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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2002
OR
[ ] 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 1-16417
VALERO L.P.
(Exact name of registrant as specified in its charter)
Delaware 74-2958817
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Valero Place
San Antonio, Texas
(Address of principal executive offices)
78212
(Zip Code)
Telephone number: (210) 370-2000
(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 X No ____
As of July 31, 2002, 9,654,572 common units were outstanding.
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VALERO L.P.
FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated and Combined Balance Sheets
as of June 30, 2002 and December 31, 2001.......................... 3
Consolidated and Combined Statements of Income
for the Three and Six Months Ended June 30, 2002 and 2001.......... 4
Consolidated and Combined Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001.................... 5
Notes to Consolidated and Combined Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................24
Item 2. Changes in Securities and Use of Proceeds...........................24
Item 3. Defaults Upon Senior Securities.....................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits and Reports on Form 8-K....................................24
SIGNATURES..........................................................26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(unaudited, in thousands, except unit data)
Restated
June 30, December 31,
2002 2001
---- ----
(note 2)
Assets
Current assets:
Cash and cash equivalents...................................... $ 15,057 $ 7,796
Receivable from parent......................................... 6,811 6,292
Accounts receivable............................................ 2,670 2,855
Other current assets........................................... 291 -
------- -------
Total current assets.......................................... 24,829 16,943
------- -------
Property, plant and equipment................................... 484,001 470,401
Less accumulated depreciation and amortization.................. (129,460) (121,389)
------- -------
Property, plant and equipment, net............................. 354,541 349,012
Goodwill, net................................................... 4,715 4,715
Investment in Skelly-Belvieu Pipeline Company................... 16,392 16,492
Other noncurrent assets, net.................................... 446 384
------- -------
Total assets.................................................. $400,923 $387,546
======= =======
Liabilities and Partners' Equity
Current liabilities:
Current portion of long-term debt.............................. $ 416 $ 462
Accounts payable and accrued liabilities....................... 4,740 4,215
Taxes other than income taxes.................................. 3,175 1,894
------- -------
Total current liabilities..................................... 8,331 6,571
Long-term debt, less current portion............................ 100,660 25,660
Other long-term liabilities..................................... - 2
Deferred income tax liabilities................................. - 13,147
Partners' equity:
Common units (9,654,572 and 9,599,322 outstanding as of 2002
and 2001, respectively)....................................... 169,708 169,305
Subordinated units (9,599,322 outstanding as of 2002 and 2001). 116,478 116,399
General partner's equity....................................... 5,746 5,831
Net parent investment in the Wichita Falls Business............ - 50,631
------- -------
Total partners' equity........................................ 291,932 342,166
------- -------
Total liabilities and partners' equity........................ $400,923 $387,546
======= =======
See accompanying notes to consolidated and combined financial statements.
3
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(unaudited, in thousands, except unit and per unit data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues..................................... $30,030 $23,637 $56,054 $47,059
------ ------ ------ ------
Costs and expenses:
Operating expenses.......................... 9,565 8,736 18,749 17,387
General and administrative expenses......... 1,699 1,331 3,487 2,503
Depreciation and amortization............... 3,875 3,251 8,231 6,489
------ ------ ------ ------
Total costs and expenses................... 15,139 13,318 30,467 26,379
------ ------ ------ ------
Operating income............................. 14,891 10,319 25,587 20,680
Equity income from Skelly-Belvieu
Pipeline Company.......................... 844 907 1,522 1,576
Interest expense, net....................... (796) (870) (1,352) (3,114)
------ ------ ------ ------
Income before income tax expense............. 14,939 10,356 25,757 19,142
Income tax expense.......................... - - (395) -
------ ------ ------ ------
Net income................................... $14,939 $10,356 $25,362 $19,142
====== ====== ====== ======
Allocation of net income:
Net income................................... $14,939 $10,356 $25,362 $19,142
Less net income applicable to the period
from January 1 through April 15, 2001..... - (1,340) - (10,126)
Less net income applicable to the Wichita
Falls Business for the month ended
January 31, 2002.......................... - - (650) -
------ ------ ------ ------
Net income applicable to the general and
limited partners' interest................ 14,939 9,016 24,712 9,016
General partner's interest in net income..... 299 180 494 180
------ ------ ------ ------
Limited partners' interest in net income..... $14,640 $ 8,836 $24,218 $ 8,836
====== ====== ====== ======
Basic and diluted net income per limited
partnership unit........................... $ 0.76 $ 0.46 $ 1.26 $ 0.46
====== ====== ====== ======
Weighted average number of limited
partnership units outstanding.............. 19,253,894 19,198,644 19,247,789 19,198,644
========== ========== ========== ==========
See accompanying notes to consolidated and combined financial statements.
4
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net income .................................................... $25,362 $ 19,142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 8,231 6,489
Equity income from Skelly-Belvieu Pipeline Company............ (1,522) (1,576)
Distributions of equity income from Skelly-Belvieu
Pipeline Company............................................. 1,622 1,232
Changes in current assets and liabilities:
Decrease (increase) in receivable from parent................ (519) 19,875
Decrease (increase) in accounts receivable................... 185 (2,141)
Decrease (increase) in other current assets.................. (291) 3,528
Increase in accounts payable and accrued liabilities......... 525 1,081
Increase (decrease) in taxes other than income taxes......... 1,311 (587)
Other, net.................................................... 321 (432)
------ -------
Net cash provided by operating activities.............. 35,225 46,611
------ -------
Cash Flows from Investing Activities:
Maintenance capital expenditures............................... (1,530) (1,843)
Expansion capital expenditures................................. (1,230) (2,403)
Acquisitions................................................... (75,000) -
------ -------
Net cash used in investing activities.................. (77,760) (4,246)
------ -------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings........................ 75,000 20,506
Repayment of long-term debt.................................... (46) (223)
Distributions to unitholders and general partner............... (24,646) -
Distributions to parent and affiliates......................... (512) (29,000)
Net proceeds from sale of common units to the public........... - 111,912
Distribution to parent and affiliates for reimbursement of
capital expenditures and repayment of debt.................... - (128,193)
------ -------
Net cash provided by (used in) financing activities.... 49,796 (24,998)
------ -------
Net increase in cash and cash equivalents...................... 7,261 17,367
Cash and cash equivalents as of the beginning of the period.... 7,796 4
------ -------
Cash and cash equivalents as of the end of the period.......... $15,057 $ 17,371
====== =======
See accompanying notes to consolidated and combined financial statements.
5
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1: Organization
Valero L.P. is a Delaware limited partnership owned approximately 73% by Valero
Energy Corporation (Valero Energy) and approximately 27% by public unitholders.
Valero Logistics Operations, L.P. (Valero Logistics Operations) is also a
Delaware limited partnership and is a subsidiary of Valero L.P. As used in this
report, the term Partnership may refer, depending on the context, to Valero
L.P., Valero Logistics Operations or both of them taken as a whole.
The Partnership owns and operates most of the crude oil and refined product
pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico
and Colorado that support Valero Energy's McKee and Three Rivers refineries
located in Texas and its Ardmore refinery located in Oklahoma. These pipeline,
terminalling and storage assets provide for the transportation of crude oil and
other feedstocks to the refineries and the transportation of refined products
from the refineries to terminals for further distribution.
Valero Energy is a refining and marketing company with 12 refineries and
approximately 4,600 company-operated and dealer-operated convenience stores.
Valero Energy's refining operations rely on various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks and rail car loading equipment) that support its refining and retail
operations, including the logistics assets owned and operated by the
Partnership. Valero Energy markets the refined products produced at the McKee,
Three Rivers and Ardmore refineries primarily in Texas, Oklahoma, Colorado, New
Mexico and Arizona through a network of approximately 2,700 company-operated and
dealer-operated convenience stores, as well as other wholesale and spot market
sales and exchange agreements.
On December 31, 2001, Valero Energy completed its acquisition of Ultramar
Diamond Shamrock Corporation (UDS) in a purchase business combination. The
assets acquired included UDS' ownership in Valero L.P. and Valero Logistics
Operations as well as ownership of Riverwalk Logistics, L.P., the general
partner of Valero L.P.
On May 30, 2002, the general partner ownership of Valero Logistics Operations
was restructured to cause it to be indirectly wholly owned by Valero L.P. Valero
GP, Inc., a subsidiary of Valero L.P., succeeded Riverwalk Logistics, L.P. as
the general partner of Valero Logistics Operations. All remaining partner
interest in Valero Logistics Operations not already owned by Valero L.P. was
transferred to Valero L.P.
As a result of the restructuring of the general partner ownership, Riverwalk
Logistics, L.P. serves as the general partner of Valero L.P. with a 2% general
partner interest, Valero GP, Inc. serves as the general partner of Valero
Logistics Operations with a 0.01% general partner interest and Valero L.P. is
the limited partner of Valero Logistics Operations with a 99.99% limited partner
interest. This reorganization was undertaken to simplify required financial
reporting by Valero Logistics Operations when guarantees of Valero Logistics
Operations debt are issued by Valero L.P. There was no financial statement
impact related to this restructuring as all transactions were recorded at
historical cost.
NOTE 2: Basis of Presentation
The accompanying unaudited consolidated and combined financial statements have
been prepared in accordance with United States generally accepted accounting
principles 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
United States generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain previously reported amounts have been reclassified to conform
to the 2002 presentation. In addition, the balance sheet as of December 31, 2001
has been restated to reflect the acquisition of the Wichita Falls Business
further described below.
6
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Operating results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The balance sheet as of December 31, 2001 has been derived from the
audited consolidated financial statements as of that date and restated to
include the balances of the Wichita Falls Business as discussed below, but does
not include all of the information and notes required by United States generally
accepted accounting principles for complete financial statements.
These consolidated and combined financial statements should be read along with
the audited consolidated and combined financial statements and notes thereto
included in Valero L.P.'s Form 8-K/A dated May 15, 2002 and filed on June 26,
2002.
Acquisition of the Wichita Falls Business
On February 1, 2002, the Partnership acquired the Wichita Falls Crude Oil
Pipeline and Storage Business (the Wichita Falls Business) from Valero Energy
for a total cost of $64,000,000. The purchase price was funded with borrowings
under the Partnership's revolving credit facility.
The Wichita Falls Business consists of the following assets:
o A 271.7 mile pipeline originating in Wichita Falls, Texas and ending at
Valero Energy's McKee refinery in Dumas, Texas. The pipeline has the
capacity to transport 110,000 barrels per day of crude oil gathered or
acquired by Valero Energy at Wichita Falls. The Wichita Falls crude oil
pipeline connects to third party pipelines that originate along the Texas
Gulf Coast.
o Four storage tanks located in Wichita Falls, Texas with a total capacity of
660,000 barrels.
In the fourth quarter of 2001, UDS completed an expansion project to increase
the capacity of the crude oil pipeline from 85,000 barrels per day to 110,000
barrels per day and to increase the capacity of the storage facility from
360,000 barrels to 660,000 barrels.
Since the acquisition of the Wichita Falls Business represents the transfer of a
business under the common control of Valero Energy, the balance sheet as of
December 31, 2001 and the statements of income and cash flows for the month
ended January 31, 2002 (preceding the acquisition date) have been restated to
include the Wichita Falls Business. The assumed transfer to the Partnership as
of December 31, 2001 (the earliest date on which common control existed) and the
restatement of the January 2002 statements of income and cash flows have been
recorded based on Valero Energy's historical cost, which was based on Valero
Energy's allocation of the purchase price paid for UDS. The balance sheet of the
Wichita Falls Business as of December 31, 2001, which is included in the
combined balance sheet as of December 31, 2001, includes the following amounts
in the respective captions.
Wichita Falls
Business
December 31, 2001
-----------------
(in thousands)
Balance Sheet Caption
Property, plant and equipment................... $ 64,160
Accrued liabilities............................. 131
Taxes other than income taxes................... 251
Deferred income tax liabilities................. 13,147
Net parent investment........................... 50,631
7
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following unaudited pro forma financial information for the six months ended
June 30, 2001 assumes that the Wichita Falls Business was acquired on January 1,
2001 with borrowings under the revolving credit facility.
Six Months
Ended
June 30,
2001
----
(in thousands,
except per unit
amount)
Pro Forma Income Statement Information
Revenues..................................................... $54,492
Costs and expenses........................................... 29,624
Operating income............................................. 24,868
Allocation of net income:
------------------------
Net income................................................... $21,831
Less net income applicable to the period from January 1
through April 15, 2001................................. (11,842)
Less general partner's interest in net income applicable to
the period from April 16 through June 30, 2001.............. (200)
------
Limited partners' interest in net income applicable to
the six months ended June 30, 2001.......................... $ 9,789
======
Net income per limited partnership unit..................... $ 0.51
======
Since Valero L.P. completed its initial public offering on April 16, 2001, the
pro forma net income for the period from January 1 through April 15, 2001 of
$11,842,000 would have been allocated to Valero Energy (the Wichita Falls
Business's parent). The pro forma net income for the period from April 16
through June 30, 2001 of $9,989,000 would have been allocated to the general and
limited partners based on their respective ownership interests.
The financial statements included in this Form 10-Q represent the following:
o consolidated financial statements of the Partnership, including the Wichita
Falls Business, as of June 30, 2002 and for the three and five months ended
June 30, 2002;
o combined financial statements of the Partnership and the Wichita Falls
Business as of December 31, 2001 and for the one month ended January 31,
2002;
o consolidated financial statements of Valero L.P. and Valero Logistics
Operations for the period from April 16, 2001 through June 30, 2001; and
o combined financial statements of Valero L.P. and Valero Logistics
Operations for the period from January 1, 2001 through April 15, 2001.
NOTE 3: Accounting Pronouncements
FASB Statement No. 145
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement:
o rescinds Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt,"
o rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"
o rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and
8
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
o amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. There was no impact to the Partnership's financial
position or results of operations as a result of adopting this statement.
FASB Statement No. 146
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," which
addresses accounting for restructuring and similar costs. Such costs include
lease termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operations, plant closings or other exit or
disposal activities. Statement No. 146 supercedes previous accounting guidance
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Partnership
will adopt the provisions of Statement No. 146 for restructuring activities
initiated after December 31, 2002. Statement No. 146 requires that the liability
for costs associated with an exit or disposal activity be recognized, at fair
value, when the liability is incurred. Under EITF No. 94-3, a liability for an
exit cost was recognized at the date of the entity's commitment to an exit or
disposal plan.
NOTE 4: Commitments and Contingencies
The Partnership's operations are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although the Partnership believes its
operations are in general compliance with applicable environmental regulations,
risks of additional costs and liabilities are inherent in pipeline, terminalling
and storage operations, and there can be no assurance that significant costs and
liabilities will not be incurred. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the operations, could result in substantial costs and
liabilities. Accordingly, the Partnership has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the handling, storage, use and disposal of hazardous materials to
prevent material environmental or other damage, and to limit the financial
liability which could result from such events. However, some risk of
environmental or other damage is inherent in pipeline, terminalling and storage
operations, as it is with other entities engaged in similar businesses. Although
environmental costs may have a significant impact on results of operations for
any single period, the Partnership believes that such costs will not have a
material adverse effect on its financial position.
In connection with the initial public offering of Valero L.P., UDS agreed to
indemnify Valero L.P. for environmental liabilities that arose prior to April
16, 2001 and are discovered within 10 years after April 16, 2001. Excluded from
this indemnification are liabilities that result from a change in environmental
law after April 16, 2001. Effective with the acquisition of UDS by Valero
Energy, Valero Energy has assumed this environmental indemnification. In
addition, as an operator or owner of the assets, the Partnership could be held
liable for pre-April 16, 2001 environmental damage should Valero Energy be
unable to fulfill its obligation. However, the Partnership believes that such a
situation is remote given Valero Energy's financial condition.
In conjunction with the sale of the Wichita Falls Business to Valero L.P.,
Valero Energy has agreed to indemnify Valero L.P. for any environmental
liabilities that arose prior to February 1, 2002 and are discovered by April 15,
2011. As of and for the years ended December 31, 2001, 2000 and 1999, and as of
and for the one month ended January 31, 2002, the Wichita Falls Business did not
incur any environmental liability; thus there was no accrual on January 31,
2002.
9
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Partnership's financial position or results of operations.
NOTE 5: Crude Hydrogen Pipeline Acquisition
In May of 2002, Valero Energy completed the construction of a 30-mile pure
hydrogen pipeline, which originates at Valero Energy's Texas City refinery and
ends at Praxair, Inc.'s La Porte, Texas plant. The total cost to construct the
pipeline was $11,000,000.
On May 29, 2002, the Partnership acquired the 30-mile pure hydrogen pipeline
from Valero Energy for $11,000,000, which was funded with borrowings under the
Partnership's revolving credit facility. The Partnership then exchanged, on May
29, 2002, its 30-mile pure hydrogen pipeline for Praxair, Inc.'s 25-mile crude
hydrogen pipeline, which originates at Celanese Ltd.'s chemical facility in
Clear Lake, Texas and ends at Valero Energy's Texas City refinery in Texas City
Texas, under an exchange agreement previously negotiated between Valero Energy
and Praxair, Inc. In conjunction with the exchange, the Partnership entered into
an operating agreement with Praxair, Inc. whereby Praxair, Inc. will operate the
pipeline for an annual fee of $92,000, plus reimbursement of repair, replacement
and relocation costs.
The crude hydrogen transported in the pipeline will be owned by Valero Energy,
and the transportation services provided by the Partnership to Valero Energy are
subject to a Hydrogen Tolling Agreement. The Hydrogen Tolling Agreement provides
that Valero Energy will pay the Partnership an annual fixed fee of $1,400,000
for transporting crude hydrogen, regardless of the actual quantities
transported.
NOTE 6: Related Party Transactions
The Partnership has related party transactions with Valero Energy for pipeline
tariff and terminalling fee revenues, certain employee costs, insurance costs,
administrative costs and interest expense on the debt due to parent (for the
period January 1, 2001 to April 15, 2001). The receivable from parent represents
the net amount due from Valero Energy for these related party transactions and
the net cash collected under Valero Energy's centralized cash management program
on the Partnership's behalf.
The following table summarizes transactions with Valero Energy:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenues.................................... $29,892 $23,488 $55,802 $46,760
Operating expenses.......................... 3,377 2,716 6,784 5,399
General and administrative expenses......... 1,499 1,300 2,931 2,600
Interest expense on debt due to parent...... - 358 - 2,512
Under the Services Agreement with the Partnership, Valero Energy has agreed to
provide the corporate functions of legal, accounting, treasury, information
technology and other services for an annual fee of $5,200,000 until July 2008.
The $5,200,000 may be adjusted annually based on the Consumer Price Index
published by the U.S. Department of Labor, and may also be adjusted to take into
account additional service levels necessitated by the acquisition or
construction of additional assets. This annual fee is in addition to the
incremental general and administrative costs to be incurred from third parties
as a result of the Partnership being a publicly held entity.
10
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The Services Agreement also requires that the Partnership reimburse Valero
Energy for various recurring costs of employees who work exclusively within the
pipeline, terminalling and storage operations and for certain other costs
incurred by Valero Energy relating solely to the Partnership. These employee
costs include salary, wages and benefit costs.
Under the Pipelines and Terminals Usage Agreement with the Partnership, Valero
Energy has agreed to use the Partnership's pipelines to transport at least 75%
of the crude oil shipped to and at least 75% of the refined products shipped
from the McKee, Three Rivers and Ardmore refineries and to use the Partnership's
refined product terminals for terminalling services for at least 50% of all
refined products shipped from these refineries until at least April 2008. For
the six months ended June 30, 2002, Valero Energy used the Partnership's
pipelines to transport 95% of its crude oil shipped to and 80% of the refined
products shipped from the McKee, Three Rivers and Ardmore refineries and Valero
Energy used the Partnership's terminalling services for 63% of all refined
products shipped from these refineries.
If market conditions change, either with respect to the transportation of crude
oil or refined products or to the end markets in which Valero Energy sells
refined products, in a material manner such that Valero Energy would suffer a
material adverse effect if it were to continue to use the Partnership's
pipelines and terminals at the required levels, Valero Energy's obligation to
the Partnership will be suspended during the period of the change in market
conditions to the extent required to avoid the material adverse effect.
As a result of the Pipelines and Terminals Usage Agreement, substantially all of
the Partnership's revenues are derived from Valero Energy and its various
subsidiaries, based on the operations of Valero Energy's McKee, Three Rivers and
Ardmore refineries. Accordingly, the Partnership's results are directly impacted
by the operations of these three Valero Energy refineries.
NOTE 7: Long-term Debt
As of June 30, 2002, the Partnership had $91,000,000 outstanding under its
$120,000,000 revolving credit facility. During the second quarter of 2002, the
Partnership borrowed $11,000,000 under the revolving credit facility to purchase
a pure hydrogen pipeline from Valero Energy and during the first quarter of
2002, the Partnership borrowed $64,000,000 under the revolving credit facility
to purchase the Wichita Falls Business.
The revolving credit facility expires on January 15, 2006 and borrowings under
the revolving credit facility bear interest based on either an alternative base
rate or LIBOR at the option of the Partnership.
The revolving credit facility requires that the Partnership maintain certain
financial ratios and includes other restrictive covenants, including a
prohibition on distributions if any default, as defined in the revolving credit
facility, exists or would result from the distribution. Management believes that
the Partnership is in compliance with all of these ratios and covenants.
For a discussion of the issuance of $100,000,000 of senior notes by Valero
Logistics Operations in July 2002, see Note 11: Subsequent Events below.
11
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 8: Net Income per Limited Partnership Unit
The following table provides details of the basic and diluted net income per
limited partnership unit computations:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------- -------------
Net Net
Income Units Per Income Units Per
(Numer- (Denom- Unit (Numer- (Denom- Unit
ator) inator) Amount ator) inator) Amount
------- ------- ------ ------- ------- ------
(in thousands) (in thousands)
Limited partners' interest in
net income...................... $14,640 $24,218
====== ======
Basic and dilutive net income per
common and subordinated unit...... $14,640 19,254 $0.76 $24,218 19,248 $1.26
====== ====== ==== ====== ====== ====
Net income per limited partnership unit for the period from April 16, 2001 (the
closing of the Partnerships initial public offering) to June 30, 2001 was $0.46
per unit based on $8,836,000 of net income allocated to the limited partners
(numerator) and 19,198,644 limited partnership units outstanding (denominator)
during such period. Net income prior to the Partnership's initial public
offering on April 16, 2001 of $10,126,000 was allocated entirely to UDS and its
affiliates.
Net income related to the Wichita Falls Business for the month ended January 31,
2002 of $650,000 was allocated entirely to Valero Energy, the Wichita Falls
Business' parent.
The Partnership generated sufficient net income such that the amount of net
income allocated to common units was equal to the amount allocated to the
subordinated units, after consideration of the general partner interest.
NOTE 9: Restricted Common Units
Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., adopted a
long-term incentive plan under which contractual rights to receive common units
of Valero L.P. and distribution equivalent rights (DERs) may be awarded to
certain key employees of affiliates providing services to Valero L.P. and to
directors and officers of Valero GP, LLC. On January 21, 2002, Valero GP, LLC
granted contractual rights to receive a total of 55,250 common units and DERs to
its officers, certain employees of its affiliates and its outside directors. In
conjunction with the grant of contractual rights to receive common units under
the plan, Valero L.P. issued 55,250 restricted common units to Valero GP, LLC on
January 21, 2002 for total consideration of $2,262,000 (based on a $40.95 market
value per common unit), the receivable for which is classified as equity in the
consolidated balance sheet as of June 30, 2002.
One-third of the contractual rights to receive common units awarded by Valero
GP, LLC will vest at the end of each year of the three-year vesting period.
Accordingly, the Partnership recognized $199,000 and $331,000 of compensation
expense associated with these contractual rights to receive common units for the
three and six months ended June 30, 2002, respectively.
NOTE 10: Distributions
The Partnership makes quarterly distributions of 100% of its available cash,
generally defined as cash receipts less cash disbursements and cash reserves
established by the general partner in its sole discretion. Pursuant to the
partnership agreement, the general partner is entitled to incentive
distributions if the amount the Partnership distributes with respect to any
quarter exceeds specified target levels shown below:
12
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Percentage of Distribution
--------------------------
Quarterly Distribution Amount per Unit Unitholders General Partner
-------------------------------------- ----------- ---------------
Up to $0.60 ......................... 98% 2%
Above $0.60 up to $0.66 ............. 90% 10%
Above $0.66 up to $0.90 ............. 75% 25%
Above $0.90 .......................... 50% 50%
On February 14, 2002, the Partnership paid the fourth quarter cash distribution
of $0.60 per unit for a total distribution of $11,788,000, including $236,000
paid to the general partner.
On May 15, 2002, the Partnership paid the first quarter cash distribution of
$0.65 per unit for a total distribution of $12,858,000, including $343,000 paid
to the general partner. The general partner's distribution included $85,000 of
an incentive distribution.
NOTE 11: Subsequent Events
On July 15, 2002, Valero Logistics Operations completed the sale of $100,000,000
of 6.875% senior notes for total proceeds of $99,686,000. The net proceeds of
$98,536,000, after deducting underwriters' commissions and offering expenses of
$1,150,000, were used to pay off the $91,000,000 outstanding under the revolving
credit facility.
The senior notes rank equally with all other existing indebtedness, including
indebtedness under the revolving credit facility. The senior notes contain
restrictions on the Partnership's ability to incur secured indebtedness unless
the same security is also provided for the benefit of holders of the senior
notes. In addition, the senior notes limit the Partnership's ability to incur
indebtedness secured by certain liens and to engage in certain sale-leaseback
transactions.
The senior notes may be redeemed in whole or in part at any time at a redemption
price, which includes a make-whole premium, plus accrued and unpaid interest to
the redemption date. The senior notes also include a change-of-control
provision, which requires that an investment grade entity own and control the
general partner of the Partnership. Otherwise the Partnership must offer to
purchase the senior notes at a price equal to 100% of their outstanding
principal balance plus accrued interest through the date of purchase.
On July 19, 2002, the Partnership declared a quarterly distribution of $0.70 per
unit payable on August 14, 2002 to unitholders of record on August 1, 2002. This
distribution, related to the second quarter of 2002, is expected to total
$14,099,000, of which $621,000 represents the general partner's share of such
distribution. The general partner's distribution includes a $339,000 incentive
distribution.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q contains certain "forward-looking" statements
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, and information relating to the
Partnership that is based on the beliefs of management as well as assumptions
made by and information currently available to management. When used in this
report, the words "anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar expressions, as they relate to the Partnership or
management, identify forward-looking statements. These statements reflect the
current views of management with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to the operations,
including as a result of:
o competitive factors such as competing pipelines;
o pricing pressures and changes in market conditions;
o reductions in production at the refineries that the Partnership supplies
with crude oil and whose refined production it transports;
o inability to acquire additional nonaffiliated pipeline entities or assets;
o reductions in space allocated to the Partnership in interconnecting third
party pipelines;
o shifts in market demand;
o changes in the credit ratings assigned to Valero Logistics Operations
senior notes;
o general economic conditions; and
o other factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from the forward-looking statements described herein.
Introduction
The Partnership's results of operations may be affected by seasonal factors,
such as the consumer demand for petroleum products, which vary during the year,
or industry factors that may be specific to a particular period, such as the
demand for refined products, supply capacity of competing pipelines and refinery
maintenance turnarounds.
On February 1, 2002, the Partnership acquired the Wichita Falls Crude Oil
Pipeline and Storage Business (the Wichita Falls Business) from Valero Energy
for a total cost of $64,000,000. Since the acquisition of the Wichita Falls
Business represents the transfer of a business under the common control of
Valero Energy, the balance sheet as of December 31, 2001 (the earliest date on
which common control existed) and the statements of income and cash flows for
the month ended January 31, 2002 (preceding the acquisition date) have been
restated to include the Wichita Falls Business. As a result, the financial data
and operating data which follow under "Results of Operations" represents the
following:
o consolidated results of the Partnership as of June 30, 2002 and for the
three and five months ended June 30, 2002;
o combined results of the Partnership and the Wichita Falls Business as of
December 31, 2001 and for the one month ended January 31, 2002;
o consolidated results of Valero L.P. and Valero Logistics Operations for the
period from April 16, 2001 through June 30, 2001; and
o combined results of Valero L.P. and Valero Logistics Operations for the
period from January 1, 2001 through April 15, 2001.
14
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Financial Data:
Three Months Ended
June 30,
--------
2002 2001
---- ----
(in thousands)
Statement of Income Data:
Revenues.................................................... $30,030 $ 23,637
------ ------
Costs and expenses:
Operating expenses......................................... 9,565 8,736
General and administrative expenses........................ 1,699 1,331
Depreciation and amortization.............................. 3,875 3,251
------ ------
Total costs and expenses.................................. 15,139 13,318
------ ------
Operating income............................................ 14,891 10,319
Equity income from Skelly-Belvieu Pipeline Company......... 844 907
Interest expense, net...................................... (796) (870)
------ ------
Net income.................................................. $14,939 $10,356
====== ======
June 30, June 30,
2002 2001
---- ----
(in thousands)
Balance Sheet Data:
Property, plant and equipment, net.......................... $354,541 277,924
Total assets................................................ 400,923 324,122
Long-term debt, including current portion................... 101,076 30,967
Partners' equity............................................ 291,932 286,375
Debt-to-capitalization ratio................................ 25.7% 9.8%
15
Operating Data:
The following table reflects throughput barrels for the Partnership's crude oil
and refined product pipelines and the total throughput for all of the refined
product terminals for the three months ended June 30, 2002 and 2001.
Three Months Ended
June 30,
--------
2002 2001 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee.................................. 4,424 5,724 (23)%
Wichita Falls to McKee.......................... 6,173 - -
Wasson to Ardmore............................... 7,216 7,389 (2)%
Ringgold to Wasson.............................. 3,532 3,887 (9)%
Corpus Christi to Three Rivers.................. 6,273 8,256 (24)%
Other crude oil pipelines....................... 5,193 3,657 42%
------ ------
Total crude oil pipelines..................... 32,811 28,913 13%
====== ======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver............. 2,364 2,138 11%
McKee to El Paso................................ 5,968 6,597 (10)%
McKee to Amarillo to Abernathy.................. 3,353 3,028 11%
Amarillo to Albuquerque......................... 1,065 1,116 (5)%
McKee to Denver................................. 1,120 1,060 6%
Ardmore to Wynnewood............................ 4,849 5,227 (7)%
Three Rivers to Laredo.......................... 1,113 1,119 (1)%
Three Rivers to San Antonio..................... 2,335 2,641 (12)%
Other refined product pipelines................. 5,466 5,823 (6)%
------ ------
Total refined product pipelines............... 27,633 28,749 (4)%
====== ======
Refined product terminal throughput.............. 16,373 14,515 13%
====== ======
Net income for the quarter ended June 30, 2002 was $14,939,000 as compared to
$10,356,000 for the quarter ended June 30, 2001. The increase of $4,583,000 is
primarily attributable to the additional net income generated from the four
acquisitions completed since July of 2001 (the Southlake refined product
terminal, the Ringgold crude oil storage facility, the Wichita Falls Business
and the crude hydrogen pipeline). The increase was partially offset by the
impact of lower throughput barrels resulting from reduced refinery production at
the three Valero Energy refineries served by the Partnership's pipelines and
terminals. The reduced refinery production was attributable to economic-based
production cuts in June of 2002 and unscheduled refinery down time.
Revenues for the quarter ended June 30, 2002 were $30,030,000 as compared to
$23,637,000 for the quarter ended June 30, 2001, an increase of 27%, or
$6,393,000. This increase is due primarily to the addition of the Wichita Falls
crude oil pipeline revenues, partially offset by decreases in revenues on
several of the Partnership's other pipelines during the quarter. The following
discusses significant revenue increases and decreases by pipeline:
o revenues for the Wichita Falls crude oil pipeline for the second quarter of
2002 totaled $5,371,000;
o revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil
pipeline increased $231,000, despite a combined 5% decrease in throughput
barrels resulting from reduced production at the Ardmore refinery, due to a
tariff rate increase on the Ringgold to Wasson crude oil pipeline effective
December 1, 2001;
16
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
decreased $663,000 due to a 24% decrease in throughput barrels, as a result
of reduced production at the Three Rivers refinery. During the second
quarter of 2002, Valero Energy implemented certain economic-based refinery
production cuts at the Three Rivers refinery resulting in reduced
throughput barrels in the Partnership's pipelines;
o revenues for the McKee to Colorado Springs to Denver and the McKee to
Amarillo to Abernathy refined product pipelines increased $642,000 due to a
combined 11% increase in throughput barrels, resulting from Valero Energy
supplying more refined products to the Colorado and West Texas markets
during the second quarter of 2002;
o revenues for the McKee to El Paso refined product pipeline decreased
$258,000 due to a 10% decrease in throughput barrels, resulting from Valero
Energy supplying less refined products to the El Paso and Arizona markets
during the second quarter of 2002; and
o revenues for the refined product terminals for the second quarter of 2002,
excluding the impact of the Southlake terminal, remained comparable to the
revenues recognized in the second quarter of 2001 since the additional fee
charged at the terminals for blending additives into certain refined
products offset the impact of the lower throughput barrels. Revenues for
the Southlake refined product terminal, which was acquired on July 1, 2001,
were $600,000 and the throughput was 2,068,000 barrels for the quarter
ended June 30, 2002.
Operating expenses increased $829,000, or 9%, for the quarter ended June 30,
2002 as compared to the quarter ended June 30, 2001 primarily due to $1,356,000
of operating expenses related to the Southlake refined product terminal, the
Ringgold crude oil storage facility and the Wichita Falls Business, partially
offset by lower utility expenses of $775,000, or 28%, due to lower natural gas
costs and lower electricity rates negotiated with power suppliers.
General and administrative expenses increased 28% for the second quarter of 2002
as compared to the second quarter of 2001 due to general and administrative
costs related to being a publicly held entity and the recognition of $199,000 of
compensation expense related to the award of contractual rights to receive
common units in January of 2002 (See Note 9: Restricted Common Units). In
addition to the $5,200,000 annual fee charged by Valero Energy to the
Partnership for general and administrative services, the Partnership incurs
costs (e.g., unitholder annual reports and preparation and mailing of income tax
reports to unitholders and director fees) as a result of being a publicly held
entity. For the three months ended June 30, 2002, general and administrative
expenses of $1,699,000 reflect $1,300,000 of the annual service fee, $360,000 of
public entity expenses and $199,000 of compensation expense, less $160,000
reimbursed by partners on jointly owned pipelines. For the three months ended
June 30, 2001, general and administrative expenses of $1,331,000 reflect
$1,300,000 of the annual service fee and $99,000 of public entity expenses, less
$68,000 reimbursed by partners on jointly owned pipelines.
Depreciation and amortization expense increased $624,000 for the quarter ended
June 30, 2002 as compared to the quarter ended June 30, 2001 due to the
additional depreciation related to the acquisition of the Southlake refined
product terminal, the Ringgold crude oil storage facility, the Wichita Falls
Business and the crude hydrogen pipeline, all subsequent to the second quarter
of 2001.
Equity income from Skelly-Belvieu Pipeline Company represents the Partnership's
50% interest in the net income of Skelly-Belvieu Pipeline Company, which
operates the Skellytown to Mont Belvieu refined product pipeline. Equity income
from Skelly-Belvieu Pipeline Company for the quarter ended June 30, 2002
approximated the amount of equity income recognized in the second quarter of
2001 as throughput volumes did not change significantly. Distributions from the
Skelly-Belvieu Pipeline Company for the second quarter of 2002 totaled $851,000
as compared to $593,000 for the second quarter of 2001, an increase of 44%, or
$258,000. This increase is primarily due to higher levels of maintenance capital
expenditures in the second quarter of 2001 that reduced the cash available to be
distributed.
17
Interest expense for the quarter ended June 30, 2002 was $796,000, net of
interest income of $23,000 and capitalized interest of $40,000, as compared to
$870,000 of interest expense for the same period in 2001. Interest expense
decreased due to the payoff of the debt due to parent in April 2001 with
proceeds from the Partnership's initial public offering. During the second
quarter of 2002, the Partnership incurred $598,000 of interest expense related
to borrowings under the revolving credit facility, $201,000 of interest expense
related to the Port of Corpus Christi note payable and $60,000 of interest
expense related to the amortization of debt issuance costs. The acquisitions of
the crude hydrogen pipeline on May 29, 2002 and the Wichita Falls Business on
February 1, 2002 from Valero Energy were funded with $75,000,000 of borrowings
under the revolving credit facility.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Financial Data:
Six Months Ended
June 30,
--------
2002 2001
---- ----
(in thousands)
Statement of Income Data:
Revenues....................................................... $ 56,054 $ 47,059
------ ------
Costs and expenses:
Operating expenses............................................ 18,749 17,387
General and administrative expenses........................... 3,487 2,503
Depreciation and amortization................................. 8,231 6,489
------ ------
Total costs and expenses.................................... 30,467 26,379
------ ------
Operating income............................................... 25,587 20,680
Equity income from Skelly-Belvieu Pipeline Company............ 1,522 1,576
Interest expense, net......................................... (1,352) (3,114)
------ ------
Income before income tax expense............................... 25,757 19,142
Income tax expense............................................ (395) -
------- ------
Net income..................................................... $ 25,362 $ 19,142
====== ======
Restated
June 30, December 31,
2002 2001
---- ----
(in thousands)
Balance Sheet Data:
Property, plant and equipment, net............................. $354,541 $349,012
Total assets................................................... 400,923 387,546
Long-term debt, including current portion...................... 101,076 26,122
Partners' equity............................................... 291,932 342,166
Debt-to-capitalization ratio................................... 25.7% 7.1%
18
Operating Data:
The following table reflects throughput barrels for the Partnership's crude oil
and refined product pipelines and the total throughput for all of the refined
product terminals for the six months ended June 30, 2002 and 2001.
Six Months Ended
June 30,
--------
2002 2001 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee.................................. 8,603 11,183 (23)%
Wichita Falls to McKee.......................... 11,614 - -
Wasson to Ardmore............................... 12,915 14,782 (13)%
Ringgold to Wasson.............................. 5,481 6,798 (19)%
Corpus Christi to Three Rivers.................. 11,831 16,229 (27)%
Other crude oil pipelines....................... 10,482 7,669 37%
------ ------
Total crude oil pipelines...................... 60,926 56,661 8%
====== ======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver............. 3,994 4,399 (9)%
McKee to El Paso................................ 11,584 12,355 (6)%
McKee to Amarillo to Abernathy.................. 6,525 6,874 (5)%
Amarillo to Albuquerque......................... 2,030 2,292 (11)%
McKee to Denver................................. 2,145 2,141 -
Ardmore to Wynnewood............................ 8,662 10,714 (19)%
Three Rivers to Laredo.......................... 2,211 2,204 -
Three Rivers to San Antonio..................... 4,593 5,096 (10)%
Other refined product pipelines................. 9,547 11,246 (15)%
------ ------
Total refined product pipelines................ 51,291 57,321 (11)%
====== ======
Refined product terminal throughput.............. 32,196 29,618 9%
====== ======
Net income for the six months ended June 30, 2002 was $25,362,000 as compared to
$19,142,000 for the six months ended June 30, 2001. The increase of $6,220,000
is primarily attributable to the additional net income generated from the four
acquisitions completed since July of 2001 (the Southlake refined product
terminal, the Ringgold crude oil storage facility, the Wichita Falls Business
and the crude hydrogen pipeline) and lower interest expense as compared to 2001
as a result of repaying the $107,676,000 of debt due to parent in April of 2001.
The increase was partially offset by the impact of lower throughput barrels
resulting from economic-based refinery production cuts at the three Valero
Energy refineries served by the Partnership's pipelines and terminals. Net
income in the first six months of 2002 includes $650,000 of net income related
to the Wichita Falls Business for the month ended January 31, 2002, which was
allocated entirely to Valero Energy, the Wichita Falls Business' parent.
Revenues for the six months ended June 30, 2002 were $56,054,000 as compared to
$47,059,000 for the six months ended June 30, 2001, an increase of 19%, or
$8,995,000. This increase is due primarily to the addition of the Wichita Falls
crude oil pipeline revenues and the Southlake refined product terminal revenues
in the first six months of 2002, partially offset by decreases in revenues on
most of the Partnership's other pipelines during the first six months of 2002.
The following discusses significant revenue increases and decreases by pipeline:
o revenues in the six months ended June 30, 2002 include $10,104,000 of
revenues related to the Wichita Falls Business, including $1,740,000 of
revenues (2,000,000 barrels of throughput) related to the month ended
January 31, 2002 as a result of the common control transfer between Valero
Energy and the Partnership;
19
o revenues for the Wasson to Ardmore crude oil pipeline and the Ardmore to
Wynnewood refined product pipeline decreased $410,000 due to a combined 15%
decrease in throughput barrels, resulting from reduced production at the
Ardmore refinery. During the first six months of 2002, Valero Energy
initiated economic-based refinery production cuts as a result of
significantly lower refining margins industry-wide;
o revenues for the Ringgold to Wasson crude oil pipeline increased $106,000,
despite a 19% decrease in throughput barrels resulting from reduced
production at the Ardmore refinery, due to a tariff rate increase effective
December 1, 2001;
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
decreased $1,359,000 due to a 27% decrease in throughput barrels, as a
result of reduced production at the Three Rivers refinery. During the first
six months of 2002, Valero Energy also initiated economic-based refinery
production cuts at the Three Rivers refinery. In addition, during the first
quarter of 2002, Valero Energy accelerated certain refinery maintenance
turnaround work scheduled for later in 2002 resulting in the partial
shutdown of the refinery and reduced throughput barrels in the
Partnership's pipelines;
o revenues for the McKee to Colorado Springs to Denver and the McKee to El
Paso refined product pipelines decreased $844,000 due to a combined 7%
decrease in throughput barrels, resulting from reduced production at the
McKee refinery. During the first quarter of 2002, Valero Energy completed
several planned refinery maintenance turnaround projects at the McKee
refinery which significantly reduced production and thus reduced throughput
barrels in the Partnership's pipelines;
o revenues for the Three Rivers to Corpus Christi and the Three Rivers to
Pettus refined product pipelines decreased $351,000 due to a combined 28%
decrease in throughput barrels, as a result of reduced production at the
Three Rivers refinery. During the refinery turnaround and economic-induced
production cutbacks, the Three Rivers refinery curtailed production of
benzene, toluene and xylene, the primary refined products transported in
the refined product pipelines going to Corpus Christi from Three Rivers;
and
o revenues for the refined product terminals for the six months ended June
30, 2002, excluding the impact of the Southlake terminal, remained
comparable to the revenues recognized in the six months ended June 30, 2001
since the throughput levels remained steady. Revenues for the Southlake
refined product terminal, which was acquired on July 1, 2001, were
$1,213,000 and the throughput was 4,175,000 barrels for the six months
ended June 30, 2002.
Operating expenses increased $1,362,000, or 8%, for the six months ended June
30, 2002 as compared to the six months ended June 30, 2001 due to $2,639,000 of
operating expenses related to the Southlake refined product terminal, the
Ringgold crude oil storage facility and the Wichita Falls Business, partially
offset by lower utility expenses of $1,420,000, or 25%, due to lower natural gas
costs and lower electricity rates negotiated with power suppliers.
General and administrative expenses increased 39% for the first six months of
2002 as compared to the first six months of 2001 due to general and
administrative costs related to being a publicly held entity and the recognition
of $331,000 of compensation expense related to the award of contractual rights
to receive common units in January of 2002 (See Note 9: Restricted Common
Units). In addition to the $5,200,000 annual fee charged by Valero Energy to the
Partnership for general and administrative services, the Partnership incurs
costs (e.g., unitholder annual reports and preparation and mailing of income tax
reports to unitholders and director fees) as a result of being a publicly held
entity. For the six months ended June 30, 2002, general and administrative
expenses of $3,487,000 reflect $2,600,000 of the annual service fee, $40,000 of
general and administrative expenses related to the Wichita Falls Business for
January 2002, $831,000 of public entity expenses and $331,000 of compensation
expense, less $315,000 reimbursed by partners on jointly owned pipelines. For
the six months ended June 30, 2001, general and administrative expenses of
$2,503,000 reflect $2,600,000 of the annual service fee and $99,000 of public
entity expenses, less $196,000 reimbursed by partners on jointly owned
pipelines.
20
Depreciation and amortization expense increased $1,742,000 for the six months
ended June 30, 2002 as compared to the six months ended June 30, 2001 due to the
additional depreciation related to the acquisition of the Southlake refined
product terminal, the Ringgold crude oil storage facility, the Wichita Falls
Business and the crude hydrogen pipeline, all subsequent to the second quarter
of 2001. Included in the first six months of 2002 is $160,000 of depreciation
expense related to the Wichita Falls Business for the month ended January 31,
2002.
Equity income from Skelly-Belvieu Pipeline Company for the six months ended June
30, 2002 approximated the amount of equity income recognized in the six months
ended June 30, 2001 as throughput volumes in the Skellytown to Mont Belvieu
refined product pipeline did not change significantly. Distributions from the
Skelly-Belvieu Pipeline Company for the six months ended June 30, 2002 totaled
$1,622,000 as compared to $1,232,000 for the six months ended June 30, 2001, an
increase of 32%, or $390,000. This increase is primarily due to higher levels of
maintenance capital expenditures in the second quarter of 2001 that reduced the
cash available to be distributed.
Interest expense for the six months ended June 30, 2002 was $1,352,000, net of
interest income of $42,000 and capitalized interest of $114,000, as compared to
$3,114,000 of interest expense for the same period in 2001. Interest expense
decreased due to the payoff of the debt due to parent in April 2001 with
proceeds from the Partnership's initial public offering. During the first six
months of 2002, the Partnership incurred $1,045,000 of interest expense related
to borrowings under the revolving credit facility, $403,000 of interest expense
related to the Port of Corpus Christi note payable and $60,000 of interest
expense related to the amortization of debt issuance costs. Borrowings under the
revolving credit facility increased in the first half of 2002, as a result of
the May 29, 2002 acquisition of a crude hydrogen pipeline for $11,000,000 and
the February 1, 2002 acquisition of the Wichita Falls Business for $64,000,000.
Income tax expense for the first six months of 2002 represents income taxes
incurred by the Wichita Falls Business during the month ended January 31, 2002,
prior to the transfer of the Wichita Falls Business to the Partnership.
Outlook for the Third Quarter and Remainder of 2002
So far during the third quarter of 2002, throughput levels in the Partnership's
pipelines and terminals are in line with volumes transported in the second
quarter of 2002. Refinery industry margins thus far in the third quarter of 2002
are comparable to the margins seen in the second quarter of 2002; which has
resulted in Valero Energy maintaining throughput levels in and out of the McKee,
Three Rivers and Ardmore refineries at below normal operating capacity. The
Partnership anticipates that throughput levels in its various pipelines and
terminals will continue at second quarter 2002 levels for the balance of 2002;
however, there can be no assurance that throughput will stay at these levels.
Liquidity and Capital Resources
Financing
As of June 30, 2002, the Partnership had $91,000,000 outstanding under its
$120,000,000 revolving credit facility. During the first quarter of 2002, the
Partnership borrowed $64,000,000 under the revolving credit facility to purchase
the Wichita Falls Business from Valero Energy. During the second quarter of
2002, the Partnership borrowed $11,000,000 under the revolving credit facility
to purchase a pure hydrogen pipeline from Valero Energy.
The revolving credit facility expires on January 15, 2006 and borrowings under
the revolving credit facility bear interest based on either an alternative base
rate or LIBOR at the option of the Partnership.
The revolving credit facility requires that the Partnership maintain certain
financial ratios and includes other restrictive covenants, including a
prohibition on distributions by the Partnership if any default, as defined in
the revolving credit facility, exists or would result from the distribution.
Management believes that the Partnership is in compliance with all of these
ratios and covenants.
21
On June 6, 2002, Valero L.P. and Valero Logistics Operations filed a
$500,000,000 universal shelf registration statement with the Securities and
Exchange Commission. On July 15, 2002, Valero Logistics Operations completed the
sale of $100,000,000 of 6.875% senior notes, issued under its shelf
registration, for total proceeds of $99,686,000. The net proceeds of
$98,536,000, after deducting underwriters' commissions and offering expenses of
$1,150,000, were used to pay off the $91,000,000 outstanding under the revolving
credit facility.
The senior notes rank equally with all other existing indebtedness, including
indebtedness under the revolving credit facility. The senior notes contain
restrictions on the Partnership's ability to incur secured indebtedness unless
the same security is also provided for the benefit of holders of the senior
notes. In addition, the senior notes limit the Partnership's ability to incur
indebtedness secured by certain liens and to engage in certain sale-leaseback
transactions.
The senior notes may be redeemed in whole or in part at any time at a redemption
price, which includes a make-whole premium, plus accrued and unpaid interest to
the redemption date. The senior notes also include a change-of-control
provision, which requires that an investment grade entity own and control the
general partner of the Partnership. Otherwise the Partnership must offer to
purchase the senior notes at a price equal to 100% of their outstanding
principal balance plus accrued interest through the date of purchase.
The Partnership's ability to complete future debt and equity offerings and the
timing of any such offerings will depend upon various factors including
prevailing market conditions, interest rates and the Partnership's financial
condition.
Distributions
Valero L.P.'s partnership agreement, as amended, sets forth the calculation to
be used to determine the amount and priority of cash distributions that the
common unitholders, subordinated unitholders and general partner will receive.
During the subordination period, the holders of Valero L.P.'s common units are
entitled to receive each quarter a minimum quarterly distribution of $0.60 per
unit ($2.40 annualized) prior to any distribution of available cash to holders
of Valero L.P.'s subordinated units. The subordination period is defined
generally as the period that will end on the first day of any quarter beginning
after December 31, 2005 if (1) the Partnership has distributed at least the
minimum quarterly distribution on all outstanding units with respect to each of
the immediately preceding three consecutive, non-overlapping four-quarter
periods and (2) the Partnership's adjusted operating surplus, as defined in the
partnership agreement, during such periods equals or exceeds the amount that
would have been sufficient to enable the Partnership to distribute the minimum
quarterly distribution on all outstanding units on a fully diluted basis and the
related distribution on the 2% general partner interest during those periods.
In addition, all of the subordinated units may convert to common units on a
one-for-one basis on the first day following the record date for distributions
for the quarter ending December 31, 2005, if the Partnership meets the tests set
forth in the partnership agreement. If the subordination period ends, the rights
of the holders of subordinated units will no longer be subordinated to the
rights of the holders of common units and the subordinated units may be
converted into common units.
On May 15, 2002, the Partnership paid a distribution of $0.65 per unit, or
$12,515,000, to unitholders representing the distribution of available cash
generated in the first quarter of 2002. The general partner's cash distribution
applicable to the first quarter of 2002 was $343,000, of which $85,000 was an
incentive distribution.
On July 19, 2002, the Partnership declared a distribution of $0.70 per unit, or
$13,478,000, payable on August 14, 2002, to unitholders representing the
distribution of available cash generated in the second quarter of 2002. The
general partner's cash distribution applicable to the second quarter of 2002 was
$621,000, of which $339,000 was an incentive distribution.
22
Capital Requirements
The petroleum pipeline industry is capital-intensive, requiring significant
investments to upgrade or enhance existing operations and to meet environmental
regulations. The Partnership's capital expenditures consist primarily of:
o maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental regulations;
and
o expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals and storage
facilities to meet Valero Energy's needs. In addition, expansion capital
expenditures will include acquisitions of pipelines, terminals or storage
assets owned by Valero Energy or other parties.
The Partnership expects to fund its capital expenditures from cash provided by
operations and, to the extent necessary, from proceeds of borrowings under the
revolving credit facility or debt and equity offerings.
During the six months ended June 30, 2002, the Partnership incurred maintenance
capital expenditures of $1,530,000 primarily related to tank and automation
upgrades at both the refined product terminals and the crude oil storage
facilities and cathodic (corrosion) protection and automation upgrades for
refined product pipelines. For the remainder of 2002, the Partnership
anticipates incurring approximately $2,400,000 of additional maintenance capital
expenditures for various automation upgrades and maintenance projects.
During the six months ended June 30, 2002, the Partnership incurred $1,230,000
of expansion capital expenditures, which related primarily to the Amarillo to
Albuquerque refined product pipeline expansion project. The capital expenditures
for the Amarillo to Albuquerque refined product pipeline expansion project are
net of Phillips Petroleum Company's 50% share of costs. Upon completion, the
Partnership's capacity in the Amarillo to Albuquerque pipeline increased from
16,083 barrels per day to 20,700 barrels per day.
On February 1, 2002, the Partnership acquired the Wichita Falls Business from
Valero Energy for a total cost of $64,000,000. The Wichita Falls Business
consists of the following assets:
o A 271.7 mile pipeline originating in Wichita Falls, Texas and ending at
Valero Energy's McKee refinery in Dumas, Texas. The pipeline has the
capacity to transport 110,000 barrels per day of crude oil gathered or
acquired by Valero Energy at Wichita Falls. The Wichita Falls crude oil
pipeline connects to third party pipelines that originate along the Texas
Gulf Coast.
o Four storage tanks located in Wichita Falls, Texas with a total capacity of
660,000 barrels.
On May 29, 2002, the Partnership completed the acquisition of a 30-mile pure
hydrogen pipeline from Valero Energy for $11,000,000 and subsequently exchanged
that pipeline for a 25-mile crude hydrogen pipeline owned by Praxair, Inc. The
crude hydrogen pipeline originates at the Celanese Ltd.'s chemical facility in
Clear Lake, Texas and ends at Valero Energy's Texas City refinery in Texas City,
Texas. The pipeline supplies crude hydrogen to the refinery under a long-term
supply arrangement between Valero Energy and Praxair, Inc.
The Partnership anticipates that it will continue to have adequate liquidity to
fund future recurring operating, investing and financing activities. Cash
distributions are expected to be funded with internally generated cash.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Partnership currently does not engage in interest rate, foreign currency
exchange rate or commodity price hedging transactions.
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Partnership is exposed is interest rate
risk on its debt. The Partnership manages its debt considering various financing
alternatives available in the market and manages its exposure to changing
interest rates principally through the use of a combination of fixed and
floating rate debt. Borrowings under the revolving credit facility expose the
Partnership to increases in the benchmark interest rate underlying its floating
rate revolving credit facility. The Partnerships remaining debt is fixed rate
debt.
23
As of June 30, 2002, the Partnership's fixed rate debt consists of the 8% Port
of Corpus Christi note payable with a carrying value of $10,076,000 and an
estimated fair value of $10,810,000. The fair value was estimated using
discounted cash flow analysis, based on current incremental borrowing rates for
similar types of borrowing arrangements.
As of June 30, 2002, the Partnership's floating rate debt consists of the
borrowings under the revolving credit facility with a carrying value of
$91,000,000 and an estimated fair value of $91,000,000.
Subsequent to June 30, 2002, Valero Logistics Operations issued $100,000,000 of
6.875% senior notes, the estimated fair value of which approximates carrying
value due to the senior notes recent issuance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material litigation has been filed or is pending against the Partnership as
of June 30, 2002.
Item 2. Changes in Securities and Use of Proceeds
On July 15, 2002, Valero Logistics Operations completed the sale of $100,000,000
of 6.875% senior notes that mature July 15, 2012. The senior notes were issued
under Valero L.P.'s and Valero Logistics Operations' previously filed Form S-3
shelf registration statement (Registration No. 333-89978). The managing
underwriter for this offering was JP Morgan.
The senior notes were sold at 99.686% of par resulting in net proceeds of
$98,536,000, after consideration of underwriters' commissions of $650,000 and
legal, accounting and printing expenses of $500,000. The closing of the offering
occurred on July 15, 2002. Valero Logistics Operations used $91,000,000 of the
net proceeds to pay off the outstanding balance of its revolving credit
facility. The remaining net proceeds will be used for general operating
purposes.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
24
(b) Reports on Form 8-K. The following Form 8-K's were filed by Valero L.P.
during the second quarter ended June 30, 2002 and through July 31, 2002:
o Valero L.P. filed a Form 8-K on April 2, 2002 dated April 2, 2002
disclosing presentation materials furnished to and discussed with
securities analysts beginning on April 2, 2002.
o Valero L.P. filed a Form 8-K/A on April 16, 2002 dated February 1, 2002
amending the previously filed Form 8-K dated February 1, 2002 to provide
the audited financial statements of the Wichita Falls Crude Oil Pipeline
and Storage Business and pro forma financial information of Valero L.P.
o Valero L.P. filed a Form 8-K on May 16, 2002 dated May 15, 2002 to reflect
the acquisition of the Wichita Falls Crude Oil Pipeline and Storage
Business by Valero L.P. as a reorganization of entities under common
control. The Form 8-K included restated selected financial data, restated
management's discussion and analysis of financial condition and results of
operations and restated audited consolidated and combined financial
statements of Valero L.P. as of and for the year ended December 31, 2001.
o Valero L.P. filed a Form 8-K on June 5, 2002 dated May 30, 2002 disclosing
the reorganization of the general partner interest of Valero Logistics
Operations. The general partner interest in Valero Logistics Operations
previously owned by Riverwalk Logistics, L.P. is now owned by Valero GP,
Inc., a wholly owned subsidiary of Valero L.P., and Riverwalk Logistics,
L.P. now owns a 2% general partner interest in Valero L.P.
o Valero L.P. filed a Form 8-K on June 6, 2002 dated June 6, 2002 to disclose
that Valero L.P. will issue full and unconditional guarantees of the senior
or subordinated debt securities, as applicable, of Valero Logistics
Operations issued under the Form S-3 shelf registration statement
previously filed by Valero L.P. and its wholly owned subsidiary, Valero
Logistics Operations. The Form 8-K included restated interim financial
statements as of and for the three months ended March 31, 2002 to include
in the notes to the consolidated and combined financial statements a note
discussing the full and unconditional guarantee.
o Valero L.P. filed a Form 8-K on June 13, 2002 dated June 12, 2002 to file
the consolidated balance sheet of Riverwalk Logistics, L.P. and
subsidiaries as of December 31, 2001. The Form 8-K included the audited
consolidated and combined balance sheet of Riverwalk Logistics, L.P. and
subsidiaries as of December 31, 2001 and related notes.
o Valero L.P. filed a Form 8-K/A on June 26, 2002 dated May 15, 2002 to
reflect the reclassification of distributions received from Skelly-Belvieu
Pipeline Company that relate to equity income generated by the joint
venture as cash flows from operating activities rather than investing
activities in the consolidated and combined statements of cash flows, and
to include taxes other than income taxes as part of operating expenses in
the consolidated and combined statements of income. The Form 8-K/A included
restated selected financial data, restated management's discussion and
analysis of financial condition and results of operations and restated
audited consolidated and combined financial statements of Valero L.P. as of
December 31, 2001, 2000, 1999, 1998 and 1997 and June 30, 2000 and for the
years ended December 31, 2001, 1999, 1998 and 1997 and for the six months
ended December 31, 2000 and June 30, 2000.
o Valero L.P. filed a Form 8-K on July 9, 2002 dated July 9, 2002 disclosing
presentation materials furnished to and discussed with underwriters and
securities brokers at presentations beginning on July 9, 2002.
o Valero L.P. filed a Form 8-K on July 15, 2002 dated July 10, 2002
disclosing that Valero Logistics Operations, Valero L.P., Valero GP, Inc.,
Riverwalk Logistics, L.P. and Valero GP, LLC entered into an underwriting
agreement with underwriters named therein, with respect to the issue and
sale by Valero Logistics Operations of $100,000,000 aggregate principal
amount of 6.875% senior notes due 2012 in an underwritten public offering,
which closed on July 15, 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Valero L.P.
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
VALERO L.P.
By: Riverwalk Logistics, L.P., its general partner
By: Valero GP, LLC, its general partner
By: /s/ Curtis V. Anastasio
----------------------------------
Curtis V. Anastasio
Chief Executive Officer and President
August 12, 2002
By: /s/ Steven A. Blank
----------------------------------
Steven A. Blank
Senior Vice President and
Chief Financial Officer
August 12, 2002
26
Exhibit 99.1
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valero L.P. (the "Partnership") on
Form 10-Q for the period ending June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Curtis V. Anastasio,
President and Chief Executive Officer of Valero GP, LLC, the general partner of
the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Partnership.
/s/ Curtis V. Anastasio
Curtis V. Anastasio
Chief Executive Officer and President
August 12, 2002
27
Exhibit 99.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valero L.P. (the "Partnership") on
Form 10-Q for the period ending June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Steven A. Blank,
Senior Vice President and Chief Financial Officer of Valero GP, LLC, the general
partner of the general partner of the Partnership, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Partnership.
/s/ Steven A. Blank
Steven A. Blank
Senior Vice President and Chief Financial Officer
August 12, 2002
28