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Refining and the Airline October 23, 2012. Contents Delta 101 Why Trainer and why now? Market reaction.

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Presentation on theme: "Refining and the Airline October 23, 2012. Contents Delta 101 Why Trainer and why now? Market reaction."— Presentation transcript:

1 Refining and the Airline October 23, 2012

2 Contents Delta 101 Why Trainer and why now? Market reaction

3 2 Delta holds a long heritage as the worlds leading airline Delta is the world's largest airline by passenger miles 5 th oldest airline founded in 1928 (Deltas legacy includes the former Northwest, Pan Am, Republic, Western, Northeastern, and Hughes AirWest airlines) Founding member of the SkyTeam Alliance, Joint-Venture partner with AirFrance/KLM and Alitalia and partial owner of AeroMexico and GOL of Brazil Fortune Magazines 2011 Worlds Most Admired Airline $35 billion in annual revenue 160 million customers annually served through 340 destinations $44 billion in assets More than 700 mainlines aircraft plus 700 regional jets 80,000 employees plus ~100,000 contractors Hubs located in Atlanta, New Yorks JFK and LaGuardia, Detroit, Minneapolis, Cincinnati, Memphis, Salt Lake City, Los Angeles, and overseas in Tokyo, Amsterdam, and Paris

4 3 Operational focus is critical to run Deltas complex business ManufacturingOperationsReal Estate Delta TechOps has 10,000 employees rebuilding airplanes and engines Delta performs its own maintenance plus it serves 150 other carriers making it the third largest MRO business in the world 3 million square feet of manufacturing space in Atlanta plus facilities in Minneapolis and Mexico $3 billion in spending on current projects In-house management of major construction projects such as the JFK Terminal 4 complex, LAX and La Guardia expansions >30 million square feet of commercial space is managed by Delta 1,400 airplanes moving 500,000 passengers per day Zero fault tolerance environment for equipment (12-sigma equivalence in quality) while still providing >99.8% equipment availability Largest carrier in the world has gone 24 years without a major aviation incident (roughly 40 million flights)

5 Delta developed an internal oil company long before Trainer Refining Point where airlines traditionally have engaged in the value chain LogisticsTerminallingOn-site FacilitiesFuel Loading Fuel value chain for Delta Delta has been one of the largest shippers on the Colonial, Plantation, Buckeye, and Teppco pipeline systems moving upwards of 175,000 bpd Delta controls several hundred thousand barrels of storage outside of its airports to facilitate its self- supply function Delta owns, leases, co- owns, and/or oversees 26 on-airport fuel facilities with their associated fuel tanks, filtration equipment, distribution pipelines, hydrants, and fuel carts Several thousand fuel loadings per day – each requiring a specialized technician, a load planner, and minutes to execute If Deltas fuel function (ex-Trainer) were to be a separate company, it would constitute the following: Approximately 1,100 employees and contractors More than $1bn in fixed assets Roughly $500mn in working capital Annual revenue of $12bn

6 Delta is the worlds largest private consumer of fuel Daily Fuel Consumption (000s bpd of all fuels) Air Tran US Air Southwest American UAL/CO Delta Airlines Portugal Denmark BNSF Railroad FEDEX Air & ground Other (all consumption) Would be in the worlds top 50 as a stand- alone country

7 Contents Delta 101 Why Trainer and why now? Market reaction

8 Crude oil price risk Refining Margin Risk Jet Fuel Specific Risk Risk Type Root Causes of volatility Natural Hedge for Delta Economic growth combined with higher production costs Supply shocks Price levels can be passed through to customers Deltas loss Economic growth Supply constraints Supply shocks and weather events Some price risk can be passed through All risk borne by Delta Regional market variations All risk borne by Delta $/bbl Brent Heat Crack Jet versus Heat Deltas exposure to fuel price is not a simple crude short…

9 8 …the jet crack is the fastest growing element of fuel expense… 100% 71% 5% 18.5% 3.6% 2.1% Fuel Expense Transport Taxes Product Markup Refining Cost Crude Oil $430mn $240mn $2.2bn $590mn $8.5bn Pipeline & barge Fuel excise taxes Represents the profit margin and marketing spread that a refiner and reseller/trader gain from jet sales, which are typically the most profitable sales at the refinery Operating cost Purchase cost of the average source feedstock for jet fuel (all crude contains jet fuel, some contain more than others) $12bnTotal Jet crack spread tripled since 2009

10 8,000 7,000 6,000 5,000 4,000 3, % +13% …driven by dieselization and slowing demand for gasoline Source: BP Statistical Yearbook 10,000 9,000 8,000 7,000 6,000 5, % Diesel & Jet Gasoline United StatesEuropean UnionChina Daily transportation fuel consumption in 000s bpd European fuel switching from gasoline to diesel and voracious BRIC demand for middle distillates are driving the global imbalance between gasoline and diesel

11 Criteria for purchasing a refinery Properly sized – large enough to make a material impact on the companys profitability but not larger than Deltas consumption Relevant to the companys demand centers (domestic, USGC or USEC based) Flexible refining kit able to maximize jet production with minimal investment Well-maintained plant that had not suffered from under-investment Actionable within a year Viable as a stand-alone business Provide a mechanism for non-jet product disposition The jet-crack will remain high for several years Refinery capacity shut-ins will drive margin volatility and regional shortages Beliefs about the market Criteria for the refinery Criteria for the deal A B C D

12 The Trainer deal 199,000 bpd refinery located in Trainer, Pennsylvania (Philadelphia) Pipeline system and 3 oil terminals included in sale Solomon Complexity Index of 9.6 with a replacement value of $2.7 billion Asset Price of $180 million ex-hydrocarbon inventory (6% of replacement value) $30 million grant from the Commonwealth of Pennsylvania $100 million in turnaround and small capital expense for max-jet mode Terms

13 Trainer is able to supply most of Deltas northeastern fuel demand A LGA JFK EWR Harbor Pipeline Laurel Pipeline Twin Oaks Buckeye Upstate NY Waterborne exports Trainer jet flows to local market Swing & export Other Delta Consump. JFK & LGA Production Production and consumption in kbd Trainer Monroe Pipelines PIT PHL

14 The flexible refining kit at Trainer is capable of full conversion… Hydrotreating Units Distillate VGO HT DHT Kero HT Gasoline NHT Post-Cat NHT Reformer – 60,000 bpd2-Stage Hydrocracker – 26,000 bpdResid Fluid Catalytic Cracker – 55,000 bpd B

15 …and a jet-optimized product yield at minimal expense Refinery Operation from Monroe Planned Refinery Operation Middle distillates = 50% of total margin risk Gasoline = 44% of total margin risk Byproduct = 7% of risk 19% Diesel Pricing 14% Jet 52% Gasoline 15% Fuel Oil, LPG 44% Gasoline 18% Diesel 32% Jet 7% Fuel Oil, LPG, Other B

16 Trainer would be viable as a stand-alone business C Trainer performance backcasted with Monroes operating plan $ million per quarter Q1 2011Q1 2010Q1 2009Q1 2008Q1 2007Q Average EBIT = $551 MM/year Average EBIT = $345 MM/year $300 million per year in earnings appears, at first glance, to be too high for a $250 million investment, however, the returns are appropriate for a business that if newly built would cost $2.7 billion and consume an additional $500 million in working capital for a pre-tax asset return of 9%

17 Exchanges with P66 and BP dispose of all non-jet production while simultaneously fueling Deltas self-supply network D

18 ExxonMobilFrontierValero 41% 38% 2% 29% Delta Effective Tax rate 2010 Delta also carries a significant tax advantage versus other refiners Post-tax earnings benefit of $120 million per year versus ExxonMobils domestic tax rate at Monroes forecast earnings run rate

19 Team MemberBackground / Prior Companies Years Energy Experience Jeff Warmann CEO All aspects of refinery, process and trading operations Murphy Oil, Frontier Refining, Western, Williams 28 Frank Pici CFAO 15 years as public co. CFO in refining, upstream, MLP CVR Energy, Penn Virginia, Mariner Energy, Cabot O&G 30 Coby Stewart VP / Maintenance Lead Construction, maintenance, turnaround experience Frontier Refining, Chicago B&I, Flour Corp. 33 Rodney Smith VP / Controller Senior accounting and financial professional Delek, Western Refining, Holly Corp 20 Brian Carlson Operations Leader Process engineering, economics, technical background Frontier Refining, Citgo Petroleum 11 Rick Chavez Technical Leader Economics & Planning, M&A, project development Stancil, Williams, Lyondell, El Paso, Amerada Hess 27 Pete Pirog VP MIPC Pipeline Pipeline construction, scheduling, storage logistics ConocoPhillips, Buckeye Pipeline 15 Liz Lundmark Environmental Leader Deep environmental compliance & logistic experience Murphy Oil 22 Keenan Kendrick H&S Leader Process Safety Management, Change Management Western Refining, ChevronTexaco Downstream Monroe has a seasoned management team

20 Contents Delta 101 Why Trainer and why now? Market reaction

21 Delta would get into the refinery business only because they are stupid – Ed Hirs, U. of Houston in Forbes Airlines, after all, know a thing or two about managing high risk, logistics intensive, industries – Janet McGurty, Reuters Market reaction Debt AnalystsRefining market punditsEquity Analysts Other airlinesBusiness Press If Delta thinks they will be able to lower fuel volatility, they are sadly mistaken – Phil Flynn It goes beyond Deltas core competency – Stephen Schork It is worth a shot, the refinery is only about the cost of a single new widebody jet – Ray Neidl Trainer is an innovative approach to the long-term management of the airline's jet fuel costs, notwith- standing the operational risks of running a refinery – Fitch Trainer attracts a lot of haters of Deltas stock – CNBC It could be brilliant or a disaster, only time will tell – CNN Money If it works for Delta, it can work for us – and is completely reproducible – Jeff Smisek, CEO of UAL

22 Shocking revelation… this has been done before! 1955: Malcolm McLean creates the Sea-Land shipping company to focus on containerized shipping, the company grows rapidly 1948: Aminoil (American Independent Oil Company) wins a concession to develop oil in Kuwait 1970: RJR purchases 100% of Aminoil for $40 million to hedge its Sea-Lands fuel expense 1969: RJR purchases Sea- Land Corp. for $530 million 1958: Aminoil builds the Mina Abdullah Refinery 1968: Aminoil expands Mina to 145,000 bpd, yields 50% bunker fuel (company nears bankruptcy) 1974: Earnings for Sea-Land reach $145 million; Aminoil earns $86 million 1984: RJR spins off Sea-Land (later merged to form CSX) 1984: RJR sells Aminoil to Phillips 66 for $1.7 billion During 14-years of vertical integration both Sea-Land and Aminoil had record years of profitability

23 Questions?

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