
3.	RELATED-PARTY AGREEMENTS AND TRANSACTIONS

Predecessor Transactions

Our Predecessor was part of the consolidated operations of Valero and all of our operating 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.

Prior to the dates of each of our business acquisitions from Valero, our operating and general and administrative expenses included charges to our Predecessor 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 limited partnership. Our management believes the charges allocated to our Predecessor were a reasonable reflection of the utilization of services provided, but they 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 with Valero

Commercial Agreements

We have transportation services agreements and a terminal services agreement (collectively, the commercial agreements) with Valero. Under these commercial agreements, 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. In connection with the IPO and subsequent acquisitions, we entered into schedules under these commercial agreements. Each schedule generally has an initial term of ten years, provides Valero an option to renew for one additional five-year term, and contains minimum throughput requirements and inflation escalators.

Effective March 31, 2017, we entered into a commercial agreement with Diamond Green Diesel Holdings, LLC (DGD), a joint venture consolidated by Valero, to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we have agreed to construct a new 180,000 barrel storage tank and provide storage services to DGD. The construction of the new tank is expected to be completed in the first quarter of 2018. The agreement has an initial term that ends on June 30, 2033. The agreement contains minimum commitments for DGD’s use of the assets.

Amended and Restated Omnibus Agreement

We have an amended and restated omnibus agreement with Valero, certain of its subsidiaries, and our general partner that addresses our payment of an annual administrative fee and our obligation to reimburse Valero for certain direct or allocated costs and expenses incurred by Valero on our behalf. This agreement also addresses, but is not limited to, indemnification rights of Valero and us for certain environmental and other liabilities related to our assets. As of December 31, 2017, the annual administrative fee was $13.2 million.

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

Amended and Restated Services and Secondment Agreement

Under the terms of an amended and restated services and secondment agreement, including its amended and restated exhibits, 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 of ten years from the Service Date (as described in the agreement) with respect to each acquisition 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.

Lease Agreements

We have lease agreements with Valero with respect to the land on which certain terminals are located. Generally, each lease agreement has an initial term of ten years with four automatic successive renewal periods of five years each. Either party may terminate each lease agreement after the initial term by providing written notice. We also have a ground lease agreement with an initial term of twenty years and no renewal periods. Initial base rent under these lease agreements is subject to annual inflation escalators, and we are required to pay Valero a customary expense reimbursement for taxes, utilities, and similar costs incurred by Valero related to the leased premises. See Note 7 for further discussion about our lease commitments with Valero.

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 or after the closing date of the IPO. 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.

Subordinated Credit Agreements

We have subordinated credit agreements with Valero as further described in Note 5.

Summary of Transactions

Operating Revenues

Operating revenues – related party disaggregated by activity type were as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Pipeline transportation revenues	$	100,631	$	78,451	$	81,435
Terminaling revenues	347,996		283,628		161,649
Storage and other revenues	3,378		540		540
Total operating revenues – related party	$	452,005	$	362,619	$	243,624

Certain schedules under our commercial agreements with Valero are considered operating leases under U.S. GAAP. These agreements contain minimum throughput requirements and escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. These lease revenues are recorded within operating revenues – related party in our statements of income. The components of our lease revenues were as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Minimum rental revenues	$	292,034	$	232,211	$	128,468
Contingent rental revenues	59,498		41,519		22,949
Total lease revenues	$	351,532	$	273,730	$	151,417

As of December 31, 2017, future minimum rentals to be received related to these noncancelable commercial agreements were as follows (in thousands):



2018	$	359,842
2019	359,842
2020	360,828
2021	359,842
2022	359,842
Thereafter	2,899,476
Total minimum rental payments	$	4,699,672

Related Party Expenses

The expenses incurred for services or financing provided to us by Valero are reflected in the supplemental information disclosure on our statements of income.

Insurance Recoveries

During 2017, we experienced property damage losses and repair costs associated with Hurricane Harvey primarily at our Houston terminal and Port Arthur products system. As a result of these losses, we have submitted claims under our insurance policies with Valero. The amount shown in our statements of income as other operating expenses reflects the uninsured portion of our losses. For the year ended December 31, 2017, we recognized $2.7 million of insurance recoveries, which were recorded as a reduction to other operating expenses. As of December 31, 2017, we had an $828,000 receivable from Valero related to these property damage claims that was included in receivables – related party.

Net Investment

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



	Year Ended December 31,
	2017		2016		2015
Net transfers from Valero per statements of partners’ capital	$	—	$	15,030	$	70,334
Less: Noncash transfers from (to) Valero	—		144		(6,950		)
Net transfers from Valero per statements of cash flows	$	—	$	14,886	$	77,284

See Note 13 for additional information related to our noncash transfers from (to) Valero.

Concentration Risk

All of our related party balances resulted from transactions with Valero. Therefore, we are subject to the business risks associated with Valero’s business.