VALERO ENERGY PARTNERS LP - FORM 10-Q

Attached files

file	filename
EX-31.02 - EXHIBIT 31.02 - VALERO ENERGY PARTNERS LP	vlpexh3102-9302015.htm
EX-31.01 - EXHIBIT 31.01 - VALERO ENERGY PARTNERS LP	vlpexh3101-9302015.htm
EX-32.01 - EXHIBIT 32.01 - VALERO ENERGY PARTNERS LP	vlpexh3201-9302015.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number 1-36232

VALERO ENERGY PARTNERS LP

(Exact name of registrant as specified in its charter)



Delaware	90-1006559
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

One Valero Way

San Antonio, Texas

(Address of principal executive offices)

78249

(Zip Code)

(210) 345-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The registrant had 32,278,253 common units, 28,789,989 subordinated units, and 1,246,094 general partner units outstanding at October 30, 2015.

VALERO ENERGY PARTNERS LP

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014	2
Consolidated Statements of Partners’ Capital for the Nine Months Ended September 30, 2015 and 2014	3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	4
Condensed Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	44
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 6. Exhibits	45
SIGNATURE	46

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In Thousands)



	September 30, 2015			December 31, 2014
	September 30, 2015			December 31, 2014
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	50,563		$	236,579
Receivables from related party	13,395			8,499
Prepaid expenses and other	760			727
Total current assets	64,718			245,805
Property and equipment, at cost	835,366			819,104
Accumulated depreciation	(195,160		)	(174,530		)
Property and equipment, net	640,206			644,574
Deferred charges and other assets, net	1,264			1,385
Total assets	$	706,188		$	891,764
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Current portion of debt and capital lease obligations	$	1,183		$	1,200
Accounts payable	5,013			4,297
Accrued liabilities	1,275			1,054
Taxes other than income taxes	1,235			765
Deferred revenue from related party	146			124
Total current liabilities	8,852			7,440
Debt and capital lease obligations, net of current portion	175,381			1,519
Note payable to related party	160,000			—
Deferred income taxes	463			830
Other long-term liabilities	1,103			1,065
Commitments and contingencies
Partners’ capital:
Common unitholders – public (17,259,651 and 17,255,208 units outstanding)	384,976			374,954
Common unitholder – Valero (13,448,089 and 11,539,989 units outstanding)	64,712			58,844
Subordinated unitholder – Valero (28,789,989 and 28,789,989 units outstanding)	(87,204		)	146,804
General partner – Valero (1,214,043 and 1,175,102 units outstanding)	(2,095		)	4,617
Net investment	—			295,691
Total partners’ capital	360,389			880,910
Total liabilities and partners’ capital	$	706,188		$	891,764

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Unit Amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014 (a)			2015			2014 (a)
Operating revenues – related party	$	62,037		$	33,666		$	164,168		$	94,998
Costs and expenses:
Operating expenses	15,042			17,510			47,280			50,062
General and administrative expenses	3,444			3,133			10,169			9,591
Depreciation expense	10,684			7,178			25,887			19,226
Total costs and expenses	29,170			27,821			83,336			78,879
Operating income	32,867			5,845			80,832			16,119
Other income, net	29			156			166			1,315
Interest and debt expense, net of capitalized interest	(1,353		)	(214		)	(3,365		)	(663		)
Income before income taxes	31,543			5,787			77,633			16,771
Income tax expense (benefit)	115			129			(62		)	436
Net income	31,428			5,658			77,695			16,335
Less: Net loss attributable to Predecessor	—			(11,885		)	(9,516		)	(23,890		)
Net income attributable to partners	31,428			17,543			87,211			40,225
Less: General partner’s interest in net income	1,612			351			3,821			805
Limited partners’ interest in net income	$	29,816		$	17,192		$	83,390		$	39,420

Net income per limited partner unit – basic and diluted:
Common units	$	0.51		$	0.30		$	1.43		$	0.68
Subordinated units	$	0.49		$	0.30		$	1.40		$	0.68

Weighted-average limited partner units outstanding:
Common units – basic	30,698			28,790			30,279			28,790
Common units – diluted	30,698			28,791			30,279			28,791
Subordinated units – basic and diluted	28,790			28,790			28,790			28,790

Cash distribution declared per unit	$	0.3075		$	0.2400		$	0.8775		$	0.6750

____________________

(a) Financial information has been retrospectively adjusted for the acquisition of the Houston and St. Charles Terminal Services Business from Valero Energy Corporation. See Notes 1 and 3.

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In Thousands)

(Unaudited)



	Partnership
	Common Unitholders Public			Common Unitholder Valero			Subordinated Unitholder Valero			General Partner Valero			Net Investment			Total
Balance as of December 31, 2013	$	369,825		$	75,998		$	189,601		$	6,167		$	328,482		$	970,073
Net income (loss):
Attributable to Predecessor (a)	—			—			—			—			(23,890		)	(23,890		)
Attributable to partners	11,814			7,896			19,710			805			—			40,225
Net transfers from Valero Energy Corporation (a)	—			—			—			—			65,202			65,202
Allocation of Valero Energy Corporation’s net investment in the Texas Crude Systems Business	—			22,276			55,572			2,268			(80,116		)	—
Consideration paid to Valero Energy Corporation for the acquisition of the Texas Crude Systems Business	—			(42,818		)	(106,822		)	(4,360		)	—			(154,000		)
Cash distributions to unitholders	(8,142		)	(5,447		)	(13,589		)	(555		)	—			(27,733		)
Distribution equivalent right payments	(2		)	—			—			—			—			(2		)
Unit-based compensation	51			—			—			—			—			51
Balance as of September 30, 2014 (a)	$	373,546		$	57,905		$	144,472		$	4,325		$	289,678		$	869,926

Balance as of December 31, 2014	$	374,954		$	58,844		$	146,804		$	4,617		$	295,691		$	880,910
Net income (loss):
Attributable to Predecessor	—			—			—			—			(9,516		)	(9,516		)
Attributable to partners	24,348			18,406			40,636			3,821			—			87,211
Net transfers from Valero Energy Corporation	—			—			—			—			9,934			9,934
Allocation of Valero Energy Corporation’s net investment in the Houston and St. Charles Terminal Services Business	—			82,330			205,396			8,383			(296,109		)	—
Consideration paid to Valero Energy Corporation for the acquisition of the Houston and St. Charles Terminal Services Business	—			(186,625		)	(465,592		)	(19,003		)	—			(671,220		)
Units issued to Valero Energy Corporation in connection with the acquisition of the Houston and St. Charles Terminal Services Business	—			98,000			—			2,000			—			100,000
Noncash capital contributions from Valero Energy Corporation	—			4,493			9,620			405			—			14,518
Cash distributions to unitholders	(14,420		)	(10,736		)	(24,068		)	(2,318		)	—			(51,542		)
Distribution equivalent right payments	(9		)	—			—			—			—			(9		)
Unit-based compensation	103			—			—			—			—			103
Balance as of September 30, 2015	$	384,976		$	64,712		$	(87,204	)	$	(2,095	)	$	—		$	360,389

(a) Financial information has been retrospectively adjusted for the acquisition of the Houston and St. Charles Terminal Services Business from Valero Energy Corporation. See Notes 1 and 3.

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2015			2014 (a)
Cash flows from operating activities:
Net income	$	77,695		$	16,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	25,887			19,226
Deferred income tax expense (benefit)	(400		)	43
Changes in current assets and current liabilities	(4,643		)	(1,935		)
Changes in deferred charges and credits and other operating activities, net	341			(44		)
Net cash provided by operating activities	98,880			33,625
Cash flows from investing activities:
Capital expenditures	(7,246		)	(54,800		)
Acquisitions from Valero Energy Corporation	(296,109		)	(80,116		)
Proceeds from dispositions of property and equipment	70			33
Net cash used in investing activities	(303,285		)	(134,883		)
Cash flows from financing activities:
Proceeds from debt borrowings	200,000			—
Repayment of debt	(25,000		)	—
Proceeds from note payable to related party	160,000			—
Payments of capital lease obligations	(884		)	(772		)
Offering costs	—			(3,223		)
Debt issuance costs	—			(1,071		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets	(275,111		)	(73,884		)
Cash distributions to unitholders and distribution equivalent right payments	(51,551		)	(27,735		)
Net transfers from Valero Energy Corporation	10,935			63,659
Net cash provided by (used in) financing activities	18,389			(43,026		)
Net decrease in cash and cash equivalents	(186,016		)	(144,284		)
Cash and cash equivalents at beginning of period	236,579			375,118
Cash and cash equivalents at end of period	$	50,563		$	230,834

____________________

(a) Financial information has been retrospectively adjusted for the acquisition of the Houston and St. Charles Terminal Services Business. See Notes 1 and 3.

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	BUSINESS AND BASIS OF PRESENTATION

Business

Valero Energy Partners LP (the Partnership) is a fee-based master limited partnership formed by Valero (defined below) in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets.

References in this report to “Partnership,” “we,” “us,” or “our” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References in this report to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.

We acquired the Texas Crude Systems Business and the Houston and St. Charles Terminal Services Business (the Houston and St. Charles Terminals Acquisition) from Valero (collectively, the Acquisitions) on July 1, 2014 and March 1, 2015, respectively. See Note 3 for further discussion of the Houston and St. Charles Terminals Acquisition. As of September 30, 2015, our assets consisted of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of seven of Valero’s refineries.

On October 1, 2015, we acquired the Corpus Christi Terminal Services Business from Valero as further described in Note 3.

We generate operating revenues by providing fee-based transportation and terminaling services to Valero.

Basis of Presentation

Our consolidated financial statements include the accounts of the Partnership as well as our Predecessor (defined below). All intercompany accounts and transactions have been eliminated.

The Acquisitions were accounted for as transfers of businesses between entities under common control. As entities under the common control of Valero, we recorded the Acquisitions on our balance sheet at Valero’s carrying value rather than fair value. Transfers between entities under common control are accounted for as though the transfer occurred as of the beginning of the period of transfer, and prior period financial statements and financial information are retrospectively adjusted to furnish comparative information. Accordingly, the Partnership’s financial statements and related notes have been retrospectively adjusted to include the historical results of the Acquisitions for all periods presented prior to the effective dates of each acquisition. We refer to the historical results of the Acquisitions prior to their respective acquisition dates as those of our “Predecessor.”

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

There were no transactions between the operations of our Predecessor; therefore, there were no intercompany transactions or accounts to be eliminated in connection with the combination of those operations. In addition,

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

our Predecessor’s statements of income include direct charges for the management and operation of our assets and certain expenses allocated by Valero for general corporate services, such as treasury, accounting, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Prior to the Acquisitions, our Predecessor transferred cash to Valero daily and Valero funded our Predecessor’s operating and investing activities as needed. Therefore, transfers of cash to and from Valero’s cash management system are reflected as a component of net investment and are reflected as a financing activity in our statements of cash flows. In addition, interest income was not included on the net cash transfers to Valero.

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

These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and nine months ended September 30, 2015 and 2014 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These unaudited financial statements and notes thereto should be read in conjunction with the audited financial statements of the Partnership included in our current report on Form 8-K filed with the Securities and Exchange Commission (SEC) on September 24, 2015, which reflect retrospective adjustments to the Partnership’s 2014 Form 10-K filed with the SEC on February 27, 2015 for the historical results of operations and financial position of the Houston and St. Charles Terminals Acquisition.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

New Accounting Pronouncements

In May 2014, the Accounting Standards Codification (ASC) was amended and a new accounting standard, ASC Topic 606, “Revenue from Contracts with Customers,” was issued to clarify the principles for recognizing revenue. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires improved interim and annual disclosures that enable the users of financial statements to better understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. In July 2015, the effective date of the new standard was deferred by one year. As a result, the standard is

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those reporting periods, and can be adopted either retrospectively to each prior reporting period presented using a practical expedient, as allowed by the standard, or retrospectively with a cumulative-effect adjustment to partners’ capital as of the date of initial application. Early adoption is permitted, but not before the original effective date, which was for annual reporting periods beginning after December 15, 2016, including interim reporting periods within those reporting periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In February 2015, the provisions of ASC Topic 810, “Consolidation,” were amended to improve consolidation guidance for certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance for certain money market funds. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. These provisions may also be adopted retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to partners’ capital as of the beginning of the first year restated. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations.

In April 2015, the provisions of ASC Subtopic 835-30, “Interest–Imputation of Interest,” were amended to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a note be reported in the balance sheet as a direct deduction from the face amount of that note, consistent with debt discounts, and that amortization of debt issuance costs be reported as interest expense. In August 2015, these provisions were further amended with guidance from the SEC staff that they would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. These provisions are to be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations.

Also in April 2015, the provisions of ASC Topic 260, “Earnings Per Share,” were amended to provide guidance on how master limited partnerships apply the two-class method of calculating earnings per unit for historical periods when they receive net assets in a dropdown transaction that is accounted for as a transaction between entities under common control as required under Subtopic 805-50, “Business Combinations–Related Issues.” The amendments specify that for purposes of calculating earnings per unit under the two-class method for periods before the date of a dropdown transaction, earnings or losses of a transferred business should be allocated entirely to the general partner. Qualitative disclosures are also required to describe how the rights to earnings or losses differ before and after the dropdown transaction for purposes of computing earnings per unit under the two-class method. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, with early adoption permitted, and should be applied retrospectively for all financial statements presented. We have historically calculated our net income per unit after a dropdown transaction as prescribed by these

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provisions; therefore, the adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations, but will result in additional disclosures.

In September 2015, the provisions of ASC Topic 805, “Business Combinations,” were amended to simplify the accounting and reporting of adjustments made to provisional amounts recognized in a business combination. The amendment requires that an acquirer (i) record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (ii) present separately on the statement of income or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. These provisions are effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods, and should be applied prospectively to adjustments made to provisional amounts that occur after the effective date. Earlier application is permitted for financial statements that have not yet been issued. The adoption of this guidance effective January 1, 2016 will not affect our financial position or results of operations; however, it may result in changes to the manner in which adjustments to provisional amounts recognized in a future business combination, if any, are presented in our financial statements.


3.	ACQUISITIONS

Houston and St. Charles Terminals Acquisition

Effective March 1, 2015, we acquired two subsidiaries from Valero that own and operate crude oil, intermediates, and refined petroleum products terminals supporting Valero’s Houston Refinery (in Houston, Texas) and St. Charles Refinery (in Norco, Louisiana) for total consideration of $671.2 million, which consisted of (i) a cash distribution of $571.2 million and (ii) the issuance of 1,908,100 common units and 38,941 general partner units having an aggregate value of $100.0 million. We funded the cash distribution to Valero with $211.2 million of our cash on hand, $200.0 million of borrowings under our revolving credit facility, and $160.0 million of proceeds from a subordinated credit agreement we entered into with Valero. See Note 6 for further discussion of the borrowings under our revolving credit facility and subordinated credit agreement.

In connection with the acquisition, we entered into various agreements with Valero related to the acquisition agreement, including amended and restated schedules to our omnibus agreement, an amended and restated services and secondment agreement, lease agreements, and additional schedules to our commercial agreements. See Note 4 for a summary of the terms of these agreements.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The results of operations of the Houston and St. Charles Terminal Services Business after the effective date of the acquisition are included in “Valero Energy Partners LP,” and the results of operations prior to the effective date of the acquisition are included in “Houston and St. Charles Terminal Services Business.” The following table presents our consolidated statement of income for the nine months ended September 30, 2015 as though the acquisition had occurred at the beginning of the period (in thousands):



	Nine Months Ended September 30, 2015
	Valero Energy Partners LP			Houston and St. Charles Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Operating revenues – related party	$	164,168		$	—		$	164,168
Costs and expenses:
Operating expenses	40,085			7,195			47,280
General and administrative expenses	10,122			47			10,169
Depreciation expense	23,613			2,274			25,887
Total costs and expenses	73,820			9,516			83,336
Operating income (loss)	90,348			(9,516		)	80,832
Other income, net	166			—			166
Interest and debt expense, net of capitalized interest	(3,365		)	—			(3,365		)
Income (loss) before income taxes	87,149			(9,516		)	77,633
Income tax benefit	(62		)	—			(62		)
Net income (loss)	87,211			(9,516		)	77,695
Less: Net loss attributable to Predecessor	—			(9,516		)	(9,516		)
Net income attributable to partners	$	87,211		$	—		$	87,211

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our previously reported consolidated statement of income for the three months ended September 30, 2014 retrospectively adjusted for the acquisition (in thousands):



	Three Months Ended September 30, 2014
	Valero Energy Partners LP (Previously Reported)			Houston and St. Charles Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Operating revenues – related party	$	33,666		$	—		$	33,666
Costs and expenses:
Operating expenses	8,553			8,957			17,510
General and administrative expenses	3,065			68			3,133
Depreciation expense	4,318			2,860			7,178
Total costs and expenses	15,936			11,885			27,821
Operating income (loss)	17,730			(11,885		)	5,845
Other income, net	156			—			156
Interest and debt expense, net of capitalized interest	(214		)	—			(214		)
Income (loss) before income taxes	17,672			(11,885		)	5,787
Income tax expense	129			—			129
Net income (loss)	17,543			(11,885		)	5,658
Less: Net loss attributable to Predecessor	—			(11,885		)	(11,885		)
Net income attributable to partners	$	17,543		$	—		$	17,543

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our previously reported consolidated statement of income for the nine months ended September 30, 2014 retrospectively adjusted for the acquisition (in thousands):



	Nine Months Ended September 30, 2014
	Valero Energy Partners LP (Previously Reported)			Houston and St. Charles Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Operating revenues – related party	$	94,998		$	—		$	94,998
Costs and expenses:
Operating expenses	24,027			26,035			50,062
General and administrative expenses	9,392			199			9,591
Depreciation expense	12,087			7,139			19,226
Total costs and expenses	45,506			33,373			78,879
Operating income (loss)	49,492			(33,373		)	16,119
Other income, net	1,315			—			1,315
Interest and debt expense, net of capitalized interest	(663		)	—			(663		)
Income (loss) before income taxes	50,144			(33,373		)	16,771
Income tax expense	436			—			436
Net income (loss)	49,708			(33,373		)	16,335
Less: Net income (loss) attributable to Predecessor	9,483			(33,373		)	(23,890		)
Net income attributable to partners	$	40,225		$	—		$	40,225

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The cash flows of the Houston and St. Charles Terminal Services Business after the effective date of the acquisition are included in “Valero Energy Partners LP,” and the cash flows prior to the effective date of the acquisition are included in “Houston and St. Charles Terminal Services Business.” The following table presents our consolidated statement of cash flows for the nine months ended September 30, 2015 as though the acquisition had occurred at the beginning of the period (in thousands):



	Nine Months Ended September 30, 2015
	Valero Energy Partners LP			Houston and St. Charles Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Cash flows from operating activities:
Net income (loss)	$	87,211		$	(9,516	)	$	77,695
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense	23,613			2,274			25,887
Deferred income tax benefit	(400		)	—			(400		)
Changes in current assets and current liabilities	(4,643		)	—			(4,643		)
Changes in deferred charges and credits and other operating activities, net	341			—			341
Net cash provided by (used in) operating activities	106,122			(7,242		)	98,880
Cash flows from investing activities:
Capital expenditures	(3,553		)	(3,693		)	(7,246		)
Acquisition of the Houston and St. Charles Terminal Services Business from Valero Energy Corporation	(296,109		)	—			(296,109		)
Proceeds from dispositions of property and equipment	70			—			70
Net cash used in investing activities	(299,592		)	(3,693		)	(303,285		)
Cash flows from financing activities:
Proceeds from debt borrowings	200,000			—			200,000
Repayment of debt	(25,000		)	—			(25,000		)
Proceeds from note payable to related party	160,000			—			160,000
Payments of capital lease obligations	(884		)	—			(884		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of the Houston and St. Charles Terminal Services Business	(275,111		)	—			(275,111		)
Cash distributions to unitholders and distribution equivalent right payments	(51,551		)	—			(51,551		)
Net transfers from Valero Energy Corporation	—			10,935			10,935
Net cash provided by financing activities	7,454			10,935			18,389
Net decrease in cash and cash equivalents	(186,016		)	—			(186,016		)
Cash and cash equivalents at beginning of period	236,579			—			236,579
Cash and cash equivalents at end of period	$	50,563		$	—		$	50,563

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our previously reported consolidated statement of cash flows for the nine months ended September 30, 2014 retrospectively adjusted for the acquisition (in thousands):



	Nine Months Ended September 30, 2014
	Valero Energy Partners LP (Previously Reported)			Houston and St. Charles Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Cash flows from operating activities:
Net income (loss)	$	49,708		$	(33,373	)	$	16,335
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense	12,087			7,139			19,226
Deferred income tax expense	43			—			43
Changes in current assets and current liabilities	(1,935		)	—			(1,935		)
Changes in deferred charges and credits and other operating activities, net	(44		)	—			(44		)
Net cash provided by (used in) operating activities	59,859			(26,234		)	33,625
Cash flows from investing activities:
Capital expenditures	(7,282		)	(47,518		)	(54,800		)
Acquisition of the Texas Crude Systems Business from Valero Energy Corporation	(80,116		)	—			(80,116		)
Proceeds from dispositions of property and equipment	33			—			33
Net cash used in investing activities	(87,365		)	(47,518		)	(134,883		)
Cash flows from financing activities:
Payments of capital lease obligations	(772		)	—			(772		)
Offering costs	(3,223		)	—			(3,223		)
Debt issuance costs	(1,071		)	—			(1,071		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of the Texas Crude Systems Business	(73,884		)	—			(73,884		)
Cash distributions to unitholders and distribution equivalent right payments	(27,735		)	—			(27,735		)
Net transfers from (to) Valero Energy Corporation	(10,093		)	73,752			63,659
Net cash provided by (used in) financing activities	(116,778		)	73,752			(43,026		)
Net decrease in cash and cash equivalents	(144,284		)	—			(144,284		)
Cash and cash equivalents at beginning of period	375,118			—			375,118
Cash and cash equivalents at end of period	$	230,834		$	—		$	230,834

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Acquisition of the Corpus Christi Terminal Services Business

Effective October 1, 2015, we acquired Valero’s Corpus Christi East Terminal and Corpus Christi West Terminal (collectively, the Corpus Christi Terminal Services Business) for total consideration of $465.0 million, which consisted of (i) a cash distribution of $395.0 million and (ii) the issuance of 1,570,513 common units and 32,051 general partner units having an aggregate value of $70.0 million. We funded the cash distribution to Valero with proceeds from a subordinated credit agreement we entered into with Valero. The Corpus Christi Terminal Services Business is engaged in the business of terminaling crude oil, intermediates, and refined petroleum products at terminals in Corpus Christi, Texas and supports Valero’s Corpus Christi East and West Refineries. We also entered into various agreements with Valero effective with the acquisition, including amended and restated schedules to our amended and restated omnibus agreement, amended and restated exhibits to our amended services and secondment agreement, additional schedules to our commercial agreements with respect to the related logistics assets, and lease agreements.


4.	RELATED-PARTY TRANSACTIONS

Agreements Effective with the Houston and St. Charles Terminals Acquisition

The following agreements became effective on March 1, 2015, the date of the Houston and St. Charles Terminals Acquisition.

Commercial Agreements

We entered into additional schedules under our existing master transportation services agreement and master terminal services agreement (collectively, the commercial agreements) with Valero with respect to each terminal acquired. Each schedule has an initial term through March 1, 2025 and, in the case of the Houston terminal, provides us an option to renew for one additional five-year term, and, in the case of the St. Charles terminal, provides us an option to renew through January 31, 2030.

Amended and Restated Omnibus Agreement

We entered into amended and restated schedules to our amended and restated omnibus agreement with Valero that include the following modifications, among others:


•	the indemnification obligations of Valero and the Partnership were extended to apply to the Houston terminal and the St. Charles terminal;


•	our payment of an annual administrative fee was increased from $9.2 million to $10.4 million per year, which amount is prorated for the remainder of 2015 based on the number of days from March 1, 2015 to December 31, 2015; and


•	the grant to Valero of a right of first refusal with respect to the Houston terminal and the St. Charles terminal.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amended and Restated Services and Secondment Agreement

Our general partner entered into an amended and restated services and secondment agreement with Valero to provide for the additional secondment of employees to our general partner for the provision of services with respect to the assets acquired in the Houston and St. Charles Terminals Acquisition.

Lease and Access Agreements

We entered into two lease and access agreements with Valero with respect to the land on which each terminal is located. Each agreement has an initial term through March 1, 2025 with four automatic successive renewal periods of five years each, provided that the final renewal period for the St. Charles terminal agreement will end on December 31, 2044. Either party may terminate the lease after the initial term by providing written notice. Initially, our base rent under the Houston and St. Charles terminal agreements totals $6.4 million per year and each agreement is subject to annual inflation escalators.

Subordinated Credit Agreement

We entered into a subordinated credit agreement with Valero as further described in Note 6.

Summary of Related-Party Transactions

Receivables from related party consist of the following (in thousands):



	September 30, 2015			December 31, 2014
	September 30, 2015			December 31, 2014
Trade receivables – related party	$	19,058		$	10,515
Due to related party	(5,663		)	(2,016		)
Receivables from related party	$	13,395		$	8,499

Deferred revenue from related party represents the unearned revenues from Valero associated with Valero’s quarterly deficiency payment, which is the result of Valero not meeting its minimum quarterly throughput commitments under our commercial agreements.

The following table reflects significant transactions with Valero (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014 (a)		2015		2014 (a)
Operating revenues – related party	$	62,037	$	33,666	$	164,168	$	94,998
Operating expenses	7,437		6,542		21,247		18,559
General and administrative expenses	2,648		2,481		7,808		7,666

(a) Financial information has been retrospectively adjusted for the Houston and St. Charles Terminals Acquisition.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Costs associated with Valero’s benefit plans were included in the costs allocated to our Predecessor. Our share of costs associated with pension and postretirement and defined contribution plans was as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014 (a)		2015		2014 (a)
Pension and postretirement costs	$	—	$	3	$	2	$	78
Defined contribution plan costs	—		2		2		68

(a) Financial information has been retrospectively adjusted for the Houston and St. Charles Terminals Acquisition.

Concentration Risk

All of our operating revenues were derived from transactions with Valero and all of our receivables were due from Valero. Therefore, we are subject to the business risks associated with Valero’s business.

Leases

Certain schedules under our commercial agreements with Valero are considered operating leases under U.S. GAAP. These agreements contain minimum throughput requirements and escalation clauses to adjust transportation tariffs and to adjust terminaling and storage fees to reflect changes in price indices. Revenues from all lease agreements are recorded within “operating revenues – related party” in our consolidated statements of income. Contingent lease revenues from all lease agreements totaled $5.5 million and $2.3 million for the three months ended September 30, 2015 and 2014, respectively, and $13.3 million and $3.2 million for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, future minimum rentals to be received related to these noncancelable lease agreements were as follows (in thousands):



Remainder of 2015	$	32,219
2016	127,824
2017	127,824
2018	127,824
2019	127,824
Thereafter	637,196
Total minimum rental payments	$	1,180,711

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.	PROPERTY AND EQUIPMENT

Major classes of property and equipment consisted of the following (in thousands):



	September 30, 2015
	Non-Leased Assets			Assets Under Operating Leases (a)			Total
Pipelines and related assets	$	228,574		$	46,541		$	275,115
Terminals and related assets	110,506			420,715			531,221
Other	9,295			—			9,295
Land	4,672			—			4,672
Construction-in-progress	15,063			—			15,063
Property and equipment, at cost	368,110			467,256			835,366
Accumulated depreciation	(115,611		)	(79,549		)	(195,160		)
Property and equipment, net	$	252,499		$	387,707		$	640,206



	December 31, 2014
	Non-Leased Assets			Assets Under Operating Leases (a)			Total
Pipelines and related assets	$	227,780		$	45,695		$	273,475
Terminals and related assets	432,047			72,326			504,373
Other	9,439			—			9,439
Land	4,672			—			4,672
Construction-in-progress	27,145			—			27,145
Property and equipment, at cost	701,083			118,021			819,104
Accumulated depreciation	(155,511		)	(19,019		)	(174,530		)
Property and equipment, net	$	545,572		$	99,002		$	644,574

(a) Represents assets owned by us for which we are the lessor (see Note 4). Substantially all of the assets acquired in the Houston and St. Charles Terminals Acquisition were reflected as assets under operating leases on March 1, 2015.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.	DEBT

Revolving Credit Facility

We have a $300.0 million senior unsecured revolving credit facility agreement (the Revolver) with a group of lenders. The Revolver matures in December 2018. The Revolver includes sub-facilities for swingline loans and letters of credit. Our obligations under the Revolver are jointly and severally guaranteed by our directly owned subsidiary, Valero Partners Operating Co. LLC.

The Revolver contains certain restrictive covenants, including a covenant that requires us to maintain a ratio of total debt to EBITDA (as described in the Revolver) for the prior four fiscal quarters of not greater than 5.0 to 1.0 as of the last day of each fiscal quarter (5.5 to 1.0 during the specified period following certain acquisitions). The Revolver contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for an agreement of this type that could, among other things, limit our ability to pay distributions to our unitholders.

In connection with the Houston and St. Charles Terminals Acquisition as described in Note 3, we borrowed $200.0 million under the Revolver on March 2, 2015. This borrowing bears interest at a variable rate, which was 1.5 percent as of September 30, 2015. Accrued interest is payable in arrears on each Interest Payment Date (as defined in the Revolver) and on the maturity date. On July 1, 2015, we repaid $25.0 million on the Revolver. As of September 30, 2015, we had $175.0 million of borrowings and no letters of credit outstanding under the Revolver. As of December 31, 2014, we had no borrowings and no letters of credit outstanding under the Revolver. As of September 30, 2015 and December 31, 2014, we were in compliance with the Revolver’s restrictive covenants.

Subordinated Credit Agreement

On March 2, 2015, we entered into a subordinated credit agreement with Valero (the Loan Agreement) under which we borrowed $160.0 million (the loan) to finance a portion of the Houston and St. Charles Terminals Acquisition as described in Note 3. The loan matures on March 1, 2020 and may be prepaid at any time without penalty; we are not permitted to reborrow amounts. The loan bears interest at the LIBO Rate (as defined in the Loan Agreement) plus the applicable margin. Accrued interest is payable in arrears on each Interest Payment Date (as defined in the Loan Agreement) and on the maturity date. As of September 30, 2015, the interest rate was 1.447 percent.

The payment of amounts owing under the Loan Agreement are subordinated to our obligations under our Revolver with third-party lenders. The Loan Agreement contains customary terms regarding covenants, representations, default, and remedies, including covenants that limit the creation of liens, the incurrence of debt by us or our subsidiaries, the payment of distributions, and the entry into securitization transactions, sale/leaseback transactions, certain restrictive agreements, consolidations, mergers, and the sale of all or substantially all of our assets. The Loan Agreement also includes a covenant that requires, as of the last day of each fiscal quarter, the ratio of Consolidated Total Debt (as defined in the Loan Agreement) to Consolidated EBITDA (as defined in the Loan Agreement) for the four-quarter period ending on such day not to exceed 5.0 to 1.0 (or 5.5 to 1.0 during a specified acquisition period).

As of September 30, 2015, we had $160.0 million outstanding under the Loan Agreement and we were in compliance with the ratio of consolidated total debt to consolidated EBITDA.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Capitalized Interest

Capitalized interest was approximately $6,000 and $12,000 for the three and nine months ended September 30, 2015, respectively. We had no capitalized interest for the three and nine months ended September 30, 2014.


7.	COMMITMENTS AND CONTINGENCIES

Operating Leases

We have long-term operating lease commitments for land used in the terminaling and transportation of crude oil and refined petroleum products. Certain leases contain escalation clauses and renewal options that allow for the same rental payment over the new lease term or a revised rental payment based on fair rental value or negotiated value. We expect that, in the normal course of business, our leases will be renewed or replaced by other leases.

As of September 30, 2015, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in thousands):



Remainder of 2015	$	1,609
2016	6,487
2017	6,486
2018	6,472
2019	6,443
Thereafter	33,753
Total minimum rental payments	$	61,250

Rental expense for all operating leases was $1.7 million and $4.2 million for the three and nine months ended September 30, 2015, respectively. Rental expense for all operating leases was $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, as retrospectively adjusted for the Houston and St. Charles Terminals Acquisition.

Litigation Matters

From time to time, we are party to claims and legal proceedings arising in the ordinary course of business. We also may be required by existing laws and regulations to report the release of hazardous substances and begin a remediation study. We have not recorded a loss contingency liability as there are no matters for which a loss has been incurred. We re-evaluate and update our loss contingency liabilities as matters progress over time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8.	CASH DISTRIBUTIONS

Our partnership agreement prescribes the amount and priority of cash distributions that the common and subordinated unitholders and general partner will receive. Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions:

Quarterly

Period

Ended

Total

Quarterly

Distribution

(Per Unit)

Total Cash

Distribution

(In Thousands)

Declaration

Date

Record

Date

Distribution

Date

September 30, 2015

0.3075

20,164

October 15, 2015

November 2, 2015

November 10, 2015

June 30, 2015

0.2925

18,456

July 24, 2015

August 3, 2015

August 11, 2015

March 31, 2015

0.2775

17,266

April 21, 2015

May 1, 2015

May 12, 2015

December 31, 2014

0.2660

15,829

January 26, 2015

February 5, 2015

February 12, 2015

September 30, 2014

0.2400

14,102

October 14, 2014

October 31, 2014

November 12, 2014

June 30, 2014

0.2225

13,074

July 15, 2014

August 1, 2014

August 13, 2014

March 31, 2014

0.2125

12,487

April 17, 2014

May 1, 2014

May 14, 2014

December 31, 2013 (a)

0.0370

2,174

January 20, 2014

January 31, 2014

February 12, 2014

(a) This quarterly distribution reflects the pro rata portion of the minimum quarterly distribution rate of $0.2125 for the partial quarter beginning December 16, 2013 and ending December 31, 2013.

The following table reflects the allocation of total cash distributions to the general and limited partners and distribution equivalent right (DER) payments applicable to the period in which the distributions and DERs were earned (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
General partner’s distributions:
General partner’s distributions	$	404	$	282	$	1,118	$	793
General partner’s incentive distribution rights (IDRs)	982		—		2,076		—
Total general partner’s distributions	1,386		282		3,194		793
Limited partners’ distributions:
Common – public	5,305		4,139		15,137		11,643
Common – Valero	4,618		2,770		12,284		7,790
Subordinated – Valero	8,853		6,909		25,263		19,433
Total limited partners’ distributions	18,776		13,818		52,684		38,866
DERs	2		2		8		4
Total cash distributions, including DERs	$	20,164	$	14,102	$	55,886	$	39,663

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.	NET INCOME PER LIMITED PARTNER UNIT

Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of net income per limited partner unit.

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

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

Diluted net income per limited partner unit is also determined using the two-class method, unless the treasury stock method is more dilutive. For the three and nine months ended September 30, 2015, we used the two-class method to determine diluted net income per limited partner unit. We did not have any potentially dilutive instruments outstanding during the three and nine months ended September 30, 2015.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net income per unit was computed as follows (in thousands, except per unit amounts):



	Three Months Ended September 30, 2015
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	404	$	9,923	$	8,853	$	—	$	19,180
General partner’s IDRs	982		—		—		—		982
DERs	—		—		—		2		2
Distributions and DERs declared	1,386		9,923		8,853		2		20,164
Undistributed earnings	226		5,691		5,345		2		11,264
Net income available to limited partners – basic and diluted	$	1,612	$	15,614	$	14,198	$	4	$	31,428

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			30,698		28,790

Net income per limited partner unit – basic and diluted			$	0.51	$	0.49

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Three Months Ended September 30, 2014
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions	$	282	$	6,909	$	6,909	$	—	$	14,100
DERs	—		—		—		2		2
Distributions and DERs declared	282		6,909		6,909		2		14,102
Undistributed earnings	69		1,683		1,687		2		3,441
Net income available to limited partners – basic	$	351	8,592		8,596		$	4	$	17,543
Add: DERs			4		—
Net income available to limited partners – diluted			$	8,596	$	8,596

Net income per limited partner unit – basic:
Weighted-average units outstanding			28,790		28,790

Net income per limited partner unit – basic			$	0.30	$	0.30

Net income per limited partner unit – diluted:
Weighted-average units outstanding			28,790		28,790
Common equivalent units for restricted units			1		—
Weighted-average units outstanding – diluted			28,791		28,790

Net income per limited partner unit – diluted			$	0.30	$	0.30

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 2015
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	1,118	$	27,421	$	25,263	$	—	$	53,802
General partner’s IDRs	2,076		—		—		—		2,076
DERs	—		—		—		8		8
Distributions and DERs declared	3,194		27,421		25,263		8		55,886
Undistributed earnings	627		15,733		14,960		5		31,325
Net income available to limited partners – basic and diluted	$	3,821	$	43,154	$	40,223	$	13	$	87,211

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			30,279		28,790

Net income per limited partner unit – basic and diluted			$	1.43	$	1.40

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 2014
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions	$	793	$	19,433	$	19,433	$	—	$	39,659
DERs	—		—		—		4		4
Distributions and DERs declared	793		19,433		19,433		4		39,663
Undistributed earnings	12		273		277		—		562
Net income available to limited partners – basic	$	805	19,706		19,710		$	4	$	40,225
Add: DERs			4		—
Net income available to limited partners – diluted			$	19,710	$	19,710

Net income per limited partner unit – basic:
Weighted-average units outstanding			28,790		28,790

Net income per limited partner unit – basic			$	0.68	$	0.68

Net income per limited partner unit –diluted:
Weighted-average units outstanding			28,790		28,790
Common equivalent units for restricted units			1		—
Weighted-average units outstanding – diluted			28,791		28,790

Net income per limited partner unit – diluted			$	0.68	$	0.68

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.	UNIT ACTIVITY

Activity in the number of units was as follows:



	Common			General Partner
	Public	Valero	Subordinated	General Partner	Total
Balance as of December 31, 2013	17,250,000	11,539,989	28,789,989	1,175,102	58,755,080
Unit-based compensation	5,208	—	—	—	5,208
Balance as of September 30, 2014	17,255,208	11,539,989	28,789,989	1,175,102	58,760,288

Balance as of December 31, 2014	17,255,208	11,539,989	28,789,989	1,175,102	58,760,288
Unit-based compensation	4,443	—	—	—	4,443
Units issued in connection with the acquisition of the Houston and St. Charles Terminal Services Business (see Note 3)	—	1,908,100	—	38,941	1,947,041
Balance as of September 30, 2015	17,259,651	13,448,089	28,789,989	1,214,043	60,711,772


11.	SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in thousands):



	Nine Months Ended September 30,
	2015			2014
Decrease (increase) in current assets:
Receivables from related party	$	(6,354	)	$	2,955
Prepaid expenses and other	(33		)	(1,462		)
Increase (decrease) in current liabilities:
Accounts payable	1,031			(4,408		)
Accrued liabilities	221			686
Taxes other than income taxes	470			65
Deferred revenue from related party	22			229
Changes in current assets and current liabilities	$	(4,643	)	$	(1,935	)

The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable balance sheets for the respective periods for the following reasons:


•	amounts accrued for capital expenditures are reflected in investing activities when such amounts are paid, and


•	amounts accrued for offering costs and debt issuance costs were reflected in financing activities when paid.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We attributed $80.1 million of the total $154.0 million cash consideration paid for the acquisition of the Texas Crude Systems Business to the historical carrying value of this acquisition (an investing cash outflow). The remaining $73.9 million of cash consideration paid represents the excess purchase price paid over carrying value of this acquisition (a financing cash outflow).

We attributed $296.1 million of the total $571.2 million cash consideration paid for the Houston and St. Charles Terminals Acquisition to the historical carrying value of this acquisition (an investing cash outflow). The remaining $275.1 million of cash consideration represents the excess purchase price paid over the carrying value of this acquisition (a financing cash outflow).

There were no significant noncash investing activities for the nine months ended September 30, 2015. Noncash financing activities for the nine months ended September 30, 2015 included:


•	a capital contribution of $14.5 million for projects that were funded by Valero related primarily to the Houston and St. Charles terminals. Valero agreed to fund these projects as part of the Houston and St. Charles Terminals Acquisition, and


•	the issuance of 1,908,100 common units and 38,941 general partner units having an aggregate value of $100.0 million in connection with the Houston and St. Charles Terminals Acquisition described in Note 3.

There were no significant noncash investing or financing activities for the nine months ended September 30, 2014.

The following is a reconciliation of the amounts presented as net transfers from Valero on our statements of partners’ capital and statements of cash flows (in thousands):



	Nine Months Ended September 30,
	2015			2014 (a)
Net transfers from Valero per statement of partners’ capital	$	9,934		$	65,202
Less: Noncash transfers from (to) Valero	(1,001		)	1,543
Net transfers from Valero per statement of cash flows	$	10,935		$	63,659

(a) Financial information has been retrospectively adjusted for the Houston and St. Charles Terminals Acquisition.

Noncash transfers from (to) Valero primarily represent the change in amounts accrued by our Predecessor for capital expenditures as we do not reflect capital expenditures in our statements of cash flows until such amounts are paid.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash flows related to interest and income taxes paid were as follows (in thousands):



	Nine Months Ended September 30,
	2015		2014 (a)
Interest paid	$	2,952	$	686
Income taxes paid	441		74

(a) Financial information has been retrospectively adjusted for the Houston and St. Charles Terminals Acquisition.


12.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of cash and cash equivalents approximates the carrying value due to the low level of credit risk of these assets combined with their market interest rates. The fair value measurement for cash and cash equivalents is categorized as Level 1 in the fair value hierarchy. Fair values determined by Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets.

The fair values of our debt and note payable to related party approximate their carrying values as our borrowings bear interest based upon short-term floating market interest rates. The fair value measurement for these liabilities is categorized as Level 2 in the fair value hierarchy. Fair values determined by Level 2 utilize inputs that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-Q, including without limitation our disclosures below under the headings “OVERVIEW” and “OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similar expressions.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:


•	the suspension, reduction, or termination of Valero’s obligation under our commercial agreements and our services and secondment agreement;


•	changes in global economic conditions and the effects of the global economic downturn on Valero’s business and the business of its suppliers, customers, business partners, and credit lenders;


•	a material decrease in Valero’s profitability;


•	disruptions due to equipment interruption or failure at our facilities, Valero’s facilities, or third-party facilities on which our business or Valero’s business is dependent;


•	the risk of contract cancellation, non-renewal, or failure to perform by Valero’s customers, and Valero’s inability to replace such contracts and/or customers;


•	Valero’s ability to remain in compliance with the terms of its outstanding indebtedness;


•	the timing and extent of changes in commodity prices and demand for Valero’s refined petroleum products;


•	actions of customers and competitors;


•	changes in our cash flows from operations;


•	state and federal environmental, economic, health and safety, energy, and other policies and regulations, including those related to climate change and any changes therein, and any legal or regulatory investigations, delays, or other factors beyond our control;


•	operational hazards inherent in refining operations and in transporting and storing crude oil and refined petroleum products;


•	earthquakes or other natural disasters affecting operations;


•	changes in capital requirements or in execution of planned capital projects;


•	the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;

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•	changes in the cost or availability of third-party vessels, pipelines, and other means of delivering and transporting crude oil, feedstocks, and refined products;


•	direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;


•	weather conditions affecting our or Valero’s operations or the areas in which Valero markets its refined petroleum products;


•	seasonal variations in demand for refined petroleum products;


•	adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any accruals, which affect us or Valero;


•	risks related to labor relations and workplace safety;


•	changes in insurance markets impacting costs and the level and types of coverage available; and


•	political developments.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and affect whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

We are a fee-based master limited partnership formed by Valero in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. As of September 30, 2015, our assets consisted of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of seven of Valero’s refineries.

We acquired the Texas Crude Systems Business from Valero on July 1, 2014 for total cash consideration of $154.0 million and began receiving fees for services provided by this business commencing on July 1, 2014. We acquired the Houston and St. Charles Terminal Services Business from Valero on March 1, 2015 for total consideration of $671.2 million, as further described in Note 3 of Condensed Notes to Consolidated Financial Statements, and began receiving fees for services provided by this business commencing on March 1, 2015. These acquisitions were each accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, the Partnership’s financial statements have been retrospectively adjusted to include the historical results of the acquired businesses for all periods presented prior to the effective dates of each acquisition. We refer to the historical results of the acquired businesses prior to their respective acquisition dates as those of our “Predecessor.” See Notes 1 and 3 of Condensed Notes to Consolidated Financial Statements for a discussion of the basis of this presentation.

Operating revenues include amounts attributable to our Predecessor. Prior to being acquired by us, the Texas Crude Systems Business generated revenues by providing fee-based transportation and terminaling services to Valero, but the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and did not generate revenues. Effective with the date of each acquisition, we entered into additional

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schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired businesses. This resulted in changes to pipeline and terminaling throughput fees previously charged to Valero, as well as new charges for terminaling services. Because of these new agreements, our future results of operations may not be comparable to our historical results of operations.

For the third quarter of 2015, we reported net income and net income attributable to partners of $31.4 million and net income per limited partner common unit of $0.51. This compares to net income of $5.7 million, net income attributable to partners of $17.5 million, and net income per limited partner common unit of $0.30 for the third quarter of 2014.

•

The increase in net income of $25.8 million in the third quarter of 2015 compared to the third quarter of 2014 was due primarily to $27.9 million of revenues generated by our Houston and St. Charles terminals during the third quarter of 2015. As discussed above, the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and did not generate revenues prior to our acquisition of that business on March 1, 2015.

•

Net income attributable to partners represents our results of operations and only includes those of an acquired business for the period subsequent to the effective date of its acquisition. Therefore, the increase in net income attributable to partners of $13.9 million in the third quarter of 2015 compared to the third quarter of 2014 was due primarily to the results of operations of the Houston and St. Charles terminals during the third quarter of 2015.

For the first nine months of 2015, we reported net income of $77.7 million, net income attributable to partners of $87.2 million, and net income per limited partner common unit of $1.43. This compares to net income of $16.3 million, net income attributable to partners of $40.2 million, and net income per limited partner common unit of $0.68 for the first nine months of 2014.

•

The increase in net income of $61.4 million in the first nine months of 2015 compared to the first nine months of 2014 was due primarily to $64.8 million of revenues generated by our Houston and St. Charles terminals from the date of their acquisition (March 1, 2015) through September 30, 2015. As discussed above, the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and did not generate revenues prior to our acquisition of that business on March 1, 2015.

•

As previously discussed, net income attributable to partners represents our results of operations and only includes those of an acquired business for the period subsequent to the effective date of its acquisition. Therefore, the increase in net income attributable to partners of $47.0 million in the first nine months of 2015 compared to the first nine months of 2014 was due primarily to the 2015 period reflecting the results of operations of the Texas Crude Systems Business for the first nine months of 2015 and the Houston and St. Charles terminals from March 1, 2015 through September 30, 2015.

Additional analysis of the changes in the components of net income is provided below under “RESULTS OF OPERATIONS.”

Effective October 1, 2015, we acquired Valero’s Corpus Christi East Terminal and Corpus Christi West Terminal (collectively, the Corpus Christi Terminal Services Business) for total consideration of $465.0 million, as further described in Note 3 of Condensed Notes to Consolidated Financial Statements. The Corpus Christi Terminal Services Business is engaged in the business of terminaling crude oil, intermediates, and refined petroleum products at terminals in Corpus Christi, Texas. The Corpus Christi Terminal Services Business consists of:

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•	Corpus Christi East Terminal. The Corpus Christi East terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Corpus Christi East Refinery. The terminal is located on the Corpus Christi ship channel and has storage tanks with 6.3 million barrels of storage capacity.


•	Corpus Christi West Terminal. The Corpus Christi West terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Corpus Christi West Refinery. The terminal is located on the Corpus Christi ship channel and has storage tanks with 3.8 million barrels of storage capacity.

OUTLOOK

Because our operating revenues are generated from fee-based arrangements with Valero, the amount of operating revenues we generate primarily depends on the volumes of crude oil and refined petroleum products that we transport through our pipelines and handle at our terminals on behalf of Valero. These volumes are primarily affected by refinery reliability and the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. We expect that Valero will ship volumes in excess of its total minimum throughput commitments on our pipeline systems and will throughput volumes in excess of its total minimum throughput commitments at our terminals for the fourth quarter of 2015.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance. The results of operations, operating highlights, and capital expenditures data have been retrospectively adjusted to include the historical results of operations of the Houston and St. Charles Terminal Services Business for periods presented prior to March 1, 2015. See Notes 1 and 3 of Condensed Notes to Consolidated Financial Statements for a discussion of the basis of this presentation. The narrative following these tables provides an analysis of our results of operations.

Results of Operations

(in thousands, except per unit amounts)



	Three Months Ended September 30,
	2015			2014			Change
Operating revenues – related party	$	62,037		$	33,666		$	28,371
Costs and expenses:
Operating expenses	15,042			17,510			(2,468		)
General and administrative expenses	3,444			3,133			311
Depreciation expense	10,684			7,178			3,506
Total costs and expenses	29,170			27,821			1,349
Operating income	32,867			5,845			27,022
Other income, net	29			156			(127		)
Interest and debt expense, net of capitalized interest	(1,353		)	(214		)	(1,139		)
Income before income taxes	31,543			5,787			25,756
Income tax expense	115			129			(14		)
Net income	31,428			5,658			25,770
Less: Net loss attributable to Predecessor	—			(11,885		)	11,885
Net income attributable to partners	31,428			17,543			13,885
Less: General partner’s interest in net income	1,612			351			1,261
Limited partners’ interest in net income	$	29,816		$	17,192		$	12,624

Net income per limited partner unit – basic and diluted:
Common units	$	0.51		$	0.30
Subordinated units	$	0.49		$	0.30

Weighted-average limited partner units outstanding:
Common units – basic	30,698			28,790
Common units – diluted	30,698			28,791
Subordinated units – basic and diluted	28,790			28,790

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Operating Highlights and Other Financial Information

(in thousands, except throughput, per barrel, and per unit amounts)



	Three Months Ended September 30,
	2015		2014		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	21,322	$	20,602	$	720
Pipeline transportation throughput (BPD) ^(a)	960,410		955,285		5,125
Average pipeline transportation revenue per barrel ^(b)	$	0.24	$	0.23	$	0.01

Terminaling:
Terminaling revenues	$	40,580	$	12,827	$	27,753
Terminaling throughput (BPD)	1,335,659		479,923		855,736
Average terminaling revenue per barrel ^(b)	$	0.33	$	0.29	$	0.04

Storage revenues	$	135	$	237	$	(102	)

Total operating revenues – related party	$	62,037	$	33,666	$	28,371

Capital expenditures:
Maintenance	$	326	$	3,870	$	(3,544	)
Expansion	868		8,729		(7,861		)
Total capital expenditures	1,194		12,599		(11,405		)
Less: Capital expenditures attributable to Predecessor	—		9,574		(9,574		)
Capital expenditures attributable to Partnership	$	1,194	$	3,025	$	(1,831	)

Other financial information:
Distribution declared per unit	$	0.3075	$	0.2400

Distribution declared:
Limited partner units – public	$	5,307	$	4,141
Limited partner units – Valero	13,471		9,679
General partner units – Valero	1,386		282
Total distribution declared	$	20,164	$	14,102

____________________


(a)	Represents the sum of volumes transported through each separately tariffed pipeline segment.


(b)	Average revenue per barrel is calculated as revenue divided by throughput for the period. Throughput is derived by multiplying the throughput barrels per day (BPD) by the number of days in the period.

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Operating revenues increased $28.4 million, or 84 percent, for the third quarter of 2015 compared to the third quarter of 2014. The increase was due primarily to $27.9 million of revenues generated by the Houston and St. Charles terminals during the third quarter of 2015. Prior to being acquired by us on March 1, 2015, the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and therefore did not generate revenues. Effective March 1, 2015, we entered into additional schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired business and began generating revenues with respect to these assets.

Operating expenses decreased $2.5 million, or 14 percent, for the third quarter of 2015 compared to the third quarter of 2014 due primarily to a decrease in maintenance expense of $2.9 million mainly at our St. Charles terminal and our Lucas crude system. The decrease in maintenance expense was partially offset by an increase in insurance expense of $596,000 as a result of the acquired assets being covered under our own insurance policies. Prior to the acquisition, our Predecessor was allocated a portion of Valero’s insurance costs.

General and administrative expenses increased $311,000, or 10 percent, for the third quarter of 2015 compared to the third quarter of 2014 due primarily to higher transaction costs (legal and investment advisor fees) of $274,000 associated with the acquisition of businesses from Valero. In the third quarter of 2015, we incurred transaction costs of $423,000 in connection with the October 1, 2015 acquisition of the Corpus Christi Terminal Services Business. In the third quarter of 2014, we incurred $149,000 in transaction costs in connection with the July 1, 2014 acquisition of the Texas Crude Systems Business.

Depreciation expense increased $3.5 million, or 49 percent, for the third quarter of 2015 compared to the third quarter of 2014 due primarily to $2.8 million in accelerated depreciation related to the retirement of certain assets in the McKee Crude System during the third quarter of 2015.

“Other income, net” decreased $127,000, or 81 percent, for the third quarter of 2015 compared to the third quarter of 2014 due to a decrease in interest income (net of bank fees) attributable to a reduced cash balance during the third quarter of 2015.

“Interest and debt expense, net of capitalized interest” increased $1.1 million for the third quarter of 2015 compared to the third quarter of 2014 due primarily to interest expense incurred on borrowings under our revolving credit facility and the subordinated credit agreement with Valero as discussed above under “OVERVIEW.” Interest expense on this indebtedness was $1.2 million for the third quarter of 2015.

Our income tax expense is associated with the Texas margin tax. In June 2015, the Texas margin tax rate was reduced from 1 percent to 0.75 percent. The impact of this rate reduction resulted in a lower tax expense for the third quarter of 2015 as compared to the third quarter of 2014.

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Results of Operations

(in thousands, except per unit amounts)



	Nine Months Ended September 30,
	2015			2014			Change
Operating revenues – related party	$	164,168		$	94,998		$	69,170
Costs and expenses:
Operating expenses	47,280			50,062			(2,782		)
General and administrative expenses	10,169			9,591			578
Depreciation expense	25,887			19,226			6,661
Total costs and expenses	83,336			78,879			4,457
Operating income	80,832			16,119			64,713
Other income, net	166			1,315			(1,149		)
Interest and debt expense, net of capitalized interest	(3,365		)	(663		)	(2,702		)
Income before income taxes	77,633			16,771			60,862
Income tax expense (benefit)	(62		)	436			(498		)
Net income	77,695			16,335			61,360
Less: Net loss attributable to Predecessor	(9,516		)	(23,890		)	14,374
Net income attributable to partners	87,211			40,225			46,986
Less: General partner’s interest in net income	3,821			805			3,016
Limited partners’ interest in net income	$	83,390		$	39,420		$	43,970

Net income per limited partner unit – basic and diluted:
Common units	$	1.43		$	0.68
Subordinated units	$	1.40		$	0.68

Weighted-average limited partner units outstanding:
Common units – basic	30,279			28,790
Common units – diluted	30,279			28,791
Subordinated units – basic and diluted	28,790			28,790

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Operating Highlights and Other Financial Information

(in thousands, except throughput, per barrel, and per unit amounts)



	Nine Months Ended September 30,
	2015		2014		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	61,164	$	51,842	$	9,322
Pipeline transportation throughput (BPD) ^(a)	964,380		879,192		85,188
Average pipeline transportation revenue per barrel ^(b)	$	0.23	$	0.22	$	0.01

Terminaling:
Terminaling revenues	$	102,599	$	42,343	$	60,256
Terminaling throughput (BPD)	1,176,216		560,139		616,077
Average terminaling revenue per barrel ^(b)	$	0.32	$	0.28	$	0.04

Storage revenues	$	405	$	813	$	(408	)

Total operating revenues – related party	$	164,168	$	94,998	$	69,170

Capital expenditures:
Maintenance	$	4,549	$	12,218	$	(7,669	)
Expansion	2,697		42,582		(39,885		)
Total capital expenditures	7,246		54,800		(47,554		)
Less: Capital expenditures attributable to Predecessor	3,693		48,551		(44,858		)
Capital expenditures attributable to Partnership	$	3,553	$	6,249	$	(2,696	)

Other financial information:
Distribution declared per unit	$	0.8775	$	0.6750

Distribution declared:
Limited partner units – public	$	15,145	$	11,647
Limited partner units – Valero	37,547		27,223
General partner units – Valero	3,194		793
Total distribution declared	$	55,886	$	39,663

____________________


(a)	Represents the sum of volumes transported through each separately tariffed pipeline segment.


(b)	Average revenue per barrel is calculated as revenue divided by throughput for the period. Throughput is derived by multiplying the throughput barrels per day (BPD) by the number of days in the period.

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Operating revenues increased $69.2 million, or 73 percent, for the first nine months of 2015 compared to the first nine months of 2014. The increase was due primarily to:

•

Revenues of $64.8 million generated by the Houston and St. Charles terminals for the period from the date of their acquisition (March 1, 2015) through September 30, 2015. Prior to being acquired by us, the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and did not generate revenues. Effective with the acquisition date, we entered into additional schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired business and began generating revenues with respect to these assets.


•	An increase of $3.4 million at our Memphis logistics system as a result of higher throughput volumes due to increased production at Valero’s Memphis Refinery. During the first nine months of 2014, refinery throughput volumes were lower as a result of harsh winter weather conditions and a planned turnaround.


•	An increase of $1.2 million at our Port Arthur logistics system driven by higher utilization of our Port Arthur products system.

Operating expenses decreased $2.8 million, or 6 percent, for the first nine months of 2015 compared to the first nine months of 2014 due primarily to a decrease in maintenance expense of $5.2 million mainly at our St. Charles and Houston terminals and our Lucas crude system. The decrease in maintenance expense was partially offset by an increase in insurance expense of $1.7 million as a result of the acquired assets being covered under our own insurance policies. Prior to the acquisitions, our Predecessor was allocated a portion of Valero’s insurance costs. Additionally, salaries, wages, and benefits for seconded employees increased by $686,000 during the first nine months of 2015 due to the annual merit increase and higher incentive compensation.

General and administrative expenses increased $578,000, or 6 percent, for the first nine months of 2015 compared to the first nine months of 2014 due primarily to higher transaction costs (legal and investment advisor fees) of $512,000 associated with the acquisition of businesses from Valero. In 2015, we incurred transaction costs of $546,000 in connection with the March 1, 2015 acquisition of the Houston and St. Charles Terminal Services Business and $423,000 in connection with the October 1, 2015 acquisition of the Corpus Christi Terminal Services Business. In 2014, we incurred $457,000 in connection with the July 1, 2014 acquisition of the Texas Crude Systems Business.

Depreciation expense increased $6.7 million, or 35 percent, for the first nine months of 2015 compared to the first nine months of 2014 due to $2.8 million in accelerated depreciation related to the retirement of certain assets in the McKee Crude System in 2015, as well as depreciation expense associated with assets placed into service in the latter part of 2014, including the expansion of our St. Charles and Houston terminals and Three Rivers crude system and the interconnection with TransCanada’s Cushing Marketlink pipeline at our Lucas crude system.

“Other income, net” decreased $1.1 million, or 87 percent, for the first nine months of 2015 compared to the first nine months of 2014 due partially to a decrease in interest income (net of bank fees) of $545,000 attributable to a reduced cash balance during the first nine months of 2015. In addition, scrap metal sales decreased $409,000 and right-of-way fees decreased $141,000.

“Interest and debt expense, net of capitalized interest” increased $2.7 million for the first nine months of 2015 compared to the first nine months of 2014 due primarily to interest expense incurred on borrowings under our revolving credit facility and the subordinated credit agreement with Valero associated with our acquisition of the Houston and St. Charles Terminal Services Business on March 1, 2015. See Notes 3 and 6

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of Condensed Notes to Consolidated Financial Statements. Interest expense on this indebtedness was $3.0 million for the first nine months of 2015.

Our income tax expense (benefit) is associated with the Texas margin tax. During the first nine months of 2015, we reduced our deferred income tax liabilities due to a reduction in the relative amount of revenue we generate in Texas compared to our total revenue. This reduction was a result of the acquisition of the Houston and St. Charles Terminal Services Business (which includes operations in Louisiana). In addition, in June 2015, the Texas margin tax rate was reduced from 1 percent to 0.75 percent.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility, and issuances of additional debt and equity securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.

Distributions

On October 15, 2015, the board of directors of our general partner declared a distribution of $0.3075 per unit applicable to the third quarter of 2015, which equates to $20.2 million in total distributions to unitholders of record as of November 2, 2015. This quarterly distribution per unit is more than the minimum quarterly distribution of $0.2125 per unit.

Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions:

Quarterly
Period
Ended

Total
Quarterly
Distribution
(Per Unit)

Total Cash
Distribution
(In Thousands)

Declaration
Date

Record
Date

Distribution
Date

September 30, 2015

0.3075

20,164

October 15, 2015

November 2, 2015

November 10, 2015

June 30, 2015

0.2925

18,456

July 24, 2015

August 3, 2015

August 11, 2015

March 31, 2015

0.2775

17,266

April 21, 2015

May 1, 2015

May 12, 2015

December 31, 2014

0.2660

15,829

January 26, 2015

February 5, 2015

February 12, 2015

September 30, 2014

0.2400

14,102

October 14, 2014

October 31, 2014

November 12, 2014

June 30, 2014

0.2225

13,074

July 15, 2014

August 1, 2014

August 13, 2014

March 31, 2014

0.2125

12,487

April 17, 2014

May 1, 2014

May 14, 2014

December 31, 2013 (a)

0.0370

2,174

January 20, 2014

January 31, 2014

February 12, 2014

(a) This quarterly distribution reflects the pro rata portion of the minimum quarterly distribution rate of $0.2125 for the partial quarter beginning December 16, 2013 and ending December 31, 2013.

Revolving Credit Facility

We have a $300.0 million senior unsecured revolving credit facility agreement (the Revolver) with a group of lenders that matures in December 2018. The Revolver includes sub-facilities for swingline loans and letters of credit. Effective March 2, 2015, we borrowed $200.0 million under the Revolver in connection with the acquisition of the Houston and St. Charles Terminal Services Business. On July 1, 2015, we repaid $25.0 million of the outstanding balance. As of September 30, 2015, we had $175.0 million borrowings

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outstanding under the Revolver. See Note 6 of Condensed Notes to Consolidated Financial Statements for a description of the Revolver.

Subordinated Credit Agreement

On March 2, 2015, we entered into a subordinated credit agreement with Valero (the Loan Agreement) under which we borrowed $160.0 million to finance a portion of the acquisition of the Houston and St. Charles Terminal Services Business. See Note 6 of Condensed Notes to Consolidated Financial Statements for a description of the Loan Agreement.

On October 1, 2015, we entered into a subordinated credit agreement with Valero under which we borrowed $395.0 million to finance a portion of the acquisition of the Corpus Christi Terminal Services Business.

Cash Flows Summary

Components of our cash flows are set forth below (in thousands):



	Nine Months Ended September 30,
	2015			2014 (a)
Cash flows provided by (used in):
Operating activities	$	98,880		$	33,625
Investing activities	(303,285		)	(134,883		)
Financing activities	18,389			(43,026		)
Net decrease in cash and cash equivalents	$	(186,016	)	$	(144,284	)

(a) Prior period financial information has been retrospectively adjusted for the acquisition of the Houston and St. Charles Terminal Services Business.

Operating Activities

Net cash provided by operating activities for the first nine months of 2015 was $98.9 million, which included net income of $77.7 million plus noncash adjustments (primarily for depreciation expense) of $25.9 million, partially offset by unfavorable changes in working capital of $4.6 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The changes in working capital were composed primarily of an increase in receivables from related parties of $6.4 million, partially offset by an increase in accounts payable of $1.0 million as shown in Note 11 of Condensed Notes to Consolidated Financial Statements. The increase in receivables from related parties was attributed primarily to billings related to our newly acquired Houston and St. Charles terminals. The increase in accounts payable was due primarily to the timing of project expenditures.

Net cash provided by operating activities for the first nine months of 2014 was $33.6 million, which included net income of $16.3 million plus noncash adjustments (primarily for depreciation expense) of $19.3 million, partially offset by unfavorable changes in working capital of $1.9 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The changes in working capital were composed primarily of a decrease in accounts payable of $4.4 million, partially offset by a decrease in receivables from related parties of $3.0 million as shown in Note 11 of Condensed Notes to Consolidated Financial Statements. The decrease in accounts payable was due primarily to the timing of project expenditures. The decrease in receivables from related parties was due to the timing of payments received from related parties on outstanding receivables.

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Investing Activities

Cash used for investing activities for the first nine months of 2015 was primarily impacted by the acquisition of the Houston and St. Charles Terminal Services Business effective March 1, 2015. In connection with that acquisition, we paid $571.2 million in cash to Valero, and of this amount, $296.1 million represented Valero’s carrying value in the net assets transferred to us, which was reflected as an investing activity. The remaining cash paid of $275.1 million represented the excess purchase price paid over the carrying value and was reflected as a financing activity as described below.

Cash used for investing activities for the first nine months of 2014 was primarily impacted by the acquisition of the Texas Crude Systems Business effective July 1, 2014. In connection with that acquisition, we paid $154.0 million in cash to Valero, and of this amount, $80.1 million represented Valero’s carrying value in net assets transferred to us, which was reflected as an investing activity. The remaining cash paid of $73.9 million represented the excess purchase price paid over the carrying value and was reflected as a financing activity as described below.

In addition, we and our Predecessor incurred capital expenditures of $7.2 million and $54.8 million during the nine months ended September 30, 2015 and 2014, respectively. See “Capital Expenditures” below for a discussion of the various maintenance and expansion projects.

Financing Activities

Cash provided by financing activities for the first nine months of 2015 consisted primarily of the $200.0 million of borrowings under the Revolver and $160.0 million of proceeds from the Loan Agreement in connection with the acquisition of the Houston and St. Charles Terminal Services Business. These cash inflows were offset by the $275.1 million of excess purchase price paid over the carrying value for the acquired business as described above under “Investing Activities,” $51.6 million in cash distributions to limited partners and our general partner, and $25.0 million in repayments of borrowings under the Revolver. Further, we reflected a net transfer from Valero of $10.9 million related to the cash flows for the first two months of the year associated with our Predecessor.

For the first nine months of 2014, our financing activities consisted primarily of the $73.9 million of excess purchase price paid over the carrying value for the acquisition of the Texas Crude Systems Business, the payment of $27.7 million of cash distributions to limited partners and our general partner, $3.2 million of offering costs related to our initial public offering, and $1.1 million of debt issuance costs related to the Revolver. In addition, we reflected a net transfer from Valero of $63.7 million related to the cash flows associated with our Predecessor.

See Notes 3 and 11of Condensed Notes to Consolidated Financial Statements for additional information on the acquisitions discussed above, including consideration paid and the cash and noncash elements of the acquisitions.

Capital Expenditures

Our operations can be capital intensive, requiring investments to expand, upgrade, or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures as those terms are defined in our partnership agreement. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash

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flows. In contrast, examples of expansion capital expenditures include those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business.

Our capital expenditures were as follows (in thousands):



	Nine Months Ended September 30,
	2015		2014 (a)
Maintenance	$	4,549	$	12,218
Expansion	2,697		42,582
Total capital expenditures	$	7,246	$	54,800

(a) Prior period financial information has been retrospectively adjusted for the acquisition of the Houston and St. Charles Terminal Services Business.

Our capital expenditures for the first nine months of 2015 were primarily directed toward the following activities:


•	the improvement of assets at our St. Charles terminal that will extend the useful lives of the tanks;


•	the expansion of our St. Charles and Houston terminals; and


•	the construction of a connection to receive crude oil from the Seaway pipeline into our Lucas crude system.

Our capital expenditures for the first nine months of 2014 were primarily directed toward the following activities:


•	the expansion and improvement of assets at the St. Charles and Houston terminals;


•	the expansion of the Three Rivers crude system; and


•	the interconnection with TransCanada’s Cushing Marketlink pipeline.

For the full year 2015, we expect our capital expenditures to be approximately $12.0 million. Our estimate consists of approximately $6.0 million for maintenance capital expenditures and approximately $6.0 million for expansion capital expenditures. We continuously evaluate our capital budget and make changes as conditions warrant. We anticipate that these capital expenditures will be funded from cash flows from operations. The foregoing capital expenditure estimate does not include any amounts related to strategic business acquisitions.

In addition to the above-mentioned capital expenditures, $14.1 million of capital projects were funded by Valero primarily related to the Houston and St. Charles terminals. Valero agreed to fund these projects as part of our acquisition of the Houston and St. Charles Terminal Services Business. See Note 11 of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.

Contractual Obligations

As of September 30, 2015, our contractual obligations included debt and capital lease obligations, operating leases, purchase obligations, and other long-term liabilities. In March 2015, we borrowed $200.0 million under the Revolver and $160.0 million under the Loan Agreement with Valero in connection with the acquisition of the Houston and St. Charles Terminal Services Business. In addition, we entered into lease

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and access agreements with Valero with respect to the land on which each terminal is located. On July 1, 2015, we repaid $25.0 million of the outstanding balance under the Revolver. As of September 30, 2015, we had $175.0 million and $160.0 million of borrowings outstanding under the Revolver and the Loan Agreement with Valero, respectively. See Note 6 of Condensed Notes to Consolidated Financial Statements for a full description of the Revolver and Loan Agreement. See Note 4 of Condensed Notes to Consolidated Financial Statements for a full description of the lease and access agreements. There were no other material changes outside the ordinary course of business with respect to our contractual obligations during the nine months ended September 30, 2015.

On October 1, 2015, we borrowed $395.0 million under a subordinated credit agreement with Valero in connection with the acquisition of the Corpus Christi Terminal Services Business. In addition, we entered into lease and access agreements with Valero with respect to the land on which each terminal is located.

Regulatory Matters

Rate and Other Regulations

Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act. Our pipelines and terminal operations are also subject to safety regulations adopted by the Department of Transportation, as well as to state regulations. For more information on federal and state regulations affecting our business, please read our annual report on Form 10-K for the year ended December 31, 2014.

Environmental Matters and Compliance Costs

We are subject to extensive federal, state, and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment on our equipment and facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints.

There were no significant changes to our environmental matters and compliance costs during the nine months ended September 30, 2015.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. As of September 30, 2015, there were no significant changes to our critical accounting estimates since the date our annual report on Form 10-K for the year ended December 31, 2014 was filed.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices. Because we do not take ownership of or receive any payments based on the value of the crude oil or refined petroleum products

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that we handle and do not engage in the trading of any commodities, we have no direct exposure to commodity price fluctuations.

Our commercial agreements with Valero are indexed to inflation to mitigate our exposure to increases in the cost of labor and materials used in our business.

Debt incurred under our Revolver and our Loan Agreement bears interest at a variable rate and exposes us to interest rate risk. Unless interest rates increase significantly in the future, our exposure to interest rate risk should be minimal. We had debt of $175.0 million and note payable to related party of $160.0 million as of September 30, 2015.

Item 4. Controls and Procedures


(a)	Evaluation of disclosure controls and procedures

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of September 30, 2015.


(b)	Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We incorporate by reference into this Item our disclosures made in Part I, Item 1 of this report included in Note 7 of Condensed Notes to Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2014.

Item 6. Exhibits



Exhibit No.		Description

*31.01		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal executive officer.

*31.02		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal financial officer.

**32.01		Section 1350 Certifications (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

***101		Interactive Data Files

______________


*	Filed herewith.


**	Furnished herewith.


***	Submitted electronically herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	VALERO ENERGY PARTNERS LP
	(Registrant)

	By:	Valero Energy Partners GP LLC
		its general partner


	By:	/s/ Donna M. Titzman
		Donna M. Titzman
		Senior Vice President,
		Chief Financial Officer and Treasurer
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)

Date: November 3, 2015

VALERO ENERGY PARTNERS LP - FORM 10-Q - November 3, 2015

Attached files

VALERO ENERGY PARTNERS LP Reports