
3.	RELATED-PARTY AGREEMENTS AND TRANSACTIONS

Predecessor Transactions

Our Predecessor was part of the consolidated operations of Valero and all of our revenues were derived from transactions with Valero. The crude oil and refined petroleum products pipeline transportation and terminaling services we provided to Valero were settled through net parent investment, and payables and receivables related to these transactions were included as a component of net investment.

Our operating and general and administrative expenses historically included charges for the management of our operations and the allocation of certain overhead and shared services expenses by Valero. These charges and allocations included such items as management oversight, information technology, legal, human resources, and other financial and administrative services. These allocations do not fully reflect the expenses that would have been incurred had we been a stand-alone company for periods prior to the Offering. Our management believes the charges allocated to our Predecessor prior to the Offering were a reasonable reflection of the utilization of services provided and cannot be presumed to be carried out on an arm’s-length basis as the requisite conditions of competitive, free-market dealings may not have existed.

Agreements Effective with the Offering

The following agreements became effective on December 16, 2013, the date the Offering was completed.

Commercial Agreements

Under our master transportation services agreement and master terminal services agreements with Valero, we provide transportation and terminaling services to Valero and Valero pays 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 have initial terms through December 16, 2023 and, with the exception of our El Paso truck rack and Memphis truck rack, Valero has the option to renew the agreements with respect to each asset for one additional five-year term.

Omnibus Agreement

Our omnibus agreement with Valero, certain of its subsidiaries, and our general partner addresses the following matters:


•	our payment of an annual administrative fee, initially in the amount of $7.9 million (payable in equal monthly installments) for the management of our operations and general corporate services by Valero;


•	our obligation to reimburse Valero for certain direct or allocated costs and expenses incurred by Valero on our behalf;


•	our right of first offer to acquire certain of Valero’s transportation and logistics assets for a period of five years after the closing of the Offering;


•	Valero’s obligation to indemnify us for certain environmental and other liabilities and our obligation to indemnify Valero for certain environmental and other liabilities related to our assets to the extent Valero is not required to indemnify us;


•	Valero’s right of first refusal to acquire certain of our assets;


•	the granting of a license from Valero to us with respect to use of certain Valero trademarks and tradenames; and


•	the prefunding of $3.5 million by Valero for certain capital projects.

So long as Valero controls our general partner, the omnibus agreement will remain in full force and effect. If Valero ceases to control our general partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.

Services and Secondment Agreement

Under our services and secondment agreement with Valero, employees of Valero are seconded to our general partner to provide operational and maintenance services for certain of our pipelines and terminals, and we reimburse our general partner for these costs. During their period of secondment, the seconded employees are under the management and supervision of our general partner.

This agreement has an initial term through December 16, 2023 and will automatically extend for successive renewal terms of one year each, unless terminated by either party upon at least 30 days’ prior written notice before the end of the initial term or any renewal term. In addition, our general partner may terminate the agreement or reduce the level of services under the agreement at any time upon 30 days’ prior written notice.

Tax Sharing Agreement

Under our tax sharing agreement with Valero, we are required to 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 the Offering. The amount of any such reimbursement will be limited to any entity-level tax that we 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 are nevertheless required to 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.

Ground Lease Agreement

We entered into a ground lease agreement with Valero under which we will lease the land on which our Memphis truck rack is located. The term of the ground lease agreement is through November 30, 2023, with no renewal periods. Initially, our base rent under the lease is $35,007 per year. Commencing on January 1, 2016 and on January 1st of each year thereafter, base rent will increase by 1.015 percent. We are also required to pay Valero a customary expense reimbursement for taxes, utilities, and similar costs incurred by Valero related to the leased premises.

Summary of Transactions

Receivables from related party consist of the following (in thousands):



	December 31,
	2013
Trade receivables – related party	$	4,196
Due from related party	2,954
Receivables from related party	$	7,150

Deferred revenue from related party of $85,000 represents the unearned revenues from Valero associated with Valero’s quarterly deficiency payment, which is the result of Valero not meeting its minimum quarterly throughput commitments under our commercial agreements described above (prorated for the period from December 16, 2013, the date the commercial agreements with Valero became effective, through December 31, 2013).

The following table reflects significant transactions with Valero (in thousands):



	Year Ended December 31,
	2013		2012		2011
Operating revenues – related party	$	94,529	$	86,804	$	73,136
Operating expenses	5,994		5,353		4,931
General and administrative expenses	5,397		5,016		4,351

In conjunction with the Offering, we purchased insurance coverage from Valero’s captive insurance company for property liability, general liability, director and officers liability, and various other insurance liabilities. This insurance expense was included in operating expenses and general and administrative expenses based on the type of coverage provided.

Prior to the Offering, we leased certain crude oil and refined petroleum products storage capacity to Valero under operating leases; these leases did not contain escalating rates. The lease revenues totaled $18.2 million, $18.4 million, and $18.2 million for the years ended December 31, 2013, 2012, and 2011, respectively. Concurrent with the closing of the Offering and as described above, we entered into commercial agreements with Valero under which we no longer lease storage capacity to Valero, but we provide crude oil and refined petroleum products terminaling services to Valero at these locations with revenues based on contractual rates and throughput volumes.

Net Investment

The following is a reconciliation of the amounts presented as net transfers to Valero on our statements of partners’ capital and statements of cash flows (in thousands).



	Year Ended December 31,
	2013			2012			2011
Net transfers to Valero per statements of partners’ capital	$	(46,655	)	$	(47,383	)	$	(6,098	)
Less: Noncash transfers to Valero	(599		)	(1,023		)	(1,551		)
Net transfers to Valero per statements of cash flows	$	(46,056	)	$	(46,360	)	$	(4,547	)

Noncash transfers primarily represent the change in amounts accrued for capital expenditures as we do not reflect capital expenditures in our statements of cash flows until such amounts are paid and transfers from (to) Valero for property and equipment, net.

Concentration Risk

Our revenues were derived solely from Valero and all of our receivables as of December 31, 2013 were due from Valero. Therefore, we are subject to the business risks associated with Valero’s business.