Tesoro, Delek Report 3Q Results

SAN ANTONIO and BRENTWOOD, Tenn. -- Tesoro Corp. reported third quarter 2010 net earnings of $56 million, while Delek US reported a net loss from continuing operations of $9.9 million for the three months ended Sept. 30, 2010.

Tesoro reportedly earned $73 million for the period before one-time after-tax expenses of $17 million, primarily associated with its Anacortes, Wash., refinery outage.

Third quarter segment operating income was $201 million excluding the one-time items, compared to $137 million in the third quarter a year ago. The increase in operating income was driven by stronger distillate margins, improved feedstock cost and the company's improvement initiatives. These benefits were partially offset by decreased gasoline margins and reduced throughput. The reduction in throughput was primarily a result of the continued shutdown of the company's Anacortes refinery and the planned turnaround of its Hawaii refinery.

"We are pleased with our third quarter results, even with Anacortes down for the period," said Greg Goff, president and CEO of Tesoro. "During the quarter, we saw improvement in distillate margins in our markets similar to what's been seen across the country. We attribute this to strong distillate exports, improvements in the U.S. manufacturing sector and increased port activity nationwide. Unfortunately, these increases are not being seen in gasoline margins. While gasoline demand has stabilized, high unemployment in California continues to keep gasoline demand weak."

Capital spending, including turnarounds, for the third quarter 2010 was $110 million. The company reaffirmed prior full year 2010 guidance for capital spending, including turnarounds, to be in the range of $475 to $500 million. Tesoro ended the third quarter with $339 million in cash on its balance sheet -- a gain of nearly $150 million for the quarter.

"While we have seen improvements in the market during the third quarter, we continue to plan for a challenging margin environment and are committed to our improvement initiatives," Goff stated. "Our third quarter results benefited from the changes to corporate overhead and benefits costs we announced in July, and we expect those improvements to continue. We're looking forward to our analyst day event later in the fourth quarter where we'll discuss our 2011 plans for further strengthening Tesoro."

Tesoro restarted its Anacortes, Wash., refinery on Oct. 17. "Today, most of the refinery is operating and we expect to be back to normal operations soon," Goff noted. "In addition to completing repairs to the damaged units, extensive future inspections and maintenance work was accelerated to take advantage of the down time."

Tesoro, through its subsidiaries, operates seven refineries in the western United States with a combined capacity of approximately 665,000 barrels per day. Tesoro's retail-marketing system includes more than 875 branded retail stations, of which 380-plus are company operated under the Tesoro, Shell, Mirastar and USA Gasoline brands.

Meanwhile, Delek US Holdings reported a net loss from continuing operations of $9.9 million for Q3 2010, vs. a net loss of $4.8 million in the third quarter 2009. Excluding special items, the company reported an adjusted net loss from continuing operations of $7.9 million in the third quarter 2009. The company reported no special items in the third quarter of 2010.

During third quarter 2010, the company conducted unplanned maintenance on several process units at its Tyler, Texas, refinery. The crude unit at Tyler was offline for approximately 14 days during late July and early August, resulting in lower throughputs and subsequently, lower sales volumes at the refinery in the period, when compared to the third quarter 2009.

"Although our consolidated results were impacted by downtime at the refinery, our retail segment continued to perform well during the third quarter, as it did during the first half of 2010," said Uzi Yemin, president and CEO of Delek US. "Same-store fuel (gallons) and merchandise sales grew above year-ago levels, while retail fuel margins remained strong.

"In recent weeks, we have renewed or extended maturities on more than $140 million in promissory notes with various lenders. In the coming months, we intend to refinance our retail segment credit facilities. These refinancings will support us in growing our core businesses, while maintaining ample financial flexibility," Yemin concluded.

As of Sept. 30, 2010, Delek US had $17.5 million in cash and $274.2 million in debt, resulting in a net debt position of $256.7 million.

Retail segment contribution margin was $18.7 million in the third quarter 2010, compared to $17.4 million in the third quarter 2009. The year-over-year improvement in contribution margin was primarily attributed to strong growth in same-store fuel (gallons) and merchandise sales; increased gross profit generation on select merchandise; as well as an increase in the retail fuel margin, when compared to the year-ago period.

On a year-over-year basis, same-store fuel gallons sold increased 5.2 percent in the third quarter 2010, vs. an increase of 1.0 percent in the third quarter 2009. The retail segment sold a total of 108.2 million gallons during the three months ended Sept. 30, 2010, vs. 108.4 million gallons in the prior-year period. At the conclusion of the third quarter 2010, the retail segment operated 420 locations, compared with 452 locations in the prior-year period.

On a year-over-year basis, same-store merchandise sales increased 6.3 percent in the third quarter 2010, vs. an increase of 1.8 percent in the third quarter 2009. The improvement in same-store merchandise sales was attributed to several key factors, including successful promotional efforts within the dairy, grocery and beer categories; consumer acceptance of recently introduced private label products; as well as continued growth in fresh food sales.

For the second consecutive quarter, same-store sales of food and fountain increased compared to the prior-year period. Same-store sales of food and fountain increased 6.6 percent in the third quarter 2010 compared to the third quarter 2009, due primarily to the ongoing success of franchised quick-service restaurant (QSR) concepts at select locations, as well as improved consumer acceptance of the company's ongoing fresh "grab-n-go" food initiative.

Merchandise margin declined to 30.1 percent in the third quarter 2010, vs. 31.3 percent in the year-ago period. The year-over-year decline was attributed to introductory pricing on select merchandise, as well as promotional pricing, according to the company.

Delek US Holdings' retail segment markets gasoline, diesel and other refined petroleum products and convenience merchandise through a network of company-operated retail fuel and convenience stores, operated under the MAPCO Express, MAPCO Mart, East Coast, Fast Food and Fuel, Favorite Markets, Delta Express and Discount Food Mart brand names. The company's refining segment operates a high-conversion, independent refinery, with a design crude distillation capacity of 60,000 barrels per day, in Tyler, Texas.

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