwedonotandwillnotexpressanyformofassuranceconclusionthereon.

InconnectionwithourauditofthefinancialstatementsoftheGroupandoftheCompany,ourresponsibilityistoreadtheotherinformationidentifiedaboveand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththefinancialstatementsoftheGroupandoftheCompanyorourknowledgeobtainedintheaudit,orotherwiseappearstobemateriallymisstated.If,basedontheworkwehaveperformedontheotherinformationthatweobtainedpriortothedateofthisauditors’report,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.Wehavenothingtoreportinthisregard.

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Responsibilities of Directors for the Financial Statements

TheDirectorsoftheCompanyareresponsibleforthepreparationoffinancialstatementsoftheGroupandoftheCompanythatgiveatrueandfairviewinaccordancewithMalaysianFinancialReportingStandards,InternationalFinancialReportingStandardsandtherequirementsoftheCompaniesAct,1965inMalaysia.TheDirectorsarealsoresponsibleforsuchinternalcontrolastheDirectorsdetermineisnecessarytoenablethepreparationoffinancialstatementsoftheGroupandoftheCompanythatarefreefrommaterialmisstatement,whetherduetofraudorerror.

InpreparingthefinancialstatementsoftheGroupandoftheCompany,theDirectorsareresponsibleforassessingtheabilityoftheGroupandoftheCompanytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlesstheDirectorseitherintendtoliquidatetheGrouportheCompanyortoceaseoperations,orhavenorealisticalternativebuttodoso.

Auditors’ Responsibilities for the Audit of the Financial Statements

OurobjectivesaretoobtainreasonableassuranceaboutwhetherthefinancialstatementsoftheGroupandoftheCompanyasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditors’reportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithapprovedstandardsonauditinginMalaysiaandInternationalStandardsonAuditingwillalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisofthesefinancialstatements. Aspart of an audit in accordancewith approved standards on auditing inMalaysia and International Standards onAuditing,we exerciseprofessionaljudgementandmaintainprofessionalscepticismthroughouttheaudit.Wealso:

• IdentifyandassesstherisksofmaterialmisstatementofthefinancialstatementsoftheGroupandoftheCompany,whetherduetofraudorerror,designandperformauditproceduresresponsivetothoserisks,andobtainauditevidencethatissufficientandappropriatetoprovideabasisforouropinion.Theriskofnotdetectingamaterialmisstatementresultingfromfraudishigherthanforoneresultingfromerror,asfraudmayinvolvecollusion,forgery,intentionalomissions,misrepresentations,ortheoverrideofinternalcontrol.

• Obtainanunderstandingofinternalcontrolrelevanttotheauditinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheinternalcontroloftheGroupandoftheCompany.

• EvaluatetheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesandrelateddisclosuresmadebytheDirectors.

• ConcludeontheappropriatenessoftheDirectors’useofthegoingconcernbasisofaccountingand,basedontheauditevidenceobtained,whetheramaterialuncertaintyexistsrelatedtoeventsorconditionsthatmaycastsignificantdoubtontheabilityoftheGrouporoftheCompanytocontinueasagoingconcern.Ifweconcludethatamaterialuncertaintyexists,wearerequiredtodrawattentioninourauditors’report to the relateddisclosures in thefinancialstatementsof theGroupandof theCompanyor, if suchdisclosuresare inadequate, tomodifyouropinion.Ourconclusionsarebasedontheauditevidenceobtaineduptothedateofourauditors’report.However,futureeventsorconditionsmaycausetheGrouportheCompanytoceasetocontinueasagoingconcern.

• Evaluatetheoverallpresentation,structureandcontentofthefinancialstatementsoftheGroupandoftheCompany,includingthedisclosures,andwhetherthefinancialstatementsoftheGroupandoftheCompanyrepresenttheunderlyingtransactionsandeventsinamannerthatgivesatrueandfairview.

• Obtainsufficientappropriateauditevidence regarding thefinancial informationof theentitiesorbusinessactivitieswithin theGroup toexpressanopiniononthefinancialstatementsoftheGroup.Weareresponsibleforthedirection,supervisionandperformanceofthegroupaudit.Weremainsolelyresponsibleforourauditopinion.

WecommunicatewiththeDirectorsregarding,amongothermatters,theplannedscopeandtimingoftheauditandsignificantauditfindings,includinganysignificantdeficienciesininternalcontrolthatweidentifyduringouraudit.




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PETRONAS CHEMICALS

GROUP BERHAD

Wealsoprovide theDirectorswitha statement thatwehavecompliedwith relevant ethical requirements regarding independence, and tocommunicatewiththemallrelationshipsandothermattersthatmayreasonablybethoughttobearonourindependence,andwhereapplicable,relatedsafeguards.

FromthematterscommunicatedwiththeDirectors,wedeterminethosemattersthatwereofmostsignificanceintheauditofthefinancialstatementsoftheGroupandoftheCompanyforthecurrentyearandarethereforethekeyauditmatters.Wedescribethesemattersinourauditors’reportunlesslaworregulationprecludespublicdisclosureaboutthematterorwhen,inextremelyrarecircumstances,wedeterminethatamattershouldnotbecommunicatedinourauditors’reportbecausetheadverseconsequencesofdoingsowouldreasonablybeexpectedtooutweighthepublicinterestbenefitsofsuchcommunication.

Report on Other Legal and Regulatory Requirements

InaccordancewiththerequirementsoftheCompaniesAct,1965inMalaysia,wealsoreportthefollowing:

a) Inouropinion,theaccountingandotherrecordsandtheregistersrequiredbytheActtobekeptbytheCompanyanditssubsidiariesofwhichwehaveactedasauditorshavebeenproperlykeptinaccordancewiththeprovisionsoftheAct.

b) Wehaveconsideredtheaccountsandtheauditors’reportsofthesubsidiariesofwhichwehavenotactedasauditors,whichareindicatedinNote26tothefinancialstatements,beingaccountsthathavebeenincludedintheconsolidatedfinancialstatements.

c) WearesatisfiedthattheaccountsofthesubsidiariesthathavebeenconsolidatedwiththeCompany’sfinancialstatementsareinformandcontentappropriateandproperforthepurposesofthepreparationofthefinancialstatementsoftheGroupandwehavereceivedsatisfactoryinformationandexplanationsrequiredbyusforthosepurposes.

d) TheauditreportsontheaccountsofthesubsidiariesdidnotcontainanyqualificationoranyadversecommentmadeunderSection174(3)oftheAct.

Other Reporting Responsibilities

ThesupplementaryinformationsetoutinNote38isdisclosedtomeettherequirementofBursaMalaysiaSecuritiesBerhadandisnotpartofthefinancialstatements.TheDirectorsareresponsibleforthepreparationofthesupplementaryinformationinaccordancewithGuidanceonSpecialMatterNo.1,DeterminationofRealisedandUnrealisedProfitsorLossesintheContextofDisclosurePursuanttoBursaMalaysiaSecuritiesBerhadListingRequirements, as issuedby theMalaysian Institute ofAccountants ("MIAGuidance") and thedirectiveofBursaMalaysiaSecuritiesBerhad. Inouropinion,thesupplementary informationisprepared, inallmaterialrespects, inaccordancewiththeMIAGuidanceandthedirectiveofBursaMalaysiaSecuritiesBerhad.

Other Matter

ThisreportismadesolelytothemembersoftheCompany,asabody,inaccordancewithSection174oftheCompaniesAct,1965inMalaysiaandfornootherpurpose.Wedonotassumeresponsibilitytoanyotherpersonforthecontentofthisreport.

KPMG PLT Thong Foo Vung(LLP0010081-LCA&AF0758) Approvalnumber:02867/08/2018JCharteredAccountants CharteredAccountant

PetalingJaya,Selangor

Date:20February2017




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Sectionsix

LIST OF PROPERTIES

No.

Name of registered owner/Beneficial owner:

Acquisition date

Existing use

Land area: Age of Plant & building:

NBV as at 31/12/2016:

Lot. no./Leasehold period (sq metre unless

otherwise stated)

(Years) (RM ‘000)

1 PETRONAS Chemicals Derivatives Sdn Bhd, PETRONAS Chemicals Olefins Sdn Bhd and PETRONAS Chemicals Glycols Sdn Bhd (eacha1/3partowner)

H.S.(D)3385,PTNo.10535,MukimKertih,Kemaman,Terengganu

Leaseholdof60years,expiringon29August2060

H.S.(D)3316,PTNo.9015,MukimKertih,Kemaman,Terengganu

Leaseholdof60years,expiringon29August2060

PajakanNegeriNo.Hakmilik7594,No.Lot8068,MukimKertih,Kemaman,Terengganu

Leaseholdof60years,expiringon 29August2060

30.08.2000

30.08.2000

30.08.2000

Industrialland-TNBsub-station

Industrialland-Wastewaterandtreatment substation

Industrialland-Plantforproductionofethylenederivatives

3,886

260,469

611,075

16

16

16

299,432

2 PETRONAS Chemicals Methanol Sdn Bhd

No.205350607,Kg.Rancha-Rancha, WilayahPersekutuanLabuan

Leaseholdfor99years,expiringon31 December 2082

31.8.2004 Industrialland-Plantforproductionofmethanol

14hectares 12 1,363,625

3 PETRONAS Chemicals Methanol Sdn Bhd

No.206291590,Kg.Rancha-Rancha, WilayahPersekutuanLabuan

Leasefor51years,expiringon30 December 2043

01.06.1992 Industrialland-Plantforproductionofmethanolandadministrationoffice

34 acres 25 467,454

4 PETRONAS Chemicals MTBE Sdn Bhd

H.S.(D)9688P.T.No.4538,MukimSungaiKarang,Kuantan,Pahang

Leaseholdfor66years,expiringon14July2058

17.11.1992 Industrialland-PlantforproductionofMTBE

36hectares 24 126,077

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PETRONAS CHEMICALS

GROUP BERHAD

No.


Acquisition date

Existing use


NBV as at 31/12/2016:


otherwise stated)

(Years) (RM ‘000)


H.S.(D)34911,No.P.T.15128,MukimSungaiKarang,Kuantan,Pahang

Leaseholdfor99years,expiringon8January2100

09.01.2001 Industrialland-Propanedehydrogenationplant

34 acres 16 493,594


H.S.(D)34912,No.P.T.15129,MukimSungaiKarang,Kuantan,Pahang


09.01.2001 Emergencyresponsebuilding

15 acres 16 6,632

7 Polypropylene Malaysia Sdn Bhd

H.S.(D)9686,No.LotP.T.4536, MukimSungaiKarang,Kuantan,Pahang

Leaseholdfor66years,expiringon14July2058

15.07.1992 Industrialland-Plantforproductionofpolypropylene

20hectares 24 10,426

8 PETRONAS Chemicals Fertiliser (Kedah) Sdn Bhd

PajakanNegeriNo.Hakmilik1010,No.Lot10750BandarGurun,KualaMuda,Kedah

Leaseholdfor99yearsexpiringon22April2102

01.11.1999 Commercial/industrialland-Plantforproductionofureaandammonia

699,100 17 282,384

9 PETRONAS Fertiliser (Kedah) Sdn Bhd

PajakanNegeriNo.Hakmilik3396-3399,No.Lot174-177,Seksyen6,Gurun,KualaMuda,Kedah

Leaseholdfor99yearsexpiringon12 February 2105

01.11.1999 Commercial/industrialland-Plantforproductionofureaandammonia

201,233 17 81,283

List of Properties (Cont’d)

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Sectionsix

No.


Acquisition date

Existing use


NBV as at 31/12/2016:


otherwise stated)

(Years) (RM ‘000)

10 ASEAN Bintulu Fertilizer Sdn Bhd

No.323,Lot35,Block20,KemenalandDistrict,Bintulu,Sarawak

Leaseholdfor99years,expiringon19 February 2083

01.04.1983 Mixedzone/townland-Plantforproductionofureaandammonia

38hectares 34 199,239

11 ASEAN Bintulu Fertilizer Sdn Bhd

No.321,Lot2233-2239,Block26,KemenalandDistrict,Bintulu,Sarawak

Leaseholdfor60years,expiringon8May2046

08.02.2005 Mixedzone/townland-Dwellinghouse

8,298 12 1,428

12 PETRONAS Chemicals Ethylene Sdn Bhd, PETRONAS Chemicals Polyethylene Sdn Bhd


Leaseholdfor51years,expiringon16June2052

02.04.1993 Industrialland-Plantforproductionofethylene/polyethylene

567,800 24 459,446

13 PETRONAS Chemicals Ethylene Sdn Bhd


Leaseholdfor60years,expiringon23October2054

31.05.1995 Industrialland-Storagefacilityforwater

191,200 22 4,762

14 PETRONAS Chemicals Ammonia Sdn Bhd*


Leaseholdfor60years,expiringon19August2060

01.08.2000 Industrialland-Plantforproductionofammoniaandanyotherrelatedgas

98,490 16 315,187

15 PETRONAS Chemicals Ammonia Sdn Bhd

PT15786,Lot5276,MukimKertih,Kemaman,Terengganu


30.12.2011 Industrialland-KIPCSharedFacilitieswhichincludestheadministrative,laboratoryandworkshopbuildings

96,208 5 31,804


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PETRONAS CHEMICALS

GROUP BERHAD

No.


Acquisition date

Existing use


NBV as at 31/12/2016:


otherwise stated)

(Years) (RM ‘000)

16

PETRONAS Chemicals LDPE Sdn Bhd


Leaseholdfor60years,expiringon19August2060

20.08.2000 Industrialland-PlantforproductionofLDPE

184,677 16 106,349

17 Kertih Port Sdn Bhd


Leasehold for60years,expiringon5March2060

02.08.2000 Industrialland-OperationsofKertihPort(Jettyandmarinerelatedfacilities)

43,100 16 340,827



Leaseholdfor60years,expiringon5March2060

02.08.2000 Industrialland-Gasandoilpipelines(Reclaimationarealand&CoastalStripLand)

41,400 16 431



Leaseholdfor51years,expiringon16June2052

31.03.1993 Industrialland-administrationcomplexandotherrelatedfacilities.

58,570 24 17,025

20 Vinyl Chloride (Malaysia) Sdn Bhd




Leaseholdfor60years,expiringon18 December 2056

01.09.1998

01.09.1998

Industrialland-IntegratedPVCmanufacturingplant

Industrialland-IntegratedPVCmanufacturingplant

187,958

121,400

18

18

3,911


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Sectionsix

ANALYSIS OF SHAREHOLDINGS as at 17 February 2017

ShareCapital : RM800,000,000comprising8,000,000,000sharesClassofShares : OrdinarysharesVotingRights : Onevoteperordinaryshare(onapoll)

Size of HoldingsNo. of

Shareholders% of Total

ShareholdersNo. of

Shares% of

Shareholdings

Lessthan100 157 0.91 1,268 0.00

100-1,000 5,865 33.84 5,178,466 0.06

1,001-10,000 8,949 51.64 37,287,379 0.47

10,001-100,000 1,597 9.21 46,575,214 0.58

100,001tolessthan5%ofissuedshares 761 4.39 1,967,142,330 24.59

5%andaboveofissuedshares 2 0.01 5,943,815,343 74.30

Total 17,331 100.00 8,000,000,000 100.00

LIST OF DIRECTORS’ SHAREHOLDINGSAs at 17 February 2017

No. Name No. of Shares% of

Shareholdings

1 MdArifMahmood 20,000 0.00

2 DatukSazaliHamzah - -

3 VimalaVRMenon 20,000 0.00

4 ChingYewChye 20,000 0.00

5 DongSooKim 10,000 0.00

6 DatukTohAhWah - -

7 ZakariaKasah 6,000 0.00

8 FreidaAmat 6,000 0.00

LIST OF MANAGEMENT’S SHAREHOLDINGSAs at 17 February 2017


Shareholdings

1 RashidahAlias 6,000 0.00

2 MohdYusriMohamedYusof 6,000 0.00

3 AkbarMdThayoob 6,000 0.00

4 AbdulAzizOthman 6,000 0.00

5 MohamadIskandarBakeri - -

6 NoorLilyZuriatiAbdullah - -

7 DrRossForrestGilmour - -

8 Datin Zarina Zakaria - -

9 SitiAzlinaAbdLatif - -

10 AhmadZakiDaud - -

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PETRONAS CHEMICALS

GROUP BERHAD

Category of Shareholders

No. ofShareholders

% ofShareholders

No. ofShares

% ofShareholdings

Malaysian Foreign Malaysian Foreign Malaysian Foreign Malaysian Foreign

Individual 13,755 128 79.37 0.74 59,587,565 1,119,041 0.75 0.01

BodyCorporate- Bank/FinanceCompanies 86 0 0.49 0 776,262,010 0 9.71 0

- InvestmentTrusts/Foundation/Charities 3 0 0.02 0 470,000 0 0.01 0

- Othertypesofcompanies 247 7 1.43 0.04 10,343,000 84,000 0.13 0

GovernmentAgencies/ Institutions 4 0 0.02 0 1,250,000 0 0.02 0

Nominees 2,388 713 13.78 4.11 6,443,628,305 707,256,079 80.54 8.83

Others 0 0 0 0 0 0 0 0

Total 16,483 848 95.11 4.89 7,291,540,880 708,459,120 91.16 8.84

LIST OF TOP 30 HOLDERS

No. Name No. of shares% of

Shareholdings

1 CIMBGROUPNOMINEES(TEMPATAN)SDNBHDEXEMPTANFORPETROLIAMNASIONALBERHAD 5,148,000,000 64.35

2 CITIGROUPNOMINEES(TEMPATAN)SDNBHDEMPLOYEESPROVIDENTFUNDBOARD 795,815,343 9.95

3 AMANAHRAYATRUSTEESBERHADAMANAHSAHAMBUMIPUTERA 266,062,000 3.33

4 KUMPULANWANGPERSARAAN(DIPERBADANKAN) 244,848,800 3.06

5 CARTABANNOMINEES(ASING)SDNBHDEXEMPTANFORSTATESTREETBANK&TRUSTCOMPANY(WESTCLTOD67) 69,198,100 0.86

6 MALAYSIANOMINEES(TEMPATAN)SENDIRIANBERHADGREATEASTERNLIFEASSURANCE(MALAYSIA)BERHAD(PAR1) 51,798,600 0.65

7 AMANAHRAYATRUSTEESBERHADAMANAHSAHAMWAWASAN2020 49,255,100 0.62

8 HSBCNOMINEES(ASING)SDNBHDBBHANDCOBOSTONFORVANGUARDEMERGINGMARKETSSTOCKINDEXFUND 45,559,022 0.57

9 HSBCNOMINEES(ASING)SDNBHDEXEMPTANFORJPMORGANCHASEBANK,NATIONALASSICIATION(U.S.A) 43,076,125 0.54

10 MAYBANKNOMINEES(TEMPATAN)SDNBHDMAYBANKTRUSTEESBERHADFORPUBLICITTIKALFUND 38,000,000 0.48

11 AMSECNOMINEES(TEMPATAN)SDNBHDMTRUSTEEBERHADFORCIMBISLAMICDALIEQUITYGROWTHFUND(UT-CIMB-DALI) 33,251,500 0.42

12 CARTABANNOMINEES(TEMPATAN)SDNBHDPAMBFORPRULINKEQUITYFUND 32,616,600 0.41

13 AMANAHRAYATRUSTEESBERHADPUBLICISLAMICDIVIDENDFUND 28,731,400 0.36

14 CITIGROUPNOMINEES(TEMPATAN)SDNBHDEMPLOYEESPROVIDENTFUNDBOARD(NOMURA) 27,818,500 0.35

Analysis of Shareholdings (Cont’d)as at 17 February 2017

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LIST OF TOP 30 HOLDERS (CONTINUED)

No. Name No. of shares% of

Shareholdings

15 CITIGROUPNOMINEES(TEMPATAN)SDNBHDEXEMPTANFORAIABHD 24,038,700 0.30

16 AMANAHRAYATRUSTEESBERHADPUBLICISLAMICSELECTENTERPRISESFUND 23,993,200 0.30

17 CARTABANNOMINEES(ASING)SDNBHDGICPRIVATELIMITEDFORGOVERNMENTOFSINGAPORE(C) 23,634,800 0.30

18 MAYBANKNOMINEES(TEMPATAN)SDNBHDMAYBANKTRUSTEESBERHADFORPUBLICREGULARSAVINGSFUND(N140119490100) 16,467,800 0.21

19 CITIGROUPNOMINEES(ASING)SDNBHDEXEMPTANFORCITIBANKNEWYORK(NORGESBANK14) 15,823,200 0.20

20 AMANAHRAYATRUSTEESBERHADAMANAHSAHAMMALAYSIA 15,540,100 0.19

21 CITIGROUPNOMINEES(TEMPATAN)SDNBHDEMPLOYEESPROVIDENTFUNDBOARD(CIMBPRIN) 15,418,500 0.19

22 PERMODALANNASIONALBERHAD 14,980,200 0.19

23 AMANAHRAYATRUSTEESBERHADPUBLICISLAMICEQUITYFUND 14,821,000 0.19

24 AMANAHRAYATRUSTEESBERHADAMANAHSAHAMDIDIK 14,616,400 0.18

25 MALAYSIANOMINEES(TEMPATAN)SENDIRIANBERHADGREATEASTERNLIFEASSURANCE(MALAYSIA)BERHAD(PAR3) 14,004,900 0.18

26 CITIGROUPNOMINEES(ASING)SDNBHDEXEMPTFORANCITIBANKNEWYORK(NORGESBANK9) 12,665,475 0.16

27 CITIGROUPNOMINEES(ASING)SDNBHDLEGAL&GENERALASSURANCE(PENSIONSMANAGEMENT)LIMITED(A/C1125250001) 12,419,549 0.16

28 CITIGROUPNOMINEES(ASING)SDNBHDUBSAG 12,327,136 0.15

29 HSBCNOMINEES(ASING)SDNBHDEXEMPTANFORJPMORGANCHASEBANK,NATIONALASSOCIATION(JPMELABAIFAPG) 12,182,100 0.15

30 HSBCNOMINEES(ASING)SDNBHDHSBCBKPLCFORABUDHABIINVESTMENTAUTHORITY(TRANG) 11,186,800 0.14


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Sectionsix

PETRONAS CHEMICALS

GROUP BERHAD


LIST OF SUBSTANTIAL SHAREHOLDERS


Shareholdings

1 PETROLIAMNASIONALBERHADSHAREHELDUNDERCIMBGROUPNOMINEES(TEMPATAN)SDNBHD

5,148,000,000 64.35

2 EMPLOYEESPROVIDENTFUNDBOARDSHAREHELDUNDERCITIGROUPNOMINEES(TEMPATAN)SDNBHD:EMPLOYEESPROVIDENTFUNDBOARD 795,815,343EMPLOYEESPROVIDENTFUNDBOARD(NOMURA) 27,818,500EMPLOYEESPROVIDENTFUNDBOARD(CIMBPRIN) 15,418,500EMPLOYEESPROVIDENTFUNDBOARD(AFFIN-HWG) 8,414,800EMPLOYEESPROVIDENTFUNDBOARD(FTEMPLETON) 7,451,300EMPLOYEESPROVIDENTFUNDBOARD(AMINV) 6,250,500EMPLOYEESPROVIDENTFUNDBOARD(AMUNDI) 4,408,000EMPLOYEESPROVIDENTFUNDBOARD(ABERDEEN) 3,205,000EMPLOYEESPROVIDENTFUNDBOARD(F.TEMISLAMIC) 1,870,600EMPLOYEESPROVIDENTFUNDBOARD(ASIANISLAMIC) 1,547,100EMPLOYEESPROVIDENTFUNDBOARD(ABERISLAMIC) 1,495,200EMPLOYEESPROVIDENTFUNDBOARD(ARIM) 1,050,000

795,815,343 9.95

AR16

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CORPORATE DIRECTORY

WHOLLY OWNED SUBSIDIARIES

1. PETRONAS Chemicals Ammonia Sdn Bhd KompleksPentadbiran PetrokimiaPETRONAS KM105,JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098305000 Fax : +6098305222

2. PETRONAS Chemicals Derivatives Sdn Bhd AdministrationBuilding PETRONASPetroleumIndustryComplex KM106,JalanKualaTerengganu-Kuantan 24300Kertih TerengganuDarulIman Tel : +6098307700 Fax : +6098307759

3. PETRONAS Chemicals Fertiliser Kedah Sdn Bhd KM3,JalanJeniang P.O.Box22 08300Gurun

KedahDarulAman Tel : +6044666666 Fax : +6044685200

4. PETRONAS Chemicals Fertiliser Sabah Sdn Bhd WDT32,PETRONASOffice SAMURProject 89857,Sipitang Sabah Tel : +6087813872 Fax : +6087813852

6. PETRONAS Chemicals Glycols Sdn Bhd AdministrationBuilding, PETRONASPetroleumIndustryComplex KM106,JalanKualaTerengganu-Kuantan 24300Kertih TerengganuDarulIman Tel : +6098307700 Fax : +6098307759

7. PETRONAS Chemicals Marketing Sdn Bhd Level19,Tower2,PETRONASTwinTowers KualaLumpurCityCentre 50088KualaLumpur Tel : +60323315000 Fax : +60323311747

8. PETRONAS Chemicals Marketing (Labuan) Ltd Level19,Tower2,PETRONASTwinTowers KualaLumpurCityCentre 50088KualaLumpur Tel : +60323315000 Fax : +60323311747

9. PCM (Thailand) Company Limited 5thFloor,BangkokCityTower 179SouthSathornRoad KwaengTungmahamek KhetSathornBangkok 10120Thailand Tel : +6626795600 Fax : +6626795511

10. PCM (China) Company Limited Room10-011,10th Floor No.1000LujiazuiRingRoad HangSengBankTower PudongNewArea Shanghai200120

China Tel : +862168871445 Fax : +86211445ext211

11. PETRONAS Chemicals Methanol Sdn Bhd KawasanPerindustrianRancha-Rancha P.O.Box80079 87010FederalTerritoryLabuan Tel : +6087594000 Fax : +6087594979

12. PETRONAS Chemicals MTBE Sdn Bhd Lot111/112 KawasanPerindustrianGebeng 26080Kuantan PahangDarulMakmur Tel : +6095856700 Fax : +6095834090/4743

13. PETRONAS Chemicals Polyethylene Sdn Bhd Lot3834 KawasanBukitTengah,KM105 JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098302000 Fax : +6098273940

14. Kertih Port Sdn Bhd Lot3633,KawasanBukitTengah KM105,JlnKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098305648/5796 Fax : +6098305618/5623/5639

15. Polypropylene Malaysia Sdn Bhd Lot111/112 KawasanPerindustrianGebeng 26080Kuantan PahangDarulMakmur Tel : +6095856700 Fax : +6095834090/4743

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PETRONAS CHEMICALS

GROUP BERHAD

16. Vinyl Chloride (M) Sdn Bhd Aras1,KompleksPentadbiranPetrokimiaPETRONAS Km105JalanKuantan-KualaTerengganu 24300,KertehKemaman TerengganuDarulIman Tel : +6098305000 Fax : +60323311747

17. PRPC Polymers Sdn Bhd PRPC Glycols Sdn Bhd PRPC Elastomers Sdn Bhd Tower1,PETRONASTwinTowers KualaLumpurCityCentre 50088KualaLumpur Tel : +60328582174 Fax : +60328582444

18. PT PCM Kimia Indonesia Menara165,Lantai14 J1.TBSimatupangKav1 CilandakTimur JakartaSelatan 12560Indonesia Tel : +622129406682 Fax : +622129406683

PARTLY OWNED SUBSIDIARIES

19. PETRONAS Chemicals Olefins Sdn Bhd AdministrationBuilding PETRONASPetroleumIndustryComplex KM106,JalanKualaTerengganu-Kuantan 24300Kertih TerengganuDarulIman Tel : +6098307700 Fax : +6098307759

20. PETRONAS Chemicals Ethylene Sdn Bhd Lot3834,KawasanBukitTengah KM105,JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098302000 Fax : +6098273940

21. PETRONAS Chemicals Aromatics Sdn Bhd c/oPETRONASPenapisan(T)SdnBhd KM105JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098303007 Fax : +6098303188

22. ASEAN Bintulu Fertilizer Sdn Bhd KM18,JalanTanjungKidurong P.O.Box482 97008Bintulu,Sarawak Tel : +6086231000/232000 Fax : +6086251043

23. PETRONAS Chemicals LDPE Sdn Bhd Lot9717,PETRONASPetroleumIndustryComplex KM105,JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098305068 Fax : +6098305858/5990

24. PCM Chemical India Pvt Ltd 704,TolstoyHouse 14-15,TolstoyMarg NewDelhi-110001 Tel : +911123738715 Fax : +911123738712

JOINT VENTURES

25. Kertih Terminals Sdn Bhd Tingkat1,KompleksPentadbiranKPSB Lot3633KawasanBukitTengah KM105,JalanKuantan-KualaTerengganu 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098305788 Fax : +6098305665

26. BP PETRONAS Acetyls Sdn Bhd KompleksPentadbiran PetrokimiaPETRONAS 24300Kertih,Kemaman TerengganuDarulIman Tel : +6098305300 Fax : +6098305321

ASSOCIATES

27. BASF PETRONAS Chemicals Sdn Bhd JalanGebeng2/1 KawasanPerindustrianGebeng 26080Kuantan PahangDarulMakmur Tel : +6095855000 Fax : +6095834623

28. Idemitsu SM (Malaysia) Sdn Bhd PLO408,OffJalanPekeliling PasirGudangIndustrialEstate 81700PasirGudang JohorDarulTakzim Tel : +6072525350 Fax : +6072528281

29. Malaysian NPK Fertilizer Sdn Bhd Batu2,JalanJeniang P.O.Box24 08300Gurun KedahDarulAman Tel : +6044684075 Fax : +6044684619

Corporate Directory (Cont’d)

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NOTICE OF ANNUAL GENERAL MEETING

Agenda 1. ToreceivetheAuditedFinancialStatementsforthefinancialyearended31December2016togetherwiththeReports

oftheDirectorsandAuditorsthereon.

Please refer to Explanatory Note A. 2. Tore-electthefollowingDirectorswhoretirebyrotationpursuanttoArticle93oftheCompany’sConstitutionand

beingeligible,offersthemselvesforre-election:

a) ChingYewChyeb) DatukTohAhWah

Please refer to Explanatory Note B 3. ToapproveDirectors’ feesofup toRM1.5millionwitheffect from1January2017until thenextAnnualGeneral

MeetingoftheCompanypayabletoNon-ExecutiveDirectors.

Please refer to Explanatory Note C.

4. To approve re-appointment of KPMGPLT, as Auditor of the Company for the ensuing year and to authorise theDirectorstofixtheirremuneration.

Please refer to Explanatory Note D.

5. Totransactanyotherbusinessofwhichduenoticehasbeengiven.

By Order of the Board

Noor Lily Zuriati Abdullah (LS0010101) Kang Shew Meng (MAICSA 0778565)Company Secretaries

KualaLumpur28March2017

(Resolution1)(Resolution2)

(Resolution3)

(Resolution4)

NOTICE IS HEREBY GIVEN THAT the19thAnnualGeneralMeetingoftheCompanywillbeheldatTamingsariBallroom,TheRoyaleChulanHotelKualaLumpur,5JalanConlay,50450KualaLumpur,MalaysiaonWednesday,26thApril2017at10.30a.m.totransactthefollowingbusinesses:

212

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PETRONAS CHEMICALS

GROUP BERHAD

Notes:-1. OnlydepositorswhosenamesappearintheRecordofDepositorsasatTuesday,18April2017shallberegardedasmembersandentitledto

attend,speakandvoteattheMeeting.

2. AmemberoftheCompanywhoisentitledtoattendandvoteatthemeetingisentitledtoappointnotmorethantwoproxiestoattendandvoteinhis/herstead.AproxymaybutneednotbeamemberoftheCompany,anadvocate,anapprovedcompanyauditor,orapersonapprovedbytheRegistrar.

WhereamemberoftheCompanyappointstwoproxies,theappointmentshallbeinvalidunlessthememberspecifiestheproportionofhisshareholdingstoberepresentedbyeachproxy.

3. WhereamemberoftheCompanyisanauthorisednomineeasdefinedundertheSecuritiesIndustry(CentralDepositories)Act,1991,itmayappointatleastoneproxybutnotmorethantwoproxiesinrespectofeachsecuritiesaccountitholdswithordinarysharesoftheCompanystandingtothecreditofthesaidsecuritiesaccount.

4. Theinstrumentappointingaproxyshallbeinwritingunderthehandsoftheappointororofhisattorneydulyauthorisedinwritingoriftheappointorisacorporation,eitherunderitscommonseal,orunderthehandofitsofficeroritsdulyauthorisedattorney.

5. Iftheinstrumentappointingaproxyissignedunderthehandofanofficerdulyauthorised,itshouldbeaccompaniedbyastatementreading“signed as authorised officer under AuthorisationDocumentwhich is still in force, no notice of revocation having been received”. If theinstrumentappointingaproxyissignedbyanattorneydulyappointedunderapowerofattorney,itshouldbeaccompaniedbyastatementreading“signedunderPowerofAttorneywhichisstill inforce,nonoticeofrevocationhavingbeenreceived”.AcopyoftheAuthorisationDocumentor thePowerofAttorney,whichshouldbevalid inaccordancewith the lawsof the jurisdiction inwhich itwascreatedand isexercised,shouldbeenclosedwiththeinstrumentappointingaproxy.

6. TheinstrumentappointingaproxymustbedepositedattheofficeoftheCompany’sShareRegistrar,SymphonyShareRegistrarsSdnBhd,Level6,SymphonyHouse,PusatDaganganDana1,JalanPJU1A/46,47301PetalingJaya,SelangorDarulEhsan,Malaysiaatleast48hoursbeforethemeeting,orifthemeetingisadjournedatleast48hoursbeforethetimefixedfortheadjournedmeeting.

7. Explanatory Notes

Note A TheauditedfinancialstatementsarelaidbeforetheshareholderspursuanttotheprovisionsofSection244(2)(a)oftheCompaniesAct,2016.

Thesameisfordiscussionandnotputforwardforvoting.

Note B Re-election of Directors who retire in accordance with Article 93 of the Company’s Constitution

1. Articles93oftheCompany’sConstitutionprovidesthatone-thirdoftheDirectorsforthetimebeing,oriftheirnumberisnotamultipleof three, thenumbernearest toone-thirdwithaminimumofone,shall retire fromofficeandanelectionofDirectorsshall takeplacePROVIDEDALWAYSthateachDirectorshallretireatleastonceineverythreeyearsbutshallbeeligibleforre-election.ADirectorretiringatameetingshallretainofficeuntilthecloseofthemeetingwhetheradjournedornot.WithcurrentBoardsizeofeight,twoDirectorsaretoretireinaccordancewithArticle93oftheCompany’sConstitution.

2. TheNominationandRemunerationCommittee(NRC)oftheCompanydeterminestheeligibilityofeachdirectorstandingforre-electionattheAGMbasedontheperformanceoftheDirectors,takingintoaccounttheresultsoftheirlatestBoardEvaluation,contributiontotheBoardthroughtheirskills,experience,strengthsandqualities,levelofindependenceandabilitytoactinthebestinterestoftheCompanyindecision-making.

TheprofilesoftheretiringDirectorsaresetoutintheProfileoftheBoardofDirectorsonpages29and31,ofthe2016AnnualReport.TheBoardendorsedtheNRC’srecommendationthattheDirectorswhoretireinaccordancewithArticle93oftheCompany’sConstitutionareeligibletostandforre-election.

Notice of Annual General Meeting (Cont’d)

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InviewthattherewasnoDirectorappointedduringthefinancialyearunderreview,thereisnoretirementpursuanttoArticle99oftheCompany’sConstitution.

Note C PursuanttoSection230(1)oftheCompaniesAct2016,thefeesofthedirectors,andanybenefitspayabletothedirectorsincludingany

compensationforlossofemploymentofadirectororformerdirectorofapubliccompanyoralistedcompanyanditssubsidiaries,shallbeapprovedatageneralmeeting.

ThefeesstructureoftheNon-ExecutiveDirectors(NEDs)oftheCompanyisasfollows:• MonthlyfixedfeesfordutiesasDirector/Chairman;• MeetingallowanceforeachBoard/BoardCommitteeattended;and• DirectorsandOfficersLiabilityinsurance.

TheDirectors’feesandmeetingallowanceforMdArifMahmoodandZakariaKasahbeingtheNon-IndependentNon-ExecutiveDirectorswhoarealsoemployeesofPetroliamNasionalBerhad(PETRONAS)andholdingpositionsofVicePresidentandabovearepaiddirectlytoPETRONAS.

Theshareholders,atthe15thAnnualGeneralMeetingheldon22May2013,hasapprovedtheannuallimitoftheDirectors’feesuptoRM1.5millionfromfinancialyearcommencing1January2013.TheactualDirectors’feesamountpaidtoNEDsforthefinancialyearended31December2016isRM1,001,500.

TheDirectors’ feesfrom1January2017until theconclusionof thenextAnnualGeneralMeetingareestimatednot toexceedRM1.5million.TheBoardwillseekshareholders’approvalatthenextAGMintheeventtheDirectors’feesproposedareinsufficient.

DetailsofthefeespaidtotheDirectorsforthefinancialyearended31December2016aredisclosedonpage102oftheStatementon

CorporateGovernanceinthe2016AnnualReport.

Note D TheBoardatitsmeetingheldon20February2017recommendedthere-appointmentofKPMGPLTasexternalAuditorsoftheCompany

forthefinancialyearending31December2017forapprovaloftheshareholders.

KPMGPLThasmetthecriteriaprescribedbyParagraph15.21oftheMainMarketListingRequirementsofBursaMalaysiaSecuritiesBerhad.

KPMGhadconverted its legalentitystatus fromUnlimitedLiabilityPartnershippursuant toPartnershipAct1961 toLimitedLiabilityPartnershippursuanttoSection29oftheLimitedLiabilityPartnershipsAct2012(LLPAct2012)effective27December2016.Accordingly,KPMGhadbeenregisteredinthenameofKPMGPLT.Inthisinstance,PLTmeans“PerkongsianLiabilitiTerhad”.TherewasnochangetothePartnersservingtheCompany.

Inanyevent,pursuanttoSection36oftheLLPAct2012anyagreements/engagementsalreadymadebetweentheCompanyanditsGroupandKPMGwillcontinuetobeinforceasifKPMGPLTwereapartytotheagreements.Accordingly,allengagementletterssignedwithKPMGcontinuetobeinforceuntilthesearesuperseded.

Other Information TheCompanyhasengagedindependentscrutineerstocount,auditandvalidatethevotesforeachproposalpresentedtoshareholders.

Notice of Annual General Meeting (Cont’d)

214

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PETRONAS CHEMICALS

GROUP BERHAD

ADMINISTRATIVE DETAILSPETRONAS CHEMICALS GROUP BERHAD 19TH ANNUAL GENERAL MEETING

Registration

1) Registrationwillstartat8.15a.m.on26April2017infrontoftheTamingsariBallroom,TheRoyaleChulanHotelKualaLumpur,Malaysia.

2) PleaseproduceyouroriginalIdentityCard(IC)totheregistrationstaffforverification.PleasemakesureyoucollectyourICthereafter.

3) Uponverification,youarerequiredtowriteyournameandsignontheattendancelistplacedontheregistrationtable.

4) Youwillalsobegivenanidentificationtag.Nopersonwillbeallowedtoenterthemeetingroomwithouttheidentificationtag.Therewillbenoreplacementintheeventthatyouloseormisplacetheidentificationtag.

5) Nopersonwillbeallowedtoregisteronbehalfofanotherperson,evenwiththeoriginalICofthatperson.

6) Theregistrationcounterwillhandleonlyverificationofidentityandregistration.

Help Desk

7) PleaseproceedtotheHelpDeskforanyclarificationorenquiry.

8) TheHelpDeskwillhandlerevocationofproxy’sappointment.

Parking

9) Pleasetakenotethattransportationisatattendees’owncost.

10) ThereisnodedicatedparkingspaceforAGMattendees.However,youmayparkyourvehicleatparkingarealocatedattheRoyaleChulanHotelKualaLumpur,5JalanConlay,50450KualaLumpur,Malaysia.

Annual Report

11) PCG’sAnnualReportforFinancialYear2016isavailableat:

http://www.petronaschemicals.com http://www.bursamalaysia.com

PROXY FORMPETRONASCHEMICALSGROUPBERHAD(COMPANYNO:459830-K)

No.ofOrdinarySharesHeld

CDSAccountNo.

I/We................................................................................................................................................................................................................................(Full Name In Capital Letters)

of....................................................................................................................................................................................................................................(Full Address)

beingaMember/Members*ofPETRONASCHEMICALSGROUPBERHAD,doherebyappoint:

FullName(inBlock) NRIC/PassportNo. ProportionofShareholdings

No.ofShares %

Address

and/or*

FullName(inBlock) NRIC/PassportNo. ProportionofShareholdings

No.ofShares %

Address

orfailinghim/her,theChairmanoftheMeeting,asmy/our*proxytovoteforme/us*andonmy/our*behalfatthe19thAnnualGeneralMeetingoftheCompanytobeheldatTamingsari Ballroom, The Royale Chulan Hotel Kuala Lumpur, 5 Jalan Conlay, 50450 Kuala Lumpur, Malaysia on Wednesday,26April2017at10.30a.m.andatanyadjournmentthereof.

Pleaseindicatewithan“X”inthespaceprovidedbelowwhetheryouwishyourvotestobecastfororagainsttheResolutions.Intheabsenceofspecificdirections,yourproxywillvoteorabstainfromvotingashe/shethinksfit.

No. Resolutions For Against

1. Re-electionofChingYewChyeasaDirector.

2. Re-electionofDatukTohAhWahasaDirector.

3. Directors’feesofuptoRM1.5millionwitheffectfrom1January2017untilthenextAnnualGeneralMeetingoftheCompanypayabletoNon-ExecutiveDirectors.

4. Re-appointmentofKPMGPLTasAuditors.

PleaserefertotheNoticeofAnnualGeneralMeetingforfulldetailsoftheproposedResolutions.

Aswitnessmy/ourhandthis................................. day................................. 2017.

......................................................................

Signature/CommonSealofShareholder(s)*deletewhichevernotapplicable

Notes:-

1. OnlydepositorswhosenamesappearintheRecordofDepositorsasatTuesday,18April2017shallberegardedasmembersandentitledtoattend,speakandvoteattheMeeting.

2. AmemberoftheCompanywhoisentitledtoattendandvoteatthemeetingisentitledtoappointnotmorethantwoproxiestoattendandvoteinhis/herstead.AproxymaybutneednotbeamemberoftheCompany,anadvocate,anapprovedcompanyauditor,orapersonapprovedbytheRegistrar.

WhereamemberoftheCompanyappointstwoproxies,theappointmentshallbeinvalidunlessthememberspecifiestheproportionofhisshareholdingstoberepresentedbyeachproxy.

3. WhereamemberoftheCompanyisanauthorisednomineeasdefinedundertheSecuritiesIndustry(CentralDepositories)Act,1991,itmayappointatleastoneproxybutnotmorethantwoproxiesinrespectofeachsecuritiesaccountitholdswithordinarysharesoftheCompanystandingtothecreditofthesaidsecuritiesaccount.

4. Theinstrumentappointingaproxyshallbeinwritingunderthehandsoftheappointororofhisattorneydulyauthorisedinwritingoriftheappointorisacorporation,eitherunderitscommonseal,orunderthehandofitsofficeroritsdulyauthorisedattorney.

5. If the instrumentappointingaproxy issignedunder thehandofanofficerdulyauthorised, it shouldbeaccompaniedbyastatement reading “signedasauthorisedofficerunderAuthorisationDocumentwhichisstill inforce,nonoticeofrevocationhavingbeenreceived”. Iftheinstrumentappointingaproxyissignedbyanattorneydulyappointedunderapowerofattorney,itshouldbeaccompaniedbyastatementreading“signedunderPowerofAttorneywhichisstillinforce,nonoticeofrevocationhavingbeenreceived”.AcopyoftheAuthorisationDocumentorthePowerofAttorney,whichshouldbevalidinaccordancewiththelawsofthejurisdictioninwhichitwascreatedandisexercised,shouldbeenclosedwiththeinstrumentappointingaproxy.

6. TheinstrumentappointingaproxymustbedepositedattheofficeoftheCompany’sShareRegistrar,SymphonyShareRegistrarsSdnBhd,Level6,SymphonyHouse,PusatDaganganDana1,JalanPJU1A/46,47301PetalingJaya,SelangorDarulEhsan,Malaysiaatleast48hoursbeforethemeeting,orifthemeetingisadjournedatleast48hoursbeforethetimefixedfortheadjournedmeeting.

foldhere

foldhere

Symphony Share Registrars Sdn BhdLevel6,SymphonyHousePusatDaganganDana1JalanPJU1A/4647301PetalingJayaSelangorDarulEhsanMalaysia

AffixStamphere
