0001583103-18-000022.txt : 20181105 0001583103-18-000022.hdr.sgml : 20181105 20181105161417 ACCESSION NUMBER: 0001583103-18-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 59 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181105 DATE AS OF CHANGE: 20181105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALERO ENERGY PARTNERS LP CENTRAL INDEX KEY: 0001583103 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 901006559 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36232 FILM NUMBER: 181160061 BUSINESS ADDRESS: BUSINESS PHONE: (210) 345-2639 MAIL ADDRESS: STREET 1: P.O. BOX 696000 CITY: SAN ANTONIO STATE: TX ZIP: 78269-6000 FORMER COMPANY: FORMER CONFORMED NAME: Valero Energy Partners LP DATE OF NAME CHANGE: 20130801 10-Q 1 vlpform10-qx09302018.htm 10-Q Document
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-36232
VALERO ENERGY PARTNERS LP
(Exact name of registrant as specified in its charter)
Delaware
90-1006559
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)
(210) 345-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The registrant had 69,262,070 common units representing limited partner interests and 1,413,511 general partner units outstanding as of October 31, 2018.
 
 
 
 
 
 
 
 
 
 




VALERO ENERGY PARTNERS LP
TABLE OF CONTENTS
 
 
 
Page
 
 
 




i



PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

VALERO ENERGY PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in thousands)

 
 
 
September 30,
2018
 
December 31,
2017
 
 
 
 
ASSETS
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
128,199

 
$
42,052

Receivables – related party
 
46,434

 
46,496

Receivables
 
873

 
781

Prepaid expenses and other
 
659

 
720

Total current assets
 
176,165

 
90,049

Property and equipment, at cost
 
2,014,049

 
1,969,233

Accumulated depreciation
 
(599,611
)
 
(552,817
)
Property and equipment, net
 
1,414,438

 
1,416,416

Deferred charges and other assets, net
 
9,678

 
10,887

Total assets
 
$
1,600,281

 
$
1,517,352

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
18,400

 
$
18,633

Accounts payable – related party
 
8,190

 
3,944

Accrued liabilities
 
801

 
1,007

Accrued liabilities – related party
 
304

 
1,128

Accrued interest payable
 
7,326

 
2,558

Accrued interest payable – related party
 
770

 
911

Taxes other than income taxes payable
 
7,283

 
5,141

Total current liabilities
 
43,074

 
33,322

Debt
 
989,694

 
905,283

Notes payable – related party
 
285,000

 
370,000

Other long-term liabilities
 
3,382

 
2,950

Commitments and contingencies
 


 


Partners’ capital:
 
 
 
 
Limited partners:
 
 
 
 
Common unitholders – public
(22,493,484 and 22,487,586 units outstanding)
 
612,202

 
596,047

Common unitholder – Valero
(46,768,586 and 46,768,586 units outstanding)
 
(328,500
)
 
(382,652
)
General partner – Valero
(1,413,511 and 1,413,391 units outstanding)
 
(4,571
)
 
(7,598
)
Total partners’ capital
 
279,131

 
205,797

Total liabilities and partners’ capital
 
$
1,600,281

 
$
1,517,352


See Condensed Notes to Consolidated Financial Statements.



1


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per unit amounts)
(unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues – related party:
 
 
 
 
 
 
 
Revenues from lease contracts
$
112,078

 
$
85,811

 
$
325,655

 
$
251,580

Revenues from contracts with customer
28,512

 
23,529

 
81,504

 
74,121

Total revenues – related party
140,590

 
109,340

 
407,159

 
325,701

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues from lease contracts (excluding depreciation expense reflected below) (a)
26,753

 
20,202

 
77,867

 
59,570

Cost of revenues from contracts with customer (excluding depreciation expense reflected below) (b)
6,176

 
6,276

 
19,717

 
17,508

Depreciation expense associated with lease contracts
15,946

 
9,288

 
47,384

 
27,768

Depreciation expense associated with contracts with customer
3,120

 
2,825

 
9,087

 
8,625

Other operating expenses

 
537

 

 
537

General and administrative expenses (c)
4,082

 
3,865

 
12,352

 
11,558

Total costs and expenses
56,077

 
42,993

 
166,407

 
125,566

Operating income
84,513

 
66,347

 
240,752

 
200,135

Other income, net
610

 
300

 
1,403

 
546

Interest and debt expense, net of capitalized interest (d)
(14,348
)
 
(8,747
)
 
(40,527
)
 
(25,587
)
Income before income tax expense
70,775


57,900


201,628


175,094

Income tax expense
426

 
311

 
1,181

 
925

Net income
70,349


57,589


200,447


174,169

Less: General partner’s interest in net income
18,203

 
13,037

 
52,835

 
33,923

Limited partners’ interest in net income
$
52,146


$
44,552


$
147,612


$
140,246

 
 
 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted
$
0.75

 
$
0.65

 
$
2.13

 
$
2.06

Weighted-average limited partner common units outstanding – basic and diluted
69,251

 
68,163

 
69,250

 
67,997

 
 
 
 
 
 
 
 
 
Supplemental information – each income statement line item reflected below includes costs of revenues, expenses, or financing activities provided by related party as follows:
(a) Cost of revenues from lease contracts (excluding depreciation expense) – related party
$
17,810

 
$
14,469

 
$
52,820

 
$
43,184

(b) Cost of revenues from contracts with customer (excluding depreciation expense) – related party
$
2,104

 
$
2,005

 
$
6,243

 
$
5,058

(c) General and administrative expenses – related party
$
3,361

 
$
3,186

 
$
10,083

 
$
9,557

(d) Interest and debt expense – related party
$
2,615

 
$
2,579

 
$
7,925

 
$
7,029

See Condensed Notes to Consolidated Financial Statements.



2


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except per unit amounts)
(unaudited)
 
 
 
Three Months Ended September 30, 2018
 
 
 
Limited Partners
 
General
Partner
Valero
 
Total
 
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
 
Balance as of June 30, 2018
 
$
607,611

 
$
(347,174
)
 
$
(5,045
)
 
$
255,392

Net income
 
16,929

 
35,217

 
18,203

 
70,349

Noncash capital contributions from Valero Energy Corporation
 

 
9,226

 
189

 
9,415

Cash distributions to unitholders and distribution equivalent right payments ($0.5510 per unit)
 
(12,394
)
 
(25,769
)
 
(17,918
)
 
(56,081
)
Unit-based compensation
 
56

 

 

 
56

Balance as of September 30, 2018
 
$
612,202

 
$
(328,500
)
 
$
(4,571
)
 
$
279,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
Limited Partners
 
General
Partner
Valero
 
Total
 
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
 
Balance as of June 30, 2017
 
$
579,002

 
$
(417,210
)
 
$
(8,651
)
 
$
153,141

Net income
 
14,690

 
29,862

 
13,037

 
57,589

Noncash capital contributions from Valero Energy Corporation
 

 
8,418

 
172

 
8,590

Cash distributions to unitholders and distribution equivalent right payments ($0.4550 per unit)
 
(10,231
)
 
(20,788
)
 
(11,092
)
 
(42,111
)
Unit-based compensation
 
51

 

 

 
51

Other
 
(76
)
 

 

 
(76
)
Balance as of September 30, 2017
 
$
583,436

 
$
(399,718
)
 
$
(6,534
)
 
$
177,184


See Condensed Notes to Consolidated Financial Statements.




3


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except per unit amounts)
(unaudited)
 
 
 
Nine Months Ended September 30, 2018
 
 
 
Limited Partners
 
General
Partner
Valero
 
Total
 
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
 
Balance as of December 31, 2017
 
$
596,047

 
$
(382,652
)
 
$
(7,598
)
 
$
205,797

Net income
 
47,921

 
99,691

 
52,835

 
200,447

Unit issuance
 

 

 
5

 
5

Transfers to (from) partners
 
3,730

 
(2,396
)
 
(1,334
)
 

Noncash capital contributions from Valero Energy Corporation
 

 
31,098

 
634

 
31,732

Cash distributions to unitholders and distribution equivalent right payments ($1.586 per unit)
 
(35,675
)
 
(74,175
)
 
(49,112
)
 
(158,962
)
Unit-based compensation
 
179

 

 

 
179

Other
 

 
(66
)
 
(1
)
 
(67
)
Balance as of September 30, 2018
 
$
612,202

 
$
(328,500
)
 
$
(4,571
)
 
$
279,131

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
Limited Partners
 
General
Partner
Valero
 
Total
 
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
 
Balance as of December 31, 2016
 
$
548,619

 
$
(482,197
)
 
$
(10,598
)
 
$
55,824

Net income
 
46,001

 
94,245

 
33,923

 
174,169

Unit issuance
 
33,429

 

 
748

 
34,177

Transfers to (from) partners
 
(16,097
)
 
19,816

 
(3,719
)
 

Noncash capital contributions from Valero Energy Corporation
 

 
27,308

 
558

 
27,866

Cash distributions to unitholders and distribution equivalent right payments ($1.289 per unit)
 
(28,713
)
 
(58,890
)
 
(27,446
)
 
(115,049
)
Unit-based compensation
 
197

 

 

 
197

Balance as of September 30, 2017
 
$
583,436

 
$
(399,718
)
 
$
(6,534
)
 
$
177,184


See Condensed Notes to Consolidated Financial Statements.



4


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
200,447

 
$
174,169

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
56,471

 
36,393

Changes in current assets and current liabilities
 
4,862

 
7,988

Changes in deferred charges and credits and other operating activities, net
 
2,448

 
1,269

Net cash provided by operating activities
 
264,228

 
219,819

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(17,968
)
 
(24,297
)
Acquisition of undivided interest in Red River crude system
 

 
(71,793
)
Other investing activities, net
 
8

 
142

Net cash used in investing activities
 
(17,960
)
 
(95,948
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of senior notes
 
498,300

 

Repayment of debt and note payable – related party
 
(495,000
)
 

Payment of debt issuance costs
 
(4,464
)
 
(492
)
Proceeds from issuance of common units
 

 
35,728

Proceeds from issuance of general partner units
 
5

 
748

Payment of offering costs
 

 
(542
)
Cash distributions to unitholders and distribution equivalent right payments
 
(158,962
)
 
(115,049
)
Net cash used in financing activities
 
(160,121
)
 
(79,607
)
Net increase in cash and cash equivalents
 
86,147

 
44,264

Cash and cash equivalents at beginning of period
 
42,052

 
71,491

Cash and cash equivalents at end of period
 
$
128,199

 
$
115,755


See Condensed Notes to Consolidated Financial Statements.



5


VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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. Our “general partner” refers to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation (VLO), and “Valero” refers collectively to VLO 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 revenues from fee-based transportation and terminaling activities.

Pending Merger with Valero
On October 18, 2018, we entered into a definitive Agreement and Plan of Merger (the Merger Agreement) (the Merger Agreement and the transactions contemplated thereby are referred to herein as the “Merger Transaction”) with VLO, Forest Merger Sub, LLC, a wholly owned subsidiary of Valero (Merger Sub), and our general partner pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero. Under the Merger Agreement, the holders of such publicly traded common units will receive $42.25 in cash for each common unit without any interest thereon and all such publicly traded common units will automatically be canceled and cease to exist. Our incentive distribution rights and general partner interest, and our common units that are owned by Valero, will be unaffected by the Merger Transaction and will remain issued and outstanding with no consideration being delivered in respect thereof.

A wholly owned subsidiary of Valero which owns more than a majority of our common units has agreed to deliver, or cause to be delivered, a written consent approving the Merger Transaction. This written consent will constitute the requisite vote of our common units to approve the Merger Transaction and, as a result, we have not solicited and are not soliciting approval of the Merger Transaction by our common unitholders.

The Merger Agreement has been unanimously approved by the board of directors of our general partner, the conflicts committee of the board of directors of our general partner, and a special committee consisting of VLO directors who do not own any of our common units, which was given full power, authority and responsibility to review, evaluate, negotiate and approve the Merger Transaction, for and on behalf of the VLO board and VLO. The Merger Transaction will close as soon as possible following the satisfaction of certain customary closing conditions and upon the closing we will be a wholly owned subsidiary of Valero and will cease to be a publicly held partnership.

We will file with the Securities and Exchange Commission (the SEC) an information statement that will provide additional important information concerning the proposed Merger Transaction. Since the proposed Merger Transaction is a “going private” transaction under SEC rule 13e-3, we will also file with the SEC a transaction statement on Schedule 13E-3. After the information statement is cleared by the SEC, we will mail a definitive information statement to our common unitholders.



6




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Basis of Presentation
General
These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The balance sheet as of December 31, 2017 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2017.

Acquisitions from Valero
The acquisitions of the Parkway pipeline and the Port Arthur terminal (both 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.

Reclassifications
In connection with our adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” (Topic 606) on January 1, 2018, which is more fully described below, we have separately reflected (i) revenues from lease contracts and (ii) revenues from contracts with our customer. Because of this presentation of our revenues, we have also separately reflected cost of revenues and depreciation expense associated with lease contracts and contracts with our customer and have reclassified prior period amounts to conform to the 2018 presentation.
In addition, certain amounts reported for the nine months ended September 30, 2017 and as of December 31, 2017 have been reclassified to conform to the 2018 presentation.
Significant Accounting Policies
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.




7




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue Recognition
General
We generate revenues from fee-based transportation and terminaling activities to transport and store crude oil and refined petroleum products using our pipelines and terminals under commercial agreements with Valero. Certain schedules under these agreements are classified as operating leases under existing lease accounting standards, with such revenues reflected as revenues from lease contracts on our statements of income. The remaining schedules under these agreements are service arrangements accounted for as revenues from contracts with our customer, and are reflected as revenues from contracts with customer on our statements of income.

Revenue from Lease Contracts
Lease revenues are recognized on a straight-line basis over the lease term. Contingent lease revenues are recognized for volumes in excess of minimum throughput commitments.

Revenue from Contracts with Customer
We adopted the provisions of Topic 606 on January 1, 2018, as described below in “Accounting Pronouncements Adopted on January 1, 2018.” Accordingly, our revenue recognition accounting policy has been revised to reflect the adoption of this standard.

At contract inception, we assess the services promised in our contracts and identify a performance obligation for each promise to transfer to our customer a service (or bundle of services) that is distinct. Revenue from contracts with our customer is recognized over time at the amount of consideration we expect to receive as our performance obligation is satisfied.

Our service primarily includes the delivery of crude oil and refined petroleum products that are ratably lifted by or delivered to our customer for its future use or future sale to its end customers. Under our transportation service agreements, the service provided is the delivery of crude oil and refined petroleum products to various points in our pipeline system. Although the products are delivered on a batch basis, we deliver a series of similar goods consecutively over time, therefore, the service is treated as a single performance obligation. Under our terminaling service agreement, the services provided for each terminal are the receipt, storage, and delivery of crude oil and refined petroleum products. These services are treated as a single performance obligation as we perform the service with the same pattern of transfer to our customer over time for which progress towards satisfying the performance obligation can be measured uniformly. The above performance obligations under the transportation service agreements and the terminaling service agreement are satisfied over time because (i) our customer simultaneously receives and consumes the benefits provided by our performance and (ii) another entity would not need to substantially reperform the work that we have completed to date.
Our transaction price is based on a contractual rate, which may vary depending on volumes transported on a quarterly basis within each quarterly period. Some schedules contain a quarterly tier-pricing structure, whereby one rate is charged for volumes up to a certain number of average barrels per day and a reduced rate is charged for excess average barrels per day. For schedules that include such variable consideration, we estimate the factors driving the variable consideration to determine the transaction price. Our schedule with our customer states the final terms of the sale, including the description, quantity, and price of each service delivered. We invoice our customer the contractual rate based on the greater of throughput volumes



8




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

or minimum throughput commitments. Payment is typically due in full within 10 days of receipt of billing, which occurs monthly. In the normal course of business, we do not have obligations for returns or refunds.

Accounting Pronouncements Adopted on January 1, 2018
Topic 606
As previously noted, we adopted the provisions of Topic 606 on January 1, 2018. Topic 606 clarifies the principles for recognizing revenue and supersedes previous revenue recognition requirements under “Revenue Recognition (Topic 605),” using the modified retrospective method of adoption 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. We elected to apply the transition guidance for Topic 606 to individual contracts with our customer that were not completed as of the date of adoption. There was no material impact to our financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to partners’ capital as of January 1, 2018. Additionally, there was no material impact to our financial position or results of operations as of and for the three and nine months ended September 30, 2018. See “Revenue Recognition” above for a discussion of our accounting policy affected by our adoption of Topic 606. Also see Note 5 for further information on our revenues.

ASU No. 2016-01
In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” (ASU No. 2016-01) to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. We adopted the provisions of ASU No. 2016-01 on January 1, 2018 using the cumulative-effect method of adoption as required by the ASU. The adoption of this ASU did not affect our financial position or our results of operations as of or for the three and nine months ended September 30, 2018, but it resulted in reduced disclosures as it eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.

Accounting Pronouncements Not Yet Adopted
Topic 842
In February 2016, the FASB issued “Leases (Topic 842),” (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 reporting periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expect to use the optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance of partners’ capital at the date of adoption and apply the new disclosure requirements beginning in the period of adoption.




9




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The new standard provides a number of optional practical expedients and we expect to elect the following:

Transition Elections. We expect to elect the package of practical expedients that permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs, as well as the practical expedient that permits us to not assess existing land easements under the new standard.

Lessee Accounting Policy Elections. We expect to elect the short-term lease recognition exemption whereby right-of-use (ROU) assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year, and the practical expedient to not separate lease and non-lease components for all classes of underlying assets other than the real estate asset class.

Lessor Accounting Policy Election. We expect to elect the practical expedient to account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets.

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. We have monitored and will continue to monitor the adoption process to ensure compliance with accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, including the modifications to our related procurement and payment processes during the fourth quarter of 2018.

We anticipate this standard will have a material impact on (i) the recognition of ROU assets and lease liabilities on our balance sheet for our operating leases and (ii) the presentation of new disclosures about our leasing activities. However, we do not expect adoption to have a material impact on our results of operations or liquidity. We expect our accounting for leases in which we are the lessor to remain substantially unchanged.

ASU No. 2016-13
In June 2016, the FASB issued “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (ASU No. 2016-13) to improve financial reporting by requiring the immediate recognition of credit losses on financial instruments held by a reporting entity. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It also requires enhanced disclosures including qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual reporting periods, with early adoption permitted for annual periods beginning after December 15, 2018. The provisions of this ASU should be applied through a cumulative-effect adjustment to partners’ capital as of the beginning of the first reporting period in which this ASU is effective (i.e., the modified-retrospective approach). We expect to adopt ASU No. 2016-13 effective January 1, 2020 and we do not expect such adoption to affect our financial position or our results of operations.



10




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.
ACQUISITIONS
In connection with the following acquisitions, we entered into various agreements with Valero, including additional schedules to our commercial agreements, an omnibus agreement, a services and secondment agreement, and lease agreements for the use of land on which our assets are located.

Red River Crude System
On January 18, 2017, we acquired a 40 percent undivided interest in (i) the Hewitt segment of Plains All American Pipeline, L.P.’s (Plains) Red River pipeline (the Hewitt segment), (ii) two 150,000 shell barrel capacity tanks located at Hewitt Station in Hewitt, Oklahoma (the Hewitt Storage Tanks), and (iii) a pipeline connection from Hewitt Station to Wasson Station (the Wasson Interconnect) (collectively, the Red River crude system) for total cash consideration of $71.8 million, which we funded with our cash on hand. This acquisition was accounted for as an acquisition of assets.
The Hewitt segment consists of an approximately 138-mile, 16-inch crude oil pipeline with 150,000 barrels per day of throughput capacity that originates at Plains Marketing L.P.’s Cushing, Oklahoma terminal and ends at Hewitt Station. The pipeline supports Valero’s Ardmore Refinery and began supplying crude oil to Valero in January 2017. We retain a right to participate in any future expansions of the pipeline.

We also entered into a Joint Ownership Agreement (JOA) and an Operating and Administrative Services Agreement with Plains concurrent with this acquisition. The JOA provides us with access to the remaining 60 percent of the capacity of the Hewitt Storage Tanks and the Wasson Interconnect and continues until terminated by mutual agreement. This access arrangement is accounted for as an operating lease. The administrative agreement facilitates the day-to-day operations and management functions of the pipeline for an initial five-year term and automatically renews for successive five-year terms.

Parkway Pipeline
On November 1, 2017, we acquired Parkway Pipeline LLC, a subsidiary of Valero, that owns and operates an approximately 140-mile, 16-inch refined petroleum products pipeline (Parkway pipeline) with 110,000 barrels per day of capacity that transports refined petroleum products from Valero’s St. Charles Refinery, located in Norco, Louisiana, to Collins, Mississippi for supply into the Plantation and Colonial pipeline systems. We paid to Valero cash consideration of $200.0 million. We funded the cash distribution with $82.0 million of our cash on hand and $118.0 million of borrowings under the Revolver (defined in Note 4). This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.
Port Arthur Terminal
On November 1, 2017, we acquired Valero Partners Port Arthur, LLC, a subsidiary of Valero that owns certain terminaling assets (Port Arthur terminal) that support Valero’s Port Arthur Refinery for total consideration of $308.0 million, which consisted of (i) a cash distribution of $262.0 million and (ii) the issuance of 1,081,315 common units and 22,068 general partner units to Valero having an aggregate value of $46.0 million. We funded the cash distribution with $262.0 million of borrowings under the Revolver. This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.



11




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.
RELATED-PARTY TRANSACTIONS
Summary of Transactions
Related-Party Agreements
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 constructed a new 180,000 barrel storage tank and began leasing to DGD in April 2018. This commercial agreement, which includes both the rail loading facility and the storage tank, has an initial term that ends on June 30, 2033, and contains minimum commitments for DGD’s use of the assets.
Revenues Related Party
Revenues – related party include revenues from lease contracts and revenues from contracts with our customer, as further described in Note 5.

Related-Party Expenses
The related-party expenses include costs of revenues, expenses, or financing activities provided to us by Valero and are reflected in the supplemental information disclosure on our statements of income.
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.

Insurance Recoveries
During the three and nine months ended September 30, 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 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 three and nine months ended September 30, 2017, we recognized $2.3 million of insurance recoveries, which were recorded as a reduction to other operating expenses.

4.
DEBT AND NOTES PAYABLE RELATED PARTY
Debt
Debt, at stated values consisted of the following (in thousands):
 
Maturity
Date
 
September 30,
2018
 
December 31,
2017
 
 
 
Revolver
November 2020
 
$

 
$
410,000

Senior Notes, 4.375%
December 2026
 
500,000

 
500,000

Senior Notes, 4.5%
March 2028
 
500,000

 

Net unamortized discount and debt issuance costs
 
 
(10,306
)
 
(4,717
)
Debt
 
 
$
989,694

 
$
905,283




12




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revolver
We have a $750.0 million senior unsecured revolving credit facility agreement (the Revolver) that matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit of up to $100.0 million. Borrowings under the Revolver bear interest at a variable rate.

On March 29, 2018, we repaid the outstanding balance of $410.0 million on the Revolver as discussed below. There was no activity related to the Revolver during the nine months ended September 30, 2017.

Senior Notes
On March 29, 2018, we issued in a public offering $500.0 million aggregate principal amount of 4.5 percent Senior Notes due March 15, 2028 (4.5 percent Senior Notes). Gross proceeds from this debt issuance totaled $498.3 million before deducting the underwriting discount and other debt issuance costs totaling $4.5 million. We used the proceeds to repay the outstanding balance of $410.0 million under the Revolver and a portion of the outstanding balance under one of our Loan Agreements (defined below) with Valero.

The 4.5 percent Senior Notes are unsecured and contain various customary restrictive covenants that, among other things, limit our ability to create or permit to exist liens, or to enter into any sale and leaseback transactions, with respect to principal properties, and limit our ability to merge or consolidate with any other entity or transfer or dispose of all or substantially all of our assets. These covenants are subject to a number of important qualifications and limitations. The 4.5 percent Senior Notes are not currently guaranteed by any of our subsidiaries. If in the future any of our subsidiaries becomes a borrower or guarantor under, or grants any lien to secure any obligations pursuant to, the Revolver, then we will cause such subsidiary to guarantee the 4.5 percent Senior Notes. Interest is payable semi-annually on March 15 and September 15, commencing on September 15, 2018.
Notes Payable Related Party
We have two subordinated credit agreements with Valero (the Loan Agreements). Borrowings on the Loan Agreements bear interest at a variable rate, which was 3.6038 percent and 2.86069 percent as of September 30, 2018 and December 31, 2017, respectively.
On March 29, 2018, we paid down $85.0 million under one of the Loan Agreements. There was no activity under the Loan Agreements for the nine months ended September 30, 2017. The outstanding balance of these Loan Agreements was $285.0 million and $370.0 million as of September 30, 2018 and December 31, 2017, respectively.

Other Disclosures
Interest and debt expense, net of capitalized interest was as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Interest and debt expense incurred
$
14,442

 
$
8,912

 
$
40,809

 
$
25,957

Less: Capitalized interest
94

 
165

 
282

 
370

Interest and debt expense, net of capitalized interest
$
14,348

 
$
8,747

 
$
40,527

 
$
25,587




13




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.
REVENUES
Disaggregation of Revenues
Revenues – related party disaggregated by activity type were as follows (in thousands):
 
 
Pipeline
Transportation
 
Terminaling
 
Storage
and Other
 
Total
Three Months Ended September 30, 2018:
 
 
 
 
 
 
Revenues from lease contracts
$
17,702

 
$
93,874

 
$
502

 
$
112,078

Revenues from contracts with customer
13,861

 
13,215

 
1,436

 
28,512

Total revenues – related party
$
31,563

 
$
107,089

 
$
1,938

 
$
140,590

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017:
 
 
 
 
 
 
Revenues from lease contracts
$
11,197

 
$
74,476

 
$
138

 
$
85,811

Revenues from contracts with customer
11,845

 
10,681

 
1,003

 
23,529

Total revenues – related party
$
23,042

 
$
85,157

 
$
1,141

 
$
109,340

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018:
 
 
 
 
 
 
Revenues from lease contracts
$
53,584

 
$
270,933

 
$
1,138

 
$
325,655

Revenues from contracts with customer
39,654

 
37,823

 
4,027

 
81,504

Total revenues – related party
$
93,238

 
$
308,756

 
$
5,165

 
$
407,159

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017:
 
 
 
 
 
 
Revenues from lease contracts
$
33,379

 
$
217,793

 
$
408

 
$
251,580

Revenues from contracts with customer
37,697

 
34,667

 
1,757

 
74,121

Total revenues – related party
$
71,076

 
$
252,460

 
$
2,165

 
$
325,701


Operating Leases Lessor
As described in Note 1, certain schedules under our commercial agreements with Valero are considered operating leases under U.S. GAAP. These agreements contain minimum throughput commitments and escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. Revenues from lease contracts are reflected separately on our statements of income. The components of our revenues from lease contracts were as follows (in thousands):
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
 
2018
 
2017
Minimum lease revenues
 
$
91,059

 
$
70,588

 
$
270,257

 
$
208,859

Contingent lease revenues
 
21,019

 
15,223

 
55,398

 
42,721

Revenues from lease contracts
 
$
112,078

 
$
85,811

 
$
325,655

 
$
251,580





14




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables from Contracts with Customer
Our receivables from contracts with our customer are included in receivables – related party. These balances were $9.1 million and $8.3 million as of September 30, 2018 and January 1, 2018, respectively.

Future Minimum Rentals and Remaining Performance Obligations
As of September 30, 2018, future minimum rentals to be received for operating leases (described above) having initial or remaining noncancelable lease terms in excess of one year are shown below under “Lease Contracts,” and future revenues expected to be recognized from our remaining performance obligations from contracts with our customer with an original expected duration of greater than one year are shown below under “Contracts with Customer” (in thousands):
 
 
Lease
Contracts
 
Contracts with
Customer
Remainder of 2018
 
$
91,060

 
$
20,462

2019
 
361,282

 
81,215

2020
 
362,268

 
81,426

2021
 
361,282

 
81,215

2022
 
361,282

 
81,215

Thereafter
 
2,914,596

 
116,994

Total
 
$
4,451,770

 
$
462,527


Our lease contracts and our contracts with our customer contain annual inflation escalation clauses that are (i) deemed contingent rentals and variable consideration, respectively, and (ii) applied to the remainder of the contracts. The amounts presented above exclude any estimates for future rate changes due to these inflation rate escalations as prescribed by the contracts.



15




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.
CASH DISTRIBUTIONS AND NET INCOME PER LIMITED PARTNER COMMON UNIT
Cash Distributions
Our partnership agreement prescribes the amount and priority of cash distributions that our limited partners and general partner will receive. Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions that have been declared since January 1, 2017:
Quarterly
Period
Ended
 
Total
Quarterly
Distribution
(per unit)
 
Total Cash
Distribution
(in thousands)
 
Declaration
Date
 
Record
Date
 
Distribution
Date
September 30, 2018
 
$
0.5510

 
$
56,081

 
October 18, 2018
 
November 1, 2018
 
November 9, 2018
June 30, 2018
 
0.5510

 
56,081

 
July 23, 2018
 
August 3, 2018
 
August 13, 2018
March 31, 2018
 
0.5275

 
52,826

 
April 19, 2018
 
May 1, 2018
 
May 9, 2018
December 31, 2017
 
0.5075

 
50,055

 
January 24, 2018
 
February 5, 2018
 
February 13, 2018
September 30, 2017
 
0.4800

 
46,242

 
October 19, 2017
 
November 1, 2017
 
November 9, 2017
June 30, 2017
 
0.4550

 
42,111

 
July 19, 2017
 
August 1, 2017
 
August 10, 2017
March 31, 2017
 
0.4275

 
38,043

 
April 20, 2017
 
May 2, 2017
 
May 11, 2017
December 31, 2016
 
0.4065

 
34,895

 
January 20, 2017
 
February 2, 2017
 
February 10, 2017

The Merger Agreement provides that prior to the closing of the Merger Transaction, our general partner may not declare, and we may not pay, any distribution other than the distribution of $0.551 per common unit that we declared for the third quarter of 2018 without the prior written consent of Valero. See Note 1 for further discussion of the Merger Transaction.

Net Income per Limited Partner Common Unit
We calculate net income available to limited partners based on the distributions pertaining to each period’s net income. After considering the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner, limited partners, and other participating securities in accordance with the contractual terms of our partnership agreement and as prescribed under the two-class method. Participating securities include the general partner’s incentive distribution rights (IDRs) and awards under our Valero Energy Partners LP 2013 Incentive Compensation Plan that receive distribution equivalent right (DER) payments. However, the terms of our partnership agreement limit the general partner’s incentive distribution to the amount of available cash, which, as defined in our partnership agreement, is net of reserves deemed appropriate. As such, IDRs are not allocated undistributed earnings or distributions in excess of earnings in the calculation of net income per limited partner common unit.

Basic net income per limited partner common unit is determined pursuant to the two-class method for master limited partnerships. The two-class method is an earnings allocation formula that is used to determine earnings to our general partner, common unitholders, and participating securities according to (i) distributions pertaining to each period’s net income and (ii) participation rights in undistributed earnings.




16




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Diluted net income per limited partner common unit is also determined using the two-class method, unless the treasury stock method is more dilutive. For the three and nine months ended September 30, 2018 and 2017, we used the two-class method to determine diluted net income per limited partner common unit. We did not have any potentially dilutive instruments outstanding during the three and nine months ended September 30, 2018 and 2017.

Net income per unit was computed as follows (in thousands, except per unit amounts):
 
 
Three Months Ended September 30, 2018
 
 
General
Partner
 
Limited Partners
Common Units
 
Restricted
Units
 
Total
 
 
 
Public
 
Valero
 
Total
 
 
Allocation of net income to determine net income available to limited partners:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions, excluding general partner’s IDRs
 
$
1,122

 
$
12,388

 
$
25,769

 
$
38,157

 
$

 
$
39,279

General partner’s IDRs
 
16,796

 

 

 

 

 
16,796

DERs
 

 

 

 

 
6

 
6

Distributions and DERs declared
 
17,918

 
12,388

 
25,769

 
38,157

 
6

 
56,081

Undistributed earnings
 
285

 
4,538

 
9,442

 
13,980

 
3

 
14,268

Net income available to limited partners – basic and diluted
 
$
18,203

 
$
16,926

 
$
35,211

 
$
52,137

 
$
9

 
$
70,349

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average units outstanding
 
 
 
 
 
 
 
69,251

 
 
 
 
Net income per limited partner common unit – basic and diluted
 
 
 
 
 
 
 
$
0.75

 
 
 
 



17




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Three Months Ended September 30, 2017
 
 
General
Partner
 
Limited Partners
Common Units
 
Restricted
Units
 
Total
 
 
 
Public
 
Valero
 
Total
 
 
Allocation of net income to determine net income available to limited partners:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions, excluding general partner’s IDRs
 
$
925

 
$
10,789

 
$
22,449

 
$
33,238

 
$

 
$
34,163

General partner’s IDRs
 
12,074

 

 

 

 

 
12,074

DERs
 

 

 

 

 
5

 
5

Distributions and DERs declared
 
12,999

 
10,789

 
22,449

 
33,238

 
5

 
46,242

Undistributed earnings
 
38

 
3,666

 
7,641

 
11,307

 
2

 
11,347

Net income available to limited partners – basic and diluted
 
$
13,037

 
$
14,455

 
$
30,090

 
$
44,545

 
$
7

 
$
57,589

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average units outstanding
 
 
 
 
 
 
 
68,163

 
 
 
 
Net income per limited partner common unit – basic and diluted
 
 
 
 
 
 
 
$
0.65

 
 
 
 

 
 
Nine Months Ended September 30, 2018
 
 
General
Partner
 
Limited Partners
Common Units
 
Restricted
Units
 
Total
 
 
 
Public
 
Valero
 
Total
 
 
Allocation of net income to determine net income available to limited partners:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions, excluding general partner’s IDRs
 
$
3,300

 
$
36,634

 
$
76,209

 
$
112,843

 
$

 
$
116,143

General partner’s IDRs
 
48,826

 

 

 

 

 
48,826

DERs
 

 

 

 

 
19

 
19

Distributions and DERs declared
 
52,126

 
36,634

 
76,209

 
112,843

 
19

 
164,988

Undistributed earnings
 
709

 
11,279

 
23,465

 
34,744

 
6

 
35,459

Net income available to limited partners – basic and diluted
 
$
52,835

 
$
47,913

 
$
99,674

 
$
147,587

 
$
25

 
$
200,447

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average units outstanding
 
 
 
 
 
 
 
69,250

 
 
 
 
Net income per limited partner common unit – basic and diluted
 
 
 
 
 
 
 
$
2.13

 
 
 
 



18




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Nine Months Ended September 30, 2017
 
 
General
Partner
 
Limited Partners
Common Units
 
Restricted
Units
 
Total
 
 
 
Public
 
Valero
 
Total
 
 
Allocation of net income to determine net income available to limited partners:
 
 
 
 
 
 
 
 
 
 
 
 
Distributions, excluding general partner’s IDRs
 
$
2,362

 
$
30,620

 
$
62,768

 
$
93,388

 
$

 
$
95,750

General partner’s IDRs
 
30,631

 

 

 

 

 
30,631

DERs
 

 

 

 

 
15

 
15

Distributions and DERs declared
 
32,993

 
30,620

 
62,768

 
93,388

 
15

 
126,396

Undistributed earnings
 
930

 
15,358

 
31,476

 
46,834

 
9

 
47,773

Net income available to limited partners – basic and diluted
 
$
33,923

 
$
45,978

 
$
94,244

 
$
140,222

 
$
24

 
$
174,169

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average units outstanding
 
 
 
 
 
 
 
67,997

 
 
 
 
Net income per limited partner common unit – basic and diluted
 
 
 
 
 
 
 
$
2.06

 
 
 
 



19




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.
PARTNERS’ CAPITAL

Unit Activity
Activity in the number of units was as follows:

 
 
Limited Partners
 
General
Partner
Valero
 
Total
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
 
Balance as of December 31, 2017
 
22,487,586

 
46,768,586

 
1,413,391

 
70,669,563

Unit-based compensation
 
5,898

 

 

 
5,898

General partner units issued to maintain 2% interest
 

 

 
120

 
120

Balance as of September 30, 2018
 
22,493,484

 
46,768,586

 
1,413,511

 
70,675,581

 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
21,738,692

 
45,687,271

 
1,375,721

 
68,801,684

Unit-based compensation
 
5,997

 

 

 
5,997

Units issued under ATM Program
 
742,897

 

 

 
742,897

General partner units issued to maintain 2% interest
 

 

 
15,602

 
15,602

Balance as of September 30, 2017
 
22,487,586

 
45,687,271

 
1,391,323

 
69,566,180


ATM Program
On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). As of September 30, 2018, we have sold common units having an aggregate value of $45.5 million under our ATM Program, resulting in $304.5 million remaining available.

There were no issuances of common units under our ATM Program for the nine months ended September 30, 2018. The table below summarizes activities of the common units issued under our ATM Program and general partner units issued to maintain the 2.0 percent general partner interest in the Partnership for the nine months ended September 30, 2017 (in thousands, except unit amounts):
 
 
Units
Issued
 
Total
Proceeds
 
Offering
Costs
 
Net
Proceeds
Common – public
 
742,897

 
$
35,728

 
$
542

 
$
35,186

General partner
 
15,602

 
748

 

 
748


If the Merger Transaction is consummated, our common units will no longer be publicly traded and, as a result, we would not expect issuances of additional common units under our ATM Program following the closing of the Merger Transaction. See Note 1 for further discussion of the Merger Transaction.



20




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Transfers to (from) Partners
Subsequent to the expiration of the subordination period on August 10, 2016, all of our common units have equal rights, including rights to distributions and to our net assets in the event of liquidation. As a result, a reallocation of the carrying values of our public common unitholders’ interest in us and Valero’s common unitholder interest in us is required when a change in ownership occurs in order for the portion of those carrying values associated with activity subsequent to the subordination period to be equal to the respective unitholders’ ownership interests (in units) in us.

8.
SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in thousands):
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
Decrease (increase) in current assets:
 
 
 
 
Receivables – related party
 
$
62

 
$
894

Receivables
 
(92
)
 
(225
)
Prepaid expenses and other
 
61

 
512

Increase (decrease) in current liabilities:
 
 
 
 
Accounts payable
 
(5,154
)
 
1,361

Accounts payable – related party
 
4,246

 
1,433

Accrued liabilities
 
(206
)
 
(283
)
Accrued liabilities – related party
 
(824
)
 
(3,192
)
Accrued interest payable
 
4,768

 
5,173

Accrued interest payable – related party
 
(141
)
 
797

Taxes other than income taxes payable
 
2,142

 
1,518

Changes in current assets and current liabilities
 
$
4,862

 
$
7,988


Cash flows related to interest and income taxes paid were as follows (in thousands):
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
Interest paid
 
$
35,067

 
$
19,136

Income taxes paid
 
918

 
695




21




VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncash investing and financing activities that affected recognized assets or liabilities were as follows (in thousands):
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
2017
Increase in accounts payable related to capital expenditures
 
$
4,921

 
$
2,424

Noncash capital contributions from Valero for capital projects
 
31,732

 
27,866

In addition to the activities in the preceding table, noncash financing activities for the nine months ended September 30, 2018 and 2017 included the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the grant of restricted units made to each of our three independent directors and the issuance of equity under our ATM Program, respectively, as described in Note 7.

9.
FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in thousands):
 
 
 
Fair
Value
Hierarchy
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Level 1
 
$
128,199

 
$
128,199

 
$
42,052

 
$
42,052

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
 
Revolver
 
Level 2
 

 

 
410,000

 
410,000

Senior Notes
 
Level 2
 
989,694

 
983,810

 
495,283

 
523,800

Notes payable – related party
 
Level 2
 
285,000

 
285,000

 
370,000

 
370,000





22


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
This Form 10-Q, including without limitation our disclosures below under the heading “OUTLOOK,” includes forward-looking statements, including forward-looking statements regarding the Merger Agreement and the Merger Transaction that we entered into on October 18, 2018 with VLO, Merger Sub, and our general partner, pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero as discussed in Note 1 of Condensed Notes to Consolidated Financial Statements. The safe harbor provisions under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 do not apply to forward-looking statements made or referred to in this Form 10-Q. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” and similar expressions.
Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:
the risk that the potential Merger Transaction is not consummated on the expected time frame, or at all;
failure of closing conditions, delays in the consummation of the potential Merger Transaction and changes to business plans, as circumstances warrant, and other factors, many of which are difficult to control or predict, that could affect Valero’s or our ability to consummate the Merger Transaction;
the diversion of management in connection with the Merger Transaction;
the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement;
the suspension, reduction, cessation, or termination of Valero’s obligation under our commercial agreements, omnibus agreement, and services and secondment agreement;
changes in global economic conditions on Valero’s business and the business of its suppliers, customers, business partners, and credit lenders;
a material decrease in Valero’s profitability;
disruptions due to equipment interruption or failure at our facilities, Valero’s facilities, or third-party facilities on which our business or Valero’s business is dependent;
the risk of contract cancellation, non-renewal, or failure to perform by Valero’s customers, and Valero’s inability to replace such contracts and/or customers;
Valero’s and our ability to remain in compliance with the terms of its and our outstanding indebtedness;
the timing and extent of changes in commodity prices and demand for Valero’s refined petroleum products;
our ability to obtain credit and financing on acceptable terms in light of uncertainty and illiquidity in credit and capital markets;
actions of customers and competitors;



23


changes in our cash flows from operations;
changes in state and federal policies and regulations relating to tariffs, environmental, economic, health and safety, energy, and other matters;
legal or regulatory investigations, delays, or other factors beyond our control;
operational hazards inherent in refining operations and in transporting and storing crude oil and refined petroleum products;
earthquakes or other natural disasters affecting operations;
changes in capital requirements or in execution of planned capital projects;
the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;
changes in the cost or availability of third-party vessels, pipelines, and other means of delivering and transporting crude oil, feedstocks, and refined petroleum products;
direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;
weather conditions affecting our or Valero’s operations or the areas in which Valero markets its refined petroleum products;
seasonal variations in demand for refined petroleum products;
adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any accruals, which affect us or Valero;
risks related to labor relations and workplace safety;
changes in insurance markets impacting costs and the level and types of coverage available;
political developments; and
other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, 2017, in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2018, and in this Form 10-Q, each of which are incorporated by reference herein.
Any one of these factors, or a combination of these factors, could materially affect our future results of operations and affect whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.



24


OVERVIEW
2018 Developments
Pending Merger with Valero
On October 18, 2018, we entered into the Merger Agreement with VLO, Merger Sub, and our general partner pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero. Under the Merger Agreement, the holders of such publicly traded common units will receive $42.25 in cash for each common unit without any interest thereon and all such publicly traded common units will automatically be canceled and cease to exist. See Note 1 of Condensed Notes to Consolidated Financial Statements for further discussion of the Merger Transaction.

Senior Notes
On March 29, 2018, we issued $500.0 million of 4.5 percent Senior Notes. Gross proceeds from the debt issuance totaled $498.3 million. As discussed in Note 4 of Condensed Notes to Consolidated Financial Statements, we used the proceeds to repay the outstanding balance of $410.0 million under the Revolver and $85.0 million of the outstanding balance under one of the Loan Agreements with Valero.

Third Quarter and First Nine Months Results
We reported net income of $70.3 million in the third quarter of 2018 and $200.4 million in the first nine months of 2018. This compares to net income of $57.6 million in the third quarter of 2017 and $174.2 million in the first nine months of 2017.

The increase in net income of $12.8 million in the third quarter of 2018 compared to the third quarter of 2017 and $26.3 million in the first nine months of 2018 compared to the first nine months of 2017 was due primarily to an $18.2 million and $40.6 million increase, respectively, in operating income driven by contributions from our Port Arthur terminal and Parkway pipeline, which we acquired from Valero in November 2017, as further described in Note 2 of Condensed Notes to Consolidated Financial Statements. The increase in operating income was partially offset by a $5.6 million and $14.9 million increase, respectively, in interest and debt expense, net of capitalized interest that resulted from incremental borrowings of $380.0 million used to fund a portion of the amount paid to acquire the Port Arthur terminal and Parkway pipeline, as well as a higher effective interest rate in 2018 due to higher interest rates on our variable rate debt.
Additional analysis of the changes in the components of net income is provided below under “RESULTS OF OPERATIONS.”
OUTLOOK
All of our revenues are generated from fee-based commercial agreements with Valero, and the amount of revenues we generate depends on the volumes of crude oil and refined petroleum products owned by Valero that we transport through our pipelines and handle at our terminals. These volumes are primarily affected by the reliability of Valero’s refineries served by our pipelines and terminals as well as the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. However, our commercial agreements with Valero contain minimum throughput commitments that require Valero to ship minimum volumes during each calendar quarter or pay us a deficiency payment. Valero has historically met or exceeded most of its minimum throughput commitments, and we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals in 2018 generally consistent with historical levels.



25


RESULTS OF OPERATIONS
The following tables highlight our results of operations and our operating performance for the three and nine months ended September 30, 2018 and 2017. The narrative following these tables provides an analysis of our results of operations.
Results of Operations
(in thousands, except per unit amounts)
 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
Change
Revenues – related party:
 
 
 
 
 
 
Revenues from lease contracts
 
$
112,078

 
$
85,811

 
$
26,267

Revenues from contracts with customer
 
28,512

 
23,529

 
4,983

Total revenues – related party
 
140,590

 
109,340

 
31,250

Costs and expenses:
 
 
 
 
 
 
Cost of revenues from lease contracts (excluding depreciation expense reflected below)
 
26,753

 
20,202

 
6,551

Cost of revenues from contracts with customer (excluding depreciation expense reflected below)
 
6,176

 
6,276

 
(100
)
Depreciation expense associated with lease contracts
 
15,946

 
9,288

 
6,658

Depreciation expense associated with contracts with customer
 
3,120

 
2,825

 
295

Other operating expenses
 

 
537

 
(537
)
General and administrative expenses
 
4,082

 
3,865

 
217

Total costs and expenses
 
56,077


42,993


13,084

Operating income
 
84,513


66,347


18,166

Other income, net
 
610

 
300

 
310

Interest and debt expense, net of capitalized interest
 
(14,348
)
 
(8,747
)
 
(5,601
)
Income before income tax expense
 
70,775

 
57,900

 
12,875

Income tax expense
 
426

 
311

 
115

Net income
 
70,349

 
57,589

 
12,760

Less: General partner’s interest in net income
 
18,203

 
13,037

 
5,166

Limited partners’ interest in net income
 
$
52,146

 
$
44,552

 
$
7,594

 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted
 
$
0.75

 
$
0.65

 


 
 
 
 
 
 
 
Weighted-average limited partner common units outstanding – basic and diluted
 
69,251

 
68,163

 
 



26


Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)
 
 
Three Months Ended September 30,
 
 
2018
 
2017
 
Change
Operating highlights:
 
 
 
 
 
 
Pipeline transportation:
 
 
 
 
 
 
Pipeline transportation revenues
 
$
31,563

 
$
23,042

 
$
8,521

Pipeline transportation throughput (BPD) (a)
 
1,141,216

 
859,473

 
281,743

Average pipeline transportation revenue per barrel (b)
 
$
0.30

 
$
0.29

 
$
0.01

 
 
 
 
 
 
 
Terminaling:
 
 
 
 
 
 
Terminaling revenues
 
$
107,089

 
$
85,157

 
$
21,932

Terminaling throughput (BPD)
 
3,766,632

 
2,693,788

 
1,072,844

Average terminaling revenue per barrel (b)
 
$
0.31

 
$
0.34

 
$
(0.03
)
 
 
 
 
 
 
 
Storage and other revenues
 
$
1,938

 
$
1,141

 
$
797

 
 
 
 
 
 
 
Total revenues – related party
 
$
140,590