What do you mean by inefficient?
If I did it the traditional way, just collateralizing another letter of credit, I still would have had the revolving facility with the cash-flow covenant. In hindsight, that facility was really too small for the business. It was a $250 million revolving credit facility, and today I operate with a $750 million facility.
What is your debt situation now?
Since June 2002, we've paid down $2.1 billion of debt. During that time our debt-to-capitalization ratio has dropped from about 69 percent to 36 percent. Our stock is sitting at around $70 today.
Has your job gotten easier since then?
In some sense, the job was easier before. Once we figured out a way to start paying down debt, the next two and a half years were basically consumed with doing just that. The one and only decision that had to be made was which piece of debt were we going to pay down. Last November we paid down all the legacy debt that remained, and refinanced all the other debt. The refinancing took us from a single interest rate of 9 5/8 percent to two tranches of debt, one at 6 1/4 percent and one at 6 5/8 percent, so our interest expense is way down also.
Other than debt service, where is your free cash flow flowing these days?
That's clearly what shareholders want to know. What we've said for quite a while is that we will approach the use of free cash flow in a balance manner. For example, in the Spring of 2005, we announced a [$0.05] dividend on the common stock. Tesoro hasn't had a dividend on common stock since the early 1980s. We had enough cash flow [last year] that the board was comfortable doubling the dividend in November. The board also agreed to a $200-million share repurchase program, which we have accomplished about half of thus far. And lastly, we will be pursuing capital projects that will produce more cash flow. When we were financially distressed, we only pursued environmental, safety, and reliability projects. Now we're asking employees to suggest projects that will earn a good return.
Are you anxious to get into an acquisition mode again?
We grew through acquisitions. We would like to continue to grow. But we have to be mindful that its a very different refining margin environment now. [The earlier acquisitions] have already paid for themselves. Today's refineries, if they are purchased, will be going for much higher prices. As a result, I think you'll see record prices being paid for refineries, and the people bidding on the assets will have to justify the deal economics by identifying corporate synergies. So we'll just have to evaluate new refinery acquisitions on a case-by-case basis.
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