Tesoro pays off revolver, exceeds debt to capitalization goal

By Jennifer Lanning Drey

Portland, Ore., Aug. 7 - Tesoro Corp.'s higher-than-expected cash generation in the second quarter allowed the company to repay all outstanding debt on its revolving line of credit, which included $500 million borrowed to help fund the purchase of a Los Angeles refinery from Shell Oil and USA Petroleum in May, Bruce Smith, Tesoro's chief executive officer, said Tuesday during the company's quarterly earnings call for the second quarter.

The debt repayment brought the company's debt-to-capital ratio to 37% at June 30, exceeding Tesoro's goal of achieving a 40% ratio by the end of the year.

"This capital structure puts us in the position to meet another financial goal - that of becoming an investment-grade company," Smith said.

With its debt repaid, Tesoro will focus its cash flow on organic capital projects, a variation from the company's past strategy of primarily focusing on asset acquisitions, Smith said.

"As a result of our growth, we believe our current size and expected future cash flow gives us the ability to pursue a broader investment strategy that includes both organic capital projects and acquisitions," Smith said.

"We think we'd be able to do a larger acquisition today and still stay true to a course of more fully developing the assets we've got," he said later, during the question-and-answer portion of the call.

In preparation for an organic growth phase, the company has reorganized its capital project group and is in the process of developing projects.

The effort will be rolled into a long-term financial plan to be presented to Tesoro's board of directors in November and, if approved, discussed publicly in more detail toward the end of the year, Smith said.

"Deciding how to allocate capital to future programs that can create new value for our shareholders will be critical since I expect Tesoro's free cash flow to continue to grow for many years due to the quality of our assets and the ingenuity of our people," he said.

Tesoro had cash and cash equivalents of $169 million at June 30, down from $986 million at Dec. 31, 2006, according to a company news release.

Capital expenditures for the year are expected to be $900 million.

Net income, revenue growth

Tesoro reported second-quarter net income of $443 million on revenues of $5.60 billion, compared with net income of $326 million on revenues of $4.92 billion in the second quarter of 2006, according to the release.

Growth during this year's quarter came from "the heart of existing operations," with 90% of operating income being generated by operations outside of the recently acquired Los Angeles refinery, Smith said.

The company plans to spend $1 billion in capital at the Los Angeles refinery over the next four to five years to improve operations, increase throughput and fulfill environmental regulations.

Smith said Tesoro is on track to achieve the $100 million in synergies expected from the acquisition.

Based in San Antonio, Tesoro is an independent refiner and marketer of petroleum products.

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