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Management's Discussion and Analysis for Business Operations For the Third Quarter of 2008 and the nine-month period ended September 30, 2008 Business Overview Oil Price Situation From the beginning of 2008, oil prices had continuously increased and reached its highest level at July 4, 2008 which was 140.77 USD/BBL (Dubai crude price) supported by the fundamental of the tightness of oil supply as compared to the demand. Unexpectedly, at the end of the third quarter, oil prices had subsequently decreased to 87.66 USD/BBL, lower than that of the end of the second quarter which was 136.30 USD/BBL. This drastic decreasing, the result from the upcoming financial crisis concern over the U.S.'s subprime problem which would blow up the globe economic recession, leads depressing impact to world oil industry. That recession will slice out the oil demand; as a result, the demand drive has eliminated. Moreover, high level of US oil inventories was also the factor to slump down the price. However, in 24 October 2008, the OPEC has made the response to the low oil price by cutting its production quota of 1.5 million barrel per day from November onward. Nevertheless, the cutting has yet to impact the oil price, as analysts' forecasts that the recession will take out oil demand by 2.5 million barrel per day. Consequently, there is high possibility that OPEC will further slash the production quota by another 1 million barrel per day to stabilize the oil prices. During the time of high oil price, refineries will have good positive impact of time lacking between crude prices and product selling prices (in other words: inventory gain); however, the companies have to use significant part of such gain to purchase higher price of crude feedstock. Conversely, the current downward trend in oil prices causes refineries' inventory loss; nonetheless, they recognize the lower working capital required for feedstock procurement. In order to balance the risk and return matters arising from this unexpected oil prices, the company has been managing to maintain the optimum inventory level to minimize the impacts from the inventory value. Production and Sales In the third quarter, the Company's crude run was 74.3 KBD (lower than the second quarter's of 83.6 KBD). This lower utilization came from declining in products demand by reason of low season period; though, it was higher than the third quarter of 2007 which was 71.3 KBD. This is owing to the increasing in exporting of Fuel Oil Very Low Sulfur (FOVS), which was still having good demand from the captive users. The company is able to export all of fuel oil production at premium price as its premium quality; this was accounted for 430 million liters in the third quarter increased from 309 million liters in the third quarter of 2007. Comparing to the same period of 2007, the sale volume through retail gas station for the third quarter was decreased by 1.2%. Yet, the market share through retail gas station in Jan.-Aug.2008 achieved the 4th rank or 14.0 %, increased from 12.6 % of the same period in 2007. 1. Analysis of the Operating Results for 3rd quarter of 2008 1.1 Profit/(Loss) Analysis 1) For the nine-month period, the consolidated financial statements recorded net profit of Baht 2,445 million (EPS = 2.19 Baht), which belongs to the part of the Company's net profit of Baht 2,439 million and the subsidiaries' (Bangchak Green Net Company Limited - BGN and Bangchak Bio Fuel - BBF) net profit of Baht 38 million, with the adjustment of connected transactions of Baht 32 million. 2) For the third quarter of 2008, the Company and its subsidiaries recorded net loss of Baht 252 million, which comprised of the Company's loss of Baht 220 million and the subsidiaries' loss of Baht 27 million. The consolidated figures were adjusted by connected transactions of Baht 5 million. 3) The Company's performance EBITDA for the third quarter of 2008 was Baht 1,568 million. Combining with another Baht -1,245 million inventory effect (Baht 295 million for inventory loss and Baht 950 million for inventory mark down by lower of cost or market-LCM), total EBITDA was Baht 323 million. However, breakdown EBITDA by business units were as follows: Table: Details of breakdown EBITDA 3rd Quarter,08 3rd Quarter,07 Change +/ - (Million Baht) (A) (B) (A) - (B) Performance EBITDA 1,568 681 +887 - Refinery 909 536 +373 - Marketing 659 145 +514 (less) Inventory effect (295) 279 -574 (less) LCM (950) - -950 Total EBITDA 323 960 -637 - Refinery (336) 815 -1,151 - Marketing 659 145 +514 - Performance EBITDA of the Refinery Business was Baht 909 million, increased from Baht 536 million of the same period of 2007. Refining Margin (excluded inventory loss and LCM) for this quarter was 5.38 USD/BBL (equivalent to 1.15 Baht/liter), higher than those of the third quarter in the last year which was 3.65 USD/BBL (equivalent to 0.78 Baht/liter). Plus, the Company's crude run was at 74.3 KBD, also higher than those in the last year at 71.3 KBD. USD/BBL 3rd Quarter 3rd Quarter Change GRM 2008 2007 +/- Base GRM 5.62 3.80 +1.82 GRM Hedging (0.24) (0.15) -0.09 Total 5.38 3.65 +1.73 Base GRM: Due to the Company's crude selection optimization and slightly tall Dubai's crack spread especially Gas oil/Dubai (GO/DB) which was improved to 25.87 USD/BBL (quarter average) comparing with the same period of 2007 at average 16.40 USD/BBL, for this quarter, base GRM was higher than the last year by 1.82 USD/BBL. Major influences of rising in crack spread came from higher crude oil price and arbitrage window from Asia to Europe, thanks to the scheduled CDU shutdowns in Europe. The negative spread of Fuel oil/Dubai was about the same level as the last year;however, the export of FOVS at premium price over MOPs was the supporting factor for the better performance in this quarter. Details of products crack spread were shown as below. USD/BBL 3rd Quarter 3rd Quarter Change Products crack spread 2008 2007 +/- UNL95/DB 6.06 11.65 -5.59 IK/DB 28.68 17.26 +11.42 GO/DB 25.87 16.40 +9.47 FO/DB -10.91 -10.42 -0.49 GRM hedging was lower than the same period of the last year by 0.09 USD/BBL since the actual crack spreads were greater than the hedged spreads; therefore, the Company has booked merely loss on GRM hedging at 0.24 USD/BBL. The hedged position for this quarter was at 21% of average actual production while the same period of 2007 was at 52%. - Marketing Business's EBITDA was Baht 659 million, increased from Baht 145 million of the same period in the last year. The overall Marketing Margin (exclude lubricant margin) was 118.7 satang/liter, compared to 36.7 satang/liter at the same period in year 2007; as the result of oil price volatility that all refined product players were getting more cautious on adjusting the retail price down as the concern over price fluctuation in the past. Therefore, the retail price was well over the cost (ex-refinery price). However, the Marketing Business sales volume (retail marketing business, industrial customers business and aviation fuel business) was falling from 49.7 KBD to 47.8 KBD or 3.8% which was lower comparing to whole industrial demand. According to DOEB's July and August report, it illustrated that BCP's retail volume decreasing rate at 8.1% was better than the country's demand which was 12% (yoy). - Regarding to the dramatic decreasing of crude oil price in the third quarter, it resulted the refinery business to experience inventory loss of Baht 295 million (-1.27 USD/BBL) compared to the same period in the last year which was inversely gain of Baht 279 million (1.24 USD/BBL). In addition, in this quarter, the company realized another Baht 950 million for inventory mark down by lower of cost or market-LCM). 1.2 Income Analysis 1) Revenues from sales and services of the Company as well as its subsidiaries' for the nine-month period of 2008 were Baht 106,527 million, comprised of the Company's revenues of Baht 105,801 million and its subsidiary's (BGN) of Baht 14,982 million,adjusted by connected transaction of Baht 14,256 million which mostly associated with the sale transactions from the Company to BGN. 2) Revenues from sales and services of the Company plus its subsidiaries for the third quarter of 2008 were totally Baht 37,121 million, consisted of the Company's sale revenue of Baht 36,870 million and its subsidiary's (BGN) of Baht 4,658 million,adjusted by connected transaction of Baht 4,407 million. The major combinations of the changes in the Company's revenues comparing to those of last year were as follows: - Revenues from total sales (including refinery business sales and marketing business sales) were higher than those of last year by Baht 14,054 million or 61.6%. Th improvements came from 1) increasing of sale volumes by 12.0% and 2) average rising in selling price by 44.3%. - Interest income reduced by Baht 29 million or 73.0% since the Company has used up cash from PQI fund raising proceed to pay the PQI contractor in accordance with their milestone achievement. - Other income decreased by Baht 32 million or 46.2%, given that, the Company, the last year, realized the settlement claim of 1) a pier damage loss from vessel collision amounted Baht 26 million and 2) the 1987 corporate income tax claim from the Revenue Department amounted Baht 20 million. However, if these extra items were neglected, other income for this period would have increased by Baht 14 million which mainly was the profit from NGV sales. 1.3 Expense Analysis 1) Total expenses of the Company along with its subsidiaries for nine-month period of 2008 primarily were costs of sale and services of Baht 99,108 million, which involved the Company's costs of Baht 98,753 million and its subsidiary's (BGN) of Baht 14,544 million, adjusted by connected transaction of Baht 14,189 million, which mostly were cost of product sales from the Company to BGN. 2) For this third quarter, expenses of the Company and its subsidiaries mainly were costs of sale and services of Baht 35,334 million, which comprised of the Company's costs of Baht 35,156 million and its subsidiary's (BGN) of Baht 4,559 million, adjusted by connected transaction of Baht 4,381 million. Major components in changes of the Company's expenses comparing to those of the last year were as follows: - By using lower of cost or market (LCM) to assess inventory value, the Company had realized loss of Baht 950 million from inventory write down caused by oil price's continuous plunge. - Interest expense was Baht 418 million, increased from those of the last year at Baht 160 million, according to recognizing of refinancing fee which included prepayment and cancellation fee as well as write off accrued financial fees and expenses of the refinanced loan. 1.4 Profitability Analysis Jan-Sep 2008 Jan-Sep 2007 Consolidated Company Consolidated Company sales and services, Million Baht 106,527 105,801 67,086 66,471 Net Profit (Loss), Million Baht 2,445 2,439 1,346 1,289 Gross Profit Margin, % 6.96 6.66 5.23 4.76 Net Profit Margin, % 2.30 2.30 2.01 1.94 Earning Per Share, Baht/Share 2.19 2.18 1.20 1.15 3rd Quarter 2008 3rd Quarter 2007 Consolidated Company Consolidated Company Total Revenues, Million Baht 37,121 36,870 23,008 22,815 Net Profit (Loss), Million Baht (252) (220) 508 498 Gross Profit Margin, % 4.82 4.65 6.20 5.77 Net Profit Margin, % -0.68 -0.60 2.21 2.18 Earning Per Share, Baht/Share -0.22 -0.20 0.45 0.44 Gross profit margin varies by the world oil price movement for both refining and marketing margin. Gross profit margin for the nine-month period was 6.66%, increased from the same period in the last year which was 4.76%. However, for the third quarter of 2008, gross profit margin was accounted for 4.65% decreasing from 5.77% of the same period in the last year,this result was influenced by the oil price that affected to refining and marketing margin as mentioned in item 1.1 section 3. The net profit margin for the third quarter then decreased from 2.18% to -0.60%; though, the seemingly decrease was actually growing for the nine-month period from 1.94% to 2.30%, comparing to the last year. 2. Analysis of the Financial Position as of September 30, 2008 2.1 Assets 1) At the end of the third quarter of 2008, total assets of the Company and its subsidiaries were totally Baht 52,100 million, which comprised of Baht 51,903 million of the Company's total assets, Baht 617 million of BGN's total assets and Baht 144 million of BBF's total assets, adjusted by connected transactions of Baht 564 million which was mainly account receivable items of Baht 481 million. 2) The Company's total assets increased by Baht 7,063 million or 15.7%, at the end of the third quarter of 2008, comparing to the end of 2007. The major changes of assets were as follows: - Cash and cash equivalent items decreased by Baht 3,910 million or 64.2%, drawn for normal operation especially to support the higher inventory value as well as for PQI project cost. (See details in cash flow statement analysis) - Inventories increased by Baht 2,633 million or 24.5% due to rising in oil prices (average Dubai price in September 2008 was 95.74 USD/BBL, increased by 11.4% while at December last year was 85.98 USD/BBL). Inventories level slightly grew by 0.06 million barrels, providing the increasing in crude run level. The write down (LCM) in inventory of Baht 950 million or 6.6% was already taken into account for the inventory value. - To alleviate the impact of high oil price, Energy Policy and Planning Office (EPPO) has promoted more subsidy for gasohol and diesel. Therefore, Oil Fund Subsidies Receivables increased by Baht 504 million or approximately 2.5 times. Moreover, the company has been receiving the oil fund subsidy from producing EURO IV high speed diesel. Thus, at the end of third quarter, total oil fund subsidies receivables equal Baht 701 million. - Other current assets increased by Baht 851 million or 6 times approximately which was mainly VAT receivable. Since the no-VAT-FOVS export volume has increased as well as oil price reduction, this made VAT receivable higher than VAT payable. - Long-term investments increased by Baht 112 million, mainly for purchasing 6.56% common shares of ASEAN Potash Mining Public Company Limited in the amount of Baht 80 million. - As of the third quarter ended, values of property, plant and equipment (PPE) was Baht 24,847 million increased by Baht 6,440 million or 35.0% which consisted of the investment in PQI project of Baht 6,877 million and other normal CAPEX of Baht 301 million. Moreover, there was the reversal of Baht 31 million for fixed assets impairment. For the nine-month period of this year, the Company also recorded depreciation of PPE of Baht 769 million. - Other non current assets decreased by Baht 281 million or 29.7%. Concerning to the oil prices and the crack spreads descent; the Company was able to repossess the margin call deposit of oil hedging from counterparties. 2.2 Liabilities 1) At the end of the third quarter of 2008, total liabilities of the Company and its subsidiaries were Baht 29,013 million, which included Baht 28,896 million of the Company's total liabilities and Baht 570 million of BGN's total liabilities as well as Baht 55 million of BBF's total liabilities, adjusted by connected transactions of Baht 507 million most of which arrived from account payable of Baht 481 million. 2) Comparing to the end of 2007, the Company's total liabilities increased by Baht 5,255 million or 22.2% at the end of the third quarter of 2008. The major changes of liabilities were as follow: - Long-term loan increased by Baht 4,551 million, mainly for PQI project investment. - Other current liabilities grew by Baht 1,092 million or 239.4%, mainly were the accounts payable for PQI's contractor and retention for PQI construction project. - Liabilities on hedging contracts were decreased by Baht 853 million or 91.9% as the payment on the maturity contracts of oil hedging and FX had been settled. - The Company had no corporate income tax payable at ending of the third quarter. 2.3 Shareholders' Equity 1) At the end of the third quarter of 2008, the consolidated total shareholders' equity of the Company were Baht 23,087 million, which comprised of Baht 23,007 million from the total shareholders' equity of the Company and Baht 47 million from BGN's as well as Baht 89 million from BBF's, adjusted by Baht 57 million connected transactions. 2) The Company's total shareholders' equity increased by Baht 1,808 million comparing to the end of 2007. As the Company generated nine-month period net profit of Baht 2,439 million while paid dividend of year 2007 was Baht 336 million and amortized of surplus on fixed assets revaluation was the Baht 295 million, this resulted total shareholders' equity at the end of the third quarter to be Baht 23,007 million. 3) As of September 30, 2008 the Company had financial instruments (CDDR, subordinated convertible debenture, warrant and ESOP), if these were fully converted or exercised, equivalent to 287 million common shares or approximately 20.4% of total shares in fully dilution. 3. Explanation and Analysis of the Cash Flow Statement for nine-month period of 2008 3.1 For the nine-month period of 2008, the Company and its subsidiaries had beginning cash as well as cash equivalent items of total Baht 6,450 million. During the period, net cash was decreased from the utilizing in various activities by Baht 3,996 million, of which Baht 1,715 million were used in operating activities, Baht 7,460 million were used in investing activities while Baht 5,179 million were received from financing activities. Hence,Cash and cash equivalent at the end of third quarter of 2008 were Baht 2,454 million,which consisted of Baht 2,178 million of the Company and Baht 258 million of BGN as well as Baht 18 million of BBF. 3.2 The Company's beginning cash of this year itself was Baht 6,088 million, consisted of Baht 2,918 million for PQI project and Baht 3,170 million for normal operation. During this nine-month period, the Company had utilized Baht 3,910 million for the following activities; 1) Net cash used in operating activities was Baht 1,588 million; The Company received cash of Baht 5,953 million from operation before changes in operating assets and liabilities. The Company used cash of Baht 5,648 million in operating assets which consisted of increasing in inventories of Baht 3,583 million and accounts receivable of Baht 740 million as well as the other current assets of Baht 1,325 million (mostly oil fund and VAT receivables). Cash from operating liabilities increased by Baht 730 million mainly from rising in trade accounts payable of Baht 635 million and other operating liabilities of Baht 95 million. The Company used cash of Baht 862 million and Baht 1,761 million for interest paid and corporate income tax respectively. 2) Net cash used for investing activities was Baht 7,403 million; Investment in fixed assets of Baht 7,669 million, of which Baht 6,573 million was PQI's. Cash was received from other investments for the amount of Baht 266 million which was primarily from margin called deposit return. 3) Net cash received from financing activities was Baht 5,081 million; Short term loan drawdown for the Company's working capital was Baht 1,020 million. Long term loan drawdown for the amount of Baht 14,221 million used for the PQI project and refinancing activities. Long term loan prepayment for refinance was Baht 9,824 million. Dividend payment was Baht 336 million (total share of common stock 1,119 million at 0.30 Baht per share). At the end of the third quarter of 2008, cash and cash equivalents items was Baht 2,178 million which consisted of Baht 1,057 million appropriated for PQI project and Baht 1,121 million for normal operation. (more)