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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 September 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 October 31, 2002, 9,654,572 common units were outstanding.
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VALERO L.P.
FORM 10-Q
SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated and Combined Balance Sheets
as of September 30, 2002 and December 31, 2001.................................. 3
Consolidated and Combined Statements of Income
for the Three and Nine Months Ended September 30, 2002 and 2001................. 4
Consolidated and Combined Statements of Cash Flows
for the Nine Months Ended September 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........................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 25
Item 4. Controls and Procedures.......................................................... 25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................. 26
SIGNATURES....................................................................... 27
CERTIFICATIONS................................................................... 28
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
September 30, December 31,
2002 2001
---- ----
(note 2)
Assets
Current assets:
Cash and cash equivalents.......................................... $ 31,176 $ 7,796
Receivable from parent............................................. 7,897 6,292
Accounts receivable................................................ 1,526 2,855
Other current assets............................................... 296 -
------- -------
Total current assets.............................................. 40,895 16,943
------- -------
Property, plant and equipment....................................... 485,556 470,401
Less accumulated depreciation and amortization...................... (133,617) (121,389)
------- -------
Property, plant and equipment, net................................ 351,939 349,012
Goodwill, net....................................................... 4,715 4,715
Investment in Skelly-Belvieu Pipeline Company....................... 16,192 16,492
Other noncurrent assets, net........................................ 1,584 384
------- -------
Total assets....................................................... $415,325 $387,546
======= =======
Liabilities and Partners' Equity
Current liabilities:
Current portion of long-term debt.................................. $ 416 $ 462
Accounts payable and accrued liabilities........................... 7,923 4,215
Taxes other than income taxes...................................... 4,660 1,894
------- -------
Total current liabilities......................................... 12,999 6,571
Long-term debt, less current portion................................ 109,353 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)........................................... 170,102 169,305
Subordinated units (9,599,322 outstanding as of 2002 and 2001)..... 116,682 116,399
General partner's equity........................................... 6,189 5,831
Net parent investment in the Wichita Falls Business................ - 50,631
------- -------
Total partners' equity............................................ 292,973 342,166
------- -------
Total liabilities and partners' equity............................ $415,325 $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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues..................................... $32,161 $26,857 $88,215 $73,916
------ ------ ------ ------
Costs and expenses:
Operating expenses.......................... 10,376 8,649 29,125 26,036
General and administrative expenses......... 1,783 1,326 5,270 3,829
Depreciation and amortization............... 4,157 3,452 12,388 9,941
------ ------ ------ ------
Total costs and expenses................... 16,316 13,427 46,783 39,806
------ ------ ------ ------
Operating income............................. 15,845 13,430 41,432 34,110
Equity income from Skelly-Belvieu
Pipeline Company.......................... 843 728 2,365 2,304
Interest expense, net....................... (1,738) (387) (3,090) (3,501)
------ ------ ------ ------
Income before income tax expense............. 14,950 13,771 40,707 32,913
Income tax expense.......................... - - (395) -
------ ------ ------ ------
Net income................................... $14,950 $13,771 $40,312 $32,913
====== ====== ====== ======
Allocation of net income:
Net income................................... $14,950 $13,771 $40,312 $32,913
Less net income applicable to the period
from January 1 through April 15, 2001..... - - - (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................ 14,950 13,771 39,662 22,787
General partner's interest in net income..... (1,064) (276) (1,558) (456)
------ ------ ------ ------
Limited partners' interest in net income..... $13,886 $13,495 $38,104 $22,331
====== ====== ====== ======
Basic and diluted net income per limited
partnership unit........................... $ 0.72 $ 0.70 $ 1.98 $ 1.16
====== ====== ====== ======
Weighted average number of limited
partnership units outstanding - diluted.... 19,253,894 19,198,644 19,249,921 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)
Nine Months Ended
September 30,
------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net income .................................................... $40,312 $ 32,913
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization................................. 12,388 9,941
Equity income from Skelly-Belvieu Pipeline Company............ (2,365) (2,304)
Distributions of equity income from Skelly-Belvieu
Pipeline Company............................................. 2,665 2,020
Changes in current assets and liabilities:
Decrease (increase) in receivable from parent................ (1,605) 16,940
Decrease (increase) in accounts receivable................... 1,329 (1,719)
Decrease (increase) in other current assets.................. (296) 3,528
Increase in accounts payable and accrued liabilities......... 3,708 1,187
Increase in taxes other than income taxes.................... 2,796 97
Other, net.................................................... 671 (413)
------ -------
Net cash provided by operating activities.............. 59,603 62,190
------ -------
Cash Flows from Investing Activities:
Maintenance capital expenditures............................... (2,834) (2,587)
Expansion capital expenditures................................. (1,481) (3,287)
Acquisitions................................................... (75,000) (5,600)
------ -------
Net cash used in investing activities.................. (79,315) (11,474)
------ -------
Cash Flows from Financing Activities:
Proceeds from senior note offering, net of issuance costs...... 98,394 -
Proceeds from other long-term debt borrowings.................. 75,000 20,506
Repayment of long-term debt.................................... (91,046) (5,729)
Distributions to unitholders and general partner............... (38,744) (9,817)
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... 43,092 (40,321)
------ -------
Net increase in cash and cash equivalents...................... 23,380 10,395
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.......... $31,176 $ 10,399
====== =======
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 4,200 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 2,500 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. as well as ownership of
Riverwalk Logistics, L.P., which at that time was the general partner of both
Valero L.P. and Valero Logistics Operations.
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 if 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
6
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
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.
Operating results for the nine months ended September 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 with the
Securities and Exchange Commission 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 represented the transfer of
a business between entities 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 nine months
ended September 30, 2001 assumes that the Wichita Falls Business was acquired on
January 1, 2001 with borrowings under the revolving credit facility.
Nine Months Ended
September 30,
2001
----
(in thousands,
except per unit
amount)
Pro Forma Income Statement Information
Revenues..................................................... $87,159
Costs and expenses........................................... 45,335
Operating income............................................. 41,824
Allocation of net income:
------------------------
Net income .................................................. $38,376
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 September 30, 2001......... (531)
------
Limited partners' interest in net income applicable to
the period from April 16 through September 30, 2001......... $26,003
======
Net income per limited partnership unit...................... $ 1.35
======
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' parent). The pro forma net income for the period from April 16 through
September 30, 2001 of $26,534,000 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 September 30, 2002 and for the three and eight months
ended September 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 September 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. The Partnership adopted Statement No. 145 effective
April 30, 2002 and there was no impact to the Partnership's financial position
or results of operations as a result of adoption.
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. Statement No. 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Partnership will adopt the provisions of Statement No.
146 for restructuring activities initiated on or after January 1, 2003.
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 Issue 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, which may
not create an obligation that meets the definition of a liability.
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 the Partnership 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 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, this 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 Nine Months Ended
September 30, September 30,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenues..................................... $31,981 $26,650 $87,783 $73,410
Operating expenses........................... 3,686 3,432 10,470 8,831
General and administrative expenses.......... 1,490 1,300 4,421 3,900
Interest expense on debt due to parent....... - - - 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
for services Valero Energy does not provide under the Services Agreement.
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, wage 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 nine months ended September 30, 2002, Valero Energy used the Partnership's
pipelines to transport 96% 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 61% 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 September 30, 2002, the Partnership had no outstanding borrowings 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 is available to fund working capital
requirements, to finance future acquisitions and for general corporate purposes.
It may also be used to fund quarterly distributions to unitholders up to a
maximum of $25,000,000. Borrowings under this distribution sublimit must be
reduced to zero each year for a 15-day period. 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. The Partnership is in
compliance with all of these ratios and covenants.
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
$98,394,000, after deducting underwriters' commissions and offering expenses of
$1,292,000, were used to pay off the then outstanding balance of $91,000,000
under the revolving credit facility.
The senior notes rank equally with all other existing senior unsecured
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.
11
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
At the option of the Partnership, 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; however, the senior
notes are not subject to sinking fund provisions. 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.
Valero L.P. has no operations and its only asset is its investment in Valero
Logistics Operations, which owns and operates the Partnership's pipelines and
terminals. Valero L.P. has fully and unconditionally guaranteed the senior notes
issued by Valero Logistics Operations and any obligations under Valero Logistics
Operations' revolving credit facility.
NOTE 8: Net Income per Limited Partnership Unit
The following table reflects the allocation of net income and provides details
of the basic and diluted net income per limited partnership unit computations:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except unit and per unit data)
Net income applicable to the general and
limited partners' interest................. $14,950 $13,771 $39,662 $22,787
Less general partner ownership interest
in net income.............................. (301) (276) (795) (456)
Less general partner incentive income....... (763) - (763) -
------ ------ ------ ------
Net income applicable to the limited
partners' interest......................... $13,886 $13,495 $38,104 $22,331
====== ====== ====== ======
Basic and dilutive net income per
common and subordinated unit............... $ 0.72 $ 0.70 $ 1.98 $ 1.16
====== ====== ====== ======
Weighted average limited partnership
units outstanding - basic.................. 19,253,894 19,198,644 19,249,846 19,198,644
Dilutive effect of unit options issued...... - - 75 -
---------- ---------- ---------- ----------
Weighted average limited partnership
units outstanding - diluted................ 19,253,894 19,198,644 19,249,921 19,198,644
========== ========== ========== ==========
General partner incentive income for the three months ended September 30, 2002
includes $85,000 of incentive income from the first quarter of 2002, $339,000 of
incentive income from the second quarter of 2002 and $339,000 of incentive
income from the third quarter of 2002.
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.
Diluted net income per unit is similar to the computation of basic net income
per unit, except for the dilutive effect of outstanding unit options determined
under the treasury stock method.
12
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 9: Restricted Common Units and Unit Options
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 the then $40.95
market value per common unit), the receivable for which is classified as equity
in the consolidated balance sheet as of September 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 a three-year vesting period.
Accordingly, the Partnership recognized $197,000 and $528,000 of compensation
expense associated with these contractual rights to receive common units for the
three and nine months ended September 30, 2002, respectively.
In addition to the grants of contractual rights to receive common units under
the long-term incentive plan, Valero GP, LLC may grant options to purchase
common units of Valero L.P. Under the provisions of the long-term incentive
plan, one-third of the unit options vest at the end of each year of a three-year
vesting period and expire 10 years from the grant date. In September of 2002 and
in March of 2002, 105,000 unit options and 71,200 unit options, respectively,
were granted to officers, directors and certain employees of Valero GP, LLC and
its affiliates. The Partnership follows the intrinsic value method of accounting
for unit-based compensation. Under this method, the Partnership records no
compensation expense for unit options granted when the exercise price of options
granted is equal to the fair value of the units on the grant date.
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. These quarterly
distributions are declared and paid within 45 days subsequent to each quarter
end. 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:
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%
13
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following table reflects the allocation of total cash distributions to the
general and limited partners applicable to the period in which the distributions
are earned:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per unit data)
General partner ownership interest........ $ 282 $ 235 $ 822 $ 431
General partner incentive distribution.... 339 - 763 -
------ ------ ------ ------
Total general partner distribution....... 621 235 1,585 431
Limited partnership units................. 13,478 11,519 39,470 21,140
------ ------ ------ ------
Total cash distributions................. $14,099 $11,754 $41,055 $21,571
====== ====== ====== ======
Total cash distribution per limited
partnership unit......................... $ 0.70 $ 0.60 $ 2.05 $ 1.10
====== ====== ====== ======
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.
On August 14, 2002, the Partnership paid the second quarter cash distribution of
$0.70 per unit for a total distribution of $14,098,000, including $621,000 paid
to the general partner. The general partner's distribution included $339,000 of
an incentive distribution.
NOTE 11: Subsequent Event
On October 21, 2002, the Partnership declared a quarterly distribution of $0.70
per unit payable on November 14, 2002 to unitholders of record on November 1,
2002. This distribution, related to the third 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.
14
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, its
affiliates 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 represented the transfer of a business between entities 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"
represent the following:
o consolidated results of the Partnership as of September 30, 2002 and for
the three and eight months ended September 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 September 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.
15
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Financial Data:
Three Months Ended
September 30,
------------
2002 2001
---- ----
(in thousands)
Statement of Income Data:
Revenues................................................. $ 32,161 $26,857
------ ------
Costs and expenses:
Operating expenses...................................... 10,376 8,649
General and administrative expenses..................... 1,783 1,326
Depreciation and amortization........................... 4,157 3,452
------ ------
Total costs and expenses.............................. 16,316 13,427
------ ------
Operating income......................................... 15,845 13,430
Equity income from Skelly-Belvieu Pipeline Company...... 843 728
Interest expense, net................................... (1,738) (387)
------ ------
Net income............................................... $14,950 $13,771
====== ======
September 30, September 30,
2002 2001
---- ----
(in thousands)
Balance Sheet Data:
Property, plant and equipment, net....................... $351,939 $281,775
Total assets............................................. 415,325 323,361
Long-term debt, including current portion................ 109,769 25,461
Partners' equity......................................... 292,973 290,329
Debt-to-capitalization ratio............................. 27.3% 8.1%
16
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 September 30, 2002 and 2001.
Three Months Ended
September 30,
------------
2002 2001 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee................................. 3,942 4,879 (19)%
Wichita Falls to McKee......................... 7,887 - -
Wasson to Ardmore.............................. 7,286 7,751 (6)%
Ringgold to Wasson............................. 3,674 3,645 1%
Corpus Christi to Three Rivers................. 6,578 5,672 16%
Other crude oil pipelines...................... 4,579 5,331 (14)%
------ ------
Total crude oil pipelines..................... 33,946 27,278 24%
====== ======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver............ 1,760 2,598 (32)%
McKee to El Paso............................... 6,520 6,192 5%
McKee to Amarillo to Abernathy................. 3,499 3,255 7%
Amarillo to Albuquerque........................ 1,088 1,297 (16)%
McKee to Denver................................ 1,144 1,118 2%
Ardmore to Wynnewood........................... 5,334 5,073 5%
Three Rivers to Laredo......................... 1,213 1,103 10%
Three Rivers to San Antonio.................... 2,271 2,374 (4)%
Other refined product pipelines................ 5,747 4,823 19%
------ ------
Total refined product pipelines............... 28,576 27,833 3%
====== ======
Refined product terminal throughput.............. 16,309 17,496 (7)%
====== ======
Net income for the quarter ended September 30, 2002 was $14,950,000 as compared
to $13,771,000 for the quarter ended September 30, 2001. The increase of
$1,179,000 was primarily attributable to the additional net income generated
from the three acquisitions completed after September 30, 2001 (the Ringgold
crude oil storage facility, the Wichita Falls Business and the crude hydrogen
pipeline), partially offset by higher interest expense related to borrowings to
fund the three acquisitions. The increase was also 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 during the third quarter of 2002 and unscheduled refinery
downtime due in part to hurricane activity along the Gulf Coast.
Revenues for the quarter ended September 30, 2002 were $32,161,000 as compared
to $26,857,000 for the quarter ended September 30, 2001, an increase of 20%, or
$5,304,000. This increase was due primarily to the addition in 2002 of the
Wichita Falls crude oil pipeline revenues and lower volumes transported to and
from Valero Energy's Three Rivers refinery in 2001 due to the fire discussed
further below, partially offset by decreases in revenues on several of the
Partnership's other pipelines during the quarter. Beginning on July 9, 2001,
Valero Energy's 95,000 barrel per day Three Rivers refinery was shut down for
eight weeks as a result of a fire in the alkylation unit of the refinery. Valero
Energy operated the Three Rivers refinery at reduced rates during the alkylation
unit shutdown; thus volumes of crude oil transported to and refined products
transported from the refinery were lower during the third quarter of 2001.
17
The following discusses significant revenue increases and decreases by pipeline:
o revenues for the Wichita Falls crude oil pipeline for the third quarter of
2002 totaled $6,863,000;
o revenues for the Ringgold to Wasson crude oil pipeline increased $353,000
due to a tariff rate increase effective December 1, 2001 related to the
Ringgold crude oil storage facility acquisition;
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
decreased $707,000 despite a 16% increase in throughput barrels. During the
third quarter of 2002, Valero Energy transported crude oil in the pipeline
at the posted tariff rate, however, during the third quarter of 2001, the
Corpus Christi to Three Rivers crude oil pipeline was temporarily converted
into a refined product pipeline, which increased the tariff rate
temporarily;
o revenues for the McKee to Colorado Springs to Denver and the Amarillo to
Albuquerque refined product pipelines decreased $1,527,000 due to a
combined 27% decrease in throughput barrels, resulting from Valero Energy
supplying less refined products through these pipelines to the Colorado and
New Mexico markets during the third quarter of 2002. In the third quarter
of 2002, Valero Energy supplied a greater quantity of the Colorado demand
by maximizing production at its Denver refinery;
o revenues for the Cheyenne Wells to McKee and the Dixon to McKee crude oil
pipelines decreased $400,000 due to a combined 25% decrease in throughput
barrels, resulting from Valero Energy supplying more of the McKee
refinery's crude oil requirements from the Texas Gulf Coast via the Wichita
Falls to McKee crude oil pipeline during the third quarter of 2002; and
o revenues for the refined product terminals for the third quarter of 2002
decreased 7% as compared to the third quarter of 2001 due primarily to a
57% decrease in throughput barrels at the Corpus Christi refined product
terminal, resulting from Valero Energy supplying the refined product demand
from its Corpus Christi refinery instead of the Three Rivers refinery.
Operating expenses increased $1,727,000, or 20%, for the quarter ended September
30, 2002 as compared to the quarter ended September 30, 2001 primarily due to
$2,035,000 of operating expenses in 2002 related to the Ringgold crude oil
storage facility, the Wichita Falls Business and the crude hydrogen pipeline,
partially offset by lower utility expenses of $680,000, or 25%, due to lower
natural gas costs and lower electricity rates negotiated with power suppliers.
General and administrative expenses increased 34% for the quarter ended
September 30, 2002 as compared to the quarter ended September 30, 2001 due to
higher general and administrative costs related to being a publicly held entity
and the recognition of $197,000 of compensation expense related to the award of
contractual rights to receive common units to officers and directors in January
of 2002 (see Note 9: Restricted Common Units and Unit Options). 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 third quarter of 2002, general and administrative expenses of $1,783,000
reflect $1,300,000 of the annual service fee, $480,000 of public entity expenses
and $197,000 of compensation expense, less $194,000 reimbursed by partners on
jointly owned pipelines. For the third quarter of 2001, general and
administrative expenses of $1,326,000 reflect $1,300,000 of the annual service
fee and $158,000 of public entity expenses, less $132,000 reimbursed by partners
on jointly owned pipelines.
Depreciation and amortization expense increased $705,000 for the quarter ended
September 30, 2002 as compared to the quarter ended September 30, 2001 due to
the additional depreciation related to the acquisitions of the Ringgold crude
oil storage facility, the Wichita Falls Business and the crude hydrogen
pipeline, all subsequent to the third quarter of 2001.
18
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 September 30, 2002
increased 16% as compared to the quarter ended September 30, 2001 as throughput
volumes increased 4%. Distributions from the Skelly-Belvieu Pipeline Company for
the third quarter of 2002 totaled $1,043,000 as compared to $788,000 for the
third quarter of 2001, an increase of 32%, or $255,000. This increase was
primarily due to higher levels of maintenance capital expenditures in the third
quarter of 2001 that reduced the cash available to be distributed.
Interest expense for the quarter ended September 30, 2002 was $1,738,000, net of
interest income of $57,000 and capitalized interest of $32,000, as compared to
$387,000 of net interest expense for the quarter ended September 30, 2001. The
increase in interest expense was due to additional borrowings to fund the
acquisitions of the Wichita Falls Business, the Ringgold crude oil storage
facility and the crude hydrogen pipeline, all of which occurred after the third
quarter of 2001. The higher interest expense in the third quarter of 2002
included interest expense related to the fixed-rate senior notes issued in July
of 2002, the proceeds of which were used to repay borrowings under the
Partnership's variable rate revolving credit facility.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Financial Data:
Nine Months Ended
September 30,
------------
2002 2001
---- ----
(in thousands)
Statement of Income Data:
Revenues................................................ $88,215 $73,916
------ ------
Costs and expenses:
Operating expenses..................................... 29,125 26,036
General and administrative expenses.................... 5,270 3,829
Depreciation and amortization.......................... 12,388 9,941
------ ------
Total costs and expenses............................. 46,783 39,806
------ ------
Operating income........................................ 41,432 34,110
Equity income from Skelly-Belvieu Pipeline Company..... 2,365 2,304
Interest expense, net.................................. (3,090) (3,501)
------ ------
Income before income tax expense........................ 40,707 32,913
Income tax expense..................................... (395) -
------ ------
Net income.............................................. $40,312 $32,913
====== ======
Restated
September 30, December 31,
2002 2001
---- ----
(in thousands)
Balance Sheet Data:
Property, plant and equipment, net...................... $351,939 $349,012
Total assets............................................ 415,325 387,546
Long-term debt, including current portion............... 109,769 26,122
Partners' equity........................................ 292,973 342,166
Debt-to-capitalization ratio............................ 27.3% 7.1%
19
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 nine months ended September 30, 2002 and 2001.
Nine Months Ended
September 30,
------------
2002 2001 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee......................... 12,545 16,062 (22)%
Wichita Falls to McKee................. 19,501 - -
Wasson to Ardmore...................... 20,201 22,533 (10)%
Ringgold to Wasson..................... 9,155 10,443 (12)%
Corpus Christi to Three Rivers......... 18,409 21,901 (16)%
Other crude oil pipelines.............. 15,061 13,000 16%
------ ------
Total crude oil pipelines............. 94,872 83,939 13%
====== ======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver.... 5,754 6,997 (18)%
McKee to El Paso....................... 18,104 18,547 (2)%
McKee to Amarillo to Abernathy......... 10,024 10,129 (1)%
Amarillo to Albuquerque................ 3,118 3,589 (13)%
McKee to Denver........................ 3,289 3,259 1%
Ardmore to Wynnewood................... 13,996 15,787 (11)%
Three Rivers to Laredo................. 3,424 3,307 4%
Three Rivers to San Antonio............ 6,864 7,470 (8)%
Other refined product pipelines........ 15,294 16,069 (5)%
------ ------
Total refined product pipelines....... 79,867 85,154 (6)%
====== ======
Refined product terminal throughput...... 48,505 47,114 3%
====== ======
Net income for the nine months ended September 30, 2002 was $40,312,000 as
compared to $32,913,000 for the nine months ended September 30, 2001. The
increase of $7,399,000 was 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 in
2002 as compared to 2001 as a result of repaying the $107,676,000 of debt due to
parent in April of 2001. The increase in net income was partially offset by the
impact of lower throughput barrels in 2002 resulting from economic-based
refinery production cuts at the three Valero Energy refineries served by the
Partnership's pipelines and terminals. Net income for the first nine 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 nine months ended September 30, 2002 were $88,215,000 as
compared to $73,916,000 for the nine months ended September 30, 2001, an
increase of 19%, or $14,299,000. This increase was due primarily to the addition
of the Wichita Falls crude oil pipeline revenues and the Southlake refined
product terminal revenues in the first nine months of 2002, partially offset by
decreases in revenues on most of the Partnership's other pipelines during the
first nine months of 2002. The following discusses significant revenue increases
and decreases by pipeline:
20
o revenues for the first nine months of 2002 include $16,967,000 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;
o revenues for the Wasson to Ardmore crude oil pipeline and the Ardmore to
Wynnewood refined product pipeline decreased $288,000 due to a combined 11%
decrease in throughput barrels, resulting from reduced production at the
Ardmore refinery. During the first nine 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 $459,000,
despite a 12% decrease in throughput barrels resulting from reduced
production at the Ardmore refinery, due to a tariff rate increase effective
December 1, 2001 related to the Ringgold crude oil storage facility
acquisition;
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
decreased $2,066,000 due to a 16% decrease in throughput barrels, as a
result of reduced production at the Three Rivers refinery. During the first
nine 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 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 $2,022,000 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 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 $428,000 due to a combined 44%
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, excluding the impact of the
Southlake terminal, for the first nine months of 2002 remained comparable
to the revenues recognized in the first nine months of 2001 since the
throughput levels remained steady. Revenues for the Southlake refined
product terminal, which was acquired on July 1, 2001, were $1,792,000 and
throughput was 6,113,000 barrels for the first nine months of 2002.
Revenues for the Southlake refined product terminal for the third quarter
of 2001 were $663,000 and throughput was 2,261,000 barrels.
Operating expenses increased $3,089,000, or 12%, for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001 due
to $4,757,000 of increased operating expenses related to the Southlake refined
product terminal, the Ringgold crude oil storage facility, the Wichita Falls
Business and the crude hydrogen pipeline, partially offset by lower utility
expenses of $2,100,000, or 25%, due to lower natural gas costs and lower
electricity rates negotiated with power suppliers.
General and administrative expenses increased 38% for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001 due
primarily to an increase in general and administrative costs related to being a
publicly held entity and the recognition of $528,000 of compensation expense
related to the award of contractual rights to receive common units to officers
and directors in January of 2002 (see Note 9: Restricted Common Units and Unit
Options). 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
21
entity. For the first nine months of 2002, general and administrative expenses
of $5,270,000 reflect $3,900,000 of the annual service fee, $40,000 of general
and administrative expenses related to the Wichita Falls Business for January
2002, $1,311,000 of public entity expenses and $528,000 of compensation expense,
less $509,000 reimbursed by partners on jointly owned pipelines. For the first
nine months of 2001, general and administrative expenses of $3,829,000 reflect
$3,900,000 of the annual service fee and $257,000 of public entity expenses,
less $328,000 reimbursed by partners on jointly owned pipelines.
Depreciation and amortization expense increased $2,447,000 for the nine months
ended September 30, 2002 as compared to the nine months ended September 30, 2001
due to the additional depreciation related to the acquisitions of the Southlake
refined product terminal, the Ringgold crude oil storage facility, the Wichita
Falls Business and the crude hydrogen pipeline. Included in the first nine
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 nine months ended
September 30, 2002 approximated the amount of equity income recognized in the
nine months ended September 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 first nine months
of 2002 totaled $2,665,000 as compared to $2,020,000 for the first nine months
of 2001, an increase of 32%, or $645,000. This increase was primarily due to
higher levels of maintenance capital expenditures in the second and third
quarters of 2001 that reduced the cash available to be distributed.
Interest expense for the nine months ended September 30, 2002 was $3,090,000,
net of interest income of $99,000 and capitalized interest of $146,000, as
compared to $3,501,000 of interest expense for the nine months ended September
30, 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.
Partially offsetting this decrease was higher interest expense during the first
nine months of 2002 related to additional borrowings to fund the acquisitions of
the Southlake refined product terminal, the Wichita Falls Business, the Ringgold
crude oil storage facility and the crude hydrogen pipeline. Included in interest
expense for the first nine months of 2002 was interest expense related to the
fixed-rate senior notes issued in July of 2002, the proceeds of which were used
to repay borrowings under the variable-rate revolving credit facility.
Income tax expense for the first nine 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 Fourth Quarter of 2002
In the fourth quarter of 2002, the Partnership's operational performance
continues to be strong and there is no anticipation of any issues that would
significantly affect throughput volumes compared to those achieved in the third
quarter of 2002. Please refer to "Forward-Looking Statements" for factors that
could potentially cause results to be other than those anticipated.
Liquidity and Capital Resources
Financing
As of September 30, 2002, the Partnership had no outstanding borrowings 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. During the
third quarter of 2002, the outstanding balance under the revolving credit
facility of $91,000,000 was paid off with proceeds from the July 2002 senior
notes issued under the shelf registration statement discussed further below.
22
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.
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
$98,394,000, after deducting underwriters' commissions and offering expenses of
$1,292,000, were used to pay off the $91,000,000 outstanding under the revolving
credit facility.
The senior notes rank equally with all other existing senior unsecured
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.
At the option of the Partnership, 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 the 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.
23
On August 14, 2002, the Partnership paid a distribution of $0.70 per unit, or
$13,477,000, 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.
On October 21, 2002, the Partnership declared a quarterly distribution of $0.70
per unit payable on November 14, 2002 to unitholders of record on November 1,
2002. This distribution, related to the third quarter of 2002, is expected to
total $13,478,000 for unitholders and $621,000 for the general partner, of which
$339,000 is an incentive distribution.
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 nine months ended September 30, 2002, the Partnership incurred
maintenance capital expenditures of $2,834,000 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 $1,100,000 of additional maintenance capital
expenditures for various automation upgrades and maintenance projects.
During the nine months ended September 30, 2002, the Partnership incurred
$1,481,000 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 ConocoPhillips' (previously Phillips Petroleum Company) 50%
share of costs. The Partnership's capacity in the expanded 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 WichitaFalls, 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 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.
24
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.
As of September 30, 2002, the Partnership's fixed rate debt consisted of the
6.875% senior notes with a carrying value of $99,693,000 and an estimated fair
value of $97,203,000 and the 8% Port of Corpus Christi note payable with a
carrying value of $10,076,000 and an estimated fair value of $10,714,000. The
fair values were estimated using discounted cash flow analysis, based on current
incremental borrowing rates for similar types of borrowing arrangements.
As of September 30, 2002, the Partnership had no floating rate debt outstanding
since there were no outstanding borrowings under the revolving credit facility.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer of Valero
L.P., have evaluated Valero L.P.'s disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of
a date within 90 days of the filing date of this quarterly report on Form
10-Q. Based on that evaluation, these officers concluded that the design
and operation of Valero L.P.'s disclosure controls and procedures are
effective in ensuring that information required to be disclosed by Valero
L.P. in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
There have been no significant changes in Valero L.P.'s internal controls,
or in other factors that could significantly affect internal controls,
subsequent to the date the principal executive officer and principal
financial officer of Valero L.P. completed their evaluation.
25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amendment No. 1 to Valero GP, LLC 2000 Long-Term Incentive Plan
10.2 Form of Restricted Unit Agreement
12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges
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
(b) Reports on Form 8-K:
o On July 9, 2002, Valero L.P. filed pursuant to Regulation FD a Current
Report on Form 8-K dated July 9, 2002 reporting Item 9 (Regulation FD
Disclosures) and furnishing a copy of presentation materials furnished to
and discussed with underwriters and securities brokers at presentations
beginning on July 9, 2002 in connection with a $100,000,000 senior notes
offering of Valero Logistics Operations. Financial statements were not
filed with this report.
o On July 15, 2002, Valero L.P. filed a Current Report on Form 8-K dated July
10, 2002 reporting Item 5 (Other Events) to disclose that Valero Logistics
Operations, Valero L.P., Valero GP, Inc., Riverwalk Logistics, L.P. and
Valero GP, LLC had 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. Financial statements were not filed with this report.
26
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
November 8, 2002
By: /s/ Steven A. Blank
-------------------
Steven A. Blank
Senior Vice President and
Chief Financial Officer
November 8, 2002
27
CERTIFICATION
I, Curtis V. Anastasio, the principal executive officer of Valero L.P., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Curtis V. Anastasio
-----------------------------------
Curtis V. Anastasio
Chief Executive Officer and President of
Valero GP, LLC, the general partner of the general partner of Valero L.P.
28
CERTIFICATION
I, Steven A. Blank, the principal financial officer of Valero L.P., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Steven A. Blank
-----------------------------------
Steven A. Blank
Senior Vice President and Chief Financial Officer of
Valero GP, LLC, the general partner of the general partner of Valero L.P.
29
Exhibit 10.1
FIRST AMENDMENT OF
VALERO GP, LLC
2000 LONG-TERM INCENTIVE PLAN
THIS AMENDMENT made as of the date set forth below by Valero GP, LLC (the
"Company"),
W I T N E S S E T H:
-------------------
WHEREAS, the Company maintains the Valero GP, LLC 2000 Long-Term Incentive
Plan (the "Plan") for the benefit of its eligible employees and non-employee
directors; and
WHEREAS, the Company desires to amend the Plan to clarify its intent to
settle vested Awards of Restricted Units solely by distribution of Units; and
WHEREAS, in Section 7 of the Plan, the Board of Directors of the Company
(the "Board") and/or the Compensation Committee of the Company (the "Committee")
reserved the right to amend the Plan from time to time; and
WHEREAS, the Committee has authorized appropriate officers to amend the
Plan to clarify its intent to settle vested Awards of Restricted Units solely by
distribution of Units as described in the amendment set forth below;
NOW, THEREFORE, the Plan is hereby amended effective as of January 21, 2002
by this First Amendment thereto, as follows:
1. Section 2.18 of the Plan is hereby amended in its entirety to
provide as follows:
"`Restricted Unit' means a phantom unit granted under the Plan
which is equivalent in value and in dividend and interest rights
to a unit, and which upon or following vesting entitles the
Participant to receive a Unit."
2. Section 6.2(iii) of the Plan is hereby amended in its entirety to
provide as follows:
"(iii) Lapse of Restrictions. Upon the vesting of each Restricted
Unit, the Participant shall be entitled to receive from the
Company one Unit subject to the provisions of Section 8.2."
3. Except as modified herein, the Plan is specifically ratified and
affirmed.
IN WITNESS WHEREOF, this First Amendment of the Plan is executed this 21st
day of September, 2002, to be effective as herein provided.
VALERO GP, LLC
By:/s/ Curtis V. Anastasio
---------------------------------------------
Printed Name: Curtis V. Anastasio
Title: President and Chief Executive Officer
30
Exhibit 10.2
FORM OF RESTRICTED UNIT AGREEMENT
This Restricted Unit and distribution equivalent right award agreement
("Agreement"), effective as of the date set forth at the end of this Agreement
("Grant Date"), is between Valero GP, LLC (the "Company") and [ ]
("Participant"), a participant in the Valero GP, LLC 2000 Long-Term Incentive
Plan, as amended (the "Plan"). All capitalized terms contained in this Award
shall have the same definitions as are set forth in the Plan unless otherwise
defined herein. The terms of this grant are set forth below.
1. The Compensation Committee of the Board of Directors of the Company hereby
grants to Participant [ ] Restricted Units under the Plan. A "Restricted
Unit" is a phantom unit which is equivalent in value to a common unit ("MLP
Common Unit") of Valero L.P. (the "MLP"). In addition, a Restricted Unit
represents the right to receive, upon vesting as provided below, an MLP
Common Unit. Restricted Units are granted hereunder in tandem with an equal
number of distribution equivalent rights ("DERs"). A DER is a right to
receive an amount in cash from the Company or its designee equal to the
distributions made by MLP with respect to an MLP Common Unit during the
period that ends upon vesting of the tandem Restricted Unit or its
forfeiture pursuant to Section 6.2 (ii) of the Plan.
2. Subject to the further vesting provisions as may apply pursuant to the
terms of the Plan, the Restricted Units (i) will become vested
(nonforfeitable) in three equal annual increments of ________ MLP Common
Units each, with the first increment vesting on January 21, 2003, the
second increment vesting on January 21, 2004 and the third and final
increment vesting on January 21, 2005, and (ii) will otherwise be subject
to the terms, provisions, conditions, and limitations of the Plan.
3. DERs with respect to the Restricted Units will be paid to you in cash as of
each record date during the period such Restricted Units are outstanding.
4. Neither this Award nor any right under this Award may be assigned,
alienated, pledged, attached, sold, or otherwise transferred or encumbered
by you otherwise than by will or by the laws of descent and distribution.
5. The Company will withhold any taxes due from your compensation as required
by law, which, in the sole discretion of the Compensation Committee, may
include withholding a number of Restricted Units otherwise payable to you.
6. By accepting this Award, you hereby accept and agree to be bound by all of
the terms, provisions, conditions, and limitations of the Plan, as amended
by the First Amendment and any subsequent amendment or amendments, as if it
had been set forth verbatim in this Award.
7. By accepting this Award, you expressly recognize, acknowledge and agree
that this Award is in lieu of and replaces the earlier Restricted Unit
Agreement between the parties hereto which contained a grant date
coincident with the grant date of this Award, and that such earlier
Restricted Unit Agreement shall, upon execution of this Award by the
parties hereto, be hereby superseded in its entirety and any right or
rights you may have acquired under or in
31
connection with the earlier Restricted Unit Agreement shall be void,
unenforceable, and of no legal effect. You hereby expressly and
unconditionally waive and release in full any such right or rights under
the earlier Restricted Unit Agreement in consideration of the grant of this
Award.
8. By accepting this Award, you will become a Participant as of the effective
date of this Award and, as such, you shall have no rights with respect to
Restricted Units or DERs except as are expressly conferred by the Plan and
this Award.
9. This Award shall be binding upon the parties hereto and their respective
heirs, legal representatives, successors and assigns.
10. This Award is effective as of January 21, 2002.
VALERO GP, LLC
By:
-------------------------------------
William R. Klesse
Executive Vice President
Accepted:
- -------------------------------
[Name]
[Title]
[Date]
32
Exhibit 12.1
VALERO L.P.
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio)
Nine
Months
Ended
September 30, Years Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Earnings:
Income from continuing operations
before provision for income taxes and
income from equity investees $38,342 $42,694 $35,968 $65,445 $54,910
Add:
Fixed charges 3,416 4,203 5,266 997 1,001
Amortization of capitalized
interest 35 39 34 32 28
Distributions from Skelly-Belvieu
Pipeline Company 2,665 2,874 4,658 4,238 3,692
Less: Interest capitalized (146) (298) - (115) (121)
------ ------ ------ ------ ------
Total earnings $44,312 $49,512 $45,926 $70,597 $59,510
====== ====== ====== ====== ======
Fixed charges:
Interest expense, net $ 3,090 $ 3,721 $ 5,181 $ 777 $ 796
Amortization of debt issuance costs 92 90 - - -
Interest capitalized 146 298 - 115 121
Rental expense interest factor (1) 88 94 85 105 84
------ ------ ------ ----- ------
Total fixed charges $ 3,416 $ 4,203 $ 5,266 $ 997 $ 1,001
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 13.0x 11.8x 8.7x 70.8x 59.5x
===== ===== ==== ===== =====
(1) The interest portion of rental expense represents one-third of rents, which
is deemed representative of the interest portion of rental expense.
33
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 September 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
November 8, 2002
34
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 September 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
November 8, 2002
35