Delta Air Lines (NYSE: DAL) wholly owned subsidiary, Monroe Energy LLC, has reached agreement with Phillips 66 (NYSE: PSX-WI) to acquire the Trainer refinery complex south of Philadelphia. As part of the transaction, Monroe will enter into strategic sourcing and marketing agreements with BP (NYSE: BP) and Phillips 66. The acquisition includes pipelines and transportation assets that will provide access to the delivery network for jet fuel reaching Delta's operations throughout the Northeast, including its hubs at LaGuardia and JFK.
After receipt of $30 million in state government assistance for job creation and infrastructure improvement from the Commonwealth of Pennsylvania, Monroe's investment to acquire the refinery will be $150 million, and Monroe will spend $100 million to convert the existing infrastructure to maximize jet fuel production. Production at the refinery combined with multi-year agreements to exchange gasoline, diesel, and other refined products from the refinery for jet fuel will provide 80 percent of Delta's jet fuel needs in the United States.
"Acquiring the Trainer refinery is an innovative approach to managing our largest expense," said Richard Anderson, Delta's chief executive officer. "This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast. This strategy is aligned with the moves we have made to build a stronger airline for our shareholders, employees and customers."
Monroe is partnering with leading energy companies to supply crude oil and receive jet fuel in exchange for Trainer's non-jet fuel outputs. Under a three-year agreement, BP will supply the crude oil to be refined at the facility. Monroe Energy will exchange gasoline and other refined products from Trainer for jet fuel from Phillips 66 and BP elsewhere in the country through multi-year agreements.
The Commonwealth of Pennsylvania and Delaware County have agreed to provide assistance to ensure the refinery continues its economic contribution to the region.
"By working with world class partners like BP and Phillips 66, we can benefit from their expertise in energy sourcing and product distribution," said Ed Bastian, Delta's president. "We are also pleased to partner with Governor Corbett and the Commonwealth of Pennsylvania, the Pennsylvania Congressional delegation, and Delaware County to create jobs and economic growth for the region while generating substantial fuel savings for Delta."
"This supply and off-take 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," said Paul Reed, CEO, Integrated Supply and Trading, BP.
Trainer will be run by a seasoned leadership team headed by 25-year refinery veteran Jeffrey Warmann. In his last position as refinery manager for Murphy Oil USA, Inc.'s Meraux, La. refinery, Warmann led Meraux's restructuring efforts, increasing refinery output by more than 30 percent and significantly improving Meraux's profitability.
Monroe expects to close on the acquisition in the first half of 2012. Jet fuel production is expected to begin during the third quarter, and changes to the plant infrastructure to increase jet fuel production would be complete by the end of the third quarter, resulting in expected 2012 fuel savings of more than $100 million.
"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, Delta's chief financial officer. "We look forward to closing this transaction and moving quickly to begin capturing its benefits."
Located on the Delaware River in Trainer, Pa., about 10 miles southwest of downtown Philadelphia, the Trainer complex has a crude oil processing capacity of 185,000 barrels per day and processes mainly light, low-sulfur crude oil.