Tesoro repaid $398 million secured debt in 2015, enlarged Tesoro Logistics unit revolver

By Paul Deckelman

New York, Feb. 2 – Tesoro Corp. generated $1.3 billion of free cash flow in 2015, the company’s chief financial officer said Tuesday, and a big chunk of that went to repaying a term loan that otherwise would have come due later this year.

Steven M. Sterin, who also serves as executive vice president of the San Antonio-based petroleum refining, logistics and marketing company, told analysts on a conference call following the release of its results for the 2015 fourth quarter and full year ended Dec. 31 that the $1.3 billion of free cash flow was the result of “strong operational performance, annual improvements and favorable market conditions.”

He said the company invested $550 million of that free cash flow windfall in high-return capital projects, repurchased about 6.9 million of its New York Stock Exchange-traded shares for $644 million, paid dividends of $228 million and repaid $398 million of secured debt.

Debt level shrinks

That debt repayment took place last August and was done from cash on hand. The term loan facility that was repaid funded the company’s 2013 acquisition of BP plc’s integrated Southern California-based refining, marketing and logistics business, and was scheduled to mature on May 30 of this year.

As of Dec. 31, Tesoro’s consolidated balance sheet showed total debt, net of unamortized issuance costs, of $4.067 billion, down from $4.161 billion a year before. Its Tesoro Logistics LP subsidiary, which maintains a separate capital structure that is reported as part of the parent’s capital structure on a consolidated basis, accounted for $2.844 billion of that total debt figure, versus $2.544 billion a year earlier.

Its ratio of total debt, net of unamortized issuance costs, as a percentage of capitalization, stood at 34% at year-end, down from 37% a year earlier. Excluding Tesoro Logistics’ debt from that equation, the debt-to-capitalization ratio stood at 19% at year-end, down from 27% a year earlier;

Year-end consolidated cash and equivalents totaled $942 million, down from $1 billion a year earlier.

Funding the drop-down program

During the question-and-answer portion of the conference call that followed his presentation and that of Tesoro’s chairman, chief executive officer and president, Gregory J. Goff, the CFO was asked about whether Tesoro – which has been engaged in an ambitious program of transferring assets to its Tesoro Logistics unit via drop-down transactions since the unit was founded in 2011 – had any concerns about being able to fund such transactions, given the weakness since late 2014 in the overall energy sector and particularly in the master limited partnership space.

Sterin noted that “we’re really pleased” with the company’s recent creation of “a very flexible and larger and lower cost revolver within TLLP.” That recently closed transaction nearly doubled the subsidiary’s revolving credit facility to $1.7 billion from $900 million previously, split into “really two capacities – one, for $1 billion, to be able to allow us to fund drop-downs and the rest for general purposes.”

He said that the revised facility had lower overall spreads “and importantly, as we want to move TLLP to investment grade, and Tesoro, it’s got fall-away covenants now that will allow it to become an investment-grade facility.”

While touting that achievement, the CFO acknowledged that “in the intermediate term, the debt and equity markets in the MLP space are very unstable right now – [there’s] a lot of volatility, very, very poor fund flows going into the space.”

In response, he continued, the company really has “two portfolios of investments in there.” One is organic growth projects, “which are about $400 million in our plan for ’16, which we feel we can fund very, very easily through our ATM [stock issuance] program, so that’s equity from unit holders as well as a small amount of debt.”

The other is the drop-downs to Tesoro Logistics from the parent, which Tesoro Logistics pays for with a combination of cash and issuance of additional common and general partner units.

Sterin said that “we continue to have in our plan two drop-downs in 2016, that’s what we talked about at Investor Day – the Great Northern acquisition that we just completed, as well as the Alaska assets, once we complete closure of that transaction. So we’re preparing to be able to do that. We think they are still good drop-downs to make. The uncertainty is when the MLP market will support those types of transactions?”

He said that Tesoro will “continue to monitor that and we’ll be prepared to execute when the markets stabilize.”

Asked whether Tesoro might “get creative” in order to allow Tesoro Logistics to fund such drop-down transactions by just issuing units instead of cash or by lowering the value of the assets being transferred, Sterin said that “I think we can always look at all of those options – but we think it’s important for Tesoro to get cash from these drop-downs. We’ve laid out that base plan for this year kind of recognizing the weakness in the MLP market of 50% cash proceeds coming from drop-downs. Ideally, it would be more than that. So we’ll look at all of the facts and circumstances as the markets develop – but that wouldn’t be our primary path.”

He said that in terms of the valuation of the assets being dropped down, “each transaction has to stand on its own and be done at market [value]. So we don’t think it makes a lot of sense to try and force something. If you think about the principles of what we do at drop-downs, they’re supportive of TLLP growth, it provides cash back [to parent Tesoro] and we do that in a way that puts us on a path to investment grade.

“So trying to flex other variables that compromise those principles is not our primary approach.”

© 2015 Prospect News.
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