CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
|
DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
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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.
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.
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
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.
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:
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•
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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.
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•
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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.
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•
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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.
VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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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.
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4.
|
DEBT AND NOTES PAYABLE
–
RELATED PARTY
|
Debt
Debt, at stated values consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
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
|
|
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
|
|
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.
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.
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
|
|
|
|
|
|
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
|
|
|
|
|
|
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
|
|
|
|
|
|
VALERO ENERGY PARTNERS LP
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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
|
|
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
|
|