SET Announcements

- Translation - 1000 / 040 / 2007 February 23, 2006 Subject : Management's Discussion and Analysis of Business Operations for the year ended December 31, 2006 Attention : President of The Stock Exchange of Thailand Attachment : Management's Discussion and Analysis of Business Operations for the year ended December 31, 2006 As the Office of the Securities and Exchange Commission has fostered listed companies in the Stock Exchange of Thailand to conduct a Management's Discussion and Analysis for Business Operations every quarter so as to enable investors to better understand the Company's financial status and business operations-apart from the sole financial data in financial statements, as well as to adequately access information for decision in a security investment, which is in compliance with the sufficient information disclosure in the corporate governance best practice; The Bangchak Petroleum Public Company Limited (BCP), a listed company in the Stock Exchange of Thailand, has concentrated on transparent business operation harmonious with the good corporate governance practice. The Company would like to conduct and submit Management's Discussion and Analysis of Business Operations for the year ended December 31, 2006 as attachment enclosed. Please be informed accordingly. Yours sincerely -Signed- (Patiparn Sukorndhaman) Senior Executive Vice President Finance and Accounting Corporate Planning and Investor Relation Office Tel: 0-2335-4583 Management's Discussion and Analysis for Business Operations For the Year Ended December 31, 2006 General Information The Bangchak Petroleum Public Company Limited (the Company) was founded in accordance with the Cabinet Resolution in 1985. The Company was transformed to be Public Company Limited in April 23, 1993. The registered head office is located at 210 Moo 1, Soi Sukumwit 64, Sukumwit Road, Bangkok. At present, its businesses include wholesale and retail operation which the retail operation network has expanded to total of 1,096 service stations operating through out the country, of which 566 stations are standard size and another 530 stations are smaller size which designed to serve requirement of cooperative communities. The Company also operates an oil refinery with a capacity of 120,000 barrels per day which was rebuilt to replace the previous one and the latest crude distillation unit was completed in 1993. The Company has decided to built and construct the new facility units - the Product Quality Improvement Project (PQI) in early 2006. The PQI project is mainly aimed to install the hydro-cracking unit, the hydrogen unit and other associated units to work adjacently with the existing plant. Completion of this PQI project will boost value added of the company's refined product pool i.e. lower level of fuel production and significantly improve level of gasoline and diesel production. The project cost (included contingency reserve), which is awarded under fixed price, date certain and performance guaranteed, is capped at USD 378 million equivalents. Commercial operation of this project is expected to be commenced in the forth quarter of 2008. Business Overview for the year 2006 For the year 2006, world oil market was operated under the high volatility situation. The world oil price had been increased since beginning of the year and reached its highest level at the beginning of July. This situation was resulted from concerned over supply deficit situation in the market as evidenced by number of incidents occurred in the market i.e. leakage of the Russia's largest oil pipeline, political unrest in Nigeria, conflict between countries in Middle East and conflict between UN nations and Iran regarding nuclear experimentation as well as the hedge funds speculation. However, oil price pike situation has been relaxed and moved to opposite direction since mid of August and has been sharply and continuously decreased afterward until now. This reverse situation came from a significantly relief pressure concerning conflicts in Middle East, no serious damage to US and Mexico operation units during the passed Tornado season. This resulted to the overwhelming oil supply situation as evidenced by the level of US strategic reserve which was at its highest level in 7 years. During the forth quarter of 2006, even though the OPEC had announced to cut 1.2 MBD of crude oil production to 26.3 MBD since November 1, 2006 but oil price was not rebounded as per expectation. The main reasons might be 1) warmer than usual winter in western countries and, combined with, 2) over supply situation. For domestic market, oil price had followed same pattern as the world market. However, the retail domestic oil price was moved at slower pace than the world price and resulted to improvement of domestic marketing margins. 1. Explanation and Analysis of the Operating Results for the year 2006 compared with 2005 From July 1, 2006 onward, the Company has changed its accounting policy with regard to inventory cost valuation method from First In First Out (FIFO) method to Weighted Average method. As a consequence, this year financial statements were prepared by using the new inventory cost valuation method and were compared with the Weighted Average-adjusted financial statements of last year. 1.1 Net Profit/(Loss) Analysis 1) Regarding the business operations for the year 2006, the Company and its subsidiary recorded net profit of Baht 196 million, which composed of the Company's profit of Baht 239 million and the subsidiary's (the Bangchak Green Net Company Limited- BGN) loss, connected transactions adjusted, of Baht -43 million. 2) The Company's EBITDA was Baht 1,613 million, decreased from Baht 4,620 million of last year by Baht 3,007 million which different mostly came from inventory effects. The details are as following: * EBITDA of the Refinery Business was Baht 1,141 million, decreased from Baht 4,928 million of last year since Gross Refining Margin (GRM) (excluding inventory effects) was 3.05 USD/BBL, lower than last year which was at 3.57 USD/BBL. This effect was resulted from rapidly decreased in oil price due to excess supply situation in the market, the higher than usual US strategic reserves and combining with lower than expected demand from warm weather during winter. All of which has driven the refinery's crack spread to become lower. The Company's crude run was at 56.3 KBD compare to 60.0 KBD of last year. In addition, the crude oil prices which were sharply decreased from 72.29 USD/BBL-Dubai crude to 56.63 USD/BBL at the end of the year and combining with Baht appreciation has made the Company to record inventory loss of 0.70 USD/BBL (Baht 710 million) while last year the Company record inventory gain of 2.02 USD/BBL(Baht 2,359 million). At the end of 2006, the Company has also provisioned allowance for write down of inventory value of Baht 55 million or equivalent to 0.06 USD/BBL (last year it was write down reversal of Baht 288 million or 0.28 USD/BBL positively effect to GRM). When take into effect these inventory impacts, total Gross Refinery Margin for this year was 2.29 USD/BBL compare with 5.87 USD/BBL of last year. All this effects have made the refinery business EBITDA this year and last year to be at Baht 1,141 million and Baht 4,928 respectively. However, if take out inventory impacts, this year adjusted EBITDA will be Baht 1,851 million as compared to Baht 2,569 million of last year. EBITDA of the Marketing Business was Baht 472 million, increased from Baht -308 million of last year, since the Marketing Margin (excluding lubricant margin) was 38.5 satang per liter higher than last year which was at the level 15.4 satang per liter. These gains were resulted from retail oil prices which were adjusted slower than their cost during down trend market situation in the second half of 2006. Marketing business sale volume was at 51 KBD, or 3.7% decreased from 53 KBD of last year since the Company had intended to limit sale volume when the marketing margin was negative especially in the second quarter. * Please be further noted that without having effects from inventories, the adjusted EBITDA of the Company in this year was Baht 2,323 million, higher than those of last year by Baht 62 million as illustrated in the table below. Table: Details of breakdown EBITDA 2006 (A) 2005 (B) Changing +/ - (Million Baht) (Audited) (Revised) (A) - (B) * EBITDA +1,613 +4,620 -3,007 - Refinery +1,141 +4,928 -3,787 - Marketing +472 -308 +780 * (Less) Inventory Gain - (2,359) +2,359 Plus Inventory Loss 710 - +710 & Write Down * Adjusted EBITDA +2,323 +2,261 +62 - Refinery +1,851 +2,569 -718 - Marketing +472 -308 +780 1.2 Income Analysis Total revenues of the Company and its subsidiary for the year 2006 were Baht 95,375 million, composed of the Company's revenues of Baht 94,600 million and its subsidiary's of Baht 11,960 million, adjusted by connected transaction of Baht 11,185 million which mostly were sale transactions from the Company to BGN. Major changes of the Company's revenues were as follows: 1) Revenue from sales (both refinery business sales and marketing business sales) were Baht 93,539 million, higher than last year by Baht 8,503 million or 10%, since the average selling price increased by 22% (the average oil price was Baht 19.65 per liter in 2006 comparing to Baht 16.06 per liter in 2005) while the sale volumes decreased by 10%. 2) Interest income was increased by Baht 152 million to Baht 172 million since the Company invested its excess cash (mostly PQI funds raising proceed yet to be utilized) into 3-14 months fixed deposit. As of December 31, 2006, this short term investment item was Baht 4,045 million. 3) Gain from foreign exchange was Baht 120 million (last year was loss of Baht 26 million), most of which came from Baht appreciation impact to US dollar account payable. Thai Baht has been appreciated by 12% from year 2005. 4) Gain from oil hedging contract was Baht 682 million, increased by Baht 145 million or 27%. The Company has established policy to mitigate risk from price fluctuation by entering into hedging contracts as appropriate. This year, the hedge level was 40% of average crude run compared with last year at 20% of average crude run. 1.3 Expense Analysis Total expenses of the Company and its subsidiary for this year were Baht 95,179 million, which composed of the Company's expenses of Baht 94,361 million and its subsidiary's of Baht 12,010 million, adjusted by connected transaction of Baht 11,192 million, which mostly were cost of sales from the Company to BGN.Major changes of the Company's expenses were as follows: 1) Cost of sales were at Baht 91,722 million, increased by Baht 11,616 million or 15% from last year, since average crude price had been increased (Dubai crude price increased by 12 USD/BBL or 24% on average comparing to last year). 2) The Company has provisioned the allowance for write down of inventory value at Baht 55 million since the average inventories cost were higher than the net realizable market value at the end of the period. (product prices at the end of 2006 were lowered by 3-4% than average price of December 2006) 3) The Company has realized loss of Baht 9.59 million from investment into subsidiary as recorded by using equity method. 4) Interest expense was Baht 745 million, increased from last year by Baht 106 million, as the loan margin has been adjusted upward in accordance with the loan agreement as well as the reference market rate. 5) The Company had income tax credits of Baht 107 million. This tax credits mostly came from tax privileges of capital investment program in accordance with the Royal Decree No. 460 (in 2006, the company has paid Baht 2,058 million for the capital investment program, mainly PQI project). 1.4 Profitability Analysis Gross profit margin has been affected by world oil price fluctuation which had direct impact to both refining and marketing margin. Gross profit margin of the year 2006 was 2.3%, decreased from 6.2%. This lower gross profit margin came from squeezed refining margin of refinery business which was heavily affected from inventory losses even though the marketing margin of marketing business had much improvement from last year as mentioned in item 1.1 2). The net profit then decreased from 3.4% last year to 0.2% accordingly. 2. Explanation and Analysis of the Financial Position as of December 31, 2006 compared with December 31, 2005 2.1 Assets 1) At the end of 2006, total assets of the Company and its subsidiary were Baht 37,586 million, which comprised of Baht 37,541 million of the Company's total assets and Baht 434 million of its subsidiary's total assets, adjusted by connected transactions of Baht 389 million which was from account receivable of Baht 385 million. 2) At the end of the year 2006, the Company's total assets increased by Baht 3,342 million, comparing to the end of 2005. The major changes of assets were as follows: * Cash and cash equivalents were increased by Baht 1,038 million to Baht 2,599 million at the end of 2006. This amount consisted of Baht 1,799 million cash from operation and Baht 800 million cash from PQI fund raising program yet to be utilized (details of cash and cash equivalents listed in Explanation and Analysis of the Statement of Cash Flows). * The Company invested funds from excess cash and cash from PQI fund raising proceed (yet to be utilized as per project payment schedule) into fixed deposit accounts. The outstanding amount as of December 31, 2006 was Baht 4,045 million which consisted of Baht 3,816 million PQI amount and Baht 229 million debt service reserve for Krung Thai Bank. * Total inventories were Baht 8,640 million, decreased by Baht 2,070 million or 19%, comparing to the end of last year. Inventories volume has been decreased by 0.81 million barrel from 4.32 million barrel at the end of 2005 to 3.51 million barrel at the end of 2006 as per the Company's inventory control policy. Details of inventories are as follow; Million Baht 2006 2005 Increase / (Decrease) Type Value Unit Price Value Unit Price Value Unit Price (Million (Baht/Liter) (Million (Baht/Liter) (Million (Baht/Liter) Baht) Baht) Baht) Crude oil 4,565 14.28 7,053 14.84 (2,488) (0.56) Oil product 4,075 17.09 3,657 17.17 418 (0.08) Total 8,640 15.48 10,710 15.59 (2,070) (0.11) * The receivable from oil fund subsidy was decreasing as a result of the Company had already received oil subsidy amounted Baht 246 million from imported diesel which was imported in early 2005 (at that time the retail price of diesel was capped by the Government and the different between cost and price was subsidized by oil fund). * Other current assets-others was decreased by Baht 279 million mainly from 1) Hedging contract receivable reduced by Baht 156 million from the end of last year as a result of hedging settlement 2) VAT receivable was decreased by Baht 119 million since the year 2006 the Company has reduced volume of crude purchase. The Company also adopted the E-Payment system for tax payment which helps improve tax refund effectiveness. * The investment in subsidiary by using equity method decreased to zero since the subsidiary-BGN had loss of Baht 50 million. However the Company had been allowed to realize loss of subsidiary not to exceed its investment amount at the beginning of the year of Baht 9.59 million. * At the end of 2006, Property, plant and equipment was increased by Baht 1,794 million netted from additional investment in capital investment program during the year of Baht 2,664 million and annual depreciation of Baht 870 million. The capital investment consisted of Baht 2,438 million investments in PQI project and Baht 226 million investments in annual capital expenditures. * In 2006 the Company had recorded Deferred Tax Assets (DTA) amounted Baht 126 million from temporary tax difference between tax basis and accounting basis. The amount mostly came from tax loss carried forward of Baht 378 million from tax privileges of capital investment program in accordance with the Royal Decree No. 460 (in 2006, the company has paid Baht 2,058 million for the capital investment program, mainly PQI project and, in accordance of the Decree, 25% of the investment amount can be used as tax expense). From this benefit alone, the DTA has been increased to Baht 113 million. 2.2 Liabilities 1) At the end of 2006, total liabilities of the Company and its subsidiary were Baht 18,937 million, which comprised of Baht 18,850 million of the Company's total liabilities and Baht 473 million of BGN's total liabilities, adjusted by connected transactions of Baht 386 million. 2) At the end of 2006, the Company's total liabilities decreased by Baht 2,456 million comparing to 2005. The major changes of liabilities were as follow: * Trade accounts payable were Baht 4,145 million, decreased by Baht 1,332 million comparing to the end of 2005, since the Company had made more advance payments of oil purchase than what it did in 2005. The advance payments in December 2006 were Baht 1,725 million while in December 2005 were only Baht 1,191 million. In addition, oil purchase volume itself had been decreased by 0.30 million barrel in December 2006 comparing to December 2005 as per the Company's inventory control policy. * Long-term loans included current portion were Baht 11,528 million, increased by Baht 48 million comparing to the end of 2005. The details of long-term loans are as follow ; Million Baht Long-Term Loans Dec 31, 06 Dec 31, 05 +/ - Loans from Krung Thai Bank 7,784 8,309 -525 Loans from PQI lenders 38 - +38 Convertible debentures (CDDR) 2,176 2,226 -50 Convertible debentures (CD-PTT) 585 - +585 Debentures / Promissory notes 945 945 - Total 11,528 11,480 +48 Less : current portion of 1,285 319 +966 long-term loans Balance 10,243 11,161 -918 Long-term loans from Krung Thai Bank were Baht 7,784 million, CDDR was amounted Baht 2,176 million and debentures/promissory note amounted 945 million. This year the Company had privately placed convertible debentures to PTT amounting Baht 585 million as part of PQI fund raising program. The Company also had successfully made an initial draw down the PQI loans facilities at the amount of Baht 38 million (from total line of Baht 8,400 million). Current portion of long-term loans of Baht 1,285 million consisted of Baht 340 million for principle repayment of Krung Thai's loan and Baht 945 million for final redemption of debentures and promissory notes which will be payable in December 2007. * the Company did not have accrued corporate income tax for the year of 2006 since the Company had net loss in tax basis (in accounting basis the Company recorded net profit before tax of Baht 131 million) due to adoption of tax privileges from the Royal Decree No. 460. 2.3 Shareholders' Equity 1) At the end of the year 2006, the consolidated total shareholders' equity of the Company were Baht 18,649 million, which comprised of Baht 18,691 million from the total shareholder's equity of the Company and Baht -39 million from BGN's, adjusted by Baht -3 million connected transactions 2) The Company's total shareholders' equity were Baht 18,691 million which increased by Baht 5,798 million comparing to that at the end of 2005, since; * The Company increased share capital by issuing and offering of 428 million shares as part of fund for PQI project, amounted Baht 5,935 million netted from issuing fee and expenses. At this period the CDDR holder had exercised their conversion right which was equivalent to 3.5 million shares or Baht 50 million. And the Company generated net profit of Baht 239 million for the year 2006. * The Company paid dividend to common share holders by Baht 206 million in May 2006 and had amortized Baht 220 million of surplus on fixed assets revaluation. 3) As of December 31, 2006 the Company has other instruments (CDDR, convertible debenture, warrant and ESOP) which holders can exercise their conversion right ( subject to the terms and conditions of each instrument) , if fully converted or exercised shall be equal to 287 million common shares or approximately 20.4% of total shares in fully dilution. (more)