S-1 1 valeromlps-1.htm VALERO ENERGY PARTNERS LP S-1 Valero MLP S-1


AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 2013
Registration No. 333-       

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
 Valero Energy Partners LP

(Exact name of registrant as specified in its charter)
Delaware
4610
46-3263598
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
One Valero Way
San Antonio, Texas 78249
(210) 345-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Jay D. Browning
Senior Vice President and General Counsel
Valero Energy Corporation
One Valero Way
San Antonio, Texas 78249
(210) 345-2000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Gerald M. Spedale
Baker Botts L.L.P.
910 Louisiana Street
Houston, Texas 77002
(713) 229-1234
William N. Finnegan IV
Sean T. Wheeler
Latham & Watkins LLP
811 Main Street, Suite 3700
Houston, Texas 77002
(713) 546-5400
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
(do not check if a smaller reporting company)
Smaller reporting company o
Title of Each Class of Securities to be Registered
 
Proposed Maximum Aggregate Offering Price(1)(2)
 
Amount of Registration Fee
Common units representing limited partner interests
 
$345,000,000
 
$47,058
(1)
Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Prospectus     Subject to completion, dated September 19, 2013
Common Units
Representing Limited Partner Interests
This is an initial public offering of common units representing limited partner interests of Valero Energy Partners LP. We were recently formed by Valero Energy Corporation (“Valero”), and no public market currently exists for our common units. We are offering          common units in this offering. We expect that the initial public offering price will be between $        and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “VLP .” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act.
As a result of certain laws and regulations to which we are or may in the future become subject, we may require owners of our common units to certify that they are both U.S. citizens and subject to U.S. federal income taxation on our income. If you are not both a citizenship eligible holder and a rate eligible holder, your common units may be subject to redemption.
Investing in our common units involves a high degree of risk. Before buying any common units, you should carefully read the discussion of material risks of investing in our common units in “Risk Factors” beginning on page 21. These risks include the following:
Valero accounts for all of our revenues. Therefore, we are subject to the business risks associated with Valero’s business. Furthermore, if Valero changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes transported through our pipelines or terminals, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.
We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay minimum quarterly distributions or any distribution to our unitholders.
Valero may suspend, reduce or terminate its obligations under our commercial agreements in certain circumstances, including events of force majeure, and may avoid payments under such agreements in certain circumstances, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.
A material decrease in the refining margins at Valero’s refineries supported by our assets could cause Valero to reduce the volume of crude oil refined in such refineries which, in turn, could materially reduce the volumes of crude oil and refined petroleum products that we transport and terminal for Valero, which could materially and adversely affect our financial condition, results of operations and ability to make cash distributions to our unitholders.
Our general partner and its affiliates, including Valero, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Valero, and Valero is under no obligation to adopt a business strategy that favors us.
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.
Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow would be substantially reduced.
Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Per Common Unit
 
Total
Initial public offering price
$
 
$
Underwriting discount(1)
$
 
$
Proceeds to Valero Energy Partners LP, before expenses
$
 
$
(1) Excludes an aggregate structuring fee equal to    % of the gross proceeds of this offering payable to J.P. Morgan Securities LLC and Barclays Capital Inc. Please read “Underwriting.”
The underwriters may also purchase up to an additional         common units at the public offering price, less the underwriting discounts and commissions and structuring fee payable by us, to cover over allotments, if any, within 30 days from the date of this prospectus.
The underwriters are offering the common units as set forth under “Underwriting.” Delivery of the common units will be made on or about     , 2013.
J.P. Morgan
Barclays
, 2013





















TABLE OF CONTENTS
 
Page


i


Page


ii


Page
Commercial Agreements with Valero


iii



You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.
This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”
The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates.


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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors,” the historical audited and unaudited combined financial statements and accompanying notes and the unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $     per common unit (the mid-point of the price range set forth on the cover of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units.
Unless the context otherwise requires, references in this prospectus to “Valero Energy Partners LP,” “our partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to Valero Energy Partners LP Predecessor, our predecessor for accounting purposes, which we sometimes refer to as “our Predecessor.” When used in the present tense or future tense, these terms refer to Valero Energy Partners LP and its subsidiaries. References to “our general partner” refer to Valero Energy Partners GP LLC. References to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than us, our subsidiaries and our general partner. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.
Valero Energy Partners LP
Overview
We are a fee-based, growth-oriented, traditional master limited partnership recently formed by Valero to own, operate, develop and acquire crude oil and refined petroleum products pipelines, terminals and other transportation and logistics assets. We will serve as Valero’s primary vehicle to expand the transportation and logistics assets supporting its business. Our initial assets consist of crude oil and refined petroleum products pipeline and terminal systems in the Gulf Coast and Mid-Continent regions of the United States (“U.S.”) that are integral to the operations of Valero’s refinery located in Port Arthur, Texas, its McKee refinery located in Sunray, Texas, and its refinery located in Memphis, Tennessee. We generate revenue by charging tariffs and fees for transporting crude oil and refined petroleum products through our pipelines and terminals. Because we do not take ownership of or receive any payments based on the value of the crude oil or refined petroleum products that we handle and do not engage in the trading of any commodities, we have no direct exposure to commodity price fluctuations.
At the closing of this offering, we will enter into a master transportation services agreement with Valero with respect to our pipelines and a master terminal services agreement with Valero with respect to our terminals. These fee-based commercial agreements will initially be the source of all of our revenues and will have minimum quarterly throughput commitments, inflation escalators and initial terms of 10 years, which we believe will promote stable and predictable cash flows. Please read “Business—Our Commercial Agreements with Valero” for a description of these agreements.
For the six months ended June 30, 2013 and the year ended December 31, 2012, on a pro forma basis, we had revenues of $46.4 million and $84.4 million, net income of $22.7 million and $33.2 million, and EBITDA of $31.3 million and $48.0 million, respectively. Please read “Selected Historical and Pro Forma Combined Financial Data” for the definition of the term EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP.
Valero, an investment grade rated international manufacturer and marketer of transportation fuel, other petrochemical products and power, is the world’s largest independent refiner, with assets that include 16 refineries located in the U.S., Canada, the United Kingdom (“U.K.”) and Aruba, with total feedstock throughput capacity of over three million barrels per day. Valero has a substantial and growing portfolio of transportation and logistics assets. Over the past five years, Valero has invested approximately $1.4 billion on transportation and logistics expansion projects. In addition, Valero anticipates spending approximately $1.3 billion through 2015 on transportation and logistics expansion projects, substantially all of which are intended to increase access to cost-advantaged North American crude oil.


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Valero will serve as a critical source of our future growth by providing us opportunities to purchase additional transportation and logistics assets that Valero currently owns or may acquire or develop in the future. Upon the closing of this offering, we will enter into an omnibus agreement with Valero under which Valero will grant us a right of first offer for a period of five years after the closing of this offering to acquire certain of Valero’s transportation and logistics assets. We refer to such right as our “right of first offer” and to such assets as our “right of first offer assets.” Valero will be under no obligation to offer to sell us additional assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), and we are under no obligation to buy any additional assets from Valero. For additional information regarding our right of first offer, please read “Business—Our Assets and Operations—Right of First Offer Assets” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer.”
Business Strategies
Our primary business objectives are to generate stable and predictable cash flows and increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:
Maintain safe and reliable operations. We believe maintaining a safe, reliable and efficient operation is fundamental to our business and critical to our success. We are committed to these principles and intend to build upon our legacy of excellence and continuous improvement in safety, reliability and efficiency. We will continue to utilize a strong internal safety review program and maintain a comprehensive employee safety training program that emphasizes strict adherence to our safety policies and procedures.
Generate stable, fee-based cash flows. We intend to generate stable and predictable cash flows by providing fee-based transportation and terminaling services to Valero and third parties. At the closing of this offering, we will enter into a master transportation services agreement with Valero with respect to our pipelines and a master terminal services agreement with Valero with respect to our terminals. These fee-based commercial agreements will initially be the source of all of our revenues and will have minimum quarterly throughput commitments, inflation escalators and initial terms of 10 years, which we believe will promote stable and predictable cash flows.
Pursue growth. We will continually pursue opportunities to grow our business by completing strategic acquisitions, executing organic expansion projects and increasing the utilization of our existing assets.
Seek attractive acquisition opportunities. We plan to pursue strategic acquisitions, either independently or together with Valero, that will enhance our overall asset profile and provide compelling returns to our unitholders. In addition, under our omnibus agreement, Valero will grant us our right of first offer for a period of five years after the closing of this offering to acquire certain of Valero’s transportation and logistics assets.
Expand organically and optimize our assets. We intend to evaluate organic expansion projects that are consistent with our existing business operations and that will provide compelling returns to our unitholders. This strategy will include seeking opportunities to enhance the profitability of our existing assets by increasing throughput volumes, opportunistically attracting third-party volumes, managing costs and enhancing operating efficiencies.
Competitive Strengths
We believe we are well positioned to execute our business strategies based on the following competitive strengths:
Strategic relationship with Valero. Valero, an investment grade rated international manufacturer and marketer of transportation fuel, other petrochemical products and power, is the world’s largest independent refiner, with a substantial and growing portfolio of transportation and logistics assets, including pipelines, terminals (truck, rail and marine) and railcars. We will serve as Valero’s primary vehicle to expand the transportation and logistics assets supporting its business. We believe Valero will serve as a critical source of our future growth by providing us opportunities to purchase additional transportation and logistics assets that Valero currently owns or may acquire or develop in the future, as well as by serving as an investment grade rated commercial


2


counterparty supporting our cash flows. Following the closing of this offering, Valero will retain a significant interest in us through its ownership of our general partner, a        % limited partner interest in us and all of our incentive distribution rights.
Stable and predictable cash flows from long-term, fee-based contracts. Our assets consist of pipelines and terminals that generate stable revenues from tariffs and fees. We will initially generate all of our revenues under fee-based commercial agreements with Valero that will have minimum quarterly throughput commitments, inflation escalators and initial terms of 10 years, which we believe will promote stable and predictable cash flows.
Strategically located and highly integrated assets. Our initial assets are integral to the operations of Valero’s Port Arthur, McKee and Memphis refineries. We believe that each of these refineries is well positioned in the markets that it serves and is critical to Valero’s long-term strategy. Our pipelines and terminals are directly connected to these refineries and provide Valero with key strategic advantages, including cost-effective access to crude oil and/or connectivity with high demand refined petroleum products markets.
High-quality, well-maintained asset base. We continually invest in the maintenance and integrity of our assets and maintain numerous programs to help us efficiently manage our asset base. We employ a strong pipeline and facility integrity program, which focuses on risk analysis, assessment, inspection, preventive measures, repair and data integration to provide reliable operations and to prevent, control and mitigate unintentional releases of hazardous materials. We also use a SCADA system to monitor and control our operations.
Significant financial flexibility to fund our operations and growth strategy. In connection with this offering, we expect to enter into a revolving credit facility with $300 million in available capacity, under which no amounts will be drawn at the closing of this offering. Additionally, we plan to retain all of the net proceeds from this offering to fund future growth capital investments. We believe this significant financial flexibility, together with our ability to access the debt and equity capital markets, will allow us to execute our growth strategy of pursuing potential future acquisitions from Valero and third parties and developing organic expansion projects.
Experienced leadership team. We have significant experience in the management and operation of transportation and logistics assets and the execution of expansion and acquisition strategies. Our leadership team includes some of the most senior officers of Valero, who average approximately 23 years of experience in the energy industry.
Our Assets and Operations
Our initial assets consist of the following three systems:
Port Arthur Logistics System. Our Port Arthur logistics system is a crude oil and refined petroleum products pipeline and terminal system that supports Valero’s 310,000 barrel per day refinery in Port Arthur, Texas, and is comprised of the following:
Lucas Crude System. Our Lucas crude system is strategically positioned to support diverse and flexible crude oil supply options for the Port Arthur refinery and consists of our Lucas pipeline, a 12-mile, 30-inch pipeline with 400,000 barrels per day of capacity, our Nederland pipeline, a five-mile, 32-inch pipeline with 600,000 barrels per day of capacity, and our Lucas terminal, which consists of seven storage tanks with an aggregate of 1.9 million barrels of storage capacity. Our Lucas crude system also includes our TransCanada pipeline connection that links our Lucas terminal to TransCanada’s Cushing MarketLink pipeline, which is expected to connect our Lucas terminal to TransCanada’s Keystone XL pipeline if and when the Keystone XL pipeline is placed into service.
Port Arthur Products System. Our Port Arthur products system is a distribution outlet for refined petroleum products produced at the Port Arthur refinery. The system is strategically positioned to transport refined petroleum products from the Port Arthur refinery to major third-party pipeline systems, including the Explorer, Colonial, Sunoco Logistics MagTex and Enterprise TE Products pipelines, as well as Oiltanking’s Beaumont


3


marine terminal. The system includes a three-mile, 20-inch gasoline pipeline with 144,000 barrels per day of capacity, a four-mile, 20-inch diesel pipeline with 216,000 barrels per day of capacity and 13 miles of 12- and 10-inch refined petroleum products pipelines with 60,000 barrels per day of capacity. The system also includes our adjacent Port Arthur Products Station (“PAPS”) and El Vista terminals, which consist of 16 storage tanks with a total of approximately two million barrels of storage capacity.
McKee Products System. Our McKee products system is a refined petroleum products pipeline and terminal system that supports Valero’s 170,000 barrel per day McKee refinery in Sunray, Texas. The system connects the McKee refinery to our refined petroleum products terminal in El Paso, Texas and on to Kinder Morgan’s SFPP system for marketing destinations in high-growth regions such as Tucson and Phoenix, Arizona. The system consists of 408 miles of 10-inch pipeline with 63,000 barrels per day of capacity, 499,000 barrels of storage capacity, 30,000 barrels per day of truck rack capacity, and our SFPP pipeline connection, which is 12 miles of 16- and 8-inch pipelines with approximately 98,400 barrels per day of capacity. We own a 33⅓% undivided interest in the system, and NuStar owns the remaining undivided interest in the system.
Memphis Logistics System. Our Memphis logistics system is a crude oil and refined petroleum products pipeline and terminal system that supports Valero’s 195,000 barrel per day refinery in Memphis, Tennessee, and is comprised of the following:
Collierville Crude System. Our Collierville crude system is the primary crude oil supply source for the Memphis refinery, delivering crude oil from the Capline pipeline. The system consists of 52 miles of 10- to 20-inch pipelines with 210,000 barrels per day of capacity, our Collierville terminal, which consists of three storage tanks with approximately 975,000 barrels of storage capacity, and our St. James crude oil tank, which has approximately 330,000 barrels of storage capacity.
Memphis Products System. Our Memphis products system is the primary distribution outlet for refined petroleum products produced at the Memphis refinery and is comprised of our Shorthorn pipeline system, our Memphis Airport pipeline system, our West Memphis terminal and our Memphis truck rack. The Shorthorn pipeline system, which links the Memphis refinery to both our West Memphis terminal and Exxon’s Memphis terminal, consists of nine miles of 14- and 12-inch pipelines with 120,000 barrels per day of capacity. Our Memphis Airport pipeline system consists of 11 miles of six-inch pipeline with 20,000 barrels per day of capacity transporting jet fuel to the Memphis International Airport. Our West Memphis terminal consists of 18 storage tanks with approximately one million barrels of storage capacity, a truck rack with 50,000 barrels per day of capacity and a barge dock with approximately 4,000 barrels per hour of throughput capacity. Our Memphis truck rack is located adjacent to the Memphis refinery and has 8,000 barrels of storage capacity and seven truck bays with 110,000 barrels per day of truck rack capacity.
Right of First Offer Assets
Upon the closing of this offering, we will enter into an omnibus agreement with Valero under which Valero will grant us our right of first offer for a period of five years after the closing of this offering to acquire certain of its transportation and logistics assets. Our right of first offer assets, which are traditional transportation and logistics assets that primarily support Valero’s core U.S. refining operations, include the following:
Wynnewood Products System. A refined petroleum products system consisting of a 30-mile,12-inch pipeline with 90,000 barrels per day of capacity and two storage tanks with a total of 180,000 barrels of storage capacity. This system connects to the Magellan pipeline system and is the principal distribution outlet for refined petroleum products produced at Valero’s 90,000 barrel per day refinery in Ardmore, Oklahoma. For the year ended December 31, 2012, the system handled 75% of the refined petroleum products produced at the Ardmore refinery.
McKee Crude System. A crude oil system supporting the McKee refinery consisting of 270 miles of pipelines with 72,000 barrels per day of capacity. For the year ended December 31, 2012, the system handled 43% of the crude oil delivered to the McKee refinery.


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Parkway Products Pipeline. A 141-mile, 16-inch pipeline with 110,000 barrels per day of capacity. The pipeline transports refined petroleum products from Valero’s 270,000 barrel per day refinery in St. Charles, Louisiana to Collins, Mississippi for supply into the Plantation pipeline system, with an anticipated future connection to the Colonial pipeline system. The pipeline, which was placed into service in the third quarter of 2013, is owned by a joint venture between Valero and Kinder Morgan. Our right of first offer will apply to Valero’s 50% interest in the joint venture.
Three Rivers Crude System. A crude oil truck receipt system with 110,000 barrels per day of total capacity connected to Valero’s 100,000 barrel per day refinery in Three Rivers, Texas. Crude oil delivered through the system can be processed at the Three Rivers refinery or can be shipped through third-party pipelines to Valero’s two refineries in Corpus Christi, Texas, which have a combined throughput capacity of 325,000 barrels per day. For the year ended December 31, 2012, the system handled 80% of the crude oil delivered to the Three Rivers refinery and handled approximately 39,000 barrels per day of crude oil for the Corpus Christi refineries.
Hartford Crude Terminal. A crude oil terminal and associated dock located on the Mississippi River near St. Louis, Missouri. The terminal has an inbound connection to the Capwood pipeline, enabling it to receive crude oil from the Patoka, Illinois hub. The terminal has the capacity to transload up to 75,000 barrels per day of crude oil onto barges and includes 12 crude oil storage tanks with over 1.2 million barrels of storage capacity. The terminal is used by Valero to supply Canadian heavy crude oil to its St. Charles refinery. For the year ended December 31, 2012, the terminal handled approximately 11,000 barrels per day of crude oil for the St. Charles refinery.
Fannett Storage Facility. An NGL logistics facility with underground salt dome storage capacity of over four million barrels located at Valero’s terminal in Fannett, Texas. The facility supports and supplies butanes from and to the Port Arthur refinery. The facility also supports a third-party customer and has multiple proprietary and third-party pipeline connections, as well as a truck rack. For the year ended December 31, 2012, the facility handled approximately 10,000 barrels per day of butanes for the Port Arthur refinery.
For additional information regarding our right of first offer, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer.”
Valero’s Additional Transportation and Logistics Assets
Valero has a substantial and growing portfolio of transportation and logistics assets. In addition to our initial assets and our right of first offer assets, Valero has approximately 65 miles of crude oil pipelines, 1,042 miles of refined petroleum products pipelines, 40 million barrels of crude oil and feedstock tankage, 69 million barrels of refined petroleum products tankage, 50 marine docks, 135 truck rack bays at 35 locations and 1,394 railcars. Valero’s rail logistics assets also include rail facilities at its McKee, St. Charles and Quebec City refineries and an ethanol truck transloading facility in Fontana, California. Additionally, Valero is in the process of obtaining regulatory approval for the construction of a rail facility at its refinery in Benicia, California that we expect Valero to complete in 2015. For more information regarding Valero’s transportation and logistics assets, please read “Business—Valero’s Operations—Valero’s Additional Transportation and Logistics Assets.”
Although we have no contractual right to purchase, and Valero has no contractual obligation to offer, any of Valero’s assets other than our right of first offer assets, we believe we are well positioned to acquire Valero’s additional transportation and logistics assets in the future.
Our Commercial Agreements with Valero
At the closing of this offering, we will enter into a master transportation services agreement with Valero with respect to our pipelines and a master terminal services agreement with Valero with respect to our terminals. Pursuant to these agreements, we will provide transportation and terminaling services to Valero, and Valero will commit to pay us for minimum quarterly throughput volumes of crude oil and refined petroleum products, regardless of whether such volumes are physically delivered by Valero in any given quarter. These agreements, which will initially be the source of all of


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our revenues, will have initial terms of 10 years, and, with the exception of our El Paso truck rack and Memphis truck rack, Valero will have the option to renew the agreement with respect to each asset for one additional five-year term.
On a pro forma basis, Valero’s minimum quarterly throughput commitments under these agreements would have accounted for approximately 83% and 92% of our revenues for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.
The following table sets forth Valero’s minimum quarterly throughput commitments and applicable initial tariff rates with respect to our pipelines:
Pipelines
 
Minimum Quarterly
Throughput Commitment
(BPD)
 
Tariff Rates
($ per Bbl)
Port Arthur logistics system
 
 
 
 
Lucas crude system
 
 
 
 
Lucas pipeline
 
150,000
 
$0.176 up to 160,000 BPD then
$0.071 up to 200,000 BPD and
$0.06 above 200,000 BPD
Port Arthur products system
 
 
 
 
20-inch gasoline pipeline
 
127,000
 
$0.1855 up to 127,000 BPD and
20-inch diesel pipeline
 
combined on
 
$0.14 above 127,000 BPD
12-10 pipeline
 
all three lines
 
combined on all three lines
McKee products system
 
 
 
 
McKee to El Paso pipeline
 
17,836
 
$1.302
SFPP pipeline connection
 
27,880
 
$0.151
Memphis logistics system
 
 
 
 
Collierville crude system (1)
 
 
 
 
Collierville pipeline
 
100,000
 
$0.1557
Memphis products system
 
 
 
 
Shorthorn pipeline system
 
43,300
 
$0.1471 up to 43,300 BPD and
$0.12 above 43,300 BPD
Memphis Airport pipeline system
 
2,000
 
$0.81 up to 2,000 BPD and
$0.45 above 2,000 BPD
_____________
(1)
Included within the tariff rate is the ability for Valero to use break-out tankage at our Collierville terminal and our St. James crude tank for staging crude oil into the Capline pipeline.


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The following table sets forth Valero’s minimum quarterly throughput commitments and fees charged with respect to our terminals:
Terminals
 
Minimum Quarterly
Throughput Commitment
(BPD)
 
Fees
($ per Bbl)
Port Arthur logistics system
 
 
 
 
Lucas crude system
 
 
 
 
Lucas terminal (1)
 
150,000
 
$0.243 up to 160,000 BPD then
$0.071 up to 200,000 BPD and
$0.06 above 200,000 BPD
TransCanada connection (2)
 
45,000
 
$0.05
Port Arthur products system
 
 
 
 
PAPS and El Vista terminals
 
100,000
 
$0.3165 up to 100,000 BPD and
$0.05 above 100,000 BPD
McKee products system
 
 
 
 
El Paso terminal
 
36,380 (3)
 
$0.301
Memphis logistics system
 
 
 
 
Memphis products system
 
 
 
 
West Memphis terminal (4)
 
30,000
 
$0.62 up to 30,000 BPD and
$0.24 above 30,000 BPD
Memphis refinery truck rack
 
51,100
 
$0.252
_____________
(1)
Included in the Lucas terminal fee is the right to use our Nederland pipeline to transport crude oil from the Sunoco Logistics Nederland marine terminal to our Lucas terminal.
(2)
Our TransCanada connection is currently under construction and is expected to be placed into service during the first quarter of 2014. The minimum quarterly throughput commitment will not commence until the connection is in service; however, under our omnibus agreement, Valero will agree to indemnify us for lost throughput fees resulting from the connection not being in service (for any reason whatsoever, other than our gross negligence or willful misconduct) by March 1, 2014. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Other Indemnifications by Valero.” In addition, if and when the Keystone XL pipeline is placed into service, the minimum quarterly throughput commitment with respect to our TransCanada connection will increase from 45,000 barrels per day to 150,000 barrels per day and the fee will reset to $0.015 per barrel.
(3)
The El Paso terminal truck rack has a minimum quarterly throughput commitment of 8,500 barrels per day and the SFPP pipeline connection has a separate minimum quarterly throughput commitment of 27,880 barrels per day.
(4)
Includes all volumes delivered to our West Memphis terminal through pipeline, dock or truck rack.

Our Relationship with Valero
Valero, an investment grade rated international manufacturer and marketer of transportation fuel, other petrochemical products and power, is the world’s largest independent refiner, with assets that include 16 refineries located in the U.S., Canada, the U.K. and Aruba, with total feedstock throughput capacity of over three million barrels per day. Valero has a substantial and growing portfolio of transportation and logistics assets. In addition to our initial assets and our right of first offer assets, Valero has approximately 65 miles of crude oil pipelines, 1,042 miles of refined petroleum products pipelines, 40 million barrels of crude oil and feedstock tankage, 69 million barrels of refined petroleum products tankage, 50 marine docks, 135 truck rack bays at 35 locations and 1,394 railcars. Valero’s rail logistics assets also include rail facilities at its McKee, St. Charles and Quebec City refineries and an ethanol truck transloading facility in Fontana, California. Additionally, Valero is in the process of obtaining regulatory approval for the construction of a rail facility at its refinery in Benicia, California that we expect Valero to complete in 2015. Over the past five years, Valero has invested approximately $1.4 billion on transportation and logistics expansion projects. In addition, Valero anticipates spending approximately $1.3 billion through 2015 on transportation and logistics expansion projects, substantially all of which are intended to increase access to cost-advantaged North American crude oil. For more information related to Valero’s operations, please read “Business—Valero’s Operations.”
Following the closing of this offering, Valero will retain a significant interest in us through its ownership of our general partner, a     % limited partner interest in us (or        % if the underwriters’ option to purchase additional


7


common units is exercised in full) and all of our incentive distribution rights. We believe Valero will promote and support the successful execution of our business strategies given its significant ownership in us following this offering, the importance of our initial assets to Valero’s refining and marketing operations and its intention to use us as its primary vehicle to expand the transportation and logistics assets supporting its business.
In addition to the commercial agreements described above, we will also enter into the following agreements with Valero in connection with this offering:
Omnibus Agreement. We will enter into an omnibus agreement with Valero pursuant to which Valero will grant us our right of first offer for a period of five years after the closing of this offering to acquire certain of Valero’s transportation and logistics assets. For a description of our right of first offer assets, please read “Business—Our Assets and Operations—Right of First Offer Assets.” The omnibus agreement will require us to reimburse Valero for certain general and administrative services, require Valero to indemnify us for certain matters, including environmental, title and tax matters, and grant Valero a right of first refusal with respect to certain of our assets. Pursuant to the omnibus agreement, prior to making any distribution, we will pay all accrued monthly payments on our annual fee of $7.9 million to Valero for general and administrative services, and we will reimburse Valero for any out-of-pocket costs and expenses incurred by Valero in providing these services to us. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”
Services and Secondment Agreement. Our general partner will enter into a services and secondment agreement with Valero, pursuant to which employees of Valero will be seconded to our general partner to provide operational and maintenance services with respect to certain of our pipelines and terminals, and our general partner will reimburse Valero for certain costs and expenses of the seconded employees, including their wages and benefits. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Services and Secondment Agreement.”
Tax Sharing Agreement. We will enter into a tax sharing agreement with Valero pursuant to which we will reimburse Valero for our share of state and local income and other taxes incurred by Valero as a result of our tax items and attributes being included in a combined or consolidated state tax return filed by Valero with respect to taxable periods including or beginning on the closing date of this offering. The amount of any such reimbursement will be limited to any entity-level tax that we and our subsidiaries would have paid directly had we not been included in a combined group with Valero. While Valero may use its tax attributes to cause its combined or consolidated group, of which we may be a member for this purpose, to owe no tax, we would nevertheless reimburse Valero for the tax we would have owed had the attributes not been available or used for our benefit, even though Valero had no cash expense for that period. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Tax Sharing Agreement.”
Ground Lease Agreement. We will enter into a ground lease with Valero under which we will lease the land on which the Memphis truck rack is located. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Ground Lease Agreement.”
While our relationship with Valero is a significant strength, it is also a source of potential risks and conflicts. Please read “Risk Factors—Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties.”
Implications of Being an Emerging Growth Company
As a company with less than $1 billion in revenues during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:
the presentation of only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of an initial public offering of common equity securities;


8


exemption from the auditor attestation requirement on the effectiveness of our system of internal controls over financial reporting;
delayed adoption of new or revised financial accounting standards; and
reduced disclosure about our executive compensation arrangements.
We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1 billion in annual revenues, (iii) the date on which we have more than $700 million in market value of our common units held by non-affiliates or (iv) the date on which we issue more than $1 billion of non-convertible debt over a three-year period.
We have elected to take advantage of all of the applicable JOBS Act provisions, except that we have elected to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards, which election is irrevocable. Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.
Risk Factors
An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before investing in our common units.
The Transactions
We were formed on July 24, 2013 by Valero to own, operate, develop and acquire crude oil and refined petroleum products pipelines, terminals and other transportation and logistics assets. In connection with this offering, Valero will contribute all of our Predecessor’s assets and operations to us.
Additionally, at or prior to the closing of this offering:
we will issue          common units and      subordinated units to Valero, representing an aggregate    % limited partner interest in us, and      general partner units, representing a 2% general partner interest in us, and all of our incentive distribution rights to our general partner;
we will issue         common units to the public in this offering, representing a     % limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds;”
we expect to enter into a revolving credit facility with $300 million in available capacity, under which no amounts will be drawn at the closing of this offering;
we will enter into a master transportation services agreement and a master terminal services agreement with Valero;
we and our general partner will enter into an omnibus agreement with Valero;
our general partner will enter into a services and secondment agreement with Valero;
we will enter into a tax sharing agreement with Valero; and
we will enter into a ground lease with Valero with respect to the land on which the Memphis truck rack is located.
The number of common units to be issued to Valero includes         common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise the option. Any exercise of the underwriters’ option to purchase additional common units would reduce the


9


common units shown as issued to Valero by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Valero at the expiration of the option period for no additional consideration. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us for general partnership purposes, including to fund potential acquisitions from Valero and third parties and potential organic expansion capital expenditures.


10


Organizational Structure After the Transactions
After giving effect to the transactions described above, assuming the underwriters’ option to purchase additional common units from us is not exercised, our units will be held as follows:
Public common units
 
%
Valero common units
 
%
Valero subordinated units
 
%
General partner units
2
%
Total
100
%
The following simplified diagram depicts our organizational structure after giving effect to the transactions described above.


11


Management
We are managed by the board of directors and executive officers of Valero Energy Partners GP LLC, our general partner. Valero is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the New York Stock Exchange (“NYSE”). Unlike shareholders in a publicly traded corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of Valero. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of Valero Energy Partners GP LLC.”
In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Valero or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.
Principal Executive Offices
Our principal executive offices are located at One Valero Way, San Antonio, Texas 78249, and our telephone number is     . Following the completion of this offering, our website will be located at www.        .com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (“SEC”) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
Summary of Conflicts of Interest and Duties
Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is not adverse to our best interests. However, because our general partner is a wholly owned subsidiary of Valero, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner that is not adverse to the best interests of Valero. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including Valero, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive cash distributions. In addition, our general partner may determine to manage our business in a way that directly benefits Valero’s refining or marketing businesses, whether by causing us not to seek higher tariff rates or fees or not to connect our pipelines and terminals with third parties or otherwise, rather than indirectly benefiting Valero solely through its ownership interests in us. While we do not believe Valero has any current intention to cause us not to seek higher tariff rates or fees or not to connect our assets to third parties, we expect that any future decision by Valero in this regard will be made on a case-by-case basis. However, all of these actions are permitted under our partnership agreement and will not be a breach of any duty of our general partner. For a more detailed description of the conflicts of interest and duties of our general partner, please read “Risk Factors—Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties.”
Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties owed by the general partner to limited partners and the partnership. Our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of our general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of its fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including Valero and its affiliates, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By


12


purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and pursuant to the terms of our partnership agreement each holder of common units consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties—Duties of Our General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the replacement of those duties with contractual standards under our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units. For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”


13



THE OFFERING
 
Common units offered to the public
common units.
 
 
 
 
common units if the underwriters exercise in full their option to purchase additional common units from us.
 
 
 
Units outstanding after this offering
common units and        subordinated units, each representing an aggregate 49% limited partner interest in us, and general partner units, representing a 2% general partner interest in us.
If the underwriters do not exercise their option to purchase additional common units, in whole or in part, we will issue an additional        common units to Valero at the expiration of the option for no additional consideration. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Valero at the expiration of the option period for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.
 
 
 
Use of proceeds
We expect to receive net proceeds of approximately $    million from the sale of common units offered by this prospectus based on the assumed initial public offering price of $    per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, the structuring fee and estimated offering expenses. We intend to use the net proceeds from this offering to pay revolving credit facility origination and commitment fees of approximately $    million, and we will retain the remainder of the net proceeds of this offering for general partnership purposes, including to fund potential acquisitions from Valero and third parties and potential organic expansion capital expenditures. Please read “Use of Proceeds.”
 

 
 
If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be approximately $    million, after deducting underwriting discounts and the structuring fee. We will use any such additional net proceeds for general partnership purposes.
 
 
 
Cash distributions
We intend to pay minimum quarterly distributions of $      per unit ($    per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement. Our ability to pay minimum quarterly distributions is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”
 
 
 
 
For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through        ,    , based on the actual length of that period.
 
 
 


14



 
In general, we will pay any cash distributions we make each quarter in the following manner:
 
 
 
 
Ÿ
first, 98% to the holders of common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $    plus any arrearages from prior quarters;
 
 
 
 
Ÿ
second, 98% to the holders of subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $    ; and
 
 
 
 
Ÿ
third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $    .
 
 
 
 
If cash distributions to our unitholders exceed $        per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions” because they incentivize our general partner to increase distributions to our unitholders. In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”
 
 
 
 
If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay minimum quarterly distributions to our unitholders.
 
 
 
 
Pursuant to our partnership agreement, we will reimburse our general partner and its affiliates, including Valero, for costs and expenses they incur and payments they make on our behalf. Pursuant to the omnibus agreement, we will pay all accrued monthly payments on our annual fee of $7.9 million to Valero for general and administrative services, and we will reimburse Valero for any out-of-pocket costs and expenses incurred by Valero in providing these services to us. In addition, we will reimburse our general partner for payments to Valero pursuant to the services and secondment agreement for the wages, benefits and other costs of Valero employees seconded to our general partner to perform operational and maintenance services at certain of our pipelines and terminals. Each of these payments will be made prior to making any distributions on our common units. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”
 
 
 
 
The amount of distributable cash flow we must generate to support the payment of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for four quarters is approximately $    million (or an average of approximately $          million per quarter).


15



 
On a pro forma basis, assuming we had completed this offering on January 1, 2012, our distributable cash flow for the twelve months ended June 30, 2013 and the year ended December 31, 2012 was approximately $51.7 million and $43.1 million, respectively. As a result, we would have had sufficient distributable cash flow to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ended June 30, 2013, and to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units for the year ended December 31, 2012. However, we would have had sufficient distributable cash flow to pay only approximately      % of the minimum quarterly distributions on our subordinated units and the corresponding distribution on our general partner units for the year ended December 31, 2012. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended June 30, 2013 and the Year Ended December 31, 2012.”
 
 
 
 
We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2014,” we will have sufficient distributable cash flow to make cash distributions for the twelve months ending September 30, 2014, at the minimum quarterly distribution rate of $  per unit (or $    per unit on an annualized basis) on all of our common and subordinated units and to make the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. Our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”
 
 
 
Subordinated units
Valero will initially own all of our subordinated units. The principal difference between our common and subordinated units is that for any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution of available cash until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.
 
 
 
Conversion of subordinated units
The subordination period will end on the first business day after the date that we have earned and paid distributions of at least (i) $        (the annualized minimum quarterly distribution) on each of the outstanding common, subordinated and general partner units for each of three consecutive, non-overlapping four-quarter periods ending on or after         ,        , or (ii) $        (150% of the annualized minimum quarterly distribution) on each of the outstanding common units, subordinated units and general partner units and the related distributions on the incentive distribution rights for any four-quarter period ending on or after    ,    , in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.
 
 
 


16



 
The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.
 
 
 
 
When the subordination period ends, each outstanding subordinated unit will convert into one common unit, and common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.”
 
 
 
Issuance of additional units
Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Our unitholders will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Partnership Interests.”
 
 
 
Limited voting rights
Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 66% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Valero will own an aggregate of     % of our common and subordinated units (or    % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give Valero the ability to prevent the removal of our general partner. Please read “Our Partnership Agreement—Voting Rights.”
 
 
 
Limited call right
If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price not less than the then-current market price of the common units, as calculated in accordance with our partnership agreement.
 
 
 
Estimated ratio of taxable income to
distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending        ,    , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $    per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $    per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” for the basis of this estimate.
 
 
 
Material federal income tax
consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the U.S., please read “Material Federal Income Tax Consequences.”
 
 
 


17



Directed Unit Program
At our request, the underwriters have reserved up to 5% of the common units being offered by this prospectus for sale at the initial public offering price to directors and executive officers of our general partner, directors of Valero and certain other key employees of Valero. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting—Directed Unit Program.”
 
 
 
Exchange listing
We intend to apply to list our common units on the NYSE under the symbol “VLP .”
 
 
 




18


SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table shows summary historical combined financial data of our Predecessor and summary unaudited pro forma combined financial data of Valero Energy Partners LP for the periods and as of the dates indicated. The summary historical combined financial data of our Predecessor as of and for the years ended December 31, 2012 and 2011, were derived from the audited combined financial statements of our Predecessor included elsewhere in this prospectus. The summary historical interim combined financial data of our Predecessor as of June 30, 2013 and for the six months ended June 30, 2013 and 2012, were derived from the unaudited interim combined financial statements of our Predecessor included elsewhere in this prospectus. The summary historical interim combined balance sheet data of our Predecessor as of June 30, 2012 was derived from the unaudited combined balance sheet of our Predecessor, which is not included in this prospectus. The summary unaudited pro forma combined financial data of Valero Energy Partners LP as of and for the six months ended June 30, 2013 and for the year ended December 31, 2012 was derived from our unaudited pro forma combined financial statements included elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The unaudited pro forma combined balance sheet data assumes the offering and the related transactions occurred as of June 30, 2013, and the unaudited pro forma combined statements of income data for the six months ended June 30, 2013 and the year ended December 31, 2012 assumes the offering and the related transactions occurred as of January 1, 2012. These transactions include, and the unaudited pro forma combined financial statements give effect to, the following:
Valero’s contribution of all of our Predecessor’s assets to us;
our expected entry into a new revolving credit facility with $300 million in available capacity, which we have assumed was not drawn during the pro forma periods presented, estimated commitment fees that would have been paid had our revolving credit facility been in place during the pro forma periods presented, and the amortization of estimated deferred issuance costs associated with the revolving credit facility;
our entry into a master transportation services agreement and a master terminal services agreement with Valero;
our and our general partner’s entry into an omnibus agreement with Valero;
our general partner’s entry into a services and secondment agreement with Valero;
our entry into a ground lease agreement with Valero;
the consummation of this offering and our issuance of        common units to the public,     general partner units and the incentive distribution rights to our general partner and      common units and          subordinated units to Valero; and
the application of the net proceeds of this offering as described in “Use of Proceeds.”
The unaudited pro forma combined financial statements for the six months ended June 30, 2013 and the year ended December 31, 2012 give effect to $1.6 million and $2.9 million, respectively, in incremental general and administrative costs we will incur under the omnibus agreement, as well as $200,000 and $400,000, respectively, in premiums for liability coverage for our directors and officers that we will pay to a Valero captive insurance company. However, the unaudited pro forma financial statements do not give effect to an estimated $1.9 million in additional annual incremental general and administrative expenses that we expect to incur as a result of being a separate publicly traded limited partnership.



19


 
 
Valero Energy Partners LP Predecessor
Historical
 
Valero Energy Partners LP
Pro Forma
(in thousands,
except per unit amounts)
 
Six Months Ended
June 30,
 
Year Ended
December 31,
 
Six Months
Ended
June 30,
 
Year
Ended
December 31,
 
2013
 
2012
 
2012
 
2011
 
2013
 
2012
Combined statements
of income:
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenues -
related party
 
$
46,343

 
$
40,410

 
$
86,804

 
$
73,136

 
$
46,372

 
$
84,351

Total costs and expenses
 
18,714

 
23,406

 
44,146

 
46,702

 
21,527

 
49,570

Net income
 
26,133

 
16,778

 
42,285

 
25,836

 
22,727

 
33,184

Net income per
limited partner unit
(basic and diluted):
 
 
 
 
 
 
 
 
 
 
 
 
Common units
 
 
 
 
 
 
 
 
 
$
 
$
Subordinated units
 
 
 
 
 
 
 
 
 
 
 
 
Combined balance sheets
(at period end):
 
 
 
 
 
 
 
 
 
 
 
 
Property and
equipment, net
 
$
267,982

 
$
274,204

 
$
272,238

 
$
278,470

 
$
267,982

 
 
Total assets
 
268,337

 
274,562

 
272,506

 
278,988

 
546,297

 
 
Total liabilities
 
7,676

 
7,886

 
7,137

 
8,521

 
7,676

 
 
Net investment
 
260,661

 
266,676

 
265,369

 
270,467

 

 
 
Partners’ capital
 

 

 

 

 
538,621

 
 
Total liabilities and
net investment/
partners’ capital
 
268,337

 
274,562

 
272,506

 
278,988

 
546,297

 
 
Combined statements of
cash flows:
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by
(used in):
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
33,563

 
$
23,697

 
$
54,980

 
$
41,448

 
 
 
 
Investing activities
 
(2,154
)
 
(3,682
)
 
(7,650
)
 
(36,054
)
 
 
 
 
Financing activities
 
(31,409
)
 
(20,015
)
 
(47,330
)
 
(5,394
)
 
 
 
 
Other financial data:
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA (1)
 
$
34,132

 
$
24,072

 
$
55,876

 
$
42,554

 
$
31,348

 
$
47,999

______________ 
(1)
For a definition of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Combined Financial Data—Non-GAAP Financial Measure.”


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RISK FACTORS
Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.
Risks Related to Our Business
Valero accounts for all of our revenues. Therefore, we are subject to the business risks associated with Valero’s business. Furthermore, if Valero changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes transported through our pipelines or terminals, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.
For the six months ended June 30, 2013 and the year ended December 31, 2012, Valero accounted for all of our revenues. Because we expect to initially derive all of our revenues from commercial agreements with Valero, any event, whether in our areas of operation or elsewhere, that materially and adversely affects Valero’s business may adversely affect our financial condition, results of operations and cash flows and our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of Valero, the most significant of which include the following:
the relationship, or margin, between refined petroleum product prices and the prices for crude oil and other feedstocks;
disruption of Valero’s ability to obtain crude oil;
the ability to obtain credit and financing on acceptable terms, which could also adversely affect the financial strength of business partners;
the substantial capital expenditures and operating costs that may be required to comply with existing and future environmental laws and regulations, which could also impact or limit Valero’s current business plans and reduce product demand;
the effects of domestic and worldwide political and economic developments could materially reduce Valero’s profitability and cash flows;
large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns;
interruptions of supply and increased costs as a result of Valero’s reliance on third-party transportation of crude oil and refined petroleum products;
significant losses resulting from the hazards and risks of operations may not be fully covered by insurance, and could adversely affect Valero’s operations and financial results;
increased regulation of hydraulic fracturing could result in reductions or delays in domestic production of crude oil and natural gas, which could adversely impact Valero’s results of operations;
competitors that produce their own supply of feedstocks, have more extensive retail outlets or have greater financial resources may have a competitive advantage over Valero;
potential losses from Valero’s derivative transactions;


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a significant interruption in one or more of Valero’s facilities;
any decision by Valero to temporarily or permanently curtail or shut down operations at one or more of its refineries or other facilities and reduce or terminate its obligations under our commercial agreements; and
Valero’s performance depends on the uninterrupted operation of its refineries and other facilities, which are becoming increasingly dependent on information technology systems.
Valero is not obligated to use our services with respect to volumes of crude oil or products in excess of the minimum quarterly throughput commitments under our commercial agreements. Please read “Business—Our Commercial Agreements with Valero” for a detailed description of each of these commercial agreements.
We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay minimum quarterly distributions to our unitholders.
The amount of distributable cash flow we must generate to support the payment for four quarters of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, is approximately $         million (or an average of approximately $         million per quarter). On a pro forma basis, assuming we had completed this offering on January 1, 2012, our distributable cash flow for the twelve months ended June 30, 2013 and the year ended December 31, 2012 would have been approximately $51.7 million and $43.1 million, respectively. As a result, we would have had sufficient distributable cash flow to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ended June 30, 2013, and to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units for the year ended December 31, 2012. However, we would have had sufficient distributable cash flow to pay only approximately         % of the minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner units for the year ended December 31, 2012.
We may not generate sufficient cash flows each quarter to enable us to pay minimum quarterly distributions. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
the volume of crude oil and refined petroleum products we transport;
the tariff rates and fees with respect to volumes that we transport; and
prevailing economic conditions.
In addition, the actual amount of cash flows we generate will also depend on other factors, some of which are beyond our control, including:
the amount of our operating expenses and general and administrative expenses, including reimbursements to Valero, which are not subject to any caps or other limits, in respect of those expenses;
the level and timing of capital expenditures we make;
the cost of acquisitions, if any;
our debt service requirements and other liabilities;
fluctuations in our working capital needs;
our ability to borrow funds and access capital markets;
expected restrictions contained in our revolving credit facility and other debt service requirements;


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the amount of cash reserves established by our general partner; and
other business risks.
The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual distributable cash flow to differ materially from our forecast.
The forecast of distributable cash flow set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and distributable cash flow for the twelve months ending September 30, 2014. Our ability to pay full minimum quarterly distributions in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or any other independent auditor.
If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly cash distributions may be diminished or our financial leverage could increase. We do not have any commitment with any of our affiliates to provide any direct or indirect financial assistance to us following the closing of this offering.
In order to expand our asset base, we will need to make expansion capital expenditures. If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to maintain or raise the level of our quarterly cash distributions. We will be required to use cash from our operations or incur borrowings or sell additional common units or other limited partner interests in order to fund our expansion capital expenditures. Using cash from operations will reduce our distributable cash flow. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering as well as the covenants in our debt agreements, general economic conditions and contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining funds for expansion capital expenditures through equity or debt financings, the terms thereof could limit our ability to pay distributions to our common unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution and increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.
If Valero satisfies only its minimum quarterly throughput commitments under, or if we are unable to renew or extend, the commercial agreements we have with Valero, our ability to make distributions to our unitholders will be reduced.
Valero is not obligated to use our services with respect to volumes of crude oil or refined petroleum products in excess of the minimum quarterly throughput commitments under our commercial agreements. Please read “Business—Our Commercial Agreements with Valero” for a detailed description of each of these commercial agreements. During refinery turnarounds, which typically last 30 to 60 days and are performed every four to five years, we expect that Valero will only satisfy its minimum quarterly throughput commitments under our commercial agreements. Our commercial agreements with Valero, which will initially be the source of all of our revenues, will have initial terms of 10 years, and with the exception of our El Paso truck rack and Memphis truck rack, Valero will have the option to renew the agreement with respect to each asset for one additional five-year term. On a pro forma basis, Valero’s minimum quarterly throughput commitments under these agreements would have accounted for approximately 83% and 92% of our revenues for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. If Valero fails to use our facilities and services after expiration of those agreements and we are unable to generate additional revenues from third parties, our ability to make cash distributions to unitholders will be reduced.


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Valero may suspend, reduce or terminate its obligations under our commercial agreements in certain circumstances, including events of force majeure, and may avoid payments under such agreements in certain circumstances, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.
Our commercial agreements with Valero will permit Valero to suspend, reduce or terminate its obligations with respect to our assets if certain events occur, such as Valero’s determination to totally or partially suspend refining operations at one of its refineries that our assets support for a period that will continue for at least twelve months, or a force majeure event that impacts one of Valero’s refineries for more than 60 days. Any such reduction, suspension or termination of Valero’s obligations would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders. Please read “Business—Our Commercial Agreements with Valero.”
We may not be able to obtain third-party revenues due to competition and other factors, which could limit our ability to grow and may extend our dependence on Valero.
Our ability to obtain third-party revenues is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when third-party shippers require it. To the extent we have capacity at our refined petroleum products terminals available for third-party volumes, competition from other existing or future refined petroleum products terminals owned by our competitors may limit our ability to utilize this available capacity.
We can provide no assurance that we will be able to attract material third-party revenues. Our efforts to establish our reputation and attract new unaffiliated customers may be adversely affected by our relationship with Valero and our desire to provide services pursuant to fee-based contracts. Our potential customers may prefer to obtain services under contracts through which we could be required to assume direct commodity exposure.
Our right of first offer to acquire certain of Valero’s transportation and logistics assets is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.
Our omnibus agreement provides us with our right of first offer for a period of five years after the closing of this offering on certain of Valero’s transportation and logistics assets. The consummation and timing of any future acquisitions pursuant to this right will depend upon, among other things, Valero’s willingness to offer such assets for sale, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and Valero is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to exercise our right of first offer if any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by Valero at any time in the event that it no longer controls our general partner. For additional information regarding our right of first offer, please read “Business—Our Assets and Operations—Right of First Offer Assets” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer.”
If we are unable to make acquisitions on economically acceptable terms from Valero or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.
Our strategy to grow our business and increase distributions to unitholders is dependent in part on our ability to make acquisitions that result in an increase in distributable cash flow per unit. Our growth strategy is based in part on our expectation of ongoing divestitures by industry participants, including our right of first offer from Valero. The consummation and timing of any future acquisitions will depend upon, among other things, whether:
we are able to identify attractive acquisition candidates;
we are able to negotiate acceptable purchase agreements;


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we are able to obtain financing for these acquisitions on economically acceptable terms; and
we are outbid by competitors.
We can offer no assurance that we will be able to successfully consummate any future acquisitions, whether from Valero or any third parties. If we are unable to make future acquisitions, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit as a result of incorrect assumptions in our evaluation of such acquisitions or unforeseen consequences or other external events beyond our control. If we consummate any future acquisitions, unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating any such acquisitions.
Our ability to expand may be limited if Valero does not grow its business.
Part of our growth strategy depends on organic growth that depends in part on the growth of Valero’s business. For example, in our terminals business, we believe our growth will be driven in part by identifying and executing organic expansion products that will result in increased throughput volumes from Valero and third parties. Our prospects for organic growth currently include projects that we expect Valero to undertake and that we may have an opportunity to purchase from Valero. If Valero focuses on other growth areas or does not make capital expenditures to fund the organic growth of its transportation and logistics assets, we may not be able to fully execute our growth strategy.
Our operations and Valero’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Valero’s facilities supported by our assets and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our operations and financial results could be materially and adversely affected.
Our operations are subject to all of the risks and operational hazards inherent in transporting, terminaling and storing crude oil and refined petroleum products, including:
damages to pipelines, terminals and facilities, related equipment and surrounding properties caused by third parties, severe weather, natural disasters and acts of terrorism;
maintenance, repairs, mechanical or structural failures at our or Valero’s facilities or at third-party facilities on which our or Valero’s operations are dependent, including electrical shortages, power disruptions and power grid failures;
damages to and loss of availability of interconnecting third-party pipelines, terminals and other means of delivering crude oil, feedstocks and refined petroleum products;
disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack;
curtailments of operations due to severe seasonal weather, including weather events in the Gulf of Mexico;
riots, strikes, lockouts or other industrial disturbances; and
other hazards.
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, Valero’s refining operations supported by our assets, on which our operations are substantially dependent and over which we have no control, are subject to similar operational hazards and risks inherent in refining crude oil.


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Our insurance policies do not cover all losses, costs or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We are insured under Valero’s insurance policies for certain property damage, business interruption and third-party liabilities, which includes pollution liabilities, and are subject to Valero’s policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material adverse effect on our business, financial condition and results of operations.
The energy industry is highly capital intensive, and the entire or partial loss of individual facilities or multiple facilities can result in significant costs to us and our insurance carriers. In recent years, several large industry claims have resulted in significant increases in the level of premiums and deductibles for participants in the energy industry. For example, hurricanes in recent years have caused significant damage to several pipelines along the Gulf Coast. As a result of large energy industry claims, insurance companies that have historically participated in underwriting energy-related facilities may discontinue that practice, may reduce the insurance capacity they are willing to offer or may demand significantly higher premiums or deductibles to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, or if other adverse conditions over which we have no control prevail in the insurance market, we may be unable to obtain and maintain adequate insurance at a reasonable cost.
In addition, we cannot assure you that Valero’s insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer significant losses could have a material adverse effect on our business, financial condition and results of operation.
A material decrease in the refining margins at Valero’s refineries supported by our assets could cause Valero to reduce the volume of crude oil refined in such refineries which, in turn, could materially reduce the volumes of crude oil and refined petroleum products that we transport and terminal for Valero, which could materially and adversely affect our financial condition, results of operations and ability to make cash distributions to our unitholders.
The volumes of crude oil and refined petroleum products that we transport and terminal depend substantially on Valero’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstocks and the price of refined petroleum products. These prices are affected by numerous factors beyond our or Valero’s control, including the global supply and demand for crude oil, gasoline and other refined petroleum products, competition from alternative energy sources and the impact of new and more stringent regulations and standards affecting the refining industry. In order to maintain or increase production levels at the Valero refineries supported by our assets, Valero must continually contract for new crude oil supplies or consider connecting to alternative sources of crude oil. Adverse developments in major oil producing regions around the world could have a significantly greater impact on our financial condition, results of operations and cash flows because of our lack of industry and geographic diversity and reliance on Valero as a customer.
Any reduction in volumes transported for Valero on interconnecting, third-party pipelines could cause a reduction of volumes transported through our pipelines and terminals.
At times, Valero is dependent upon connections to third-party pipelines to receive and deliver crude oil and refined petroleum products for transportation on our pipelines. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures or other causes could result in reduced volumes of crude oil and refined petroleum products transported through our pipelines and terminals. In addition, it is possible that due to prorationing on third-party interconnecting pipelines, the allocations to Valero and other existing shippers on these pipelines could be reduced, which could also reduce volumes transported on our pipelines and/or through our terminals. Any significant reduction in volumes available for transportation through our pipelines and terminals would materially and adversely affect our revenues and cash flows and our ability to make distributions to our unitholders.


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We are exposed to the credit risks, and certain other risks, of our customers, and any material nonpayment or nonperformance by our customers could reduce our ability to make distributions to our unitholders.
We intend to grow our customer base beyond Valero. We will be subject to the risks of loss resulting from nonpayment or nonperformance by our customers. If any of our significant customers, including Valero, default on their obligations to us, our financial results could be adversely affected. Our customers may be highly leveraged and subject to their own operating and regulatory risks. Any material nonpayment or nonperformance by our customers could reduce our ability to make distributions to our unitholders.
Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.
In order to optimize our existing asset base, we intend to evaluate and capitalize on organic opportunities for expansion projects in order to increase revenues on our pipelines and terminals. The expansion of existing pipelines or terminals, such as by adding horsepower, pump stations or loading racks, or the construction or expansion of new transportation and logistics assets, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenues needed to support such projects and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or make such interconnections, we may not realize an increase in revenues for an extended period of time. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders.
We do not own all of the land on which our pipelines are located, which could result in disruptions to our operations.
We do not own all of the land on which our pipelines are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew leases, right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.
We are dependent upon third parties to operate some of our facilities.
Our McKee products system is operated by NuStar, which owns a 66⅔% undivided interest in the system. If NuStar fails to operate any portion of the McKee product system in accordance with the terms of our operating agreement with them, such failure could result in our inability to meet our commitments to Valero, which in turn could result in a reduction in our revenues, or in us becoming liable to Valero for any losses it may sustain by reason of our failure to comply, which losses may not be recoverable by us from NuStar. Similarly, our adjacent PAPS and El Vista terminals are both operated by Shell, and any failure by Shell to comply with the terms of our operating agreement with Shell could result in our inability to meet our commitments to Valero with respect to our Port Arthur products system, which in turn could result in a reduction in our revenues, or in us becoming liable to Valero for any losses it may sustain by reason of our failure to comply, which losses may not be recoverable by us from Shell.
Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.
We will be dependent upon the earnings and cash flows generated by our operations in order to meet any debt service obligations and to allow us to make cash distributions to our unitholders. In connection with this offering, we expect to enter into a revolving credit facility with $300 million in available capacity, under which no amounts will be drawn at the closing of this offering. The operating and financial restrictions and covenants in such revolving credit facility


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and any future financing agreements could restrict our ability to finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders.
The provisions of our revolving credit facility could affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default which would enable our lenders to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity” for additional information about our revolving credit facility.
Our future debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.
Following this offering, we will have the ability to incur debt, subject to limitations in our revolving credit facility. Our level of debt could have important consequences to us, including the following:
our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;
our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flows required to make payments on our debt;
we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and
our flexibility in responding to changing business and economic conditions may be limited.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets or seeking additional equity capital. We may not be able to effect any of these actions on satisfactory terms or at all.
Increases in interest rates could adversely impact the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes and our ability to make cash distributions at our intended levels.
We may be unsuccessful in integrating the operations of the assets we acquire with our operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we will evaluate and acquire assets and businesses that we believe will complement our existing assets and businesses. Acquisitions may require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including difficulties in the assimilation of the assets and operations of the acquired businesses, inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with them and new geographic areas and the diversion of management’s attention from other


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business concerns. Further, unexpected costs and challenges may arise whenever businesses with different operations or management are combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired business or assets, for which we have no recourse under applicable indemnification provisions.
Compliance with and changes in environmental laws, including proposed climate change laws and regulations, could adversely affect our performance.
The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive environmental laws and regulations, including those relating to the discharge and remediation of materials in the environment, greenhouse gas emissions, waste management, species and habitat preservation, pollution prevention, pipeline integrity and other safety-related regulations, and characteristics and composition of fuels. Certain of these laws and regulations could impose obligations to conduct assessment or remediation efforts at our facilities or third-party sites where we take wastes for disposal or where our wastes migrated. Environmental laws and regulations also may impose liability on us for the conduct of third parties, or for actions that complied with applicable requirements when taken, regardless of negligence or fault. If we violate or fail to comply with these laws and regulations, it could lead to administrative, civil or criminal penalties or liability and imposition of injunctions, operating restrictions or the loss of permits.
Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of expenditures required for environmental matters could increase in the future. Current and future legislative action and regulatory initiatives could result in changes to operating permits, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods we transport, and decreased demand for products we handle that cannot be assessed with certainty at this time. We may be required to make expenditures to modify operations or install pollution control equipment or release prevention and containment systems that could materially and adversely affect our business, financial condition, results of operations, and liquidity if these expenditures, as with all costs, are not ultimately reflected in the tariffs and other fees we receive for our services. For example, the EPA has, in recent years, adopted final rules making more stringent the National Ambient Air Quality Standards (“NAAQS”) for ozone, sulfur dioxide and nitrogen dioxide, and the EPA is considering further revisions to the NAAQS. Emerging rules and permitting requirements implementing these revised standards may require us to install more stringent controls at our facilities, which may result in increased capital expenditures.
We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.
Our facilities operate under a number of federal and state permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. These permits, licenses, approval limits and standards require a significant amount of monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations and on our financial condition, results of operations and cash flows.
Many of our assets have been in service for many years and, as a result, our maintenance or repair costs may increase in the future. In addition, there could be service interruptions due to unknown events or conditions or increased downtime associated with our pipelines that could have a material adverse effect on our business and results of operations.
Our pipelines and terminals are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders.


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The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenues and our ability to make distributions to our unitholders.
We own pipeline assets in Texas, New Mexico, Tennessee, Mississippi and Arkansas, and we provide both interstate and intrastate transportation services. Many of our pipelines are also common carriers and, as a consequence, we may be required to provide service to customers with credit and other performance characteristics with whom we would choose not to do business if permitted to do so.
Our Port Arthur logistics system pipelines, Shorthorn pipeline and Collierville pipeline provide interstate service that is subject to regulation by FERC. FERC uses prescribed rate methodologies for developing regulated tariff rates for interstate oil and product pipelines. Our tariff rates approved by FERC may not recover all of our costs of providing services. In addition, these methodologies and changes to FERC’s approved rate methodologies, or challenges to our application of an approved methodology, could also adversely affect our rates.
Shippers may protest (and FERC may investigate) the lawfulness of new or changed tariff rates. FERC can suspend those tariff rates for up to seven months and can also require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful and prescribe new rates prospectively. FERC and interested parties can also challenge tariff rates that have become final and effective, and if FERC finds those rates to be unjust and unreasonable, it may order payment of reparations for up to two years prior to the filing of a complaint. Under our commercial agreements, we and Valero have agreed not to challenge or support others in challenging the tariff rates in effect during the term of the agreements, except to the extent changes to the base tariff rate are inconsistent with FERC’s indexing methodology or other rate changing methodologies or to the extent any proceeding brought against us by a third party that could affect our ability to provide transportation services to Valero under the agreements. This agreement does not prevent other shippers or interested persons from challenging our tariffs, including our tariff rates and proration rules. Due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues and our ability to make distributions to our unitholders.
While FERC regulates rates and terms and conditions of service for transportation of crude oil or refined petroleum products in interstate commerce by pipeline, state agencies may regulate rates, terms and conditions of service for such pipeline transportation in intrastate commerce. There is not a clear boundary between transportation service provided in interstate commerce, which is regulated by FERC, and transportation service provided in intrastate commerce, which is not regulated by FERC. Such determinations are highly fact-dependent and are made on a case-by-case basis. We cannot provide assurance that FERC will not subsequently assert jurisdiction over certain transportation services, which we provide that are not currently subject to its regulatory oversight. If FERC were successful with any such assertion, FERC’s ratemaking methodologies could subject us to potentially burdensome and expensive operational, reporting and other requirements.
Our portion of the McKee to El Paso pipeline currently provides intrastate service that is subject to regulation by the Texas Railroad Commission. In Texas, a pipeline, with some exceptions, is required to operate as a common carrier by publishing tariffs and providing transportation without discrimination. The Texas Railroad Commission could limit our ability to increase our rates or to set rates based on our costs or could order us to reduce our rates and could require the payment of refunds to shippers. Such regulation or a successful challenge to our intrastate pipeline rates could adversely affect our financial position, cash flows or results of operations. In addition, because a portion of the McKee to El Paso pipeline crosses New Mexico, we have applied for a waiver of the tariff filing and reporting requirements imposed by FERC under the ICA for our portion of the pipeline. Valero is the only shipper on our portion of this pipeline and has been the only shipper since we acquired our portion of the pipeline in 2008. Based on FERC’s precedent regarding this type of waiver request, we fully expect the waiver will be granted to the extent such waiver is necessary. However, if that waiver is denied or FERC elects to assert jurisdiction over the line, we may be required to provide a cost justification for the transportation charge. The rates under such tariffs may be insufficient to allow us to recover fully our cost of providing service on the affected pipelines, which could adversely affect our business, financial condition and results of operations. In addition, regulation by FERC may subject us to potentially burdensome and expensive operational, reporting and other requirements. Even if FERC grants the waiver of the tariff filing and reporting requirements, if a third party makes a reasonable request for service on the McKee to El Paso pipeline, we would be required to provide service without undue discrimination and to operate in a manner that does not provide any undue preference to shippers.


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In addition, state commissions have generally not been aggressive in regulating common carrier pipelines, have generally not investigated the rates or practices of petroleum pipelines in the absence of shipper complaints, and generally resolve complaints informally. If the regulatory commissions in the states in which we operate change their policies and aggressively regulate the rates or terms of service of pipelines operating in those states, it could adversely affect our business, financial condition and results of operations.
If we lose any of our key personnel, our ability to manage our business and continue our growth could be negatively impacted.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. We do not currently maintain key person life insurance policies for any of our senior management team. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we may be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms or at all.
We rely on information technology in our operations, and any material failure, inadequacy or interruption of that technology could harm our business.
We inherited information technology systems and controls that monitor the movement of petroleum products through our pipeline systems. Information technology system failures, network disruptions (whether intentional by a third party or due to natural disaster), breaches of network or data security, or disruption or failure of the network system used to monitor and control pipeline operations could result in environmental damage, operational disruptions, regulatory enforcement or private litigation. Our computer systems, including our back-up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, or errors by our employees. Further, the failure of any of our systems to operate effectively, or problems we may experience with transitioning to upgraded or replacement systems, could significantly harm our business and operations and cause us to incur significant costs to remediate such problems. There can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and results of operations.
Terrorist or cyber-attacks and threats, or escalation of military activity in response to these attacks, could have a material adverse effect on our business, financial condition or results of operations.
Terrorist attacks and threats, cyber-attacks, or escalation of military activity in response to these attacks, may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist or cyber-attacks than other targets in the U.S. We do not maintain specialized insurance for possible liability or loss resulting from a cyber-attack on our assets that may shut down all or part of our business. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.
Our customers’ operating results are seasonal and generally lower in the first and fourth quarters of the year. Our customers depend on favorable weather conditions in the spring and summer months.
Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. As a result, our customers’ operating results are generally lower for the first and fourth quarters of each year. Unfavorable weather conditions during the spring and summer months and a resulting lack of the expected seasonal upswings in traffic and sales could adversely affect our customers’ business, financial condition and results of operations, which may adversely affect our business, financial conditions and results of operations.


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The level and terms of Valero’s indebtedness and its credit ratings could adversely affect our ability to grow our business and our ability to make cash distributions to our unitholders and our credit ratings and profile. Our ability to obtain credit in the future and our future credit rating may also be adversely affected by Valero’s credit rating and level of indebtedness.
If the level of Valero’s indebtedness increased significantly in the future, then it would increase the risk that it may default on its obligations to us under our commercial agreements. As of June 30, 2013, Valero had long-term indebtedness of $6.6 billion. The covenants contained in the agreements governing Valero’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar manner. Furthermore, if Valero were to default under certain of its debt obligations, there is a risk that Valero’s creditors would attempt to assert claims against our assets during the litigation of their claims against Valero. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. If these claims were successful, our ability to meet our obligations to our creditors, make distributions and finance our operations could be materially and adversely affected.
Valero currently has an investment grade rating. If Valero’s credit rating lowered in the future, the interest rate and fees Valero pays on its credit facilities may increase. In addition, although we will not have any indebtedness rated by any credit rating agency at the closing of this offering, we may have rated debt in the future. Credit rating agencies will likely consider Valero’s credit rating when assigning ours because of Valero’s ownership interest in us and our reliance on commercial agreements with Valero for all of our revenues. If one or more credit rating agencies were to downgrade Valero’s credit rating, we could experience an increase in our borrowing costs or difficulty accessing the capital markets. Such a development could adversely affect our ability to grow our business and to make cash distributions to our unitholders.
Risks Inherent in an Investment in Us
Our general partner and its affiliates, including Valero, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Valero, and Valero is under no obligation to adopt a business strategy that favors us.
Following the offering, Valero will own a         % limited partner interest in us (or      % if the underwriters’ option to purchase additional common units is exercised in full) and will own and control our general partner. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of us and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is not adverse to the best interests of its owner, Valero. Conflicts of interest may arise between Valero and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Valero, over the interests of our common unitholders. These conflicts include, among others, the following situations:
neither our partnership agreement nor any other agreement requires Valero to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by Valero to increase or decrease refinery production, shut down or reconfigure a refinery, shift the focus of its investment and growth to areas not served by our assets, or undertake acquisition opportunities for itself;
Valero, as our primary customer, has an economic incentive to cause us to not seek higher rates and fees, even if such higher rates and fees would reflect those that could be obtained in arm’s-length, third-party transactions;
Valero’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of Valero, which may be contrary to our interests; in addition, many of the officers and directors of our general partner are also officers and/or directors of Valero and will owe fiduciary duties to Valero and its stockholders;
Valero may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;


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our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;
except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;
disputes may arise under our commercial agreements with Valero;
our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;
our general partner will determine the amount and timing of many of our capital expenditures and whether a capital expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and the ability of the subordinated units to convert into common units;
our general partner will determine which costs incurred by it are reimbursable by us;
our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period;
our partnership agreement permits us to classify up to $    million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner units or the incentive distribution rights;
our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;
our general partner intends to limit its liability regarding our contractual and other obligations;
our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of the common units;
our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including under the omnibus agreement and our commercial agreements with Valero;
our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and
our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity


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will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” and “Conflicts of Interest and Duties.”
Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.
We expect that we will distribute all of our available cash to our unitholders and will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.
In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement, and we do not anticipate there being limitations in our revolving credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.
Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.
In some instances, our general partner may cause us to borrow funds from Valero or from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period.
The fees and reimbursements due to our general partner and its affiliates, including Valero, for services provided to us or on our behalf will reduce our distributable cash flow. In certain cases, the amount and timing of such reimbursements will be determined by our general partner and its affiliates, including Valero.
Pursuant to our partnership agreement, we will reimburse our general partner and its affiliates, including Valero, for expenses they incur and payments they make on our behalf. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Pursuant to the omnibus agreement, we will pay an annual fee of $7.9 million to Valero for general and administrative services, and we will reimburse Valero for any out-of-pocket costs and expenses incurred by Valero in providing these services to us. The omnibus agreement provides that the $7.9 million annual fee may be adjusted annually by Valero in good faith to reflect the cost of providing such services. In addition, we will reimburse our general partner for payments to Valero pursuant to the services and secondment agreement for the wages, benefits and other costs of Valero employees seconded to our general partner to perform operational and maintenance services at certain of our pipeline and terminal systems. Each of these payments will be made prior to making any distributions on our common units. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce our distributable cash flow. Please read “Cash Distribution Policy and Restrictions on Distributions” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.”


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Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:    
whenever our general partner (acting in its capacity as our general partner), the board of directors of our general partner or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was not adverse to our best interests, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;    
our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;
our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
our general partner will not be in breach of its obligations under the partnership agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:
approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;
approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates;
determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.
In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth subbullet points above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”
If you are not an Eligible Holder, your common units may be subject to redemption.
We have adopted certain requirements regarding those investors who may own our common and subordinated units. Eligible Holders are limited partners whose (a) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to regulation by FERC or an analogous


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regulatory body and (b) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If you are not an Eligible Holder, in certain circumstances as set forth in our partnership agreement, your units may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “Our Partnership Agreement—Ineligible Holders; Redemption.”
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be used to vote on any matter.
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the member of our general partner, which is a wholly owned subsidiary of Valero. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.
Unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own     % of our common and subordinated units (or         % if the underwriters’ option to purchase additional common units is exercised in full) (excluding common units purchased by officers and directors of our general partner and Valero under our directed unit program). Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on our common units will be extinguished. A removal of our general partner under these circumstances would adversely affect our common units by prematurely eliminating their distribution and liquidation preference over our subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. “Cause” does not include most cases of charges of poor management of the business, so the removal of our general partner because of unitholder dissatisfaction with the performance of our general partner in managing our partnership will most likely result in the termination of the subordination period and conversion of all subordinated units to common units.
Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.


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Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest in us without a vote of our unitholders to an affiliate or another person in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such person. Furthermore, our partnership agreement does not restrict the ability of Valero to transfer all or a portion of its ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.
The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Valero selling or contributing additional assets to us, as Valero would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.
We may issue additional units without unitholder approval, which would dilute unitholder interests.
At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
our existing unitholders’ proportionate ownership interest in us will decrease;
the amount of cash we have available to distribute on each unit may decrease;
because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of minimum quarterly distributions will be borne by our common unitholders will increase;
because the amount payable to holders of incentive distribution rights is based on a percentage of total available cash, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on common units remains the same;
the ratio of taxable income to distributions may increase;
the relative voting strength of each previously outstanding unit may be diminished; and
the market price of our common units may decline.
Valero may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.
After the completion of this offering, assuming that the underwriters do not exercise their option to purchase additional common units, Valero will hold          common units and      subordinated units. All of the subordinated


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units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide Valero with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.
Our general partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to unitholders.
Our partnership agreement requires our general partner to deduct from operating surplus the cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash we have available to distribute to unitholders.
Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.
If at any time our general partner and its affiliates own more than 80% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately         % of our common units. At the end of the subordination period (which could occur as early as         ,    ), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units) and the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our outstanding common units and therefore would not be able to exercise the call right at that time. For additional information about our general partner’s call right, please read “Our Partnership Agreement—Limited Call Right.”
There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. Following this offering, the price of our common units may fluctuate significantly, and you could lose all or part of your investment.
Prior to this offering, there has been no public market for our common units. After this offering, there will be only      publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, Valero will own      common units and      subordinated units, representing an aggregate     % limited partner interest in us (or         % if the underwriters’ option to purchase additional common units is exercised in full). We do not know the extent to which investor interest will lead to the development of an active trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:
the level of our quarterly distributions;
our quarterly or annual earnings or those of other companies in our industry;


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changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;
future sales of our common units; and
other factors described in these “Risk Factors.”
Our general partner, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.
The holder or holders of a majority of the incentive distribution rights, which is initially our general partner, have the right, at any time when there are no subordinated units outstanding and the holders have received incentive distributions at the highest level to which they are entitled (48%) for each of the prior four consecutive fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for each such quarter), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our general partner has the right to transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our general partner with respect to resetting target distributions.
In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of common units equal to that number of common units which would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain the same percentage general partner interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal expansion projects that would not otherwise be sufficiently accretive to cash distributions per common unit. It is possible, however, that our general partner or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued common units to our general partner in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”
You will experience immediate and substantial dilution in net tangible book value of $        per common unit.
The estimated initial public offering price of $    per common unit (the mid-point of the price range set forth on the cover of this prospectus) exceeds our pro forma net tangible book value of $        per unit. Based on the estimated initial public offering price of $         per common unit, you will incur immediate and substantial dilution of $    per common unit. This dilution results primarily because the assets contributed by Valero are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”


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Our general partner intends to limit its liability regarding our obligations.
Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.
Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.
Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replace those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:
how to allocate corporate opportunities among us and its other affiliates;
whether to exercise its limited call right;
whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;
how to exercise its voting rights with respect to the units it owns;
whether to exercise its registration rights;
whether to elect to reset target distribution levels;
whether to transfer the incentive distribution rights to a third party; and
whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.
By purchasing a common unit, a common unitholder agrees to become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of Our General Partner.”
If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units. Pursuant to the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company and we may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (“Securities Act”) for complying with new or revised accounting standards.
We will be required to disclose material changes made in our internal control over financial reporting on a quarterly basis and we will be required to assess the effectiveness of our controls annually. However, for as long as we are an “emerging growth company” under the recently enacted JOBS Act, our independent registered public accounting firm


40


will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. We could be an emerging growth company for up to five years. Please read “Prospectus Summary—Implications of Being an Emerging Growth Company.” Effective internal controls are necessary for us to provide reliable and timely financial reports, prevent fraud and to operate successfully as a publicly traded limited partnership. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 will require us, among other things, to annually review and report on the effectiveness of our internal control over financial reporting. We must comply with Section 404 (except for the requirement for an auditor’s attestation report) beginning with our fiscal year ending December 31, 2015. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations.
Given the difficulties inherent in the design and operation of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We cannot predict if investors will find our units less attractive because we will rely on these exemptions. If some investors find our units less attractive as a result, there may be a less active trading market for our units and our trading price may be more volatile.
Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. You could be liable for any and all of our obligations as if you were a general partner if a court or government agency were to determine that:
we were conducting business in a state but had not complied with that particular state’s partnership statute; or
your right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.
For a discussion of the implications of the limitations of liability on a unitholder, please read “Our Partnership Agreement—Limited Liability.”


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Unitholders may have to repay distributions that were wrongfully distributed to them.
Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable both for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have, and we do not intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Valero Energy Partners LP.”
We will incur increased costs as a result of being a publicly traded limited partnership.
We have no history operating as a publicly traded limited partnership. As a publicly traded limited partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 and related rules subsequently implemented by the SEC and the NYSE have required changes in the corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded limited partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting.
Tax Risks
In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.
Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow would be substantially reduced.
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.


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If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. In addition, changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce our distributable cash flow. Therefore, if we were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.
The present federal income tax treatment of publicly traded limited partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded limited partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.
Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.
Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on the unitholder’s share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which our common units trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.


43


Tax gain or loss on the disposition of our common units could be more or less than expected.
If our unitholders sell common units, the unitholders will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income decrease the unitholder’s tax basis in its common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of a unitholder’s common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. Any tax-exempt entity or non-U.S. person should consult a tax advisor before investing in our common units.
We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. Baker Botts L.L.P. is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.
We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. Recently, however, the U.S. Treasury Department issued proposed regulations that provide a safe harbor pursuant to which publicly traded limited partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Baker Botts L.L.P. has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”


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A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, the unitholder may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Baker Botts L.L.P. has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units. Therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.
We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief were not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in the unitholder’s taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a publicly traded limited partnership technical termination relief program whereby, if a publicly traded limited partnership that technically terminated requests publicly traded limited partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please


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read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.
As a result of investing in our common units, a unitholder may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.
In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if the unitholders do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We initially expect to conduct business and/or control assets in Arkansas, Louisiana, Mississippi, New Mexico, Tennessee and Texas. Except for Texas, all of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is each unitholder’s responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Prospective unitholders should consult their own tax advisors regarding such matters.


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USE OF PROCEEDS
We expect to receive net proceeds of approximately $        million from the sale of common units offered by this prospectus based on an assumed initial public offering price of $    per common unit (the mid-point of the price range set forth on the cover of the prospectus), after deducting underwriting discounts, the structuring fee and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units from us is not exercised. We intend to use the net proceeds from this offering to pay revolving credit facility origination and commitment fees of approximately $        million, and we will retain the remainder of the net proceeds of this offering for general partnership purposes, including to fund potential acquisitions from Valero and third parties and potential organic expansion capital expenditures.
We expect to use the majority of the retained net proceeds from this offering for potential future acquisitions, such as the potential acquisition from Valero of our right of first offer assets. However, the consummation and timing of any future acquisition of our right of first offer assets are subject to various contingencies, including Valero’s willingness to offer such assets for sale and its willingness to accept any offer we may choose to make. For additional information regarding our right of first offer, please read “Business—Our Assets and Operations—Right of First Offer Assets” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of First Offer.” We may also consider the acquisition of other assets from Valero and third parties. Any such acquisitions, however, will also depend on various contingencies, including our ability to identify attractive acquisition candidates and successfully negotiate acceptable purchase agreements.
If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder of the          additional common units, if any, will be issued to Valero. Any such common units issued to Valero will be issued for no additional consideration. If the underwriters exercise in full their option to purchase additional common units from us, the additional net proceeds would be approximately $        million, after deducting underwriting discounts and the structuring fee. We will use any such net proceeds for general partnership purposes.
An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts and offering expenses, to increase or decrease by approximately $    million.


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CAPITALIZATION
The following table shows:
the historical cash and cash equivalents and capitalization of our Predecessor as of June 30, 2013; and
our pro forma capitalization as of June 30, 2013, giving effect to the pro forma adjustments described in our unaudited pro forma combined financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds” and the other transactions described under “Prospectus Summary—The Transactions.”
The amounts in this table are derived from, should be read together with and is qualified in its entirety by reference to our Predecessor’s historical combined financial statements and the accompanying notes and our unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus.
 
 
June 30, 2013
(in thousands)
 
Historical
 
Pro Forma
Cash and cash equivalents
 
$

 
$
275,525

 
 
 
 
 
Capitalization:
 
 
 
 
Debt
 
 
 
 
Capital lease obligations
 
$
5,761

 
$
5,761

Revolving credit facility
 

 

Total debt
 
5,761

 
5,761

Net investment/partners’ capital
 
 
 
 
Net investment
 
260,661

 

Partners’ capital:
 
 
 
 
Held by the public
 
 
 
 
Common units
 

 
 
Held by Valero
 
 
 
 
Common units
 

 
 
Subordinated units
 

 
 
General partner units
 

 


Total net investment/partners’ capital
 
260,661

 


Total capitalization
 
$
266,422

 
$



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DILUTION
Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2013, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $    million, or $    per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.
Assumed initial public offering price per common unit (1)
 
 
 
$
Pro forma net tangible book value per unit before the offering (2)
 
$
 
 
Increase in net tangible book value per unit attributable to purchasers
in the offering
 
 
 
 
Less: Pro forma net tangible book value per unit after the offering (3)
 
 
 
 
Immediate dilution in net tangible book value per common unit to
purchasers in the offering (4) (5)
 
 
 
$
_______________
(1)
The mid-point of the price range set forth on the cover of this prospectus.
(2)
Determined by dividing the number of units (    common units,    subordinated units and      general partner units) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities.
(3)
Determined by dividing the number of units to be outstanding after this offering (    common units,    subordinated units and    general partner units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(4)
If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $     and $    , respectively.
(5)
Assumes the underwriters’ option to purchase additional common units from us is not exercised. If the underwriters’ option to purchase additional common units from us is exercised in full, the immediate dilution in net tangible book value per common unit to purchasers in this offering will be $    .

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.
 
Units Acquired
 
Total Consideration
(in thousands)
Number
 
%
 
Amount
 
%
General partner and its affiliates (1) (2) (3)
 
 
%

 
$
 
%

Purchasers in this offering
 
 
%

 
 
 
%

Total

 
100
%
 
$
 
100
%
_______________
(1)
Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own         common units,    subordinated units and    general partner units.
(2)
Assumes the underwriters’ option to purchase additional common units from us is not exercised.
(3)
The assets contributed by the general partner and its affiliates were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of June 30, 2013, after giving effect to the application of the net proceeds of the offering, is $        million.


49


CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Risk Factors” and “Forward-Looking Statements” should be read for information regarding certain risks inherent in our business and regarding statements that do not relate strictly to historical or current facts.
For additional information regarding our historical and pro forma results of operations, please refer to our historical combined financial statements and the accompanying notes and our unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus.
General
Rationale for Our Cash Distribution Policy
Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make minimum quarterly distributions on our common and subordinated units of $     per unit, or $     per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from our operations, we may, but are under no obligation to, borrow funds to pay minimum quarterly distributions to our unitholders.
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:
Our cash distribution policy may be subject to restrictions on cash distributions under our revolving credit facility. We expect that such restrictions will prohibit us from making cash distributions while an event of default has occurred and is continuing under our revolving credit facility, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”
The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.


50


While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period, our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. For a description of these limited circumstances, please read “Our Partnership Agreement—Amendment of Our Partnership Agreement—No Limited Partner Approval.” However, after the subordination period has ended, our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the closing of this offering, Valero will own our general partner and will indirectly own an aggregate of approximately         % of our outstanding common and subordinated units (or     % if the underwriters’ option to purchase additional common units is exercised in full).
Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.
We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating expenses or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our available cash is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”
Our ability to make cash distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make cash distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.
If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.
To the extent that our general partner determines not to distribute the full minimum quarterly distribution on our common units with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid on the common units with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. The subordinated units will not accrue any arrearages. Any shortfall in the payment of the minimum quarterly distribution on the common units with respect to any quarter during the subordination period may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.”
Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital
Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon our cash reserves (including the net proceeds that we will retain from this offering) and external financing sources, including borrowings under our revolving credit facility (under which no amounts will be drawn at the closing of this offering) and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions


51


to our unitholders and the value of our units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors—Risks Related to Our Business—Our future debt levels may limit our flexibility to obtain financing and to pursue other business opportunities.”
Our Minimum Quarterly Distribution
Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $     per unit for each whole quarter, or $     per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which such distributions are made. We will not make distributions for the period that begins on        ,      and ends on the day prior to the closing of this offering. We will adjust the amount of our distribution for the period from the completion of this offering through     ,     based on the actual length of the period.
The amount of available cash needed to pay the minimum quarterly distribution on all of our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for one quarter and on an annualized basis (assuming no exercise and full exercise of the underwriters’ option to purchase additional common units) is summarized in the table below:
  
No Exercise of 
Underwriters’ Option to Purchase
Additional Common Units

Full Exercise of 
Underwriters’ Option to Purchase
Additional Common Units
  
Aggregate Minimum
Quarterly Distributions

Aggregate Minimum
Quarterly Distributions
(in thousands)
Number
of Units
 
One
Quarter
 
Annualized
(Four
Quarters)

Number
of Units
 
One
Quarter
 
Annualized
(Four
Quarters)
Common units held by public
 
 
$
 
$

 
 
$
 
$
Common units held by Valero
 
 
 
 
 
 
 
 
 
 
 
Subordinated units held by Valero
 
 
 
 
 
 
 
 
 
 
 
General partner units
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
$
 
$

 
 
$
 
$
As of the date of this offering, our general partner will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner’s initial 2% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2% general partner interest. Our general partner will also initially hold all of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48%, of the cash we distribute in excess of $         per unit per quarter.
During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters, and our general partner will receive corresponding distributions on its general partner units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay distributions on our common units at our minimum quarterly distribution rate or at any other rate in any quarter.


52


Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is not adverse to our best interest. In making such determination, our general partner may take into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us. Please read “Conflicts of Interest and Duties.”
The provision in our partnership agreement requiring us to distribute all of our available cash quarterly may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.
Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution is also subject to adjustment if the holder(s) of the incentive distribution rights (initially only our general partner) elect to reset the target distribution levels related to the incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”
In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $     per unit for the twelve months ending September 30, 2014. In those sections, we present two tables, consisting of:
“Unaudited Pro Forma Distributable Cash Flow,” in which we present the amount of distributable cash flow we would have generated on a pro forma basis for the twelve months ended June 30, 2013 and the year ended December 31, 2012, derived from our unaudited pro forma combined financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and
“Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2014,” in which we provide our estimated forecast of our ability to generate sufficient distributable cash flow to support the full payment of minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2014.


53


Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended June 30, 2013 and the Year Ended December 31, 2012
On a pro forma basis, assuming we had completed this offering on January 1, 2012, our distributable cash flow for the twelve months ended June 30, 2013 and the year ended December 31, 2012 would have been approximately $51.7 million and $43.1 million, respectively. The amount of distributable cash flow we must generate to support the payment of minimum quarterly distributions for four quarters on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, is approximately $     million (or an average of approximately $        million per quarter). As a result, we would have had sufficient distributable cash flow to pay the full minimum quarterly distributions on our common, subordinated and general partner units for the twelve months ended June 30, 2013, and to pay the full minimum quarterly distributions on our common units and the corresponding distributions on our general partner units for the year ended December 31, 2012. However, we would have had sufficient distributable cash flow to pay only approximately     % of the minimum quarterly distributions on our subordinated units and the corresponding distribution on our general partner units for the year ended December 31, 2012.
We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts on the following page do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma combined financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma distributable cash flow only as a general indication of the amount of distributable cash flow that we might have generated had we been formed on January 1, 2012.
We use the term “distributable cash flow” to measure whether we have generated from our operations, or “earned,” a particular amount of cash sufficient to support the payment of the minimum quarterly distributions. Our partnership agreement contains the concept of “operating surplus” to determine whether our operations are generating sufficient cash to support the distributions that we are paying, as opposed to returning capital to our partners. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Operating Surplus and Capital Surplus—Operating Surplus.” Because operating surplus is a cumulative concept (measured from the initial public offering date, and compared to cumulative distributions from the initial public offering date), we use the term distributable cash flow to approximate operating surplus on a quarterly or annual, rather than a cumulative, basis. As a result, distributable cash flow is not necessarily indicative of the actual cash we have on hand to distribute or that we are required to distribute.

The following table illustrates, on a pro forma basis, for the twelve months ended June 30, 2013 and the year ended December 31, 2012, the amount of distributable cash flow that would have been available for distribution on our common and subordinated units and the corresponding distributions on the general partner units, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated on January 1, 2012.



54


Valero Energy Partners LP
Unaudited Pro Forma Distributable Cash Flow
 
 
Pro Forma (1)
 
 
Twelve Months
Ended
 
Year
Ended
(in thousands, except per unit amounts and percentages)
 
June 30, 2013
 
December 31, 2012
Operating revenues - related party
 
$
91,344

 
$
84,351

Costs and expenses:
 
 
 
 
Operating expenses
 
24,238

 
28,349

General and administrative expenses
 
8,340

 
8,340

Depreciation expense
 
12,398

 
12,881

Total costs and expenses
 
44,976

 
49,570

Operating income
 
46,368

 
34,781

Other income, net
 
255

 
337

Interest expense
 
(1,535
)
 
(1,602
)
Income before income taxes
 
45,088

 
33,516

Income tax expense
 
1,596

 
332

Net income
 
43,492

 
33,184

Plus:
 
 
 
 
Depreciation expense
 
12,398

 
12,881

Interest expense (2)
 
1,535

 
1,602

Income tax expense (3)
 
1,596

 
332

EBITDA (4)
 
59,021

 
47,999

Plus:
 
 
 
 
Adjustments related to minimum throughput commitments (5)
 
(2,255
)
 
2,786

Offering proceeds retained to fund expansion capital expenditures
 
4,830

 
3,736

Less:
 
 
 
 
Cash interest paid (2)
 
1,500

 
1,568

Income taxes paid (3)
 
355

 
332

Maintenance capital expenditures (6)
 
1,291

 
3,914

Expansion capital expenditures (6)
 
4,830

 
3,736

Additional incremental costs of being a separate publicly traded
limited partnership
 
1,890

 
1,890

Pro forma distributable cash flow
 
$
51,730

 
$
43,081

Pro forma cash distributions:
 
 
 
 
Annualized minimum quarterly distribution per unit
 
 
 
 
Pro forma distributable cash flow:
 
 
 
 
Distributions to public common unitholders
 
 
 
 
Distributions to Valero:
 
 
 
 
Common units
 
 
 
 
Subordinated units
 
 
 
 
General partner units
 
 
 
 
Aggregate annualized minimum quarterly distributions (7)
 
 
 
 
Excess (shortfall) of pro forma distributable cash flow over
aggregate annualized minimum quarterly distributions
 
 
 
 
Percent of annualized minimum quarterly distributions payable to:
 
 
 
 
Common unitholders
 
100
%
 
100
%
Subordinated unitholders
 
100
%
 
%

 _____________________
See note references on the following page.


55




(1)
Please read our unaudited pro forma combined financial statements included elsewhere in this prospectus for an explanation of the adjustments used to derive pro forma income statement amounts.
(2)
Interest expense and cash interest paid both include commitment fees that would have been paid by our Predecessor had our revolving credit facility been in place during the periods presented. Interest expense also includes the amortization of estimated deferred issuance costs to be incurred in connection with entering into our revolving credit facility.
(3)
Primarily consists of Texas margin tax.
(4)
For a definition of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Combined Financial Data—Non-GAAP Financial Measure.”
(5)
Under our commercial agreements with Valero, Valero will be subject to minimum quarterly throughput commitments. If Valero fails to meet its minimum quarterly throughput commitments with respect to a quarter, Valero will be required to make a quarterly deficiency payment. The quarterly deficiency payment may be applied as a credit for volumes transported in excess of Valero’s minimum quarterly throughput commitment during any of the succeeding four quarters, after which time the unused credits will expire. Please read "Business—Our Commercial Agreements with Valero.” For GAAP accounting purposes, we defer the revenues associated with these quarterly deficiency payments until either: (i) the credit has been satisfied through transportation of future volumes in excess of minimum commitments, or (ii) the credit expires through the lapse of time. For the purpose of calculating pro forma distributable cash flow, the quarterly deficiency payment is included in distributable cash flow when we receive the cash, rather than when it is recognized as revenue in accordance with GAAP. When a credit is used or expires in a future period, we will deduct the amount of the credit in calculating distributable cash flow as an offset to the corresponding increase in revenues recognized in accordance with GAAP.
(6)
Historically, we did not necessarily make a distinction between maintenance capital expenditures and expansion capital expenditures in exactly the same way as will be required under our partnership agreement. We believe that the amount of maintenance capital expenditures shown above approximates, but may not precisely reflect, the maintenance capital expenditures we would have recorded in accordance with our partnership agreement for the twelve months ended June 30, 2013 or the year ended December 31, 2012. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”
(7)
Assumes the issuance of        general partner units and the incentive distribution rights to our general partner,     common units and     subordinated units to Valero and        common units to the public and that the underwriters’ option to purchase additional common units from us is not exercised and the additional common units subject to the underwriters’ option are issued to Valero.



56


Estimated Distributable Cash Flow for the Twelve Months Ending September 30, 2014
We forecast that our estimated distributable cash flow for the twelve months ending September 30, 2014 will be approximately $48.5 million. This amount would exceed by $        million the amount of distributable cash flow we must generate to support the payment of the minimum quarterly distributions for four quarters on our common and subordinated units and the corresponding distributions on our general partner units, in each case to be outstanding immediately after this offering, for the twelve months ending September 30, 2014. The number of outstanding units on which we have based our estimate does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the closing of this offering.
We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated distributable cash flow for the twelve months ending September 30, 2014, and related assumptions set forth below to substantiate our belief that we will have sufficient distributable cash flow to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on our general partner units for the twelve months ending September 30, 2014. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical combined financial statements and accompanying notes included elsewhere in this prospectus, our unaudited pro forma combined financial statements and accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient distributable cash flow to pay the full minimum quarterly distributions on our common and subordinated units and the corresponding distributions on the general partner units for the twelve months ending September 30, 2014. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.
The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. KPMG LLP has neither compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, KPMG LLP does not express an opinion or any other form of assurance with respect thereto. The KPMG LLP report included in this registration statement relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.
When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated distributable cash flow.
We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.


57


Valero Energy Partners LP
Estimated Distributable Cash Flow
 
 
Twelve Months
Ending
September 30, 
2014
 
Three Months Ending
(in thousands, except per unit amounts)
 
September 30,
2014
 
June 30,
2014
 
March 31,
2014
 
December 31,
2013
Operating revenues - related party
 
$
92,290

 
$
23,905

 
$
22,948

 
$
22,377

 
$
23,060

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
25,513

 
6,514

 
7,226

 
6,019

 
5,754

General and administrative expenses
 
10,227

 
2,557

 
2,557

 
2,557

 
2,556

Depreciation expense
 
13,694

 
3,532

 
3,512

 
3,413

 
3,237

Total costs and expenses
 
49,434

 
12,603

 
13,295

 
11,989

 
11,547

Operating income
 
42,856

 
11,302

 
9,653

 
10,388

 
11,513

Other income, net
 
345

 
99

 
96

 
93

 
57

Interest expense
 
(1,343
)
 
(320
)
 
(331
)
 
(341
)
 
(351
)
Income before income taxes
 
41,858

 
11,081

 
9,418

 
10,140

 
11,219

Income tax expense
 
332

 
88

 
74

 
80

 
90

Net income
 
41,526

 
10,993

 
9,344

 
10,060

 
11,129

Plus:
 
 
 
 
 
 
 
 
 
 
Depreciation expense
 
13,694

 
3,532

 
3,512

 
3,413

 
3,237

Interest expense (1)
 
1,343

 
320

 
331

 
341

 
351

Income tax expense (2)
 
332

 
88

 
74

 
80

 
90

EBITDA (3)
 
56,895

 
14,933

 
13,261

 
13,894

 
14,807

Plus:
 
 
 
 
 
 
 
 
 
 
Offering proceeds retained to
fund expansion capital
expenditures
 
3,863

 

 

 
130

 
3,733

Receipt (amortization) of
deferred rental payment (4)
 

 
(20
)
 
(20
)
 
60

 
(20
)
Less:
 
 
 
 
 
 
 
 
 
 
Cash interest paid (1)
 
1,308

 
311

 
322

 
332

 
343

Income taxes paid (2)
 
375

 
99

 
84

 
90

 
102

Maintenance capital expenditures
 
6,709

 
355

 
721

 
742

 
4,891

Expansion capital expenditures
 
3,863

 

 

 
130

 
3,733

Estimated distributable cash flow
 
$
48,503

 
$
14,148

 
$
12,114

 
$
12,790

 
$
9,451

Distributions to public common
unitholders
 
$
 
$
 
$
 
$
 
$
Distributions to Valero:
 

 
 
 
 
 
 
 
 
Common units
 

 
 
 
 
 
 
 
 
Subordinated units
 

 
 
 
 
 
 
 
 
General partner units
 

 
 
 
 
 
 
 
 
Aggregate minimum quarterly
distributions
 
$
 
$
 
$
 
$
 
$
Excess of estimated distributable
cash flow over aggregate
minimum quarterly distributions
 
$
 
$
 
$
 
$
 
$
______________
(1)
Interest expense and cash interest paid both include commitment fees to be paid on our revolving credit facility. Interest expense also includes the amortization of estimated deferred issuance costs to be incurred in connection with establishing our revolving credit facility.
(2)
Primarily consists of Texas margin tax.


58


(3)
For a definition of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Combined Financial Data—Non-GAAP Financial Measure.”
(4)
We receive an annual rental payment from a third party for the lease of miscellaneous property that we own, and we recognize the associated revenues over the annual period to which the payment relates. These revenues are reflected in “Other income, net” in our combined financial statements.

Significant Forecast Assumptions
The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2014. While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate.
General Considerations
As discussed in this prospectus, all of our revenues and a significant portion of our expenses will be determined by contractual arrangements that we will enter into with Valero at the closing of this offering, including a master transportation services agreement and a master terminal services agreement. These fee-based commercial agreements will have minimum quarterly throughput commitments, inflation escalators and initial terms of 10 years, which we believe will promote stable and predictable cash flows. Accordingly, our forecasted results are not directly comparable with historical periods. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.”
Revenues
Historically, we generated revenues by providing fee-based transportation and terminaling services to Valero and by leasing certain crude oil and refined petroleum products storage capacity to Valero. At the closing of this offering, we will enter into with Valero a master transportation services agreement with respect to our pipelines and a master terminal services agreement with respect to our terminals. Under these commercial agreements, the historical storage capacity lease arrangements will be replaced with terminaling throughput fees, but our revenues are not expected to be materially impacted by this change. In addition, we will begin charging a terminaling throughput fee for crude oil delivered to our Lucas terminal for which we have not historically charged a throughput fee. These fee-based commercial agreements will initially be the source of all of our revenues.
To forecast revenues, we developed forecasted volumes using actual volumes handled on behalf of Valero for the twelve months ended June 30, 2013 and the year ended December 31, 2012, and we applied the transportation and terminaling throughput fees contained in our commercial agreements with Valero to those forecasted volumes. In connection with forecasting volumes, we also considered refinery maintenance schedules and internal forecasts for crude oil supply and the demand for refined petroleum products. Forecasted volumes are assumed to exceed the minimum quarterly throughput commitments under our commercial agreements with Valero, and we believe this assumption is reasonable because throughput volumes for the twelve months ended June 30, 2013 exceeded Valero’s minimum quarterly throughput commitments. Our forecasted volumes for the twelve months ending September 30, 2014 and actual volumes for the twelve months ended June 30, 2013 and the year ended December 31, 2012 are reflected in the table on page 61.


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The following table compares forecasted revenues by system for the twelve months ending September 30, 2014, to pro forma revenues by system for the twelve months ended June 30, 2013 and the year ended December 31, 2012.
 
 
 
Forecasted Revenues
 
Pro Forma Revenues
 
(dollars in thousands)
 
% Supported
by Minimum
Quarterly
Throughput
Commitments
 
Twelve
Months
Ending
September 30,
2014
 
Twelve
Months
Ended
June 30,
2013
 
Year
Ended
December 31,
2012
 
 
Port Arthur logistics system
 
93%
 
$
47,108

 
$
45,887

 
$
42,672

 
McKee products system
 
83%
 
16,989

 
16,741

 
16,675

 
Memphis logistics system
 
72%
 
28,193

 
28,716

 
25,004

 
Operating revenues - related party
 
85%
 
$
92,290

 
$
91,344

 
$
84,351

We estimate that we will generate revenues of $92.3 million for the twelve months ending September 30, 2014 compared to pro forma revenues of $91.3 million and $84.4 million for the twelve months ended June 30, 2013 and year ended December 31, 2012, respectively. We expect 85% of our forecasted revenues to be supported by Valero’s minimum quarterly throughput commitments under those commercial agreements. The increase in forecasted revenues during the forecast period compared to pro forma periods is due primarily to:

An increase in refined petroleum products volumes transported through the Port Arthur products system due to increased production at the Port Arthur refinery resulting from the new hydrocracker unit at the refinery, which was completed in December 2012, other refinery expansion projects and improved refinery operations.

An increase in refined petroleum products volumes transported through the Memphis products system partially due to increased production at the Memphis refinery resulting from improved refinery operations.



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The following table compares forecasted throughput volumes by system for the twelve months ending September 30, 2014 to actual volumes by system for the twelve months ended June 30, 2013 and the year ended December 31, 2012, along with Valero’s minimum quarterly throughput commitments.
 
 
Valero
Minimum
Quarterly
Throughput
Commitments
 
Twelve
Months
Ending
September 30,
2014
 
Twelve
Months
Ended
June 30,
2013
 
Year
Ended
December 31,
2012
Pipelines (MBD) (1)