2008 Annual Report

Discussion and Analysis

Total Revenue

24%

Total revenue increased primarily due to:

higher product prices driven by higher average crude oil prices. Crude oil prices rose from US$101/bbl in December 2007, peaked at US$147/bbl in July 2008, before falling to US$42/bbl in December 2008, and
higher sales volumes.

TOTAL expenses
– replacement cost basis

26%

Total expenses increased primarily due to higher cost of sales, which reflected:

higher average crude prices for the majority of 2008
inflationary impact on operating costs, and
increased product imports.

Replacement cost EBIT

52%

Caltex's underlying performance weakened, driven by foreign exchange losses resulting from the rapid fall in the Australian dollar in the last quarter of the year, and the impact of lower refinery production.

RCOP EBIT breakdown [1]

Caltex Refiner Margin (CRM)

$789M

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 basically represents: average Singapore refiner margin + product quality premium + crude discount / (premium) + product freight - crude freight - yield loss.

Despite lower production volumes (2008: 9.8 billion litres of petrol, diesel and jet; 2007: 10.9 billion litres), total CRM was A$3 million higher in 2008 than in 2007. The US dollar CRM was 11% higher in 2008 at US$10.27/bbl, compared with US$9.26/bbl in 2007. The Australian dollar CRM was 13% higher at 7.88 Australian cents per litre in 2008, compared with 7.00 Australian cents per litre in 2007.

TRANSPORT FUELS
MARKETING MARGIN

$393M

Transport fuels comprise petrol, diesel and jet. The transport fuels marketing margin is based on the average net margin over Import Parity Price in Australia.

The average transport fuels marketing margin was 11% higher than in 2007, driven by higher transport fuel sales of 14.4 billion litres in 2008, compared with 13.8 billion litres in the same period in 2007. The strongest growth was in diesel sales with Caltex volumes up 10% over the prior year.

Lubricants and
specialties margin

$128M

Lubricants and specialties products include finished lubricants, base oils, liquified petroleum gas, petrochemicals, bitumen, wax and marine fuels.

Lubes and specialty margins increased 11% compared with 2007.

Non-fuel income

$154M

Non-fuel income includes convenience store income, franchise income, royalties, property, plant and equipment rentals, StarCard income and share of profits from non-controlled equity distributors.

Non-fuel income was up slightly over 2007 in tougher economic conditions.

Operating expenses

($806M)

While cost pressures remained high through 2008, operating cost on a cents-per-litre basis was held to an increase of 4.5% above 2007. Increased refinery depreciation as well as increased maintenance costs were a major contributor. Caltex has maintained its focus on cost structure and, as a result, cents per litre cost increases tracked in line with official inflation figures.

OTHER

($337M)

Other margin includes:

gross margin other than CRM (includes unfavourable imports, purchases and export sales), and
foreign exchange loss on payables ($243 million).

TOTAL RCOP EBIT

$321M

The breakdown of RCOP shown here represents a management reporting view of the breakdown and, as such, individual components may not reconcile to statutory accounts.

Net finance costs

44%

The increase in net finance costs reflects a higher average net debt for 2008 (39% above 2007). The net debt at 31 December 2008 was $832 million, compared with $582 million at 31 December 2007. Debt increased in the year due to the weakened historical profit driven by the inventory losses caused by falling crude prices. In addition, capital expenditure remained at a high level ($462 million) as progress on a new diesel hydrotreater unit at the Lytton refinery continued. The interest on this debt was partially offset by higher capitalised finance costs, $20 million in 2008 vs. $4 million in 2007.

Inventory loss after tax

175%

Regional crude oil (Tapis) prices decreased significantly in the second half of 2008 (US$138.60/bbl July 2008, compared with US$41.71/bbl in December 2008). This decrease resulted in a net inventory loss of $217 million ($152 million after tax), compared with net inventory gains of $290 million ($202 million after tax) in 2007.

Included in the inventory loss is a write-down of inventory on hand at year end to its net realisable value by an amount of $65 million ($46 million after tax). There was no net realisable value write-down to inventory in 2007.

FINAL 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. This makes the total 2008 dividend declared 36 cents per share fully franked after the interim dividend of 36 cents per share, paid on 28 September 2008 (2007 total dividends: 80 cents per share). This represents a payout of 52% of full year RCOP earnings, in line with the dividend policy of 40–60%.

simplified financial report
INCOME STATEMENT

For the year ended 31 December 2008

Millions of dollars		2008	2007
1	Total revenue [1]	23,891	19,342
2	Total expenses [2]	(23,570)	(18,667)
3	Replacement cost earnings before interest and tax	321	675
	Finance income	4	7
	Finance expenses	(60)	(46)
4	Net finance costs	(56)	(39)
	Income tax expense	(79)	(192)
	Replacement cost profit (RCOP)	186	444
5	Inventory (loss)/gain after tax	(152)	202
	Historical cost net profit after tax	34	646
	Interim dividend per share	36c	47c
6	Final dividend per share	nil	33c
	Basic earnings per share
	– Replacement cost	69c	164c
	– Historical cost	13c	239c

Excludes interest revenue.
Excludes interest expense and inventory gains/(losses).