VALERO ENERGY PARTNERS LP - FORM 10-Q

Attached files

file	filename
EX-32.01 - EXHIBIT 32.01 - VALERO ENERGY PARTNERS LP	vlpexh3201-3312016.htm
EX-31.02 - EXHIBIT 31.02 - VALERO ENERGY PARTNERS LP	vlpexh3102-3312016.htm
EX-31.01 - EXHIBIT 31.01 - VALERO ENERGY PARTNERS LP	vlpexh3101-3312016.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 March 31, 2016



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 37,262,986 common units, 28,789,989 subordinated units, and 1,347,702 general partner units outstanding at April 29, 2016.

VALERO ENERGY PARTNERS LP

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	1
Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015	2
Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2016 and 2015	3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	4
Condensed Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 6. Exhibits	33
SIGNATURE	34

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(In Thousands)



	March 31, 2016			December 31, 2015
	March 31, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	102,278		$	80,783
Receivables from related party	20,922			18,088
Prepaid expenses and other	831			632
Total current assets	124,031			99,503
Property and equipment, at cost	1,021,289			1,010,881
Accumulated depreciation	(272,679		)	(263,599		)
Property and equipment, net	748,610			747,282
Deferred charges and other assets, net	3,155			3,322
Total assets	$	875,796		$	850,107
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Current portion of debt and capital lease obligations	$	587		$	913
Accounts payable	6,621			9,264
Accrued liabilities	1,201			1,062
Accrued liabilities – related party	808			628
Taxes other than income taxes	1,270			1,276
Deferred revenue from related party	451			129
Total current liabilities	10,938			13,272
Debt and capital lease obligations, net of current portion	175,155			175,246
Notes payable to related party	370,000			370,000
Deferred income taxes	415			320
Other long-term liabilities	1,129			1,116
Commitments and contingencies
Partners’ capital:
Common unitholders – public (21,515,609 and 21,509,651 units outstanding)	587,736			581,489
Common unitholder – Valero (15,018,602 and 15,018,602 units outstanding)	35,234			28,430
Subordinated unitholder – Valero (28,789,989 and 28,789,989 units outstanding)	(300,919		)	(313,961		)
General partner – Valero (1,332,829 and 1,332,829 units outstanding)	(3,892		)	(5,805		)
Total partners’ capital	318,159			290,153
Total liabilities and partners’ capital	$	875,796		$	850,107

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 March 31,
	2016			2015 (a)
Operating revenues – related party	$	78,767		$	41,886
Costs and expenses:
Operating expenses (b)	19,096			22,624
General and administrative expenses (c)	4,161			3,652
Depreciation expense	9,388			8,310
Total costs and expenses	32,645			34,586
Operating income	46,122			7,300
Other income, net	77			111
Interest and debt expense, net of capitalized interest (d)	(2,659		)	(601		)
Income before income taxes	43,540			6,810
Income tax expense (benefit)	242			(126		)
Net income	43,298			6,936
Less: Net loss attributable to Predecessor	—			(15,185		)
Net income attributable to partners	43,298			22,121
Less: General partner’s interest in net income	3,504			852
Limited partners’ interest in net income	$	39,794		$	21,269

Net income per limited partner unit – basic and diluted:
Common units	$	0.61		$	0.37
Subordinated units	$	0.61		$	0.36

Weighted-average limited partner units outstanding:
Common units – basic and diluted	36,520			29,426
Subordinated units – basic and diluted	28,790			28,790

Cash distribution declared per unit	$	0.3400		$	0.2775

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

Supplemental information – each income statement line item reflected below includes expenses incurred for services or financing provided by related party as follows:
(b) Operating expenses – related party	$	9,910		$	8,906
(c) General and administrative expenses – related party	$	2,858		$	2,599
(d) Interest and debt expense – related party	$	1,566		$	190

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, 2014	$	374,954		$	58,844		$	146,804		$	4,617		$	379,880		$	965,099
Net income (loss):
Attributable to Predecessor (a)	—			—			—			—			(15,185		)	(15,185		)
Attributable to partners	6,305			4,442			10,522			852			—			22,121
Net transfers from Valero Energy Corporation (a)	—			—			—			—			21,268			21,268
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	—			1,497			3,206			136			—			4,839
Cash distributions to unitholders	(4,588		)	(3,070		)	(7,658		)	(510		)	—			(15,826		)
Distribution equivalent right payments	(3		)	—			—			—			—			(3		)
Unit-based compensation	41			—			—			—			—			41
Balance as of March 31, 2015 (a)	$	376,709		$	55,418		$	(107,322	)	$	(3,525	)	$	89,854		$	411,134

Balance as of December 31, 2015	$	581,489		$	28,430		$	(313,961	)	$	(5,805	)	$	—		$	290,153
Net income attributable to partners	13,101			9,151			17,542			3,504			—			43,298
Noncash capital contributions from Valero Energy Corporation	—			2,459			4,713			218			—			7,390
Cash distributions to unitholders	(6,879		)	(4,806		)	(9,213		)	(1,809		)	—			(22,707		)
Offering costs	(5		)	—			—			—			—			(5		)
Distribution equivalent right payments	(4		)	—			—			—			—			(4		)
Unit-based compensation	34			—			—			—			—			34
Balance as of March 31, 2016	$	587,736		$	35,234		$	(300,919	)	$	(3,892	)	$	—		$	318,159

(a) Financial information has been retrospectively adjusted for the acquisition of the Corpus Christi 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)



	Three Months Ended March 31,
	2016			2015 (a)
Cash flows from operating activities:
Net income	$	43,298		$	6,936
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	9,388			8,310
Deferred income tax expense (benefit)	95			(249		)
Changes in current assets and current liabilities	(1,986		)	(7,755		)
Changes in deferred charges and credits and other operating activities, net	111			418
Net cash provided by operating activities	50,906			7,660
Cash flows from investing activities:
Capital expenditures	(6,267		)	(11,934		)
Acquisition from Valero Energy Corporation	—			(296,109		)
Net cash used in investing activities	(6,267		)	(308,043		)
Cash flows from financing activities:
Proceeds from debt borrowings	—			200,000
Proceeds from note payable to related party	—			160,000
Payments of capital lease obligations	(326		)	(284		)
Payment of offering costs	(107		)	—
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets	—			(275,111		)
Cash distributions to unitholders and distribution equivalent right payments	(22,711		)	(15,829		)
Net transfers from Valero Energy Corporation	—			22,738
Net cash provided by (used in) financing activities	(23,144		)	91,514
Net increase (decrease) in cash and cash equivalents	21,495			(208,869		)
Cash and cash equivalents at beginning of period	80,783			236,579
Cash and cash equivalents at end of period	$	102,278		$	27,710

(a) Financial information has been retrospectively adjusted for the acquisition of the Corpus Christi 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 Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business from Valero (collectively, the Acquisitions) on March 1, 2015 and October 1, 2015, respectively. See Note 3 for further discussion of the Acquisitions. As of March 31, 2016, 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 nine of Valero’s refineries.

On April 1, 2016, we acquired Valero’s McKee Terminal Services Business 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 the common control of Valero. 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 dates 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, 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,

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 expense was not included on the net cash transfers from 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 months ended March 31, 2016 and 2015 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited financial statements. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The balance sheet as of December 31, 2015 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2015.


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.

Accounting Pronouncements Adopted During the Period

In April 2015, the provisions of Accounting Standards Codification (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 Securities and Exchange Commission staff that they would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement 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 were effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

as our debt issuance costs are associated with our revolving credit facility and therefore were not required to be reclassified.

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 were effective for annual reporting periods beginning after December 15, 2015, and interim periods within those annual periods. We have historically calculated our net income per unit after a dropdown transaction as prescribed by these provisions; therefore, the adoption of this guidance effective January 1, 2016 did not affect our financial position or results of operations, but resulted in additional disclosures as shown in Note 9.

In November 2015, the provisions of ASC Topic 740, “Income Taxes,” were amended to simplify the presentation of deferred income taxes. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The amendments are effective for financial statements for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of any interim or annual period. Effective January 1, 2016, we adopted this guidance on a retrospective basis, but such adoption did not affect our financial position as we had no current deferred tax amounts to reclassify.

Accounting Pronouncements Not Yet Adopted

In May 2014, the 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 standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In January 2016, the provisions of ASC Subtopic 825-10, “Financial Instruments–Overall,” were amended to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

In February 2016, the ASC was amended and a new accounting standard, ASC Topic 842, “Leases,” was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In March 2016, the provisions of ASC Topic 718, “Compensation–Stock Compensation,” were amended to simplify the accounting and reporting for employee share-based payments. These amendments involve several aspects of the accounting for share-based payment transactions, including accounting for income taxes as it pertains to the timing of when excess tax benefits are recognized and to the recognition of excess tax benefits and tax deficiencies in the statements of income, forfeitures, minimum statutory tax withholding requirements, as well as classification of excess tax benefits and employee taxes paid on the statement of cash flows. These provisions are effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments provide specific transition and disclosure guidance for each provision. We are currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures.


3.	ACQUISITIONS

Acquisitions in 2015

Houston and St. Charles Terminal Services Business

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 this subordinated credit agreement.

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 $395.0 million of proceeds from a subordinated credit agreement 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. See Note 6 for further discussion of the borrowings under this subordinated credit agreement.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Presentation of Reported Financial Information

The following table presents our previously reported statement of income for the three months ended March 31, 2015 retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business (in thousands). The results of operations of the Houston and St. Charles Terminal Services Business are included in our previously reported statement of income for the three months ended March 31, 2015.



	Three Months Ended March 31, 2015
	Valero Energy Partners LP (Previously Reported)			Corpus Christi Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Operating revenues – related party	$	41,886		$	—		$	41,886
Costs and expenses:
Operating expenses	17,864			4,760			22,624
General and administrative expenses	3,565			87			3,652
Depreciation expense	7,488			822			8,310
Total costs and expenses	28,917			5,669			34,586
Operating income (loss)	12,969			(5,669		)	7,300
Other income, net	111			—			111
Interest and debt expense, net of capitalized interest	(601		)	—			(601		)
Income (loss) before income taxes	12,479			(5,669		)	6,810
Income tax benefit	(126		)	—			(126		)
Net income (loss)	12,605			(5,669		)	6,936
Less: Net loss attributable to Predecessor	(9,516		)	(5,669		)	(15,185		)
Net income attributable to partners	$	22,121		$	—		$	22,121

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our previously reported statement of cash flows for the three months ended March 31, 2015 retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business (in thousands). The cash flows of the Houston and St. Charles Terminal Services Business are included in our previously reported statement of cash flows for the three months ended March 31, 2015.



	Three Months Ended March 31, 2015
	Valero Energy Partners LP (Previously Reported)			Corpus Christi Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Cash flows from operating activities:
Net income (loss)	$	12,605		$	(5,669	)	$	6,936
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense	7,488			822			8,310
Deferred income tax benefit	(249		)	—			(249		)
Changes in current assets and current liabilities	(7,755		)	—			(7,755		)
Changes in deferred charges and credits and other operating activities, net	418			—			418
Net cash provided by (used in) operating activities	12,507			(4,847		)	7,660
Cash flows from investing activities:
Capital expenditures	(4,978		)	(6,956		)	(11,934		)
Acquisition of the Houston and St. Charles Terminal Services Business from Valero Energy Corporation	(296,109		)	—			(296,109		)
Net cash used in investing activities	(301,087		)	(6,956		)	(308,043		)
Cash flows from financing activities:
Proceeds from debt borrowings	200,000			—			200,000
Proceeds from note payable to related party	160,000			—			160,000
Payments of capital lease obligations	(284		)	—			(284		)
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	(15,829		)	—			(15,829		)
Net transfers from Valero Energy Corporation	10,935			11,803			22,738
Net cash provided by financing activities	79,711			11,803			91,514
Net decrease in cash and cash equivalents	(208,869		)	—			(208,869		)
Cash and cash equivalents at beginning of period	236,579			—			236,579
Cash and cash equivalents at end of period	$	27,710		$	—		$	27,710

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Acquisition of the McKee Terminal Services Business

Effective April 1, 2016, we acquired a subsidiary from Valero that owns and operates a crude oil, intermediates, and refined petroleum products terminal (the McKee Terminal) that supports Valero’s McKee Refinery (in Sunray, Texas) for total consideration of $240.0 million, which consisted of (i) a cash distribution of $204.0 million and (ii) the issuance of 728,775 common units and 14,873 general partner units having an aggregate value of $36.0 million. We funded the cash distribution to Valero with $65.0 million of our cash on hand and $139.0 million of borrowings under our revolving credit facility. See Note 6 for further discussion of the borrowings under our revolving credit facility.


4.	RELATED-PARTY TRANSACTIONS

Summary of Transactions

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



	March 31, 2016			December 31, 2015
	March 31, 2016			December 31, 2015
Trade receivables – related party	$	26,930		$	26,103
Due to related party	(6,008		)	(8,015		)
Receivables from related party	$	20,922		$	18,088

The amounts shown in our balance sheets as “deferred revenue from related party” represent 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 master transportation services agreement and master terminal services agreement (collectively, the commercial agreements) with Valero.

All of our operating revenues are generated by providing services to Valero under our commercial agreements with Valero. The cost of services provided to us by Valero, including the cost of financing provided to us by Valero in connection with the Acquisitions as more fully described in Notes 3 and 6, are reflected in the supplemental information disclosure on our statements of income.

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 terminaling and storage fees to reflect changes in price indices. Revenues from all lease agreements are recorded within “operating revenues – related party” in our statements of income.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amounts shown in our statements of income as “operating revenues – related party” included revenues from our current lease arrangements as follows (in thousands):



	Three Months Ended March 31,
	2016		2015
Minimum rental revenues	$	48,249	$	15,619
Contingent rental revenues	8,337		3,316
Total lease revenues	$	56,586	$	18,935

As of March 31, 2016, future minimum rentals to be received related to these noncancelable lease agreements were as follows (in thousands):



Remainder of 2016	$	145,823
2017	193,550
2018	193,550
2019	193,550
2020	194,078
Thereafter	821,539
Total minimum rental payments	$	1,742,090

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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):



	March 31, 2016
	Non-Leased Assets			Assets Under Operating Leases (a)			Total
Pipelines and related assets	$	239,223		$	46,964		$	286,187
Terminals and related assets	110,760			583,901			694,661
Other	9,540			—			9,540
Land	4,672			—			4,672
Construction-in-progress	26,229			—			26,229
Property and equipment, at cost	390,424			630,865			1,021,289
Accumulated depreciation	(121,613		)	(151,066		)	(272,679		)
Property and equipment, net	$	268,811		$	479,799		$	748,610



	December 31, 2015
	Non-Leased Assets			Assets Under Operating Leases (a)			Total
Pipelines and related assets	$	228,586		$	46,739		$	275,325
Terminals and related assets	110,758			580,194			690,952
Other	9,352			—			9,352
Land	4,672			—			4,672
Construction-in-progress	30,580			—			30,580
Property and equipment, at cost	383,948			626,933			1,010,881
Accumulated depreciation	(118,580		)	(145,019		)	(263,599		)
Property and equipment, net	$	265,368		$	481,914		$	747,282

(a) Represents assets owned by us for which we are considered the lessor in certain operating lease agreements with Valero under U.S. GAAP.

We have certain pipeline assets under capital lease agreements totaling $14.9 million as of March 31, 2016 and December 31, 2015. Accumulated amortization on assets under capital leases was $14.4 million and $14.1 million as of March 31, 2016 and December 31, 2015, respectively.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.	DEBT

Revolving Credit Facility

We have a $750.0 million senior unsecured revolving credit facility agreement (the Revolver) that matures in November 2020. The Revolver also provides for the issuance of letters of credit of up to $100.0 million. Our obligations under the Revolver are jointly and severally guaranteed by our directly owned subsidiary, Valero Partners Operating Co. LLC.

In connection with the acquisition of the Houston and St. Charles Terminals Services Business 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 1.75 percent as of March 31, 2016. 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 March 31, 2016 and December 31, 2015, we had $175.0 million of borrowings outstanding and no letters of credit outstanding under the Revolver.

Subordinated Credit Agreements

During 2015, we entered into two subordinated credit agreements with Valero (the Loan Agreements) under which we borrowed $160.0 million and $395.0 million (collectively, the loans) to finance a portion of the acquisitions of the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business, respectively, as described in Note 3. The loans mature on March 1 and October 1, 2020, respectively, and may be prepaid at any time without penalty; we are not permitted to reborrow amounts. The loans bear interest at the LIBO Rate (as defined in the Loan Agreements) plus the applicable margin. Accrued interest is payable in arrears on each Interest Payment Date (as defined in the Loan Agreements) and on each maturity date. As of March 31, 2016, the interest rate on each of the loans was 1.689 percent.

In December 2015, we paid down $185.0 million under one of the loans. As of March 31, 2016, we had $370.0 million outstanding under the Loan Agreements.

Capitalized Interest

Capitalized interest was approximately $32,000 and $5,000 for the three months ended March 31, 2016, and 2015, respectively.


7.	OPERATING LEASES

We have long-term operating lease commitments primarily with Valero 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. Currently, one of our land leases with Valero does not contain a renewal option. We expect that, in the normal course of business, our leases will be renewed or replaced by other leases.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2016, 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 2016	$	6,169
2017	8,229
2018	8,186
2019	8,186
2020	8,186
Thereafter	35,588
Total minimum rental payments	$	74,544

Rental expense for all operating leases was $2.2 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively, as retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business. In connection with the Acquisitions, we entered into additional land lease agreements, the expense of which is reflected subsequent to the effective dates of each acquisition.

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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 that have been declared since January 1, 2015:

Quarterly

Period

Ended

Total

Quarterly

Distribution

(Per Unit)

Total Cash

Distribution

(In Thousands)

Declaration

Date

Record

Date

Distribution

Date

March 31, 2016

0.3400

25,608

April 21, 2016

May 2, 2016

May 10, 2016

December 31, 2015

0.3200

22,711

January 25, 2016

February 4, 2016

February 11, 2016

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

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 March 31,
	2016		2015
General partner’s distributions:
General partner’s distributions	$	512	$	345
General partner’s incentive distribution rights (IDRs)	2,638		410
Total general partner’s distributions	3,150		755
Limited partners’ distributions:
Common – public	7,310		4,787
Common – Valero	5,355		3,732
Subordinated – Valero	9,788		7,989
Total limited partners’ distributions	22,453		16,508
DERs	5		3
Total cash distributions, including DERs	$	25,608	$	17,266

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.	NET INCOME PER LIMITED PARTNER UNIT

Distributions 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.

Net losses of our Predecessor are allocated to the general partner. Subsequent to the effective dates of the Acquisitions, we calculate net income available to limited partners based on the methodology described above.

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 months ended March 31, 2016 and 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 three months ended March 31, 2016 and 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 March 31, 2016
			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	$	512	$	12,665	$	9,788	$	—	$	22,965
General partner’s IDRs	2,638		—		—		—		2,638
DERs	—		—		—		5		5
Distributions and DERs declared	3,150		12,665		9,788		5		25,608
Undistributed earnings	354		9,692		7,640		4		17,690
Net income available to limited partners – basic and diluted	$	3,504	$	22,357	$	17,428	$	9	$	43,298

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			36,520		28,790

Net income per limited partner unit – basic and diluted			$	0.61	$	0.61

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Three Months Ended March 31, 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	$	345	$	8,519	$	7,989	$	—	$	16,853
General partner’s IDRs	410		—		—		—		410
DERs	—		—		—		3		3
Distributions and DERs declared	755		8,519		7,989		3		17,266
Undistributed earnings	97		2,404		2,353		1		4,855
Net income available to limited partners – basic and diluted	$	852	$	10,923	$	10,342	$	4	$	22,121

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			29,426		28,790

Net income per limited partner unit			$	0.37	$	0.36


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, 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 March 31, 2015	17,259,651	13,448,089	28,789,989	1,214,043	60,711,772

Balance as of December 31, 2015	21,509,651	15,018,602	28,789,989	1,332,829	66,651,071
Unit-based compensation	5,958	—	—	—	5,958
Balance as of March 31, 2016	21,515,609	15,018,602	28,789,989	1,332,829	66,657,029

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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):



	Three Months Ended March 31,
	2016			2015
Increase in current assets:
Receivables from related party	$	(2,834	)	$	(7,662	)
Prepaid expenses and other	(199		)	(172		)
Increase (decrease) in current liabilities:
Accounts payable	412			(275		)
Accrued liabilities	139			271
Accrued liabilities – related party	180			285
Taxes other than income taxes	(6		)	(224		)
Deferred revenue from related party	322			22
Changes in current assets and current liabilities	$	(1,986	)	$	(7,755	)

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 are reflected in financing activities when paid.

We attributed $296.1 million of the total $571.2 million cash consideration paid for the acquisition of the Houston and St. Charles Terminal Services Business 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 three months ended March 31, 2016. Noncash financing activities for the three months ended March 31, 2016 included a capital contribution of $7.4 million for projects that were funded by Valero related primarily to the Houston, St. Charles, and Corpus Christi terminals. Valero agreed to fund these projects in connection with the Acquisitions.

There were no significant noncash investing activities for the three months ended March 31, 2015. Noncash financing activities for the three months ended March 31, 2015 included:


•	a capital contribution of $4.8 million for projects that were funded by Valero related to the Houston and St. Charles terminals. Valero agreed to fund these projects as part of the acquisition of the Houston and St. Charles Terminals Services Business, and

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


•	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 acquisition of the Houston and St. Charles Terminals Service Business described in Note 3.

The following is a reconciliation of the amounts presented as net transfers from Valero on our statement of partners’ capital and statement of cash flows for the three months ended March 31, 2015 retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business (in thousands):



Net transfers from Valero per statement of partners’ capital	$	21,268
Less: Noncash transfers to Valero	(1,470		)
Net transfers from Valero per statement of cash flows	$	22,738

Noncash transfers 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.

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



	Three Months Ended March 31,
	2016		2015 (a)
Interest paid	$	2,502	$	172
Income taxes paid	—		—

(a) Financial information has been retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business.


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 notes 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 heading “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;


•	our ability to obtain credit and financing on acceptable terms in light of uncertainty and illiquidity in credit and capital markets;


•	actions of customers and competitors;


•	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 March 31, 2016 our assets consisted of crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of nine of Valero’s refineries.

Since our formation, we have acquired several businesses from Valero and began receiving fees for services provided by these businesses commencing on each respective acquisition date. The following businesses (collectively, the Acquisitions) were acquired in 2015 and are further described in Note 3 of Condensed Notes to Consolidated Financial Statements:


•	On March 1, 2015, we acquired the Houston and St. Charles Terminal Services Business for total consideration of $671.2 million.


•	On October 1, 2015, we acquired the Corpus Christi Terminal Services Business for total consideration of $465.0 million.

The Acquisitions were 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 date 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.

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In connection with the Acquisitions, we entered into commercial agreements with Valero and began recognizing terminaling revenues for certain terminals for which we did not historically charge a fee. Because of these new agreements, our results of operations subsequent to the Acquisitions are not comparable to our historical results of operations.

For the first quarter of 2016, we reported net income and net income attributable to partners of $43.3 million and net income per common unit of $0.61. This compares to net income of $6.9 million, net income attributable to partners of $22.1 million, and net income per common unit of $0.37 for the first quarter of 2015.

•

The increase in net income of $36.4 million in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to $46.2 million of revenues generated by our Houston, St. Charles, and Corpus Christi terminals during the first quarter of 2016. During March 2015, our Houston and St. Charles terminals generated $9.3 million of revenues. The Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business did not charge Valero for services provided, and therefore, did not generate revenues prior to our acquisition of those businesses on March 1, 2015 and October 1, 2015, respectively.

•

Net income attributable to partners represents our results of operations and only includes the results 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 $21.2 million in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to the comparable periods reflecting the results of operations of the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business from the date of their respective acquisition.

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

Effective April 1, 2016, we acquired the McKee Terminal Services Business from Valero for total consideration of $240.0 million, as further described in Note 3 of Condensed Notes to Consolidated Financial Statements. The McKee Terminal Services Business owns and operates a crude oil, intermediates, and refined products terminal that supports Valero’s McKee Refinery located in Sunray, Texas.

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. 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. For 2016, we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals generally consistent with historical levels.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance. The financial results for the three months ended March 31, 2015 represent our consolidated results of operations, adjusted for the Acquisitions for the periods presented prior to the effective date of each acquisition. 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 March 31,
	2016			2015			Change
Operating revenues – related party	$	78,767		$	41,886		$	36,881
Costs and expenses:
Operating expenses	19,096			22,624			(3,528		)
General and administrative expenses	4,161			3,652			509
Depreciation expense	9,388			8,310			1,078
Total costs and expenses	32,645			34,586			(1,941		)
Operating income	46,122			7,300			38,822
Other income, net	77			111			(34		)
Interest and debt expense, net of capitalized interest	(2,659		)	(601		)	(2,058		)
Income before income taxes	43,540			6,810			36,730
Income tax expense (benefit)	242			(126		)	368
Net income	43,298			6,936			36,362
Less: Net loss attributable to Predecessor	—			(15,185		)	15,185
Net income attributable to partners	43,298			22,121			21,177
Less: General partner’s interest in net income	3,504			852			2,652
Limited partners’ interest in net income	$	39,794		$	21,269		$	18,525

Net income per limited partner unit – basic and diluted:
Common units	$	0.61		$	0.37
Subordinated units	$	0.61		$	0.36

Weighted-average limited partner units outstanding – basic and diluted:
Common units	36,520			29,426
Subordinated units	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 March 31,
	2016		2015		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	20,245	$	19,875	$	370
Pipeline transportation throughput (BPD) ^(a)	918,936		979,821		(60,885		)
Average pipeline transportation revenue per barrel ^(b)	$	0.24	$	0.23	$	0.01

Terminaling:
Terminaling revenues	$	58,387	$	21,876	$	36,511
Terminaling throughput (BPD)	1,849,858		807,429		1,042,429
Average terminaling revenue per barrel ^(b)	$	0.35	$	0.30	$	0.05

Storage revenues	$	135	$	135	$	—

Total operating revenues – related party	$	78,767	$	41,886	$	36,881

Capital expenditures:
Maintenance	$	2,002	$	4,466	$	(2,464	)
Expansion	4,265		7,468		(3,203		)
Total capital expenditures	6,267		11,934		(5,667		)
Less: Capital expenditures attributable to Predecessor	—		10,649		(10,649		)
Capital expenditures attributable to Partnership	$	6,267	$	1,285	$	4,982

Other financial information:
Distribution declared per unit	$	0.3400	$	0.2775

Distribution declared:
Limited partner units – public	$	7,315	$	4,790
Limited partner units – Valero	15,143		11,721
General partner units – Valero	3,150		755
Total distribution declared	$	25,608	$	17,266

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(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 $36.9 million, or 88 percent, in the first quarter of 2016 compared to the first quarter of 2015. The increase was due to higher revenues of $36.9 million generated by the Houston, St. Charles, and Corpus Christi terminals in the first quarter of 2016 compared to the first quarter of 2015. Prior to being acquired by us, the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business did not charge Valero for services provided and, therefore, did not generate revenues. Effective with the acquisition dates, 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 businesses and began generating revenues with respect to these assets.

Operating expenses decreased $3.5 million, or 16 percent, in the first quarter of 2016 compared to the first quarter of 2015 due primarily to a decrease in maintenance expense of $2.6 million at our St. Charles and Corpus Christi terminals. Additionally, waste handling costs at the St. Charles terminal decreased $835,000 in the first quarter of 2016.

General and administrative expenses increased $509,000, or 14 percent, in the first quarter of 2016 compared to the first quarter of 2015 due primarily to an increase of $421,000 in costs related to being a separate publicly traded limited partnership.

Depreciation expense increased $1.1 million, or 13 percent, in the first quarter of 2016 compared to the first quarter of 2015 due primarily to additional depreciation expense associated with assets placed into service in 2015, including expansion and improvement projects at our Corpus Christi, Houston, and St. Charles terminals.

“Interest and debt expense, net of capitalized interest” increased $2.1 million in the first quarter of 2016 compared to the first quarter of 2015 due primarily to interest expense incurred on borrowings under our revolving credit facility and the subordinated credit agreements with Valero entered into in connection with the Acquisitions. Interest expense on this indebtedness was $2.3 million in the first quarter of 2016.

Our income tax expense is associated with the Texas margin tax. During the first quarter 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).

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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 may also enter into financing transactions with Valero in connection with acquisitions. 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 April 21, 2016 the board of directors of our general partner declared a distribution of $0.3400 per unit applicable to the first quarter of 2016, which equates to $25.6 million in total distributions to unitholders of record as of May 2, 2016. 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 that have been declared since January 1, 2015:

Quarterly
Period
Ended

Total
Quarterly
Distribution
(Per Unit)

Total Cash
Distribution
(In Thousands)

Declaration
Date

Record
Date

Distribution
Date

March 31, 2016

0.3400

25,608

April 21, 2016

May 2, 2016

May 10, 2016

December 31, 2015

0.3200

22,711

January 25, 2016

February 4, 2016

February 11, 2016

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

Revolving Credit Facility

We have a $750.0 million senior unsecured revolving credit facility agreement (the Revolver) with a group of lenders that matures in November 2020. The Revolver includes a letter of credit sub-facility. As of March 31, 2016, we had $175.0 million of borrowings outstanding under the Revolver. See Note 6 of Condensed Notes to Consolidated Financial Statements for a description of the Revolver.

Subordinated Credit Agreements

During 2015, we entered into two subordinated credit agreements with Valero (the Loan Agreements) under which we borrowed $160.0 million and $395.0 million to finance a portion of the acquisitions of the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business, respectively.

As of March 31, 2016, we had $370.0 million outstanding under the Loan Agreements. See Note 6 of Condensed Notes to Consolidated Financial Statements for a description of the Loan Agreements.

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Cash Flows Summary

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



	Three Months Ended March 31,
	2016			2015 (a)
Cash flows provided by (used in):
Operating activities	$	50,906		$	7,660
Investing activities	(6,267		)	(308,043		)
Financing activities	(23,144		)	91,514
Net increase (decrease) in cash and cash equivalents	$	21,495		$	(208,869	)

(a) Financial information has been retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business.

Operating Activities

Net cash provided by operating activities in the first three months of 2016 was $50.9 million, which included net income of $43.3 million plus noncash adjustments (primarily for depreciation expense) of $9.6 million, partially offset by unfavorable changes in working capital of $2.0 million. See “RESULTS OF OPERATIONS” for further discussion of our operating results. The change in working capital was composed primarily of an increase in receivables from related party (net of offsetting payables to related party) of $2.8 million, as shown in Note 11 of Condensed Notes to Consolidated Financial Statements. The increase in receivables from related party was attributed primarily to a decrease in the offsetting payables resulting from the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment agreement.

Net cash provided by operating activities in the first three months of 2015 was $7.7 million, which included net income of $6.9 million plus noncash adjustments (primarily for depreciation expense) of $8.5 million, partially offset by unfavorable changes in working capital of $7.8 million. See “RESULTS OF OPERATIONS” for further discussion of our operating results. The change in working capital was composed primarily of an increase in receivables from related party of $7.7 million, as shown in Note 11 of Condensed Notes to Consolidated Financial Statements. The increase in receivables from related party was attributed primarily to an increase in billings related to the Houston and St. Charles Terminal Services Business, which had been recently acquired from Valero.

Investing Activities

Cash used for investing activities in the first three months of 2016 was $6.3 million. We and our Predecessor incurred capital expenditures of $6.3 million and $11.9 million for the first three months of 2016 and 2015, respectively. See “Capital Expenditures” below for a discussion of the various maintenance and expansion projects.

Cash used for investing activities in the first three months of 2015 was $308.0 million, which was primarily impacted by the acquisition of the Houston and St. Charles Terminal Services Business on March 1, 2015. In connection with the 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.

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Financing Activities

Cash used for financing activities in the first three months of 2016 was $23.1 million, which consisted primarily of $22.7 million in cash distributions to limited partners and our general partner.

In the first three months of 2015, our financing activities provided cash of $91.5 million, which consisted primarily of the $200.0 million of borrowings under the Revolver and $160.0 million of proceeds from the loan agreement entered into 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 acquisition of the Houston and St. Charles Terminal Services Business as described above under “Investing Activities,” and we reflected a net transfer from Valero of $22.7 million related to the cash flows associated with our Predecessor. In addition, we paid $15.8 million of cash distributions to limited partners and our general partner.

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

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 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):



	Three Months Ended March 31,
	2016		2015 (a)
Maintenance	$	2,002	$	4,466
Expansion (b)	4,265		7,468
Total capital expenditures	$	6,267	$	11,934

(a) Financial information has been retrospectively adjusted for the acquisition of the Corpus Christi Terminal Services Business.
(b) This table excludes amounts paid to Valero for the acquired businesses. See Note 3 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.

Our capital expenditures in the first three months of 2016 were primarily directed toward the following activities:


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


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

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•	the improvement of assets at our Lucas crude system for enhanced monitoring of pipeline shipments.

Our capital expenditures in the first three months of 2015 were primarily directed toward the following activities:


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


•	the enhancement of pipeline and terminal monitoring systems at our Memphis products system.

For the full year 2016, we expect our capital expenditures to be approximately $19.0 million. Our estimate consists of approximately $11.0 million for maintenance capital expenditures and approximately $8.0 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, $7.4 million of capital projects were funded by Valero primarily related to the Houston, St. Charles, and Corpus Christi terminals. Valero agreed to fund these projects in connection with the Acquisitions. See Note 11 of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.

Contractual Obligations

As of March 31, 2016, our contractual obligations included debt and capital lease obligations, operating leases, purchase obligations, and other long-term liabilities. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the three months ended March 31, 2016.

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, 2015.

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.

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There were no significant changes to our environmental matters and compliance costs during the three months ended March 31, 2016.

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 March 31, 2016, 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, 2015 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 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 notes payable to related party totaling $370 million as of March 31, 2016.

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 March 31, 2016.


(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

None.

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, 2015.

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: May 6, 2016

Attached files

VALERO ENERGY PARTNERS LP Reports

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