Results for the three months ended Mar. 31, 2009 were impacted by a fire at Delek US Holdings’ Tyler, Texas refinery which occurred on November 20, 2008. Till date, the Tyler refinery has resumed most major units and is presently in the final phase of the refinery start-up process.
During the first quarter 2009, Delek US Holdings recorded income of $30.6 million related to claims under the company’s property damage and business interruption insurance policies. As well, since the start of the second quarter 2009, the company has obtained cash payments of $25 million and, to date, has received approvals for payments of an additional $18 million. The company hopes substantial additional insurance proceeds to be forthcoming as it finalizes claims.
Delek US Holdings expects that the proceeds paid on business interruption claims generated during the first quarter 2009 should be positively impacted by a 5-3-2 Gulf Coast crack spread of $9.14, as well to a main deepening of the West Texas Intermediate (WTI) crude oil contango market structure, which averaged more than $4.50 during the first quarter 2009. As a refinery that buys and processes WTI as its primary feedstock – currently one the cheapest sweet crudes in the world – Tyler is well positioned to benefit from a contango market structure which has continued into the second quarter 2009.
“We are pleased to announce that we have restarted most of the major units at our Tyler refinery and are currently producing and selling distillate products,” stated Uzi Yemin, president and chief executive officer of Delek US Holdings. “Today, the Tyler refinery is more efficient and operationally versatile than ever before, due in large part to our considerable investment in a series of value enhancing capital projects which we began in November 2008. Having finished the turnaround and the bulk of the crude optimization projects, Tyler is well-positioned to remain a key profit center for Delek US, going forward.”
Retail Segment
Retail segment contribution margin decreased to $7 million in the first quarter 2009, compared to $9.9 million in the first quarter 2008. Retail fuel margins returned to more normalized levels during the first quarter, in-line with the historical seasonal trend of years past.
First quarter 2009 retail fuel margins were 11 cents per gallon, compared with 12.6 cents per gallon in the first quarter 2008. Although same-store retail fuel gallons sold decreased by 2.1% in the first quarter 2009, the year-over-year change in the same-store gasoline gallons sold in the first quarter 2009, excluding the impact of leap year, increased about 1%.
Delek US Holdings reported a 4.5% same-store merchandise sales decline in the first quarter 2009, attributable to lower sales of several food-related categories, including dairy and soft drinks, in addition to a general reduction in discretionary consumer spending. Merchandise margin for the three months ended March 31, 2009 was 31.9%, against 32.2% in the first quarter 2008.
During the second quarter 2009, the retail segment intends to reimage more than 20 stores. Through March 31, 2009, the retail segment had reimaged about 20% of the company’s total store base.
During the fourth quarter 2008, the company’s Virginia operations were reclassified to discontinued operations and the assets and liabilities associated with remaining stores are reflected as held for sale for all periods. As of March 31, 2009, the company had sold 24 of the 36 Virginia-based stores held for sale, along with 12 sites which were sold during the first quarter 2009.
Refining Segment
Refining contribution margin rose to $19.4 million in the first quarter 2009, compared to $7.6 million in the first quarter 2008. Refining segment financial results for the three months ended March 31, 2009 are not comparable with the prior year due to a fire at the Tyler refinery which kept the facility offline for the duration of the first quarter 2009.
Delek US Holdings carries about $1 billion in combined limits to insure against property damage and business interruption. During the first quarter 2009, the company recorded $9.5 million of income on property damage insurance claims and $21.1 million of income on business interruption insurance claims. The $9.5 million recorded on property damage was partially offset by $7.9 million of expenses related to the rebuild of fire damaged units, the demolition of fire affected areas and emergency response services related to the November 2008 incident.
In May 2009, the company accomplished the reconstruction of units partially damaged in the November incident, including saturates gas plant, naphtha hydrotreater and the control room. Concurrent with the rebuild of the damaged units, the Company completed most of the work on its crude optimization projects and fully accomplished a maintenance turnaround, both of which were previously scheduled for the fourth quarter 2009.
Marketing Segment
Marketing segment contribution margin was $5 million in the first quarter 2009, compared with $6.4 million in the first quarter 2008. First quarter of 2009 marketing segment contribution margin includes $3.1 million of intercompany marketing fees paid by the refining segment to the marketing segment.
On March 31, 2009, the company accomplished the intra-company transfer of certain pipeline and storage assets from the company’s refining segment to the company’s marketing segment for total cash consideration of $29.7 million. Under the terms of the deal, the marketing segment will assume the operation of two pipelines, as well to 11 storage tanks with 900,000 barrels of shell storage.
The company expects this transaction will shift about $6 million in contribution margin from refining to marketing on yearly basis subject to crude throughput levels, going forward. The strategic intent of this transaction is to move ahead with a long-term plan to consolidate the company’s marketing and transportation assets under a single logistics arm.
