Chairman and Managing Director
& CEO's Report

Volatility in the US/Australian dollar exchange rate and the poor performance of our refineries particularly impacted Caltex’s full year results.

Caltex’s full year profit after tax for 2008 was $186 million, compared with $444 million in 2007.

$210 million of the $258 million decline was due to an 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. We expect that the short-term negative effect of the weaker Australian dollar on 2008 replacement cost of sales operating profit (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 most of the reliability impact. Specific actions have been undertaken to address these reliability issues.

The growth in our marketing business in 2008 was particularly pleasing and reflected our strategic focus on the development of this part of our business. Total transport fuels sales volume was 14.4 billion litres for the full year. This 3.9% volume growth over 2007 was supported by the strong growth in diesel sales, over and above growth in market demand. Diesel and jet fuel sales both grew by 10% to 5.7 billion litres and 1.8 billion litres respectively. In convenience retailing, shop sales continued to increase as new product categories and healthy food options were added to the Caltex offer.

The supply and distribution arm of our business also had a successful year sourcing crude oil despite periods of regional short supply and an extremely volatile price environment. In addition, local expertise and a robust supply chain enabled us to source and deliver fuel products to market to minimise the impact of both planned and unplanned refinery shutdowns at Kurnell and Lytton.

The management team responded early to the deteriorating financial climate. Cash flow improvement initiatives throughout the year, and a focus on the management of operating expenses, enabled Caltex’s balance sheet to remain strong despite the volatility.

Cost management across the business remained a major focus with unit operating expenses growth broadly in line with inflation at 4.5% in 2008.

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%, in line with Caltex’s dividend policy of paying out between 40% and 60% of RCOP. This compares with a total dividend payout of 80 cents fully franked in 2007.

Our people

We will continue to focus on our long-term strategy of profitably growing the marketing business, in order to remain the leading fuel and convenience operator in Australia

The Board would like to take this opportunity to thank our employees, contractors, franchisees and resellers for their contribution and commitment to Caltex in 2008.

The Board is committed to the health and safety of our people. Our lost time injury frequency rate has decreased from 3.8 per million hours worked in 2007 to 3.0 per million hours worked in 2008. This is an improvement of over 20% and Caltex’s best ever performance.

On a sad and poignant note, Caltex farewelled Alex Strang, General Manager – Supply and Distribution, who passed away suddenly in December 2008. Alex’s career with Caltex spanned almost 37 years and his contribution and leadership in engineering and executive management was widely recognised. Alex’s counsel, expertise, passion and unyielding dedication will be sadly missed by the Caltex Board, management and employees alike. Caltex extends its deepest sympathies to Alex’s wife, Young, and their two children.

Response to climate change

The imperative to address the issue of climate change is acknowledged and supported by Caltex. However, as the largest refiner and marketer of petroleum products in Australia, Caltex will be significantly impacted by the proposed Carbon Pollution Reduction Scheme (CPRS).

Under the proposed scheme, Caltex will be liable for its own emissions and those of its customers. We will be seeking free permits for our own emissions so as to ensure a level playing field with our overseas competitors. We will also be passing on the costs of permits we must purchase to cover our customers’ emissions.

We are cognisant of Caltex’s responsibility to ensure environmental, economic and social sustainability. We remain committed to working with the Federal Government to design an effective CPRS that does not adversely impact our business.

Outlook

Caltex recognises that, due to the economic slowdown, we may see an impact on 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.

We have always been cognisant of the need to maintain a strong balance sheet given we operate in a cyclical industry. We will maintain our focus on cost control, cash flow and debt management.

We will continue to focus on our long-term strategy of profitably growing the marketing business, in order to remain the leading fuel and convenience operator in Australia, with this growth underpinned by an effective supply chain.

Elizabeth Bryan
CHAIRMAN

Desmond King
MANAGING DIRECTOR &
CHIEF EXECUTIVE OFFICER