A little brain-power on mahogany row.
It's a good deal for $150MM plus other costs.
From Delta's internal website (likely the same in the public release):
In its next step to address rising fuel costs, Delta Monday afternoon said it has an agreement to acquire the Trainer oil refinery south of Philadelphia. Delta subsidiary Monroe Energy LLC will operate the plant independently from Delta, converting the plant to maximize jet fuel production to supply Delta’s Northeast operations.
“Today’s announcement is an innovative step that will help us reduce the impact that fuel has on our business,” Richard said in a memo to employees. “This investment is one among many strategic actions we are taking to address our fuel costs and make Delta stronger, more resilient and more profitable. Improved profitability allows for additional investment in our product, greater returns for our shareholders and higher profit sharing for Delta people.”
Delta will enter into multi-year agreements with Phillips 66 and with BP to source crude oil for the Trainer facility as well as exchange nonjet fuel byproducts of the refining process in exchange for more jet fuel throughout the country.
The refinery acquisition will save Delta $300 million a year by not having to pay the premium required to convert or “crack” crude oil into jet fuel instead of other petroleum products, such as gasoline. Delta paid $3 billion more for fuel last year than it did in 2010, and of that amount $1 billion was reflected in the additional cost attributed to what analysts call the “crack spread.”
This acquisition and the exchange agreements to swap refinery byproducts for more jet fuel around the nation will combine to supply 80% of Delta’s domestic jet fuel needs.
After using a $30 million grant from the Commonwealth of Pennsylvania, Delta will invest $150 million to buy Trainer from Phillips 66. Delta will spend approximately $100 million to improve the refinery and maximize its jet fuel production, which will feed Delta’s operations in New York and around the region.
“In the face of historically high fuel prices we’ve taken a number of steps to control costs since 2008 including creating an integrated fuel team, retiring less-fuel efficient planes, installing winglets, strictly managing capacity, using fuel hedges and pricing our tickets to reflect the cost of fuel,” Richard said. “But the reality is that crack spreads are the fastest growing part of our cost structure, more than tripling over the last three years.”
Delta’s fuel bill in 2011 was more than $12 billion, its largest single expense. The company’s hedging strategy and careful capacity planning are aimed at making sure higher fuel costs don’t threaten Delta’s sustainability.
“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 Paul Jacobson, s.v.p. and chief financial officer, in Delta’s press release. “We look forward to closing this transaction and moving quickly to begin capturing its benefits.”
The acquisition creates about 400 Monroe Energy jobs to operate the Trainer plant. The deal is expected to close in early summer, with the facility expected to be modified and producing more jet fuel later this year. The Commonwealth of Pennsylvania is offering grant assistance to lower the cost of acquiring the plant.