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Management's Discussion and Analysis for Business Operations For the three-month period and nine-month period ended September 30, 2007 Business Overview for 2007 Oil Price Situation For the third quarter of 2007, world oil market was still in upward trend, oil prices were continuously increased from the previous quarter. This situation was resulted from the concerned over possibly supply shortage in the fourth quarter due to the remain unsolved terrorist attacks in oil production areas in Nigeria and Mexico, conflicts between Iran and western countries in uranium enrichment issue and the U.S. oil reserves which were lower than analysts' expectation. These factors encouraged oil price in this 3rd quarter to be in an upward trend even though the OPEC had confirmed to increase crude oil production for additional of 500 KBD on Sep 11, 2007 (average Dubai crude price of the third quarter was 70.03 USD/BBL, 8.0% increased from the second quarter which was 64.82 USD/BBL). Currently, crude oil price is reaching a new record high. Moreover, the Federal Reserve's decision to cut interest rates a quarter-percentage point on October caused more mobilization of hedge funds investment to commodities market and it will be additional factor for oil price to increase further. If oil price goes on to increase, in some extent, it might result in lower world oil consumption as the consumer will switch for alternate energy, which may be the factors that will weaken the oil price. Refinery Production For the third quarter, the Company's crude run production was 71.3 KBD, comparing to 60.4 KBD of the third quarter of 2006. This is due to the successful execution of Fuel Oil Very Low Sulfur (FOVS) export contracts with various Chinese refineries which will crack the FOVS for Gasoline and Gas Oil. Aggregate volume of FOVS under these contracts is around 100-120 million liters per month and it shall be valid until the end of 2007. Currently, the Company has reached agreements to extend the term of those contracts until the end of 2008. In addition, the incident of nuclear power plant in Japan had made demand for fuel oil to be continuously increased as it has been anticipated that the power plant will have to take long time for rectification. These situation encouraged fuel oil price to be stronger than last year. 1. Explanation and Analysis of the Operating Results for the third quarter and nine month of 2007 compared with that of the year 2006 9 months 2007 9 months 2006 Consolidated Company Consolidated Company Total Revenues, Million Baht 67,635 67,010 75,767 75,133 Net Profit (Loss), Million Baht 1,346 1,289 878 916 Gross Profit margin, % 5.23 4.76 3.61 3.33 Net Profit Margin, % 2.01 1.94 1.17 1.24 Earning Per Share, Baht/Share 1.20 1.15 0.97 1.01 3rd Quarter 2007 3rd Quarter 2006 Consolidated Company Consolidated Company Total Revenues, Million Baht 23,117 22,924 23,956 23,741 Net Profit (Loss), Million Baht 508 498 (30) (2) Gross Profit margin, % 6.20 5.77 3.71 3.53 Net Profit Margin, % 2.21 2.18 (0.13) (0.01) Earning Per Share, Baht/Share 0.45 0.44 (0.03) (0.00) 1.1 Net Profit/(Loss) Analysis 1) For nine-month period, the consolidated financial statements recorded net profit of Baht 1,346 million, which being the Company's net profit of Baht 1,289 million and the subsidiary's (Bangchak Green Net Company Limited- BGN) net profit of Baht 56 million and adjustment of connected transactions of Baht +1 million. 2) For 3rd quarter, the consolidated financial statements recorded net profit of Baht 508 million, which was being the Company's net profit of Baht 498 million and the subsidiary's net profit of Baht 11 million and connected transactions adjustment of Baht -1 million. The Company's EBITDA was Baht 960 million, increased from Baht 243 million of the same period last year by Baht 717 million or 295%. Performance breakdown by business unit are as follow; Table: Details of breakdown EBITDA 3rd Quarter,07 3rd Quarter,06 Changing +/ - (Million Baht) (A) (B) (A) - (B) (Reviewed) EBITDA 960 243 +717 - Refinery 815 (89) +904 - Marketing 145 332 -187 (Less) Inventory Gain (279) -279 Plus Inventory Loss 582 -582 Adjusted EBITDA 681 825 -144 - Refinery 536 493 +43 - Marketing 145 332 -187 - EBITDA of the Refinery Business was Baht 815 million, increased from Baht -89 million of the same period of last year. Total Gross Refining Margin (GRM) for this quarter was 4.67 USD/BBL (included inventory gain due to crude oil price increased in average), higher than Q3 last year which was at 2.23 USD/BBL. The Company's crude run was at 71.3 KBD higher than those of last year which was only at 60.4 KBD. GRM is illustrated as follow; USD/BBL 3rd Quarter 3rd Quarter Changing GRM from 2007 2006 +/- Base GRM 3.63 3.09 +0.54 Improvement Program - 3.48 0.36 3.23 -0.36 0.25 Oil Hedging (0.15) (0.22) +0.07 Inventory Gain (Loss) 1.19 (1.00) +2.19 Total 4.67 2.23 +2.44 Gross Refining Margin - GRM (excluding inventory effects) was 3.48 USD/BBL,higher than that of the same period of last year which was at 3.23 USD/BBL. Base GRM for this quarter itself was increased from those of last year by 0.54 USD/BBL since Fuel oil/Dubai crack spread was significantly increased by 6.03 USD/BBL compare with Q3/2006 due to the increasing in Fuel oil's demand as a result of the incident of nuclear power plant in Japan. In this quarter the Company had not performed co-crack operation with TOP but concentrated on exportation of fuel oil (FOVS) to Chinese refineries. This export program help the company to achieve crude run production up to 71.3 KBD, compared with the same period of last year which was only at 60.4 KBD. GRM from oil hedging increased by 0.07 USD/BBL from last year which was loss at 0.22 USD/BBL since the actual GRM crack spread was more or less in the same level as the hedged margin. The hedged position for this quarter was at 52% of average production level while last year it was at 33%. Inventory gain for this quarter was equivalent to 1.19 USD/BBL higher than the same period of last year which had inventory loss 1.00 USD/BBL since oil price continually increasing. - EBITDA of the Marketing Business was Baht 145 million, decreased from Baht 332 million of the same period of last year, since in this quarter the world oil prices was continuously increased as it made ex-refinery price to increase accordingly while the retail oil prices failed to adjust at the same pace while the situation was in opposite way last year. Marketing Margin (exclude lubricant margin), then was at 36.7 satang per liter lower than those of last year which was at 68.4 satang per liter. The sale volume for Marketing Business was at 49.7 KBD increased from 47.3 KBD as a result of a successful promotion of renewable energy i.e. Gasohol 95, 91 and Biodiesel B5 1.2 Income Analysis 1) Total revenues of the Company and its subsidiary for nine-month period of 2007 were Baht 67,635 million, composed of the Company's revenues of Baht 67,010 million and its subsidiary's (BGN) of Baht 9,924 million, adjusted by connected transaction of Baht 9,299 million most of which were sale tansactions from the Company to BGN. 2) Total revenues of the Company and its subsidiary for the third quarter of 2007 were Baht 23,117 million, composed of the Company's revenues of Baht 22,924 million and its subsidiary's (BGN) of Baht 3,579 million, adjusted by connected transaction of Baht 3,386 million. Major changes from the same period of last year were as follows: - Revenues from sales were Baht 22,815 million, lower than those of last year by Baht 839 million or 4%. Main reason of revenues decreased was from Baht appreciation. Baht was appreciated by 10% as compared to same period last year (reference average T/T selling rate of Q3/2007 at 34.17 Baht/USD compared with Q3/2006 37.79 Baht/USD). This Baht appreciation effect had also made decrease in cost of sales. - Interest income was decreased by Baht 28 million to Baht 40 million or 41% since the Company had made payments to the PQI contractor as per project's progress and milestones completion. As of September 30, 2007, the Company had Baht 3,159 million of fixed deposit at banks (of which Baht 2,930 million was PQI funds). - Other incomes-others were Baht 69 million, increased by Baht 51 million or 295%. Different was mainly came from settlement claim of the 1987 corporate income tax with the Revenue Department amounted Baht 20 million and premium on foreign exchange hedging contracts of Baht 11 million. 1.3 Expense Analysis 1) Total expenses of the Company and its subsidiary for nine-month period of 2007 were Baht 66,289 million, which composed of the Company's expenses of Baht 65,721 million and its subsidiary's (BGN) of Baht 9,868 million, adjusted by connected transaction of Baht 9,300 million, which mostly were cost of sales from the Company to BGN. 2) Total expenses of the Company and its subsidiary for the third quarter of 2007 were Baht 22,609 million, which composed of the Company's expenses of Baht 22,426 million and its subsidiary's (BGN) of Baht 3,568 million, adjusted by connected transaction of Baht 3,385 million, major changes from the same period of last year were as follows: - This period the Company have no allowance for write down of inventory value since world oil price was increased and it has made inventories cost to be lower than the current market prices while the end of 3rd quarter of last year, the Company set Baht 350 million due to average cost of inventories was higher than the net realizable value at that time. - Loss from foreign exchange was Baht 78 million higher than Baht 4 million loss of the same period of last year. - Interest expense was Baht 161 million, decreased from those of last year by Baht 48 million or 23%, as 1) the interest rate was decreased by 0.5% p.a. thereby the average cost of debt in 3rd quarter was 5.5% p.a. and 2) the loan principle was decreased by Baht 2,305 million. 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 for nine-month period and the third quarter of 2007 were 4.8% and 5.8% respectively which it was increased from 3.3% and 3.5% of the same period of last year. This higher gross profit margin came from better refining margin of refinery business as mentioned in item 1.1 section 2. The net profit margin for nine months period then increased from 1.2% to 1.9% and the net profit margin for 3rd quarter increased from 0% to 2.2% accordingly. 2. Explanation and Analysis of the Financial Position as of September 30, 2007 compared with December 31, 2006 2.1 Assets 1) At the end of the third quarter of 2007, total assets of the Company and its subsidiary were Baht 41,589 million, which comprised of Baht 41,498 million of the Company's total assets and Baht 523 million of BGN's total assets, adjusted by connected transactions of Baht 432 million which was from account receivable of Baht 429 million. 2) At the end of the third quarter of 2007, the Company's total assets increased by Baht 3,555 million, comparing to the end of 2006. The major changes of assets were as follows: - Trade account receivable as of September 30, 2007 was Baht 4,137 million which was increased by Baht 1,009 million or 32% since oil price increased and the Company has increased export sales of FOVS of which the normal credit term is 30 days. - Total inventories were Baht 11,873 million, increased by Baht 3,233 million or 37%,due to inventories volume has been increased as per higher rate of crude utilization and a higher oil price. 2.2 Liabilities 1) At the end of the third quarter of 2007, total liabilities of the Company and its subsidiary were Baht 21,948 million, which comprised of Baht 21,871 million of the Company's total liabilities and Baht 506 million of BGN's total liabilities, adjusted by connected transactions of Baht 429 million. 2) At the end of the third quarter of 2007, the Company's total liabilities increased by Baht 2,620 million comparing to the end of 2006. The major changes of liabilities were as follow: - Trade accounts payable were Baht 8,027 million, increased by Baht 3,881 million since at the end of 2006 the Company had made advance payments for 2 shipments of crude oil purchased at the amount of Baht 1,725 million. In addition, at this quarter, the world oil price was increased around 10.9% as compared to price of December 2006. 2.3 Shareholders' Equity 1) At the end of the third quarter of 2007, the consolidated total shareholders' equity were Baht 19,641 million, which comprised of Baht 19,627 million from the total shareholders' equity of the Company and Baht 17 million from BGN's, adjusted by Baht -3 million connected transactions. 2) At the end of the third quarter of 2007, the Company's total shareholders' equity were increased by Baht 935 million comparing to that at the end of 2006, since the Company generated net profit of Baht 1,289 million for nine-month period of 2007. However, the Company had amortized Baht 164 million of surpluses on fixed assets revaluation and had paid for dividend of Baht 190 million. 3) As of September 30, 2007 the Company has financial instruments (CDDR,subordinated 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. 3. Explanation and Analysis of the Statement of Cash Flows for nine-month period of 2007 3.1 For nine months of 2007, the Company and its subsidiary had beginning cash and cash equivalent of Baht 2,705 million. During the period, the Company received cash from various activities of Baht 2,317 million, of which Baht 1,817 million were received from operating activities, Baht 2,227 million were received from investing activities and Baht 1,727 million were used in financing activities. Cash and cash equivalent at the end of the third quarter of 2007 were Baht 5,022 million, which consisted of Baht 4,858 million of the Company and Baht 164 million of BGN. 3.2 The Company had net profit of Baht 1,289 million; added back non-cash items of Baht 792 million, the Company then had cash profit from operation of Baht 2,081 million together with cash at the beginning of period of Baht 2,599 million. The Company also had additional cash flow activities as follows; 1) Net cash received from working capital was Baht 324 million; The Company used cash in operating assets of Baht 4,179 million which consisted of increased in Trade accounts receivable of Baht 961 million, increased in inventories value of Baht 3,233 million but other current assets were decreased by Baht 15 million. Cash from operating liabilities were increased by Baht 3,855 million consisted of increased in trade accounts payable of Baht 3,889 and decreased in other operating liabilities of Baht 34 million. 2) Net cash received from investing activities was Baht 2,229 million; Short term investment was reclassified to cash by Baht 3,816 million since its remaining investment period was less than 3 months. Investment in fixed assets of Baht 1,684 million, of which Baht 1,502 million was PQI's. Cash received from other investments were Baht 97 million. 3) Net cash used in financing activities was Baht 1,727 million; Baht 1,200 million short-term revolving loan and Baht 337 million long-term loan were repaid to Krungthai Bank. Dividend payment of Baht 190 million (total share of common stock 1,119 million at 0.17 Baht per share). The Company cash and cash equivalents had increased by Baht 2,259 million. When combined with beginning cash of Baht 2,599 million, at the end of the third quarter of 2007, cash and cash equivalents was Baht 4,858 million which consisted of Baht 1,534 million for operation and Baht 3,324 million appropriated for PQI project. 4. Changing in accounting policy Since January 1, 2007, the Company changed its accounting policy regarding investment in a subsidiary so that separate financial statement, which formerly reported investment using the equity method, now reports using the cost method. This is to comply with TAS 44. Thus the Company restated its financial statement by using the historical cost as the cost of the investment in a subsidiary of the separate financial statement. This adjustment caused the net income on the separate financial statement to differ permanent from that reported in the consolidated financial statement. The Company had made adjustment to retain earning at December 31, 2006 to be increased by Baht 0.49 million which equivalent to equity injections that the Company invested in BGN in order to reflect investing value by using the historical cost method. The cumulative effect of the accounting policy has been presented under the heading of "Cumulative effect of the change in accounting policy for investments in subsidiary" in the separate financial statements in the statement of changes in shareholders' equity. Million Baht Statement of income 3rd Quarter 2007 3rd Quarter 2006 (The Company Only) Cost Equity Change Cost Equity Change Mtd. Mtd. +/- Mtd. Mtd. +/- Gain (loss) from investment - 11 -11 - - - in subsidiary Balance Sheet September 30, 2007 December 31, 2006 (The Company Only) Cost Equity Change Cost Equity Change Mtd. Mtd. +/- Mtd. Mtd. +/- Investment in subsidiary 0.49 18 -17 0.49 - +0.49 Please be noted that, the change of accounting policy affects only the separate financial statement. It did not have any effect on the consolidated financial statements or business fundamentals. 5. Factors and major influences that may affect the Company's performance or financial status in the future Major factors affected the performance were the marketing margin and gross refining margin. For the marketing margin, since the oil prices were rapidly increased especially after the floating of gasoline and diesel price, the retail price could increase at a slower rate than the cost increased which depressed the marketing margin to be at a low level and this incident would slow down the demand for oil consumption; in other hand, if the oil prices were decreased, the marketing margin and oil consumption would increase as well. For the refining margin, as a simple refinery having a high proportion of fuel oil production and the fact that fuel oil price is always lower than crude price, the Company's gross refining margin was capped to a certain level depending on the fuel oil price for each period. Thus the Company has had necessity to attain the long-term resolution for reducing fuel oil production to enhance gross refining margin to be at the same level of the industry's. Therefore, the Company has adopted the Product Quality Improvement project (PQI) by installing the hydro-cracking unit and other associated units, which will reduce production of fuel oil to the near level of other local and foreign refineries and hence become a complex refinery. The Company expects that the project will increase EBITDA from average Baht 2,000-4,000 million to approximately Baht 6,000 - 8,000 million after the project reach its completion subject to oil price at the period. Currently PQI project has started its construction, which total project cost (included contingency reserve) totaling Baht 15,369 million or equivalent to USD 378 million. The Company has appointed CTCI Overseas Corporation Limited and CTCI (Thailand) Co., Ltd. to be contractors of the PQI under fixed price, date certain and performance guaranteed arrangement. The Company has achieved its financial closure for sources of funds for the project since May 16, 2006. The project is now under construction and overall progress as of (more)