
1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICES

Description of Business

As used in this report, the terms “Partnership,” “we,” “our,” or “us” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References to our “general partner” refer to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation. References in this report to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.

We are a master limited partnership formed by Valero in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. Our assets consist of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries. We generate operating revenues by providing fee-based transportation and terminaling services.

Basis of Presentation

General

These consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission.

Acquisitions from Valero

Certain of our acquisitions from Valero, as described in Note 2, were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, we recorded these business acquisitions on our balance sheet at Valero’s carrying value as of the beginning of the period of transfer, and we retrospectively adjusted prior period financial statements and financial information to furnish comparative information. We refer to the historical results of the transferred businesses from Valero prior to their transfer to us as those of our “Predecessor.”

The combined financial statements of our Predecessor were derived from the consolidated financial statements and accounting records of Valero and reflect the combined historical financial position, results of operations, and cash flows of our Predecessor as if the acquisitions from Valero had been combined for periods prior to the effective dates of each acquisition.

There were no transactions between the operations of our Predecessor; therefore, there were no intercompany transactions or accounts to be eliminated in connection with the combination of those operations. In addition, our Predecessor’s statements of income include direct charges for the management and operation of our assets and certain expenses allocated by Valero for general corporate services, such as treasury, accounting, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Prior to the acquisitions from Valero, our Predecessor transferred cash to Valero daily and Valero funded our Predecessor’s operating and investing activities as needed. Therefore, transfers of cash to and from Valero’s cash management system are reflected as a component of net investment and are reflected as a financing activity in our statements of cash flows. In addition, interest expense was not included on the net cash transfers from Valero.

The acquisitions of Parkway Pipeline LLC (Parkway Pipeline) and the Port Arthur terminal (defined in Note 2) from Valero on November 1, 2017 were accounted for as transfers of assets between entities under the common control of Valero. Accordingly, we recorded these asset acquisitions on our balance sheet at Valero’s carrying value as of the acquisition date, and our prior period financial statements and financial information were not retrospectively adjusted for these acquisitions.

The financial information presented for the periods after the effective dates of each acquisition represents the consolidated financial position, results of operations, and cash flows of the Partnership.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2017 presentation.

Significant Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of the Partnership, our subsidiaries, and our Predecessor. All intercompany items and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Cash Equivalents

Our cash equivalents are highly liquid investments that have a maturity of three months or less when acquired.

Receivables – Related Party

Receivables – related party include trade receivables from Valero for transportation and terminaling services provided under various agreements with Valero, as more fully described in Note 3. These receivables are recorded at the original invoice amount.

Property and Equipment

The cost of property and equipment purchased or constructed, including betterments of property and equipment, is capitalized. However, the cost of repairs to and normal maintenance of property and equipment is expensed when incurred. Betterments of property and equipment are those that extend the useful lives of the property and equipment or improve the safety of our operations. The cost of property and equipment constructed includes interest and certain overhead costs allocable to the construction activities. Property and equipment also includes our undivided interest in certain assets.

When property and equipment are retired or replaced, the cost and related accumulated depreciation are eliminated, with any gain or loss reflected in depreciation expense, unless such amounts are reported separately due to materiality.

Depreciation of property and equipment is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset.

Impairment of Assets

Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.

Asset Retirement Obligations

We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.

Environmental Matters

Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.

Net Investment

Net investment represents Valero’s historical investment in our Predecessor, its accumulated net earnings after taxes, and the net effect of transactions and allocations between our Predecessor and Valero. There were no terms of settlement or interest charges associated with the net investment balance.

Revenue Recognition

We generate operating revenues by providing fee-based transportation and terminaling services to transport and store crude oil and refined petroleum products using our pipelines and terminals under long-term commercial agreements (defined in Note 3). Operating revenues are recognized upon completion of the transportation or terminaling service. Certain of these commercial agreements are considered operating leases under U.S. GAAP. Lease revenue is recognized over the lease term and contingent lease revenue is recognized after minimum monthly volume commitment requirements on these leases have been met.

As further described in Note 3, certain of our commercial agreements contain minimum volume commitments. Under these commercial agreements, if our customer fails to transport its minimum throughput volumes during any quarter, then the customer will pay us a deficiency payment equal to the volume of the deficiency multiplied by the contractual rate then in effect. The deficiency payment is initially recorded as deferred revenue – related party on our balance sheets.

Our customer may apply the amount of any such deficiency payments as a credit for volumes transported on the applicable pipeline or terminal system in excess of its minimum volume commitment during the following four quarters under the terms of the applicable agreement. We recognize operating revenues for the deficiency payments when credits are used for volumes transported in excess of minimum volume commitments. If we determine, based on all available information, that it is remote that our customer will utilize these payments, the amount of the expected unused credits will be recognized as operating revenues in the period when that determination is made. The use or recognition of the credits is a reduction to deferred revenue – related party.

Income Taxes

Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these financial statements, except for state taxes that apply to partnerships, specifically the margin tax in Texas. Our Predecessor’s taxable income was included in the consolidated U.S. federal income tax returns of Valero and in certain consolidated state income tax returns.

Income taxes are accounted for under the asset and liability method, as if we were a separate taxpayer rather than a member of Valero’s consolidated tax return. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.

We classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.

Net Income per Limited Partner Unit

Basic and diluted net income per limited partner unit is determined pursuant to the two-class method for master limited partnerships as further described in Note 9.

Comprehensive Income

We have not reported comprehensive income due to the absence of items of other comprehensive income in the years presented.

Segment Reporting

Our operations consist of one reportable segment. All of our operations are conducted and all of our assets are located in the U.S.

Financial Instruments

Our financial instruments include cash and cash equivalents, receivables, receivables – related party, accounts payable, accounts payable – related party, debt, and notes payable – related party. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 14.

Business Combinations

We adopted the provisions of Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” issued by the Financial Accounting Standards Board (FASB), on January 1, 2017. This ASU provides a more robust framework to evaluate whether transactions should be accounted for as acquisitions (dispositions) of assets or businesses. Our adoption of this ASU resulted in the acquisitions of Parkway Pipeline and the Port Arthur terminal being accounted for as acquisitions of assets. See further discussion of these acquisitions in Note 2. In addition, more of our future acquisitions may be accounted for as acquisitions of assets in accordance with this ASU.

Accounting Pronouncements Adopted on January 1, 2018

ASU No. 2014-09

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We adopted this standard on January 1, 2018, and it will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. We generate operating revenues by providing fee-based transportation and terminaling services to transport and store crude oil and refined petroleum products using our pipelines and terminals under long-term commercial agreements. Revenues from contracts with customers are recognized over time as our performance obligation is satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for providing the service. Certain of our commercial agreements are considered operating leases under U.S. GAAP. The scope of this new standard does not extend to revenues generated by lease arrangements; therefore, lease revenues generated by us will continue to be accounted for under existing lease accounting standards but will be reflected in a separate revenue line item on our statements of income.

We adopted this new standard on January 1, 2018 using the modified retrospective method, as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of partners’ capital, and revenues reported in the periods prior to the date of adoption are not changed. Because the adoption of this standard did not materially impact the manner in which we recognize revenues, we will not make such an adjustment to partners’ capital. We continue to develop our revenue disclosures and have enhanced our accounting systems to enable the preparation of such disclosures.

ASU No. 2016-01

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The adoption of this ASU effective January 1, 2018 did not affect our financial position nor will it affect our results of operations, but it will result in revised disclosures.

Accounting Pronouncements Not Yet Adopted

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expect to use the modified retrospective method of adoption. We are enhancing our contracting and lease evaluation systems and related processes, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During 2018, we will continue to monitor the adoption process to ensure compliance with the accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, and we will make modifications to the related procurement and payment processes. We anticipate this standard will have a material impact on our financial position, but we do not expect adoption to have a material impact on our results of operations or liquidity. While we continue to assess potential impacts of the standard, we currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases.