CALTEX AUSTRALIA LIMITED is the

Transcription

1 ANNUAL REVIEW 2000

2 CALTEX AUSTRALIA LIMITED is the leading oil refining and marketing company in Australia with operations in all states and territories. The company owns and operates fuels refineries in Sydney and Brisbane with a combined capacity of 230,000 barrels per day. It also has a 3,750 barrels per day lubricating oil refinery in Sydney. Caltex is a retail, wholesale and commercial marketer of petroleum products with a service station network of approximately 1,600 Caltex and Ampol branded sites, of which about 658 are owned or leased by Caltex with the remainder owned or leased and operated by distributors and independent resellers. The company is expanding and rebranding its convenience store network across the country. At the end of 2000, Caltex had 166 convenience stores operating under the Star Mart brand, 193 smaller Star Shops and three Star Supermarkets. Caltex is the only petroleum refining and marketing company listed on the Australian Stock Exchange. The company has over 30,000 shareholders with the Singapore-based Caltex Corporation owning 50% of the shares and the balance held by institutional and small shareholders. Caltex has 1,469 employees. Its principal office is in Sydney Annual General Meeting 26 April 2001 Half year 2001 results and dividend announced 31 August 2001 Record date dividend entitlement 14 September 2001 Interim dividend payable 21 September 2001

3 Annual General Meeting The 2001 Annual General Meeting of Caltex Australia Limited will be held on Thursday 26 April 2001 at 10 am at the Westin Hotel, Ballroom, Basement Level, 1 Martin Place, Sydney NSW Contents REPORT BY CHAIRMAN AND MANAGING DIRECTOR 03 FINANCIAL SUMMARY 06 COMPARATIVE FINANCIAL INFORMATION 08 REPLACEMENT COST OF SALES BASIS OF ACCOUNTING 09 REVIEW OF OPERATIONS 10 Marketing Review 12 Manufacturing and Supply Review 16 Corporate Review 18 New Products 20 Oil and Petrol Prices and Government Actions 22 YOUR BOARD 26 CORPORATE GOVERNANCE 28 DIRECTORS REPORT 30 PROFIT AND LOSS STATEMENT 34 BALANCE SHEET 36 STATEMENT OF CASH FLOWS 38 NOTES TO THE CONCISE FINANCIAL STATEMENTS 40 AUDIT REPORT AND DIRECTORS DECLARATION 44 SHAREHOLDER INFORMATION 45 STATISTICAL INFORMATION 48 DIRECTORY AND CORPORATE OWNERSHIP IBC Caltex Australia Limited ABN Registered Office Level 12, MLC Centre Martin Place Sydney NSW 2000 Australia Telephone Facsimile Web site Share registry: Computershare Investor Services Pty Limited Telephone Advice to shareholders This document is the Caltex Australia Limited Annual Review, with Concise Financial Report, designed to give you a summary of our financial results and an overview of our key activities for the year ended 31 December Financial information in this review is derived from the Full Financial Report for the year ended 31 December The Concise Financial Report is designed to facilitate an understanding by shareholders of the financial performance, financial position and financing and investing activities of the group while omitting certain detailed financial data. The Full Financial Report is available free of charge from Caltex s share registry on request on telephone Both the Full Financial Report and this review can be accessed on the company s web site at results and dividend announced 22 February 2002 Record date dividend entitlement 13 March 2002 Final dividend payable 20 March 2002 Notice of Annual General Meeting and Annual Review mailed 20 March 2002 Annual General Meeting 26 April 2002 / 01

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5 per share were 13.4 cents (1999: 32.0 cents). There were no abnormals in 2000 (1999: $16.3 million net abnormal gain). Chairman Malcolm Irving and Managing Director Tony Blevins CALTEX had a difficult and disappointing year affected by high international shipping costs, an intensely competitive domestic market and production interruptions at both its fuels refineries. Despite these challenging circumstances the company has maintained its leading market share in the transport fuels market, strengthened its profile in the marketplace and increased its product range. It has continued to make improvements in operating costs and maintained its non-fuel retail development program with carefully targeted capital expenditure. Caltex has no exploration and production activity and must purchase all of its crude oil on international markets. The Caltex operating profit for 2000 after income tax, attributable to members of the company was $36.1 million (1999: $86.3 million before abnormals). Earnings In the final quarter, the unscheduled shutdown of production at the Kurnell fuels refinery was coupled with weaker than expected refiner margins and a sharp fall in crude oil prices which produced inventory losses of $64 million before tax. Of this amount, $45 million occurred in December. The result for the second half was a loss of $5.0 million (1999: profit $50.8 million excluding abnormals). Directors declared a final dividend of 6 cents per share fully franked, bringing dividend for the year to 16 cents (1999: 22 cents per share fully franked). While the company strives to pay a consistent dividend, the levels of dividend and franking credits depend on a number of factors including the company s profitability, available cash flows and taxation position. The refinery production interruptions combined with significantly higher crude oil prices and a weaker Australian dollar resulted in higher working capital requirements, particularly in the second half of the year. The resulting higher debt and related interest expense was mitigated by a reduction of inventory volumes and reduced receivables outstanding. Net debt at year end was $134 million higher than the previous year end, although it was reduced from the half year level. Report by Chairman and Managing Director / 03

6 Sharp rises in domestic fuel prices due to a combination of international factors, excise increases and the new tax system resulted in stalled growth of petrol and diesel sales. The market has remained oversupplied resulting in intense competition as retailers pursued aggressive discount pricing strategies. This brought strong downward pressure on volumes and margins in all sectors of the Caltex fuels business with improvements mainly confined to the lubricants and specialty businesses. up from US$0.88 a barrel in 1999 which significantly increased the landed cost of crude oil. Operating profit was also affected by unplanned shutdowns at both refineries. At the Kurnell fuels refinery in New South Wales, production was affected by industrial action by operators in April and $10 million annually from 2001 onwards, increasing over the following three years. In line with its improvement strategy and to manage refining margin fluctuations, the company has carried out an inventory study, which will deliver working capital benefits when the results are implemented in DESPITE CHALLENGING CIRCUMSTANCES THE COMPANY MAINTAINED ITS LEADING MARKET SHARE Caltex s domestic sales volumes of all products were slightly up on the previous year and refinery sales to export markets, domestic refiners, independents and traders were also up. Caltex s total onshore and offshore sales volume was 3% higher than the 1999 volume. Non-fuel retail earnings increased 28% as Caltex further expanded its network of Star Mart convenience stores and smaller Star Shops, with average store sales increasing for both. These developments mark further progress in the company s strategy to make its sites work harder by transforming Caltex and Ampol locations from traditional service stations to sophisticated convenience stores selling a range of groceries as well as fuel. Although average refining margins 1 recovered in 2000 to an average for the year of US$3.05 a barrel from the previous year s average of US$1.69 a barrel, this was partly offset by exceptionally high international shipping freight rates, averaging US$1.73 a barrel 1 Refiners margins are the differences between the price of the regional benchmark Malaysian Tapis crude oil feedstock and the quoted Singapore ex-refinery price of petroleum products. May and further interruptions occurred in November when a structural flaw was found in a 67-metre high exhaust stack. Production at the Lytton refinery in Queensland was affected for six weeks as a result of an external power failure in July. The financial impact of these production interruptions was an estimated $44 million (before income tax). The Board commissioned an independent review of the operations of both refineries by a group of international refinery experts. The review commenced in January 2001 and will be completed in March 2001 with the objective of recommending actions to improve the reliability of the refineries. Operating costs, excluding petroleum inputs, at 4.5 cents per litre were below the previous year level of 4.6 cents per litre, which reflects Caltex s continuing effort to be Australia s lowest cost producer. A profit improvement program at the refineries has identified opportunities to improve margins by more than The company successfully launched a number of premium products (see page 20), including the new performance enhancing Vortex Gold premium unleaded petrol and the Quality Oils range of products including Havoline Energy, a motor oil that can improve fuel economy by up to 6%, and Delo 400, a diesel engine oil which leads the world in new performance standards. These new products have been well received in the market. The company continued to develop and enhance its offer to consumers at its sites through retail partnership arrangements with specialised suppliers such as National Australia Bank and Midas. We scored measurable gains from advertising and promotion campaigns during the year, which raised customer preference for the Caltex brand and awareness of the Star Mart network. Following a two-year research and development project with three supermarkets established at service station sites, the company is now reviewing the initiative with a view to improving returns. 04

7 Caltex continued to improve its business electronically by facilitating online ordering of products for dealers and distributors and launching its first e-commerce business with Travelmate ( the first web site devoted to Australian road travel. In 2000, Caltex received $23 million from property, plant and equipment sold, and the five-year program to divest the company of unprofitable and obsolete sites was completed. We are continually reviewing our terminal and depot facilities and securing joint ventures and other cost-cutting benefits wherever available within our distribution operations. On 16 October 2000, Chevron Corporation and Texaco Inc, the joint owners of the Singapore-based Caltex Corporation, announced their intention to merge and create a new company ChevronTexaco Corporation that would rank with the world s largest and most competitive international energy companies. The two companies have had a long-term partnership in Caltex Corporation since its formation in Caltex Corporation owns 50% of Caltex Australia Limited. The Commonwealth Government will this year finalise new standards for cleaner petrol and diesel, which will help reduce urban air pollution and greenhouse gas emissions from vehicles. The standards will come into effect progressively from 2002 and will include a requirement for ultra low sulfur diesel from Caltex faces a major strategic challenge to position itself as the most competitive supplier of petroleum products in an industry that will undergo significant change in the next five years. While our strategic direction remains under review and is heavily dependent on the Government s decision on future regulation, Caltex has the advantage of refineries well located in the two fastestgrowing markets in Australia, Queensland and New South Wales. We were disappointed that following the Commonwealth Government decision to discontinue fuel price regulation in 1998, the Victorian and Western Australian governments passed price control legislation in In the intensely competitive Australian market where pretax petrol prices have consistently been the lowest among those in OECD countries, it is unreasonable to impose the additional costs of compliance with price legislation. Similarly, proposals to legislate a right for franchisees to purchase up to 50% of their fuel from other than their franchisors are ill-founded and seriously threaten the future of Australia s petroleum refining and small business franchise industry. Looking ahead, Caltex will continue to focus strongly on those areas within our control while we recognise that two major areas outside our control, crude oil prices and exchange rate movements, may have a significant impact on our future results. Caltex remains a strong cash flow business and our strategy is to build up revenue streams that are not impacted by OPEC. Our key growth will be in non-fuel areas with an emphasis on making our sites work harder with clusters of retail partners in business alongside our convenience stores. The company will be building on its strengths, maintaining its leadership position in the Australian marketplace and continuing to improve competitiveness by focusing on basics and executional excellence. We would like to express our sincere thanks and appreciation to all Caltex employees, franchisees and distributors for excellent work during such a difficult year. OUR STRATEGY IS TO BUILD UP REVENUE STREAMS NOT IMPACTED BY OPEC MG IRVING Chairman TC BLEVINS Managing Director and CEO / 05

8 Operating profit after income tax excluding abnormal items for 2000 was $36.1 million, down from $86.3 million in The result was affected by a number of items including significant impacts as a result of unplanned shutdowns at both fuels refineries and higher interest costs resulting from higher working capital levels driven mainly by unfavourable externalities which included high crude oil prices and a weak Australian dollar. Operating cash flows in 2000 were marginally negative and a significant reduction from 1999 levels. This resulted from lower earnings, additional tax payments following the introduction of the Pay As You Go tax instalment regime and an increase in working capital. In addition, the insurance claim payment in respect of the Lytton refinery outage will be received during Sales of surplus property, plant and equipment, mainly inefficient and CALTEX COLLECTED $3.4 BILLION IN DUTIES AND TAXES (EXCLUDING GST) IN 2000 There were no abnormal items in 2000 (1999: $16.3 million net abnormal gain). Directors declared a final dividend payable of 6 cents per share, bringing the total dividend to 16 cents per share, fully franked at 34% (last year: 22 cents per share fully franked at 36%). Sales revenue, net of product duties and taxes, increased by $1,913 million to $4,903 million compared with $2,990 million for The rise reflected the significant increase in underlying crude oil cost. Caltex collected $3,441 million in product duties and taxes (excluding GST) on behalf of Commonwealth and state governments, which was 41% of gross sales revenue compared to 55% for the corresponding prior period. The decrease reflected the reduction in excise on the introduction of the GST and the impact of higher crude oil prices. Operating costs, excluding petroleum inputs, fell by $1.4 million compared to last year. One-off GST implementation costs of $5.6 million were incurred. redundant service stations and depots, realised proceeds of $23.0 million (1999: $53.1 million) as the divestment project came to a successful conclusion. Capital expenditure for the year was $80.6 million (1999: $97.3 million). Gross debt at 31 December 2000 stood at $1,283 million, up from the previous year (1999: $1,119 million). Gearing (net debt to net debt plus equity) was 55.2% (1999: 52.1%). The return on equity before abnormals, attributable to members of the company, decreased from 8.6% in 1999 to 3.6% in As discussed in the Replacement Cost of Sales Basis of Accounting section (page 9), the operating profit after income tax result incorporates a $26.5 million net inventory gain from the rise in crude oil prices (1999: net gain $92.7 million). Financial Summary 06

9 1,050 1, SHAREHOLDERS EQUITY ATTRIBUTABLE TO MEMBERS OF THE COMPANY (A$ million) REFINER MARGIN (US$/barrel) TAPIS CRUDE PRICE AVERAGE FOR YEAR (US$/barrel) DIVIDEND PER SHARE (cents per share) 10 0 OPERATING COSTS EXCLUDING PETROLEUM INPUTS (cents per litre) NET OPERATING PROFIT AFTER TAX EXCLUDING ABNORMALS AND EXTRAORDINARIES (A$ million) EARNINGS PER SHARE EXCLUDING ABNORMALS AND EXTRAORDINARIES (cents per share) / 07

10 Comparative Financial Information Caltex Australia Limited 1 Consolidated Results $ million PROFIT AND LOSS Operating profit before abnormals, extraordinaries, interest and income tax Interest income Interest expense Income tax expense/(benefit) before abnormals and extraordinaries (3.5) Operating profit after tax and before abnormal/extraordinary items Abnormal/extraordinary items (net of income tax) 16.3 (193.8) 10.5 Operating profit/(loss) after abnormals/ extraordinary items and income tax (151.9) 57.7 DIVIDENDS Amount paid and payable ($/share) Times covered (excl abnormals) OTHER DATA Shareholders equity attributable to members of the company ($ million) , Total shareholders equity ($ million) 1, , Return on shareholders equity attributable to members of the company excluding abnormals (%) Total assets ($ million) 3, , , , Net tangible asset backing ($/share 5 ) Gross debt ($ million) 1, , , Net debt ($ million) 1, , , Net debt to net debt plus equity (%) Caltex Australia Limited (CAL) owned 50% of Australian Petroleum Pty Ltd (APPL) up until 31 December 1997 when it acquired the remaining 50%. Prior to 31 December 1997, CAL only recognised dividend income from APPL. For comparative purposes, in this document references to 1997 financial data relate to CAL, while references to 1997 operational and sales data relate to APPL. During the 1998 year APPL changed its name to Caltex Australia Petroleum Pty Ltd (CAPPL). 2 Earnings included 50% interest in APPL. 3 Calculated on figures excluding the issue of shares to Pioneer International in partial consideration of the purchase of Pioneer s interest in APPL. 4 Consolidation of 100% ownership of APPL on 31 December For net tangible asset backing/share calculation for 1996, 180 million shares, for , 270 million shares. 08

11 Replacement Cost of Sales Basis of Accounting To assist in understanding the group s operating performance, the Directors have provided additional disclosure of the group s results for the year on a replacement cost of sales basis 1, which excludes net inventory gains and losses. On a replacement cost of sales basis, the group s profit after income tax for the year was $9.5 million, compared to a profit of $9.9 million for Operating profit before abnormals, interest and income tax (operating profit) on a replacement cost of sales basis was $115.7 million, an increase of $43.9 million over Cumulative Full Year Full Year Full Year Full Year Full Year $ million 5 Years Historic cost operating profit before abnormal items, interest and income tax 1, (Deduct)/add inventory (gains)/losses 4 (43.5) (40.1) (144.9) (33.6) Replacement cost operating profit before abnormal items, interest and income tax 1, Abnormal items 27.5 (21.6) Net interest expense (446.0) (96.5) (71.4) (69.4) (95.1) (113.6) Historic cost income tax expense (including abnormals) (215.2) (23.3) (21.1) (49.5) (54.2) (67.1) Add/(deduct) income tax effect of inventory (losses)/gains (36.0) (27.0) 12.1 Replacement cost profit after interest and income tax Caltex Australia Limited s results are significantly impacted by external factors such as crude oil price movements. Such price movements are outside the control of the company. As a general rule using the historic cost basis of accounting, rising crude prices will result in increased profit for Caltex, falling crude oil prices will result in decreased profit. This movement in profit, often referred to as an inventory gain or loss, can create large variations in Caltex s results as calculated by the historic cost method. Consequently, in order to provide a better insight into the operating performance of the company, Caltex Australia Limited s financial reporting includes earnings on a replacement cost of sales basis. Replacement cost of sales earnings exclude inventory gains and losses and are calculated by restating cost of sales using the replacement cost of goods sold rather than the historic cost. 2 Caltex Australia Limited. 3 Caltex Australia Petroleum Pty Ltd (formerly Australian Petroleum Pty Ltd). 4 Historic cost results include gross inventory gains or losses from the movement in crude oil prices. In 2000, historical cost result includes $40.1 million in inventory gains (1999: $144.9 million in inventory gains). Net inventory gain/(loss) is adjusted to reflect impact of revenue lags. / 09

12 Review of Operations Caltex continued to expand and strengthen its profile in Another 173 retail sites were upgraded to the new Caltex international brand image. 10

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14 Marketing Review CALTEX maintained its transport fuels market share during a tough year for the Australian petroleum industry marked by rising petrol prices and an intensely competitive market. An increase in operating profit was driven mainly by increased income from nonfuel operations which continued to grow with further expansion of the Caltex convenience store Star Mart network, addition of value-adding services to existing sites and development of other non-fuel ventures. Cost savings of around $30 million were identified and put into effect. This included the restructuring of the Marketing business, the closure of regional offices and the installation of vapour recovery units at terminals. SALES In 2000, the national petrol market contracted for the first time since 1997 as the economy slowed at the same time as prices rose sharply. This was due mainly to high world oil prices and the falling Australian dollar, combined with increases in taxation (see section on oil and petrol prices, pages 22-23). The price impact on consumers was lessened in part by intense competition in the domestic market in which both major and independent petrol fuel retailers pursued aggressive pricing and rebate strategies. The average petrol throughput in company-operated, commissioned agent or franchised service stations sites increased to 263,000 litres a month, which is good by international standards. In August, Caltex successfully launched its new performance enhancing Vortex Gold premium unleaded petrol, which has been well received in the market. It also introduced Lead Replacement Petrol (LRP) in advance of Government requirements to remove leaded petrol from the market by Caltex was able to maintain its market leadership with a transport fuels market share of around 28%. Sales to major independent resellers improved and sales to distributors were maintained at similar levels to the previous year despite interruptions to supply and lower than expected demand in some areas. The fiercely competitive environment put downward pressure on margins in sales 12

15 to industrial and commercial customers. Commercial diesel volume was reduced in line with available refinery volumes. Aviation fuel sales increased with tourism generated by the Olympics, particularly in the fourth quarter. Margins, however, remained tight. Caltex won Qantas Airways global Fuel Supplier of the Year Award for Finished lubricant sales were up by 3% on the previous year, with improved margins and market share in a highly competitive market. There was strong uptake of the new Caltex Quality Oils brands of petrol engine oil Havoline Energy and diesel engine oil Delo 400 which were rolled out with print advertising campaigns and successful motor sport sponsorship for Havoline Energy. The lubricants business also benefited from the Australian Lubricants Manufacturing Company (ALMC) joint venture with BP Amoco launched at the beginning of the year. ALMC provides cost-effective blending, packaging and warehousing facilities. Base oil sales were up by 17.3% from the previous year due to a number of new accounts and expanded sales to existing customers. In the specialities business there was continued growth in sales earnings, particularly for LPG and petrochemicals, with a marked rise in revenue due to favourable movements in currency and oil prices. NON-FUEL RETAIL Earnings from the non-fuel retail business increased to $37.5 million (1999: $29.2 million), reflecting Caltex s strategy of gaining better leverage from its operating sites by building up non-fuel retail activities. There was further expansion of the core Star Mart convenience store network from 138 to 166 stores and an 8.5% growth in average store sales. This was supported by the rapid growth of a large franchised network of service stations with smaller Star Shop convenience stores, which last year grew by 38 to 193 sites and increased average store sales by 7%. Continued steps were taken to improving the offer at convenience stores and servicing the store network, including trialling of comprehensive deliveries from a central warehouse rather than many single product deliveries. During the year, the company opened a Star Supermarket in Rose Bay, Sydney and another in South Yarra, Melbourne, extending the initial trial that began with the opening of the Star Supermarket in Bondi, Sydney in The Star Supermarket concept offers a wide range of groceries in larger style convenience stores along with fuel sales. The company is evaluating the model to determine if returns can be improved. Caltex acquired three liquor businesses and retailing licences on a trial basis in Sydney in However, it has been necessary to discontinue the initiative in the light of New South Wales Government legislation to tighten liquor licensing laws, restricting the sale of liquor from premises that also sell petrol. The company continued to add value to the convenience store network with a number of retail partnerships which extended the range of benefits offered by Caltex service stations. An agreement with National Australia Bank saw the introduction of automatic teller machines to 210 Caltex sites in the second half of the year. The rollout is continuing to other sites of these ATMs, which feature cutting edge design and technology. THERE WAS GROWTH IN CONVENIENCE STORE NUMBERS AND AVERAGE STORE SALES In December, the company announced it will introduce the Midas Car Care System for automotive repairs and services in a pilot program at Caltex service stations in metropolitan and regional areas across Australia. The market for after-warranty automotive repairs and services is growing with the increasing number of older cars on the road. If the trial proves successful, the franchising of the Midas Car Care System will be available across the Caltex network, which would represent one of the largest automotive repair chains in Australia. Caltex has approximately 500 service stations with work bays while Midas currently has 102 sites operating Australia wide. / 13

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17 Truck operators have welcomed Caltex s new Delo 400, a heavy duty engine oil formulated to reduce engine wear. A driver tops up his truck at a Boral depot. Boral is one of Caltex s major customers for fuels and lubricants. In line with the changing business environment, the company is enhancing its retail operating model for franchisees, which will incorporate best practices in franchising. A range of service station and convenience store operating practices have been reviewed and input obtained from the company s National Franchise Council. The recommended model will be implemented in the second half of this year. Caltex launched its first stand alone e-commerce venture in May 2000 with Travelmate ( the first web site devoted to Australian road travel. The site provides a one-stop shop for road travellers and has become firmly established as a top Australian travel site with strong and steady growth in the number of visitors to the site and accommodation bookings. CALTEX S PROFILE Caltex continued to expand and strengthen its profile by upgrading a further 173 retail sites to the new international Caltex brand image. In most cases, these upgrades included the addition of a Star Mart convenience store with its distinctive livery and retail offer. To support the site upgrade program during the year Caltex ran a successful television advertising campaign focused on the Nice neasy positioning. Launched in Sydney, Brisbane and Perth, this was the first advertising campaign Caltex has undertaken since Research in the audience markets indicated the TV commercials doubled customer preference for Caltex as a brand of choice and significantly raised awareness of the Caltex and Star Mart brands. The increase of shop sales within these markets has been further testament to the success of the commercials. Radio advertising campaigns to promote the Star Mart brand during peak holiday periods were also run in a number of metropolitan markets. In 2000, Caltex returned to racing sponsorship with a V8 Supercar. In 2001, Dave Besnard will drive the Caltex car in the V8 Supercar Series Championship under the Havoline racing banner. These advertising and promotional programs, some of which will continue in 2001, have begun to successfully position the Caltex brand and provide a service platform to further differentiate Caltex from its competitors. CONVENIENCE STORES NATIONAL PETROL -1.0 MARKET GROWTH (%) / 15

18 Manufacturing and Supply Review THE OPERATING profit of the Manufacturing and Supply business was lower than the previous year primarily due to unplanned interruptions to production at both Caltex fuels refineries, partially offset by inventory gains and improved refiner margins. Average refining margins were better than the prior year, particularly for diesel and jet fuel. However, margins for individual products were highly volatile with petrol margins ranging from highs of US$9 a barrel to lows of minus US$0.50 cents a barrel. Margin improvements were offset by steeply increased freight costs during 2000 for both crude oil and product vessels due to a worldwide shortage of quality tonnage in the wake of the sinking of the petroleum products vessel Erika off the coast of France in For example, the cost of shipping a typical cargo of crude oil from the Arabian Gulf to eastern Australia rose from US$1.49 a barrel in the last quarter of 1999 to US$2.82 a barrel for the same period in It was difficult to recover these costs in the intensely competitive Australian fuels markets. Caltex refinery production of petrol, diesel and jet fuels was lower than the previous year due to the unscheduled shutdowns of production at both fuels refineries which lowered operational availability to 92.3%, compared with 94.5% in Significant product imports were required to mitigate supply shortages. Production was affected by a number of incidents: At the Kurnell refineries in NSW, industrial action by operators in April and May resulted in two shutdowns which affected production for a total of 20 days. The Australian Industrial Relations Commission terminated the right of the parties to take industrial action and agreed to arbitrate the matters in dispute. Arbitration hearings are scheduled for March In July, a failure of the South Brisbane power grid led to a shutdown of the Lytton refinery with production affected over a six-week period and is now the subject of material damage and business interruption insurance claims by Caltex. Improvements in the ability of the refinery to withstand electricity outages have been identified and are 16

19 being progressively put in place. A further significant interruption to production at the Kurnell refineries occurred in November when a structural flaw was found in a 67-metre high exhaust stack that required a partial shutdown of the refinery operations to allow the demolition of the stack and construction of a replacement. This resulted in the fuels refinery operating at 90% of its finished product capacity from December 2000 to March The Board commissioned an independent team of international experts to review the operations of both fuels refineries to better understand the underlying causes of incidents that occurred in 2000 and to recommend actions to improve their reliability. The review commenced in January 2001 and will be completed in March Cost and efficiency benefits were obtained in 2000 from a number of programs. Projects were also established which are expected to deliver further profit in the coming years. These included: An intensive profit improvement program using both in-house teams and a specialist international consulting firm identified opportunities for adding value and efficiencies at the Kurnell and Lytton sites that are expected to deliver additional margins in excess of $10 million a year from 2001 onwards, with the potential to deliver even greater savings when fully implemented by the end of A project to reduce costs has contributed close to $20 million in annualised cost reductions. Measures include joint procurement programs for the refineries and alliance arrangements in contract maintenance and water treating services. There have also been savings in port and wharfage charges and better ship utilisation. A review team identified potential reductions in Caltex s petroleum inventories of up to 200 million litres through initiatives ranging from physical reduction and closure of tankage to improvements in supply chain management. Through the year, inventory levels were tightly managed in response to the high cost of working capital and the year end inventory was lower than the previous year. Notwithstanding the reliability problems during the year, both refineries performed well in delivering new products. The Lytton refinery successfully met the Queensland Government s requirement to introduce low sulfur diesel by mid-july 2000 and both Lytton and Kurnell refineries modified their operations to phase out leaded petrol and produce Lead Replacement Petrol (LRP) by November The changes were made in a smooth and cost-effective way, with the company s introduction of LRP more than a year ahead of the Commonwealth Government requirement to remove leaded petrol from the market. In 2000, Caltex put in place investments in further facilities which will allow us to recover more autograde LPG and further investment is planned. Caltex has been an active participant in the Commonwealth Government review of future fuel standards. The future fuel standards are close to finalisation and the company is well progressed in its technical and economic reviews of options for meeting the expected standards. PROFIT IMPROVEMENT AND COST SAVINGS PROGRAMS WILL DELIVER ONGOING BENEFITS WORLDSCALE SHIPPING FREIGHT COSTS ($A cents per litre) OPERATIONAL AVAILABILITY (%) / 17

20 Corporate Review CALTEX carried out its annual review of risk which saw the number of key risk areas (those risks that require individual management plans) rise from 17 in 1999 to 18 in The company continued to monitor these, and all other risks, to ensure control effectiveness is managed. Progress against the key risks is reported quarterly to the Board. In response to several major incidents, a reassessment of Manufacturing risks was required during The number of major refinery incidents described in the Manufacturing and Supply Review section has provided the opportunity for Caltex to review its management systems in relevant areas. The company has responded positively and firmly by carrying out thorough investigations using root cause analysis tools. Caltex maintained its focus on safetyrelated issues and has committed to the involvement of contractors in the development and implementation of environment, health and safety initiatives. The company tracked contractor working hours and injury numbers as an indicator of its own performance. There was a considerable increase in 2000 of both Lost Time Injury Frequency Rate (LTIFR the number of lost time injuries per million hours worked) and Total Treatment Injury Frequency Rate (TTIFR the number of lost time injuries and medical treatment injuries per million hours worked). This increase is largely due to a decline in safety performance in Manufacturing. The table below shows LTIFR for contractors and for Caltex employees: LOST TIME INJURY FREQUENCY RATE Contractors Caltex employees An increased focus on risk management activities and the development and ongoing implementation of process safety management (PSM) procedures in the Manufacturing area has seen Caltex develop plans to improve performance in this area. Because of the variety and number of flammable products Caltex produces, stores and markets, the control of fires is an important aspect of the Caltex operations. Caltex s fire prevention performance showed an overall improvement of 25% compared with Environmental performance within Caltex remained strong with a reduction in the already low number of major spills from 8 to 7. Furthermore, Caltex saw a 40% reduction in the number of occasions where environmental licences were exceeded. Environmental management systems continue to be improved and are the focus of business unit review and corporate auditing. Leading from this, relationships with environment and safety regulatory bodies remain good. Caltex was an early voluntary participant in the National Pollutant Inventory (NPI) and in 2000 submitted its second annual report on the emission of NPI listed substances from its sites. This is now on the public record. As a signatory to the Cooperative Agreement on Greenhouse Gas Abatement, Caltex had its greenhouse gas abatement program independently verified last year which confirmed that Caltex s emission inventories were complete and its abatement actions accurately reported. During the year, Caltex implemented the introduction of the new tax system, including the GST. This involved a change in the mix of taxes collected from consumers and required changes to systems, processes and procedures at 18

21 each step of Caltex s fuel and retail store supply chain. The company carried out an extensive communications program on the changes with its partners, customers and the general public and the transition generally went smoothly. Caltex has provided information to the Australian Competition and Consumer Commission regarding the impact of the Fuel Sales Grants Scheme on Caltex s regional and country pricing. Caltex launched its first medium-term note into the domestic debt market to refinance some existing debt during the year. The issue was very well received allowing Caltex to increase the size of the issue from $150 million to $200 million at no increase in price. The secondary market has been trading the issue at a premium to the issue price. Caltex launched an employee share plan in July that allows employees to acquire $1,000 worth of Caltex shares each year out of pre-tax earnings. Shares are purchased at market prices four times a year. The first purchase was made on 15 December when 80,079 shares were purchased on behalf of 695 employees. A program on leadership skills for team leaders was introduced in 2000 and by the end of the year 50 team leaders from across the company had attended a four-day program. This program, which emphasises leadership through performance management, will continue in In industrial relations, enterprise bargaining agreements were renegotiated with terminal operators in New South Wales and airport refuellers in Brisbane and Cairns. These agreements will deliver improved operating efficiencies to these operations. Calstores Pty Ltd, the wholly owned operator of the 91 companyowned and operated Star Marts and Star Supermarkets, has now signed up 369 customer service attendants on Australian Workplace Agreements. These agreements are designed to allow flexibilities in work scheduling. The renewal of enterprise bargaining agreements with maintenance personnel at both the Kurnell and Lytton refineries is progressing satisfactorily. At the Lytton refinery, operators voted in 2000 to continue working on an annualised salary basis. At the Kurnell refineries, the enterprise bargaining agreement renegotiation with operators has been unsuccessful and outstanding matters will be arbitrated by the Australian Industrial Relations Commission. In 2000, the Procurement group worked with all parts of the business resulting in the realisation of savings and cost avoidance in excess of $10 million with a direct impact on company profitability. It is intended to capitalise on this success during 2001 and obtain further gains. Caltex provides contributions and sponsorships to a number of community welfare organisations and arts groups. Caltex is a major national sponsor of the Starlight Children s Foundation Star Day, which raises funds to grant the wishes of seriously ill children. The company makes financial contributions, sells Starlight merchandise through the company retail network and Caltex employees provide substantial volunteer services on the day. Caltex has supported the Australian Chamber Orchestra since 1996 through sponsorship of the orchestra s national tour program that brings world class chamber music to a wide and growing audience. The company achieves great success with the Caltex Best All Rounder Awards now presented to a final year student at 96% of secondary schools throughout Australia. The Lytton and Kurnell refineries both carry out active local community relations programs, including site open days and provision of sponsorship for school, sports, youth, environment and arts groups. Caltex has communications programs with shareholders and stakeholders including its retail and distributor franchisees through the National Franchise Council and the National Distributor Association. Intense public interest in petrol price issues during the year led to hundreds of media inquiries and interviews with Caltex spokespeople explaining fuel price movements. The web site was regularly updated with information on pricing and other company activities. Active liaison was maintained with Commonwealth and state governments on a wide range of petroleum industry issues including price regulation in Victoria and Western Australia, changes to fuel subsidy arrangements in Queensland, marketing regulation with the Senate Economics References Committee, and the Commonwealth Government departments developing new national fuel quality standards. / 19

22 New Products CUSTOMERS today have higher expectations for fuel quality, performance and value. They also want fuels that are environmentally friendly. As a customer-driven organisation, Caltex recognises the need to provide products that satisfy consumer expectations. Modern vehicles provide longer troublefree operation with better performance, fuel economy and lower emissions than in the past. Fuels and lubricants play a large part in helping engines perform properly and Caltex has formulated its products to ensure that today s engines can achieve optimal efficiency. This translates into better performance and dollars saved for customers. Another challenge is our ongoing concern for the environment. Companies such as Caltex are not just in the business of providing fuels and lubricants. We must be accountable for providing fuels that have been developed with a priority on keeping the environment clean and safe. In 2000, Caltex unveiled a new range of products to the Australian market which met some of these key criteria. These included Vortex Gold, a new brand of premium unleaded petrol, and lubricants and specialty oils headed by Havoline Energy, a high performance motor oil and Delo 400, a diesel engine lubricant. VORTEX GOLD Vortex Gold is a specially formulated 95 octane premium unleaded petrol designed to enhance a car's performance by cleaning up dirty intake and fuel systems. (Ampol Gold is the equivalent product sold at Ampol service stations.) Exclusive to Caltex, Vortex Gold was launched in Australia in August 2000 and is the first new petrol product from Caltex since the early 1990s. Extensive testing in the laboratory and fleet tests has shown that Vortex Gold can remove harmful deposits in carburettors, fuel injectors and intake valves. It can clean up deposits in older engines and prevent deposits in new engines. Motorists using Vortex Gold can notice increased engine power, better acceleration and better driveability and smoothness. Because of its unparalled deposit control capabilities, Vortex Gold can also contribute to lower exhaust emissions by helping engines maintain proper fuel/air mixing. 20

23 DELO 400 Caltex Delo 400 is a heavy duty diesel engine oil formulated to reduce engine wear while exceeding current global performance and emission standards. It is suitable for all diesel four-stroke engines from small generators to 800 tonne hydraulic mining shovels, and including mixed fleets, new and old equipment and highway and off-road applications. Delo 400 is the first diesel engine oil to meet the world s global four-stroke diesel engine oil performance specification Global DHD-1. Global DHD-1 identifies engine oils that are acceptable for use in heavy-duty diesel engines designed to meet exhaust emission standards worldwide. This breakthrough has major cost-saving and lubricants stock control implications for operators of mixed fleets. Australian diesel engine owners can now streamline costs and inventories by purchasing one oil, Delo 400, for their Japanese, European and US diesel four-stroke engines. The financial benefits are significant. The formulation of a heavy-duty diesel engine oil to meet a variety of worldwide lubrication requirements results in a more versatile formulation when compared with oils designed to meet only regional requirements. Caltex Delo 400 s unique performance advantages create cost benefits by maximising equipment life, preventing loss of fuel efficiency and standardising lubricants use and maintenance, not just locally but also worldwide. This results in reduced costs, extended vehicle uptimes, better training and best practices. Caltex Delo 400 answers the emissions reduction challenge presented by diesel engine manufacturers that are using a number of ways to ensure soot and other by-products are retained within the engine. Many lubricants retain and neutralise these materials. However, Delo 400 can handle higher levels of soot while minimising abrasive and corrosive wear, filter plugging and sludge formation. It has been formulated to resist breakdown at high engine temperatures and to minimise the abrasive engine wear that can be caused by inadequate soot dispersal. Delo 400 strongly inhibits viscosity increases and this translates directly to the customer benefits in the form of savings in costs and downtime. To support these claims, an independent testing body was engaged to perform comparative testing of Delo 400 against two premium competitor oils, using tests that determine an oil s ability to disperse soot and control soot-related wear. These tests were extended to double their normal length. Even at this extended length, Delo 400 performed exceptionally well and significantly better than the other two oils tested. HAVOLINE ENERGY Caltex s new Havoline Energy motor oil is specifically designed to cut fuel consumption by reducing engine friction and other power losses. Depending on the car and the driver s habits, the oil can achieve up to 6% improvement in fuel economy. Comparative fuel consumption tests conducted overseas and by an independent testing organisation at Anglesea in Victoria confirmed the fuel economy claim. Greater fuel economy translates to less vehicle emissions. Havoline Energy is classified as a mineral oil, yet the refining process of its base oils has ensured it contains the useable properties of a synthetic oil. It has a lighter 5W-30 viscosity specification which means the oil can achieve low temperature requirements without using high dosages of viscosity index improver. CALTEX S NEW PRODUCTS ARE DESIGNED TO REDUCE WEAR ON ENGINES AND LOWER EMISSIONS The top level refining of the base oils gives high levels of oxidation stability, so the oil lasts longer. The traditional Australian multi-grade motor oil specification has been 20W-50. Caltex is the first major oil company in Australia to have a 5W-30 oil as its flagship product. Ford became the first of the major local vehicle manufacturers to specify a 5W-30 engine oil for its AU Falcon. Havoline Energy was developed by one of Caltex Corporation s parent companies, Texaco Inc, in conjunction with engine development by three major motor vehicle manufacturers. This was a unique arrangement as oil development usually follows engine development. / 21

24 Oil and Petrol Prices and Government Actions THE PRICE of crude oil more than trebled since February 1999 increasing from a low of A$17 a barrel to a high of A$63 a barrel in November In US$, which is the basis for worldwide trade in crude oil and petroleum products, the price of Malaysian Tapis crude oil, the benchmark for Australia, increased from a low of US$11 per barrel in early 1999 to average US$29.73 per barrel in 2000, and was at times above the US$35 a barrel mark. In Australian dollars, the price increase was even greater due to depreciation of the Australian currency against the US$. Oil prices are likely to remain high as long as OPEC is able to maintain its production-sharing agreement. However, a return to early 1999 prices seems unlikely as they were unusually low compared with the average in the 1990s of around US$19 per barrel. Petroleum product prices in Australia are closely related to prices for imports as products from Australian refineries must compete with petrol and diesel from overseas refineries. Prices in both city and country markets follow changes in the spot prices of fuel in the Singapore market, which is the benchmark for the Asian region. Product price movements may be quite different from crude oil movement in prices on a weekly or even monthly basis and sharp increases and decreases may occur due to shortages or surpluses of refined product in Asia. Price spikes for petrol and diesel, accentuated by depreciation of the Australian dollar, occurred in the second half of 2000, creating significant public and media attention. The cost of refined products makes up about 40% of the price of petrol and around a further 50% of the cost is tax, including excise and GST. This leaves only a few cents per litre for oil companies, distributors and service stations to cover the cost of distribution and marketing. These costs per litre are higher in the country than the city because of longer freight distances, lower fuel sales volumes and less shop sales. There is also intense competition in major cities, which leads to greater discounting than in most country areas. Fuel pricing and taxation became a major public and political issue in 2000, building on the issues created by the increase in world crude oil prices in

25 In particular, the dissatisfaction of rural and regional consumers with high fuel prices led to greater attention by major political parties to address the issue. The potential impact of the GST on the difference between country and city prices led the Commonwealth Government to introduce the Fuel Sales Grants Scheme, which provides a 1 or 2 cents per litre (cpl) subsidy to country consumers. The Diesel and Alternative Fuels Grants Scheme also took effect from 1 July 2000, providing a rebate of 18 cpl for certain on-road diesel users. In March 2001, the Government reduced excise on petrol and diesel by 1.5 cpl and announced that fuel excise would not be subject to CPI increases in the future. During 2000, controversy surrounded plans by many states to eliminate subsidies on petrol upon introduction of the GST, particularly in Queensland, although all state subsidies for petrol (but not diesel) were ultimately retained. Regulation of fuel prices became a political issue in some states. Independents hold the balance of power in Victoria and, in line with the election commitments of independent MP Mr Russell Savage, the Victorian Government has legislated to set a maximum terminal gate price for petrol, diesel and possibly automotive LPG. In Western Australia, the Government has implemented numerous recommendations of a Parliamentary Select Committee for regulation of retail and wholesale prices and petrol pricing was a significant state election issue. These developments in pricing regulation are unfortunate as they run counter to the discontinuation of national fuel price surveillance by the Australian Competition and Consumer Commission in PUMP PRICE 94.6 cents per litre GST 8.6 cents per litre SYDNEY UNLEADED PETROL Average pump price, February Excise reduced to 38.1 cpl from 2 March The Queensland Government pays an 8.4 cpl subsidy. RETAIL/WHOLESALE GROSS MARGINS AND FREIGHT 6 cents per litre EXCISE 40 cents per litre REFINED PETROL 40 cents per litre TAPIS CRUDE OIL $ PER BARREL CRUDE OIL PRICE INCREASED DRAMATICALLY IN A$/barrel US$/barrel CENTS PER LITRE AUSTRALIAN PETROL PRICES FOLLOW OVERSEAS PRICES Average country pump price Import parity indicator Sydney pump price Feb 98 Apr 98 Jun 98 Aug 98 Oct 98 Dec 98 Feb 99 Apr 99 Jun 99 Aug 99 Oct 99 Dec 99 Feb 00 Apr 00 Jun 00 Aug 00 Oct 00 Dec 00 Feb 01 Sep 98 Nov 98 Jan 99 Mar 99 May 99 Jul 99 Sep 99 Nov 99 Jan 00 Mar 00 May 00 Jul 00 Sep 00 Nov 00 Jan 01 Prices exclude freight / 23

26 With the growth of its convenience store network and earnings Caltex is maximising returns from its sites and building non-fuel revenue streams. 24

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