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Delta Air Lines to buy Trainer refinery for $150 million
Apr 30, 2012 (The Philadelphia Inquirer - McClatchy-Tribune Information Services via COMTEX) -- Copyright (C) 2012, The Philadelphia Inquirer

Delta Air Lines announced Monday that its wholly owned subsidiary Monroe Energy L.L.C. will buy the ConocoPhillips oil refinery in Trainer for $150 million.

The deal, announced after the stock markets closed, was reached with Phillips 66, a spin-off of ConocoPhillips' refining arm.

Delta said Pennsylvania will provide $30 million in government assistance for job creation and infrastructure improvement. In addition, Monroe Energy will spend $100 million to convert the existing Trainer plant 10 miles southwest of Center City "to maximize jet fuel production."

Although Delta is the first airline to buy a refinery, the move "is an innovative approach to managing our largest expense," said Delta chief executive officer Richard Anderson.

"This modest investment, the equivalent of the list price of a new wide-body aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast," he said, noting the "strategy is aligned with the moves we have made to build a stronger airline."

If the Trainer plant, which has refining capacity of 185,000 barrels a day, were to be permanently shuttered, jet fuel supplies on the East Coast would be reduced and Delta would have to pay more for imports.

Under the deal, Monroe Energy will enter into "strategic sourcing and marketing agreements with BP and Phillips 66."

The acquisition includes pipelines and transportation assets that will provide access to the delivery network for jet fuel and will accommodate Delta's operations throughout the Northeast, including its hubs at New York's LaGuardia and John F. Kennedy airports. Delta is the second-largest U.S. airline after a merger with Northwest Airlines.

A three-year agreement calls for BP to supply the crude oil to be refined. Monroe Energy will exchange gasoline and other refined products from Trainer for jet fuel from Phillips 66 and BP elsewhere in the country through multiyear agreements, Delta said.

The airline will benefit from the expertise of BP and Phillips 66 "in energy sourcing and product distribution," said Delta president Ed Bastian. "We are also pleased to partner with Gov. Corbett and the Commonwealth of Pennsylvania" to create jobs and economic growth for the region "while generating substantial fuel savings for Delta," Bastian said.

East Coast refining has been under pressure, with a lot of refining capacity shut down. The Trainer plant, idle since last year, is one of one of three Philadelphia refineries that faced closure because of poor profits. The Carlyle Group is in exclusive negotiations to buy a majority stake in Sunoco's Philadelphia plant. Sunoco's plant in Marcus Hook has generated no interest from buyers, Sunoco said.

Fuel is one of airlines' biggest costs, and major U.S. airlines were in the red in the first quarter that ended March 31.

Refinery margins have also been pressured by high-cost imported crude oil, dwindling local fuel demand and heavy competition from new, modern plants outside the U.S. Paul Reed, CEO of BP's integrated supply and trading, said the "agreement demonstrates BP's continued commitment to supply U.S. customers with the feedstock and products they need. We are delighted to bring BP's global scale and access to the world's energy markets to this strategic agreement with Delta."

The trainer refinery will be run by a 25-year refinery veteran, Jeffrey Warmann, who was refinery manager for Murphy Oil USA Inc.'s refinery in Meraux, La. Warmann led Meraux's restructuring efforts and increased refinery output by more than 30 percent and "significantly improved" Meraux's profitability, Delta said.

The deal is expected to close by June 30, with jet fuel production to begin in the third-quarter. Changes to the plant infrastructure are expected to increase jet fuel production by the end of the third quarter, and result in a fuel savings in 2012 "of more than $100 million," the airline said.

The deal drew praise from elected officials, including the Pennsylvania congressional delegation. U.S. Sen. Bob Casey (D., Pa.) characterized it as "a major victory for our workers and the Pennsylvania economy." Casey said he "was impressed both by Delta's forward-thinking management style and its innovative approach to current market realities."

Michael Linenberg, an airline analyst with Deutsche Bank Securities, called Delta's bid "a very bold move. "

Delta spent $11.8 billion on jet fuel in 2011, about 36 percent of its operating expenses, up from 13 percent in 2000. Linenberg said each penny in savings on a gallon of fuel translates into $40 million for Delta's bottom line.

"We expect the Trainer acquisition to be accretive to Delta's earnings, expand our margins, and to fully recover our investment in the first year of operations," said Delta chief financial officer Paul Jacobson. "We look forward to closing this transaction and moving quickly to begin capturing its benefits."

Delta serves more than 160 million passengers a year, flies to 350 destinations in 62 countries, has 80,000 employees and a fleet of more than 700 aircraft.

Contact Linda Loyd at 215 854 2831 or lloyd@phillynews.com.


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