Directors' Report

Board of directors

The Board of Caltex Australia Limited comprises Ms Elizabeth Bryan (Chairman), Mr Desmond King (Managing Director & CEO), Mr Trevor Bourne, Mr Brant Fish, Mr Greig Gailey, Ms Colleen Jones-Cervantes and Mr John Thorn.

All directors have been in office since before 1 January 2008, except for Ms Jones-Cervantes. The following changes to the composition of the Board have occurred since 1 January 2008:

• Ms Jones-Cervantes was appointed as a director (to fill a casual vacancy) from 1 June 2008. She previously served as an alternate director for each of Mr Fish and Mr Wissel until 31 May 2008.
• Mr Wissel resigned as a director with effect from 31 May 2008. He was appointed as an alternate director for each of Mr Fish and Ms Jones-Cervantes from 1 June 2008.
• Mr Richard (Dick) Warburton retired as a director at the close of the Annual General Meeting held on 24 April 2008.

Board profiles

Elizabeth Bryan

Chairman (Non-Executive/Independent)

Date of appointment – Director: 18 July 2002
Date of appointment – Chairman: 1 October 2007
Board committees: Nomination Committee (Chairman); attends meetings of the Audit Committee, Human Resources Committee and OHS & Environmental Risk Committee in an ex-officio capacity.

Elizabeth is a professional director and brings management, strategic and financial expertise to Caltex. She has over 30 years’ experience in the financial services industry, in government policy and administration, and on the boards of companies and statutory organisations. Prior to becoming a professional director, she served for six years as Managing Director of Deutsche Asset Management and its predecessor organisation, NSW State Superannuation Investment and Management Corporation.

Elizabeth is Chairman of UniSuper Limited, a director of Westpac Banking Corporation (appointed November 2006) and a director of the Australian Institute of Company Directors. She was previously a director of Ridley Corporation Limited (September 2001 to October 2007).

Elizabeth holds a Bachelor of Arts from the Australian National University and a Master of Economics from the University of Hawaii (USA).

Desmond King

Managing Director & CEO

Date of appointment: 1 May 2006
Board committees: Nomination Committee

Des has served as the Managing Director & CEO from 1 May 2006. He is responsible for overseeing the day-to-day operations of the Caltex Australia Group.

Des has worked in the oil industry with Chevron for over 25 years and has held a number of senior roles, including General Manager of the Chevron Pembroke Refinery in Wales, director of Texaco UK, director of Nerefco (a Chevron/BP joint venture refinery in Holland), General Manager of Chevron Corporate Strategy & Planning, and Managing Director of Chevron Global Technology Marketing.

Des is a member of the Board of the Australian Institute of Petroleum.

Des holds a Bachelor of Chemical Engineering from Imperial College London (UK) and a Doctor of Philosophy in Chemical Engineering from the University of Cambridge (UK).

Trevor Bourne

Director (Non-Executive/Independent)

Date of appointment: 2 March 2006
Board committees: OHS & Environmental Risk Committee (Chairman), Audit Committee and Nomination Committee.

Trevor brings broad management experience in industrial and capital intensive industries, and engineering and supply chain skills and experience, to the Board. From 1999 to 2003, he served as CEO of Tenix Investments. Prior to Tenix, Trevor spent 15 years at Brambles Industries, including six years as Managing Director of Brambles Australasia. He has also previously worked for Incitec Limited and BHP Limited.

Trevor is Chairman of Hastie Group Limited (where he has served as a director since February 2005) and a director of Origin Energy Limited (appointed February 2000). He was previously a director of Coates Hire Limited (February 2004 to January 2008) and Lighting Corporation Limited (February 2004 to January 2008).

Trevor holds a Bachelor of Mechanical Engineering from the University of New South Wales and a Master of Business Administration from the University of Newcastle.

Brant Fish

Director (Non-Executive)

Date of appointment: 27 July 2006
Board committees: Human Resources Committee and Nomination Committee.

Brant brings significant downstream oil industry experience to Caltex, particularly in the areas of supply chain, refining and marketing. He currently serves as the Global Vice President of Joint Ventures & Affiliates for Chevron Global Manufacturing and as Chevron’s Downstream Regional Leader for Asia Pacific. Brant is based in Singapore and has accountability for overall Chevron Downstream earnings in Asia Pacific – from refinery crude supply to a consumer or export sale. He was previously the General Manager of Supply Chain Optimization – Asia Pacific for Chevron U.S.A. Inc.

Brant holds a Bachelor of Science (Mechanical Engineering) from the University of Florida (USA).

Brant previously served as an alternate director of Caltex Australia Limited (April 2005 to July 2006).

Greig Gailey

Director (Non-Executive/Independent)

Date of appointment: 11 December 2007
Board committees: Human Resources Committee (Chairman), Audit Committee, Nomination Committee and OHS & Environmental Risk Committee.

Greig brings extensive Australian and international oil industry experience, and broad management expertise from industrial and capital intensive industries, to the Board. From 1964 to 1998, he worked at British Petroleum Company (BP) where he held various positions throughout Australia and offshore, including management of refining, supply and distribution in Australia and Europe.

Greig was subsequently appointed CEO of Fletcher Challenge Energy (New Zealand), a position he held from 1998 to 2001. In August 2001, he joined Pasminco Limited as CEO. Pasminco was subsequently transformed and relisted as Zinifex Limited on the Australian Stock Exchange in April 2004. Greig became Managing Director & CEO of Zinifex Limited from that date until standing down in June 2007. He is currently President of the Business Council of Australia, a director of the Australian Davos Connection Limited and a director of the Victorian Opera Company Limited.

Greig holds a Bachelor of Economics from the University of Queensland.

Colleen Jones-Cervantes

Director (Non-Executive)

Date of appointment: 1 June 2008
Board committees: Nomination Committee and OHS & Environmental Risk Committee.

Colleen brings important downstream oil industry knowledge and experience, especially in marketing, to the Board. She currently serves as Chevron’s Vice President of Global Marketing, Asia Pacific Region and is responsible for retail sales for the Caltex brand (as operated by Chevron), commercial and industrial sales, asphalt and LPG sales and company operated stores in
11 countries.

Colleen holds a Bachelor of Science (Mechanical Engineering) from Michigan Technological University (USA). She is based in Singapore.

Colleen previously served as an alternate director of Caltex Australia Limited (July 2006 to May 2008).

John Thorn

Director (Non-Executive/Independent)

Date of appointment: 2 June 2004
Board committees: Audit Committee (Chairman), Human Resources Committee and Nomination Committee

John is a professional director and brings expertise to the Board in the areas of accounting and financial services, business advisory, risk and general management. He has had over 37 years’ professional experience with PricewaterhouseCoopers, where he was a partner from 1982 to 2003, and undertook work for major international and local companies. During this period, he served as the Managing Partner of PricewaterhouseCoopers’ Assurance and Business Advisory Service practice from 1998 to 2001 and as the National Managing Partner until 2003.

John is a director of Amcor Limited (appointed December 2004), National Australia Bank Limited (appointed October 2003) and Salmat Limited (appointed September 2003).

John is a Fellow of the Institute of Chartered Accountants in Australia.

Peter Wissel

Alternate Director* (Non-Executive)

Date of appointment: (* for each of Brant Fish and Colleen Jones-Cervantes) 1 June 2008

Peter is the Regional Finance Officer, Asia Pacific for Chevron’s downstream business. In this role, he is responsible for financial and management reporting, credit approval, local cash management, local tax matters, and risk management in the 14 countries in the Asia Pacific region where Chevron conducts refining and marketing operations.

Peter holds a Bachelor of Arts in Economics from the Denison University (USA) and a Master of Business Administration – Finance from the New York University Graduate School of Business Administration (USA). He is based in Singapore.

Peter previously served as a director of Caltex Australia Limited (August 2005 to May 2008).

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Mr Richard (Dick) Warburton AO served as a director from 29 July 1999 to the close of the Annual General Meeting on 24 April 2008, when he retired as a director. Mr Warburton served as Chairman from 26 April 2001 to 30 September 2007.

In 2008 (during his time with the Board), Mr Warburton served as Chairman of The Board of Taxation, Chairman of Magellan Flagship Fund Limited (appointed (as director) October 2006) and Chairman of Tandou Limited (appointed (as director) April 2004). In the previous three years, he was a director of Tabcorp Holdings Limited (June 2000 to November 2006) and Nufarm Limited (October 1993 to December 2007).

Prior to becoming a professional director, Mr Warburton was the Chairman and CEO of DuPont Australia & New Zealand, where he was responsible for DuPont’s petrochemical business operations in Australia and New Zealand.

Review of results and operations

General overview

Caltex Australia Limited recorded an after tax profit of $186 million on a replacement cost of sales operating profit (RCOP) basis for the year to 31 December 2008, down from $444 million in 2007.

$210 million of the $258 million decline is due to the unprecedented fall in the Australian dollar in the second half of 2008. The Australian dollar fell from an average of 82 cents in September to an average of 68 cents in October. This one month change alone accounted for approximately one half of the total $210 million decline.

Caltex does not actively hedge its foreign currency exposures because the impact of key external factors normally nets out over time. In 2008, the lower crude oil price offset the increase in working capital due to the lower Australian dollar with no significant impact on debt. Caltex expects that the short-term negative effect of the weaker Australian dollar on 2008 RCOP earnings will be offset by the positive impact on future earnings via a stronger Australian dollar refiner margin.

Refinery reliability was disappointing in 2008 with a single process unit at each of Kurnell and Lytton accounting for the majority of the reliability impact. Specific actions have been undertaken to address these reliability issues.

Caltex saw strong marketing volume growth and market share gains during the year. Overall, the marketing business was the major contributor to Caltex’s earnings. Caltex’s robust supply chain enabled the company to source and deliver high quality product to market to minimise the impact of both planned and unplanned refinery shutdowns at Kurnell and Lytton.

Overall, Caltex’s 2008 RCOP profit after tax equates to an average of 0.9(1) cents per litre for all petroleum products sold in comparison to 2.2 cents per litre sold in 2007.

Cash flow improvement initiatives throughout the year, and a focus on the management of operating expenses, enabled Caltex’s balance sheet to remain strong in an environment of unprecedented volatility. Caltex’s BBB+ credit rating was also reconfirmed in the fourth quarter of 2008.

On a historical cost profit basis (including inventory gains/losses), Caltex recorded an after tax profit of $34 million for 2008, compared with $646 million in 2007. This decline was dominated by the fall in crude oil prices and the unprecedented drop in the Australian dollar.

Debt at 31 December 2008 was $832 million (31 December 2007: $582 million).

Dividend

The Board declared no final dividend will be paid for 2008, reflecting the RCOP loss of $10 million in the second half of 2008. The interim dividend of 36 cents per share paid in September 2008, based on earnings of $196 million in the first half of 2008, represents a full year payout ratio of 52% of RCOP, in line with Caltex’s dividend policy. This compares with a total dividend payout of 80 cents fully franked for 2007. The final 2007 dividend of 33 cents per share was paid in March 2008.

Marketing

Caltex’s marketing business continued to provide a stable and growing platform for earnings in 2008. Total transport fuels sales volume grew to in excess of 14.4 billion litres for the full year. This 3.9% increase from 2007 was primarily driven by the strong growth in total diesel and jet sales which grew by 10.1%. In convenience retailing shop sales increased 3.6%.

Supply chain

Total production of petrol, diesel and jet was 9.8 billion litres, at an average refinery utilisation of 74%. Production and utilisation were impacted in 2008 by a combination of planned and unplanned maintenance activity and softening petrol margins in the second half of the year.

For 2008, the Caltex Refiner Margin(2) averaged US$10.27 per barrel, bolstered by strong diesel and jet demand which offset flagging petrol demand. This equates to 7.9 Australian cents per litre in 2008 compared with 7.0 Australian cents per litre in 2007.

During the year, three new biofuels blending and storage facilities at the Banksmeadow terminal in Sydney, the Newcastle terminal and the Lytton terminal in Brisbane were successfully commissioned. As at the end of January 2009, Bio E10 Unleaded has been rolled out to 191 Caltex branded petrol stations in NSW, 125 in Queensland and seven in the ACT, and biodiesel blends are now available at 151 petrol stations in NSW and distributed commercially in Adelaide and Newcastle.

Outlook

Caltex recognises that the economic slowdown may impact both marketing growth and regional US dollar refiner margins in 2009. However, the weaker Australian dollar will bolster Caltex’s refiner margin in Australian dollar terms.

Caltex has always been cognisant of the need to maintain a strong balance sheet given Caltex operates in a cyclical industry. Caltex will maintain its focus on cost control, cash flow and debt management. Caltex will also continue to focus on its long-term strategy of profitably growing the marketing business, in order to remain the leading fuel and convenience operator in Australia, with growth underpinned by an effective supply chain.

Carbon Pollution Reduction Scheme (CPRS)

The Federal Government’s Carbon Pollution Reduction Scheme (CPRS) is due to start in 2010.

Refining

Under the proposed CPRS, Caltex’s refineries will be treated as “emissions-intensive trade-exposed” and will receive approximately 60% free permits, although the rules for exact permit eligibility are still to be determined. The impact of the CPRS on Caltex’s future profit will depend on the price for the remaining permits that must be purchased. Total refinery emissions will be approximately 2.5 million tonnes, so permits for approximately 1 million tonnes p.a. must be purchased. Caltex will be unable to recover these permit purchase costs due to import competition.

Marketing

Fuel suppliers will be required to purchase permits for their customers’ emissions. Caltex customer emissions are approximately 40 million tonnes p.a. and Caltex will have to incorporate the full cost of these permits into fuel prices. This will be offset by a government excise reduction for motorists and farmers to help avoid price increases for these customers.

Principal activities

The principal activities of Caltex during the year were the purchase, refining, distribution and marketing of petroleum products and the operation of convenience stores throughout Australia. There were no significant changes in the nature of Caltex’s activities or in the state of affairs during the financial year.

Significant events after balance date

No items, transactions or events of a material or unusual nature that, in the opinion of the Board, are likely to significantly affect the operations of Caltex, the results of those operations or the state of affairs of the Group in subsequent financial years, have arisen in the period from 31 December 2008 to the date of this report.

Likely developments

Business operations

Caltex will continue to purchase, refine, distribute and market petroleum products and operate convenience stores throughout Australia.

Environmental regulations

Caltex is committed to compliance with Australian laws, regulations and standards, as well as to minimising the impact of our operations on the environment. The Board OHS & Environmental Risk Committee has oversight of Caltex’s environmental risks and the systems in place to manage operational risks and support the Caltex Environment Policy.

Caltex sets key performance indicators to measure environmental, health and safety performance and drive improvements against targets. In addition to Board review, progress against these performance measures is discussed regularly by the Managing Director & CEO with General Managers and Business Unit managers.

Risks are examined and communicated through the Caltex Risk Management Framework, an enterprise-wide risk management system which provides a consistent approach to identifying and assessing all risks, including environmental risks. Under the framework, risks and controls are assessed, improvements identified, and quarterly reports made to the Board.

In 2008, Caltex continued to disclose information on pollution and greenhouse gas emissions from its facilities under the National Pollutant Inventory and Greenhouse Challenge Plus respectively. Caltex also made its first public report on energy use and potential energy savings at the refineries under the federal Energy Efficiency Opportunities program, based on detailed assessments of energy usage at the refinery facilities to determine opportunities for savings.

In 2008, Caltex made its fourth submission to the Corporate Responsibility Index (reporting on the 2007 calendar year), and received a bronze ranking in the Index for its Corporate Responsibility performance in the 2006 calendar year.

Compliance with environmental regulations

A total of 12 environmental protection licences were held by companies in the Caltex Australia Group in 2008 for two refinery sites and 10 terminals.

Nine non-compliances were recorded against the conditions in these licences in 2008. Each of these was reported to government environmental authorities. These did not result in an infringement notice or fine. All non-compliances were investigated and corrective actions implemented.

Caltex was prosecuted for one breach of environmental regulations in 2008, and was issued one penalty infringement notice:

Caltex Refineries (NSW) Pty Ltd, at Kurnell, was fined $78,000 in the NSW Land and Environment Court for failure to properly and efficiently operate the refinery flare which resulted in odour complaints between 23 and 29 December 2006, and paid an additional $48,000 in NSW EPA legal costs. The fine was paid to the NSW National Parks and Wildlife Service to implement a Weed Management Strategy for Towra Point Nature Reserve, an internationally recognised wetland used by migratory birds.

Caltex Refineries (NSW) Pty Ltd, at Kurnell, was issued a penalty infringement notice of $1,500 by Sydney Ports Corporation in November 2008 for a spill of less than 10 litres of oil into Botany Bay from Caltex’s wharf facilities which occurred on 30 August 2008. Caltex immediately initiated a clean-up activity and all the oil was safely removed from Silver Beach. There was no significant environmental impact.

In April 2008, the Victorian EPA brought proceedings against Caltex Australia Petroleum Pty Ltd relating to a loss of containment incident in August 2006 at Newport terminal. The matter is listed for hearing before the Melbourne Magistrates Court in March 2009.

Caltex is committed to achieving 100% compliance and all breaches of environmental regulations have been investigated thoroughly and appropriate corrective actions taken to prevent recurrence.

Lead auditor’s independence declaration

The lead auditor’s independence declaration forms part of the Directors' Report for the financial year ended 31 December 2008.

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1. This calculation is based on 2008 RCOP NPAT ($186 million), which includes non-fuel income, divided by the total Caltex sales of petrol, diesel and jet fuel including sales to domestic refiners, lubricants and specialty products (20.4 billion litres).
2. The Caltex Refiner Margin (CRM) represents the difference between the cost of importing a standard Caltex basket of products to Eastern Australia and the cost of importing the crude oil required to make that product basket. The CRM calculation represents: average Singapore refiner margin + product quality premium + crude discount/(premium) + product freight - crude freight - yield loss.