Second-quarter segment operating income was $153 million excluding the special items, compared to $11 million in the second quarter a year ago. The increase in operating income was driven in large part by stronger distillate margins and improved realizations in the company's marketing channels. These benefits were partially offset by decreased gasoline margins [image-nocss] and reduced throughput.
For the second quarter, gasoline margins fell by 15% versus a year ago. Tesoro benefited from blending ethanol into gasoline as ethanol prices traded on average 55 cents per gallon below California grade gasoline. The second-quarter results also reflect improved performance in both the wholesale and retail marketing channels, as spot prices for gasoline and diesel fell more rapidly than wholesale rack or retail street prices during the period.
"During the quarter, we saw improvements in several key economic indicators, including West Coast port and rail activity. We believe these trends drove diesel margins higher. These increases are not, however, being seen in gasoline margins. While gasoline demand has stabilized, high unemployment in California continues to keep demand low," Greg Goff, president and CEO of Tesoro, said.
"While we have seen improvements in the market during the second quarter, we continue to plan for a challenging margin environment and are committed to our improvement initiatives. We are implementing changes to our corporate overhead and benefits programs that we expect will strengthen Tesoro and have an immediate and positive impact on cash flow and earnings," he said.
When fully implemented by the end of this year, the changes are expected to reduce cash corporate expenses by an estimated $40 to $50 million and reduce post-retirement benefit expenses by another $80 to $90 million, annually. For the second quarter, the net impact of these changes was a $26 million after-tax benefit to earnings.
San Antonio, Texas-based Tesoro is an independent refiner and marketer of petroleum products. Through its subsidiaries, Tesoro 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 more than 380 are company operated under the Tesoro, Shell, Mirastar and USA Gasoline brands.
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