VALERO ENERGY PARTNERS LP - FORM 10-Q

Attached files

file	filename
EX-32.01 - EXHIBIT 32.01 - VALERO ENERGY PARTNERS LP	vlpexh3201-09302017.htm
EX-31.02 - EXHIBIT 31.02 - VALERO ENERGY PARTNERS LP	vlpexh3102-09302017.htm
EX-31.01 - EXHIBIT 31.01 - VALERO ENERGY PARTNERS LP	vlpexh3101-09302017.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, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 69,256,172 common units representing limited partner interests and 1,413,391 general partner units outstanding as of November 1, 2017.

VALERO ENERGY PARTNERS LP

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016	2
Consolidated Statements of Partners’ Capital for the Nine Months Ended September 30, 2017 and 2016	3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	4
Condensed Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	42
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 6. Exhibits	44
SIGNATURE	45

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(in thousands)



	September 30, 2017			December 31, 2016

ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	115,755		$	71,491
Receivables – related party	35,995			36,889
Receivables	225			1,682
Prepaid expenses and other	485			997
Total current assets	152,460			111,059
Property and equipment, at cost	1,340,906			1,216,288
Accumulated depreciation	(385,959		)	(351,208		)
Property and equipment, net	954,947			865,080
Deferred charges and other assets, net	2,743			3,118
Total assets	$	1,110,150		$	979,257
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable	$	14,488		$	10,652
Accounts payable – related party	8,781			7,348
Accrued liabilities	738			870
Accrued liabilities – related party	93			192
Accrued interest payable	6,453			1,280
Accrued interest payable – related party	844			47
Taxes other than income taxes payable	3,975			2,457
Deferred revenue – related party	432			3,525
Total current liabilities	35,804			26,371
Debt	525,177			525,355
Notes payable – related party	370,000			370,000
Other long-term liabilities	1,985			1,707
Commitments and contingencies
Partners’ capital:
Common unitholders – public (22,487,586 and 21,738,692 units outstanding)	583,436			548,619
Common unitholder – Valero (45,687,271 and 45,687,271 units outstanding)	(399,718		)	(482,197		)
General partner – Valero (1,391,323 and 1,375,721 units outstanding)	(6,534		)	(10,598		)
Total partners’ capital	177,184			55,824
Total liabilities and partners’ capital	$	1,110,150		$	979,257

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,
	2017			2016			2017			2016
Operating revenues – related party	$	109,340		$	92,040		$	325,701		$	258,471
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below) (a)	26,478			24,089			77,078			72,461
Depreciation expense	12,113			11,319			36,393			34,652
Other operating expenses	537			—			537			—
General and administrative expenses (b)	3,865			4,094			11,558			12,174
Total costs and expenses	42,993			39,502			125,566			119,287
Operating income	66,347			52,538			200,135			139,184
Other income, net	300			76			546			210
Interest and debt expense, net of capitalized interest (c)	(8,747		)	(3,672		)	(25,587		)	(9,582		)
Income before income taxes	57,900			48,942			175,094			129,812
Income tax expense	311			235			925			780
Net income	57,589			48,707			174,169			129,032
Less: Net loss attributable to Predecessor	—			(3,002		)	—			(15,422		)
Net income attributable to partners	57,589			51,709			174,169			144,454
Less: General partner’s interest in net income	13,037			6,634			33,923			15,351
Limited partners’ interest in net income	$	44,552		$	45,075		$	140,246		$	129,103

Net income per limited partner unit – basic and diluted:
Common units	$	0.65		$	0.77		$	2.06		$	2.08
Subordinated units	$	—		$	0.29		$	—		$	1.73

Weighted-average limited partner units outstanding:
Common units – basic and diluted	68,163			53,899			67,997			42,597
Subordinated units – basic and diluted	—			12,517			—			23,326

Cash distribution declared per unit	$	0.4800		$	0.3850		$	1.3625		$	1.0900

Supplemental information – each income statement line item reflected below includes expenses incurred for services or financing provided by related party as follows:
(a) Cost of revenues (excluding depreciation expense) – related party	$	16,474		$	15,554		$	48,242		$	45,822
(b) General and administrative expenses – related party	$	3,186		$	3,156		$	9,557		$	9,353
(c) Interest and debt expense – related party	$	2,579		$	1,649		$	7,029		$	4,799

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, 2015	$	581,489		$	28,430		$	(313,961	)	$	(5,805	)	$	103,999		$	394,152
Net income (loss):
Attributable to Predecessor	—			—			—			—			(15,422		)	(15,422		)
Attributable to partners	42,096			41,685			45,322			15,351			—			144,454
Net transfers from Valero Energy Corporation	—			—			—			—			15,030			15,030
Allocation of Valero Energy Corporation’s net investment in acquisitions	—			67,800			32,758			3,049			(103,607		)	—
Consideration paid to Valero Energy Corporation for acquisitions	—			(397,859		)	(153,067		)	(14,074		)	—			(565,000		)
Units issued to Valero Energy Corporation in connection with acquisitions	—			83,300			—			1,700			—			85,000
Conversion of subordinated units	—			(406,374		)	406,374			—			—			—
Unit issuance	6,096			—			—			58			—			6,154
Transfers to (from) partners	(73,075		)	75,765			—			(2,690		)	—			—
Noncash capital contributions from Valero Energy Corporation	—			11,057			12,084			679			—			23,820
Cash distributions to unitholders and distribution equivalent right payments	(22,052		)	(15,908		)	(29,510		)	(9,761		)	—			(77,231		)
Unit-based compensation	134			—			—			—			—			134
Balance as of September 30, 2016	$	534,688		$	(512,104	)	$	—		$	(11,493	)	$	—		$	11,091

Balance as of December 31, 2016	$	548,619		$	(482,197	)	$	—		$	(10,598	)	$	—		$	55,824
Net income attributable to partners	46,001			94,245			—			33,923			—			174,169
Unit issuance	33,429			—			—			748			—			34,177
Transfers to (from) partners	(16,097		)	19,816			—			(3,719		)	—			—
Noncash capital contributions from Valero Energy Corporation	—			27,308			—			558			—			27,866
Cash distributions to unitholders and distribution equivalent right payments	(28,713		)	(58,890		)	—			(27,446		)	—			(115,049		)
Unit-based compensation	197			—			—			—			—			197
Balance as of September 30, 2017	$	583,436		$	(399,718	)	$	—		$	(6,534	)	$	—		$	177,184

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,
	2017			2016
Cash flows from operating activities:
Net income	$	174,169		$	129,032
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	36,393			34,652
Changes in current assets and current liabilities	7,988			(2,179		)
Changes in deferred charges and credits and other operating activities, net	1,269			707
Net cash provided by operating activities	219,819			162,212
Cash flows from investing activities:
Capital expenditures	(24,297		)	(15,911		)
Acquisition of undivided interest in Red River crude system	(71,793		)	—
Acquisitions from Valero Energy Corporation	—			(103,607		)
Other investing activities, net	142			29
Net cash used in investing activities	(95,948		)	(119,489		)
Cash flows from financing activities:
Proceeds from debt borrowings	—			349,000
Repayment of debt and capital lease obligations	—			(868		)
Payment of debt issuance costs	(492		)	—
Proceeds from issuance of common units	35,728			2,853
Proceeds from issuance of general partner units	748			58
Payment of offering costs	(542		)	(412		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets	—			(376,393		)
Cash distributions to unitholders and distribution equivalent right payments	(115,049		)	(77,231		)
Net transfers from Valero Energy Corporation	—			14,886
Net cash used in financing activities	(79,607		)	(88,107		)
Net increase (decrease) in cash and cash equivalents	44,264			(45,384		)
Cash and cash equivalents at beginning of period	71,491			80,783
Cash and cash equivalents at end of period	$	115,755		$	35,399

See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

Description of 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, and other than Diamond Green Diesel Holdings, LLC (DGD), a joint venture consolidated by Valero.

We acquired from Valero the McKee Terminal Services Business on April 1, 2016, the Meraux and Three Rivers Terminal Services Business on September 1, 2016, and Parkway Pipeline LLC (Parkway Pipeline) and the Port Arthur terminal (defined in Note 2) on November 1, 2017. We acquired the Red River crude system (defined in Note 2) from Plains All American Pipeline L.P. (Plains) on January 18, 2017. See Note 2 for further discussion of these acquisitions.

Our assets consist of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries.

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

Basis of Presentation

General

These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The balance sheet as of December 31, 2016 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, 2016.

Acquisitions from Valero

The acquisitions from Valero in 2016 noted above were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, we recorded these acquisitions on our balance sheet at Valero’s carrying value as of the beginning of the period of transfer, and we retrospectively adjusted prior period financial statements and financial information to furnish comparative information. We refer to

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the historical results of the transferred assets from Valero prior to their transfer to us 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 from Valero 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, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Prior to the acquisitions from Valero, 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 acquisitions of Parkway Pipeline and the Port Arthur terminal on November 1, 2017 will be accounted for as acquisitions of assets and as such, our prior period financial statements and financial information will not be retrospectively adjusted. However, because these assets were transferred between entities under the common control of Valero, we will record these assets on our balance sheet at Valero’s carrying value as of November 1, 2017.

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

Reclassifications

Certain amounts reported as of December 31, 2016 and for the nine months ended September 30, 2016 have been reclassified to conform to the 2017 presentation.

Significant Accounting Policies

Use of Estimates

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

Accounting Pronouncement Adopted During the Period

ASU No. 2017-01

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017,

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

with early adoption permitted. Our early adoption of this ASU effective January 1, 2017 did not have an effect on our financial position or results of operations. However, our acquisitions of Parkway Pipeline and the Port Arthur terminal on November 1, 2017 will be, and more of our future acquisitions may be, accounted for as acquisitions of assets in accordance with this ASU.

Accounting Pronouncements Not Yet Adopted

ASU No. 2014-09

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We have completed our evaluation of the provisions of this standard and concluded that our adoption will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. We will adopt this new standard effective January 1, 2018, and we will use the modified retrospective method of adoption as permitted by the standard. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of partners’ capital, and revenues reported in the periods prior to the date of adoption are not changed. We do not, however, expect to make such an adjustment to partners’ capital. We are currently developing our revenue disclosures and enhancing our accounting systems to enable the preparation of such disclosures as well as the implementation of our internal controls.

Certain of our commercial agreements are considered operating leases under U.S. GAAP. The scope of Topic 606 does not extend to revenues generated by lease arrangements; therefore, lease revenues generated by us will continue to be accounted for under existing lease accounting standards and will be reflected in a separate revenue line item on our statements of income.

ASU No. 2016-01

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We will adopt this new standard on January 1, 2019 and we expect to use the modified retrospective method of adoption as permitted by the standard. We are developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate 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)


2.	ACQUISITIONS

Acquisitions in 2016

McKee Terminal Services Business

Effective April 1, 2016, we acquired from Valero a subsidiary that owns and operates a crude oil, intermediates, and refined petroleum products terminal supporting Valero’s McKee Refinery 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 to Valero having an aggregate value of $36.0 million. We funded the cash distribution with $65.0 million of our cash on hand and $139.0 million of borrowings under our revolving credit facility. See Note 5 for further discussion of the borrowings under our revolving credit facility. This acquisition was accounted for as an acquisition of a business. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

Meraux and Three Rivers Terminal Services Business

Effective September 1, 2016, we acquired from Valero two subsidiaries that own and operate crude oil, intermediates, and refined petroleum products terminals supporting Valero’s Meraux and Three Rivers Refineries for total consideration of $325.0 million, which consisted of (i) a cash distribution of $276.0 million and (ii) the issuance of 1,149,905 common units and 23,467 general partner units to Valero having an aggregate value of $49.0 million. We funded the cash distribution with $66.0 million of our cash on hand and $210.0 million of borrowings under our revolving credit facility. See Note 5 for further discussion of the borrowings under our revolving credit facility. This acquisition was accounted for as an acquisition of a business. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

Acquisitions in 2017

Red River Crude System

Effective January 18, 2017, we acquired a 40 percent undivided interest in (i) the newly constructed Hewitt segment of Plains’ Red River pipeline (the Hewitt segment), (ii) two 150,000 shell barrel capacity tanks located at Hewitt Station in Hewitt, Oklahoma (the Hewitt Storage Tanks), and (iii) a pipeline connection from Hewitt Station to Wasson Station (the Wasson Interconnect) (collectively, the Red River crude system) for total cash consideration of $71.8 million. We funded this acquisition with available cash on hand.

The Hewitt segment consists of a 138-mile, 16-inch crude oil pipeline with 150,000 barrels per day of throughput capacity that originates at Plains Marketing L.P.’s Cushing, Oklahoma terminal and ends at Hewitt Station. The pipeline supports Valero’s Ardmore Refinery and began supplying crude oil to Valero in January 2017. We retain a right to participate in any future expansions of the pipeline.

This acquisition was accounted for as an acquisition of assets. See Note 3 for a further discussion of the commercial agreement we entered into with Valero concurrent with this acquisition.

We also entered into a Joint Ownership Agreement (JOA) and an Operating and Administrative Services Agreement with Plains concurrent with this acquisition. The JOA provides us with access to the remaining 60 percent of the capacity of the Hewitt Storage Tanks and the Wasson Interconnect and continues until terminated by mutual agreement. This access arrangement is accounted for as an operating lease. The administrative agreement facilitates the day-to-day operations and management functions of the pipeline for an initial five-year term and automatically renews for successive five-year terms.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Parkway Pipeline and Port Arthur Terminal

Effective November 1, 2017, we acquired Parkway Pipeline , a subsidiary of Valero, that owns and operates a 141-mile, 16-inch refined petroleum products pipeline with 110,000 barrels per day of capacity that transports refined petroleum products from Valero’s St. Charles Refinery, located in Norco, Louisiana, to Collins, Mississippi for supply into the Plantation and Colonial pipeline systems, for cash consideration of $200.0 million. We funded the cash distribution with $82.0 million of our cash on hand and $118.0 million of borrowings under our revolving credit facility. We also acquired Valero Partners Port Arthur, LLC, a subsidiary of Valero that owns certain terminaling assets (Port Arthur terminal) that support Valero’s Port Arthur Refinery for total consideration of $308.0 million, which consisted of (i) a cash distribution of $262.0 million and (ii) the issuance of 1,081,315 common units and 22,068 general partner units to Valero having an aggregate value of $46.0 million. We funded the cash distribution with $262.0 million of borrowings under our revolving credit facility. See Note 5 for further discussion of the borrowings under our revolving credit facility. These acquisitions were accounted for as acquisitions of assets.

Concurrent with the acquisitions of Parkway Pipeline and the Port Arthur terminal described above, we entered into various amended and restated agreements with Valero.


3.	RELATED-PARTY TRANSACTIONS

New and Amended Commercial Agreements in 2017

Agreement with Diamond Green Diesel

Effective March 31, 2017, we entered into a commercial agreement with DGD to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we have agreed to construct a new 180,000 barrel storage tank and provide storage services to DGD. The construction of the new tank is expected to be completed in the first quarter of 2018. The agreement has an initial term that ends on June 30, 2033. The agreement contains minimum commitments for DGD’s use of the assets.

Agreements with Valero

Effective March 31, 2017 and in connection with the DGD agreement described above, we amended our land lease and access agreement with Valero related to our St. Charles terminal to include our use of Valero’s rail loading facility.

Concurrent with the acquisition of the Red River crude system as described in Note 2, we entered into a 10-year throughput agreement under which we provide transportation services to Valero. The agreement provides Valero an option to renew for one additional five-year term, unless terminated by Valero upon at least 180 days’ prior written notice before the end of the initial term, and it contains minimum throughput requirements and inflation escalators.

Summary of Transactions

The amounts shown in our balance sheets as “deferred revenue – 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 certain schedules of our master transportation services agreement and master terminal services agreement (collectively, the commercial agreements).

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

All of our operating revenues are generated by providing services under our commercial agreements described above. The cost of services provided to us by Valero, including the cost of financing provided to us by Valero in connection with certain acquisitions from Valero as more fully described in Notes 2 and 5, is reflected in the supplemental information disclosure on our statements of income.

Concentration Risk

Substantially all of our operating revenues and “receivables – related party” resulted from transactions with Valero. Therefore, we are subject to the business risks associated with Valero’s business.

Insurance Recoveries

During the three and nine months ended September 30, 2017, we experienced property damage losses and repair costs associated with Hurricane Harvey primarily at our Houston terminal and Port Arthur products system. As a result of these losses, we have submitted claims under our insurance policies with Valero. The amount shown in our statements of income as other operating expenses reflects the uninsured portion of our losses. As of September 30, 2017, we have recorded a $2.3 million receivable from Valero related to our property damage claims, which was recorded as a reduction to other operating expenses.

Operating Leases – Lessor

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. These lease revenues are recorded within “operating revenues – related party” in our statements of income. The components of our lease revenues were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Minimum rental revenues	$	70,588	$	60,133	$	208,859	$	164,659
Contingent rental revenues	15,223		10,710		42,721		28,271
Total lease revenues	$	85,811	$	70,843	$	251,580	$	192,930

As of September 30, 2017, future minimum rentals to be received related to these noncancelable commercial agreements were as follows (in thousands):



Remainder of 2017	$	70,589
2018	280,056
2019	280,056
2020	280,824
2021	280,056
Thereafter	2,394,350
Total minimum rental payments	$	3,585,931

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


4.	PROPERTY AND EQUIPMENT

Our property and equipment includes non-leased assets and assets under operating leases for which we are the lessor under U.S. GAAP. Major classes of property and equipment consisted of the following (in thousands):



	September 30, 2017
	Non-Leased Assets			Assets Leased to Valero			Total
Land	$	4,672		$	—		$	4,672
Pipelines and related assets	224,794			113,381			338,175
Terminals and related assets	120,482			816,684			937,166
Other	10,530			—			10,530
Construction-in-progress	50,363			—			50,363
Property and equipment, at cost	410,841			930,065			1,340,906
Accumulated depreciation	(123,924		)	(262,035		)	(385,959		)
Property and equipment, net	$	286,917		$	668,030		$	954,947



	December 31, 2016
	Non-Leased Assets			Assets Leased to Valero			Total
Land	$	4,672		$	—		$	4,672
Pipelines and related assets	224,656			47,366			272,022
Terminals and related assets	112,614			793,765			906,379
Other	9,538			—			9,538
Construction-in-progress	23,677			—			23,677
Property and equipment, at cost	375,157			841,131			1,216,288
Accumulated depreciation	(115,538		)	(235,670		)	(351,208		)
Property and equipment, net	$	259,619		$	605,461		$	865,080

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.	DEBT AND NOTES PAYABLE – RELATED PARTY

Debt

We have a $750.0 million senior unsecured revolving credit facility agreement (the Revolver) that matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit of up to $100.0 million. Borrowings on the Revolver bear interest at a variable rate, which was 2.75 percent and 2.3125 percent as of September 30, 2017 and December 31, 2016, respectively.

There was no activity related to our debt during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, we borrowed $139.0 million and $210.0 million under the Revolver in connection with the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business, respectively. See Note 2 for information about our acquisitions from Valero.

In connection with the acquisitions of Parkway Pipeline and the Port Arthur terminal as described in Note 2, we borrowed $118.0 million and $262.0 million, respectively, under the Revolver on November 1, 2017. These borrowings bear interest at variable rates, which were 2.75 percent and 2.875 percent, respectively, as of November 1, 2017.

Notes Payable – Related Party

There was no activity under our two subordinated credit agreements with Valero (the Loan Agreements) for the nine months ended September 30, 2017 and 2016. Borrowings on the Loan Agreements bear interest at a variable rate, which was 2.73722 percent and 2.27 percent as of September 30, 2017 and December 31, 2016, respectively.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.	OPERATING LEASES

We have long-term operating lease commitments for pipelines and 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 lease term or a revised rental payment based on fair rental value or negotiated value. Currently, one of our leases with Valero does not contain a renewal option. We expect our leases will be renewed or replaced by other leases in the normal course of business.

As of September 30, 2017, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in thousands):



	Agreements With
	Related Party		Others		Total
Remainder of 2017	$	2,436	$	226	$	2,662
2018	9,744		1,068		10,812
2019	9,744		1,052		10,796
2020	9,745		1,052		10,797
2021	9,745		1,047		10,792
Thereafter	219,893		25,362		245,255
Total minimum rental payments	$	261,307	$	29,807	$	291,114

Minimum rental expenses for all operating leases are shown in the following table (in thousands). Contingent rental expense for all operating leases was immaterial.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Minimum rental expenses – related party	$	2,437	$	2,281	$	7,310	$	6,518
Minimum rental expenses – others	304		175		909		541
Total minimum rental expenses	$	2,741	$	2,456	$	8,219	$	7,059

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


7.	CASH DISTRIBUTIONS

Our partnership agreement prescribes the amount and priority of cash distributions that our limited partners and general partner will receive. Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions that have been declared since January 1, 2016:

Quarterly

Period

Ended

Total
Quarterly
Distribution
(Per Unit)

Total Cash
Distribution
(In Thousands)

Declaration
Date

Record
Date

Distribution
Date

September 30, 2017

0.4800

46,242

October 19, 2017

November 1, 2017

November 9, 2017

June 30, 2017

0.4550

42,111

July 19, 2017

August 1, 2017

August 10, 2017

March 31, 2017

0.4275

38,043

April 20, 2017

May 2, 2017

May 11, 2017

December 31, 2016

0.4065

34,895

January 20, 2017

February 2, 2017

February 10, 2017

September 30, 2016

0.3850

32,175

October 24, 2016

November 3, 2016

November 10, 2016

June 30, 2016

0.3650

28,912

July 21, 2016

August 1, 2016

August 9, 2016

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

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,
	2017		2016		2017		2016
General partner’s distributions:
General partner’s distributions	$	925	$	644	$	2,362	$	1,734
General partner’s incentive distribution rights (IDRs)	12,074		5,600		30,631		12,462
Total general partner’s distributions	12,999		6,244		32,993		14,196
Limited partners’ distributions:
Common – public	10,789		8,336		30,620		23,495
Common – Valero	22,449		17,590		62,768		28,692
Subordinated – Valero	—		—		—		20,297
Total limited partners’ distributions	33,238		25,926		93,388		72,484
DERs	5		5		15		15
Total cash distributions, including DERs	$	46,242	$	32,175	$	126,396	$	86,695

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


8.	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 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 from Valero, 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 and nine months ended September 30, 2017 and 2016, 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, 2017 and 2016.

Effective August 10, 2016, all of our subordinated units, which were owned by Valero, were converted on a one-for-one basis into common units. The subordinated units were only allocated earnings generated by us through the conversion date. See Note 9 for further discussion of the conversion of subordinated units.

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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, 2017
	General Partner		Limited Partners Common Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	925	$	33,238	$	—	$	34,163
General partner’s IDRs	12,074		—		—		12,074
DERs	—		—		5		5
Distributions and DERs declared	12,999		33,238		5		46,242
Undistributed earnings	38		11,307		2		11,347
Net income available to limited partners – basic and diluted	$	13,037	$	44,545	$	7	$	57,589

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			68,163

Net income per limited partner unit – basic and diluted			$	0.65

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Three Months Ended September 30, 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	$	644	$	25,926	$	—	$	—	$	26,570
General partner’s IDRs	5,600		—		—		—		5,600
DERs	—		—		—		5		5
Distributions and DERs declared	6,244		25,926		—		5		32,175
Undistributed earnings	390		15,533		3,607		4		19,534
Net income available to limited partners – basic and diluted	$	6,634	$	41,459	$	3,607	$	9	$	51,709

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			53,899		12,517

Net income per limited partner unit – basic and diluted			$	0.77	$	0.29

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 2017
	General Partner		Limited Partners Common Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	2,362	$	93,388	$	—	$	95,750
General partner’s IDRs	30,631		—		—		30,631
DERs	—		—		15		15
Distributions and DERs declared	32,993		93,388		15		126,396
Undistributed earnings	930		46,834		9		47,773
Net income available to limited partners – basic and diluted	$	33,923	$	140,222	$	24	$	174,169

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			67,997

Net income per limited partner unit – basic and diluted			$	2.06

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 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	$	1,734	$	52,187	$	20,297	$	—	$	74,218
General partner’s IDRs	12,462		—		—		—		12,462
DERs	—		—		—		15		15
Distributions and DERs declared	14,196		52,187		20,297		15		86,695
Undistributed earnings	1,155		36,568		20,025		11		57,759
Net income available to limited partners – basic and diluted	$	15,351	$	88,755	$	40,322	$	26	$	144,454

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			42,597		23,326

Net income per limited partner unit – basic and diluted			$	2.08	$	1.73

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.	PARTNERS’ CAPITAL

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, 2015	21,509,651	15,018,602	28,789,989		1,332,829	66,651,071
Unit-based compensation	5,958	—	—		—	5,958
Units issued in connection with acquisitions (see Note 2)	—	1,878,680	—		38,340	1,917,020
Conversion of subordinated units	—	28,789,989	(28,789,989	)	—	—
Units issued under ATM Program	65,980	—	—		—	65,980
General partner units issued to maintain 2% interest	—	—	—		1,346	1,346
Balance as of September 30, 2016	21,581,589	45,687,271	—		1,372,515	68,641,375

Balance as of December 31, 2016	21,738,692	45,687,271	—		1,375,721	68,801,684
Unit-based compensation	5,997	—	—		—	5,997
Units issued under ATM Program	742,897	—	—		—	742,897
General partner units issued to maintain 2% interest	—	—	—		15,602	15,602
Balance as of September 30, 2017	22,487,586	45,687,271	—		1,391,323	69,566,180

ATM Program

On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). The table below summarizes activities of the common units issued under our ATM Program and general partner units issued to maintain the 2.0 percent general partner interest in the Partnership.



	Units Issued	Total Proceeds		Offering Costs		Net Proceeds
		(in thousands)
Nine months ended September 30, 2017:
Common – public	742,897	$	35,728	$	542	$	35,186
General partner	15,602	748		—		748

Nine months ended September 30, 2016:
Common – public	65,980	2,853		39		2,814
General partner	1,346	58		—		58

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Subordinated Unit Conversion

Effective August 10, 2016, all of our subordinated units, which were owned by Valero, were converted on a one-for-one basis into common units. The conversion of the subordinated units does not impact the amount of cash distributions paid or the total number of outstanding units.

Transfers to (from) Partners

Subsequent to the expiration of the subordination period on August 10, 2016, all of our common units have equal rights, including rights to distributions and to our net assets in the event of liquidation. As a result, a reallocation of the carrying values of our public common unitholders’ interest in us and Valero’s common unitholder interest in us is required when a change in ownership occurs in order for the portion of those carrying values associated with activity subsequent to the subordination period to be equal to the respective unitholders’ ownership interests (in units) in us. Transfers to (from) partners resulted from the issuance of equity under our ATM Program for the nine months ended September 30, 2017. During the nine months ended September 30, 2016, transfers to (from) partners resulted from the issuance of equity to Valero in connection with our acquisition of the Meraux and Three Rivers Terminal Services Business and issuance of equity under our ATM Program.


10.	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,
	2017			2016
Decrease (increase) in current assets:
Receivables – related party	$	894		$	(7,668	)
Receivables	(225		)	—
Prepaid expenses and other	512			223
Increase (decrease) in current liabilities:
Accounts payable	1,361			791
Accounts payable – related party	1,433			(558		)
Accrued liabilities	(283		)	(212		)
Accrued liabilities – related party	(99		)	(66		)
Accrued interest payable	5,173			565
Accrued interest payable – related party	797			71
Taxes other than income taxes payable	1,518			1,000
Deferred revenue – related party	(3,093		)	3,675
Changes in current assets and current liabilities	$	7,988		$	(2,179	)

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncash investing and financing activities that affected recognized assets or liabilities for the nine months ended September 30, 2017 and 2016 were as follows (in thousands):



	Nine Months Ended September 30,
	2017		2016
Transfer (from) to Valero for:
Deferred income taxes	$	—	$	(190	)
Change in accrued capital expenditures	—		46
Increase (decrease) in accounts payable related to capital expenditures	2,424		(2,499		)
Noncash capital contributions from Valero	27,866		23,820
Units issued to Valero in connection with the acquisitions (see Note 2)	—		85,000

In addition to the activities in the above table, noncash financing activities for the nine months ended September 30, 2017 included the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the issuance of common units under our ATM Program described in Note 9.

Noncash financing activities for the nine months ended September 30, 2016 included:


•	the conversion of all of our outstanding subordinated units into common units having an aggregate value of $406.4 million, described in Note 9; and


•	the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the issuance of common units (i) to Valero for the acquisition of the Meraux and Three Rivers Terminal Services Business and (ii) under our ATM Program, described in Note 9.

The following table presents our investing and financing cash outflows in connection with the acquisitions from Valero described in Note 2 (in thousands). Of the cash consideration paid, the portion attributed to Valero’s historical carrying value of each acquisition was reflected as an investing cash outflow and the excess purchase price paid over the carrying value of each acquisition was reflected as a financing cash outflow.



	Investing Cash Outflow		Financing Cash Outflow		Total Cash Outflow
Nine months ended September 30, 2016:
McKee Terminal Services Business	$	51,361	$	152,639	$	204,000
Meraux and Three Rivers Terminal Services Business	52,246		223,754		276,000
	$	103,607	$	376,393	$	480,000

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

There were no net transfers from Valero during the nine months ended September 30, 2017. 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 (in thousands) for the nine months ended September 30, 2016.



	Nine Months Ended September 30, 2016
Net transfers from Valero per statement of partners’ capital	$	15,030
Less: Noncash transfers from Valero	144
Net transfers from Valero per statement of cash flows	$	14,886

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



	Nine Months Ended September 30,
	2017		2016
Interest paid	$	19,136	$	8,688
Income taxes paid	695		496

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


11.	FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in thousands):



	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	115,755	$	115,755	$	71,491	$	71,491
Financial liabilities:
Debt:
Revolver	30,000		30,000		30,000		30,000
Senior Notes	495,177		516,305		495,355		506,670
Notes payable – related party	370,000		370,000		370,000		370,000

The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:


•	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 variable-rate debt, which includes our Revolver and “notes payable – related party,” approximate their carrying values as our borrowings bear interest based upon short-term floating market interest rates. The fair value of our fixed-rate 4.375 percent Senior Notes is determined primarily using the market approach based on quoted prices provided by vendor pricing services. 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 and our ability to remain in compliance with the terms of its and our 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;


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

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•	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

Third Quarter Results

We reported net income and net income attributable to partners of $57.6 million in the third quarter of 2017. This compares to net income of $48.7 million and net income attributable to partners of $51.7 million in the third quarter of 2016.

The increase in net income of $8.9 million was due primarily to $10.0 million of revenues generated by our Meraux and Three Rivers terminals in the third quarter of 2017. We acquired these terminals from Valero in September 2016 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements. Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the third quarter of 2017 compared to the third quarter of 2016 was due primarily to the revenues associated with services provided by these terminals in the third quarter of 2017.

Net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the Meraux and Three Rivers terminals for the periods prior to the date we acquired these businesses from Valero and represent only the costs of operating the terminals. See Note 1 of Condensed Notes to Consolidated Financial Statements for the reason that results of businesses acquired from Valero are included with our results for periods prior to their dates of acquisition. The increase in net income attributable to partners of $5.9 million in the third quarter of 2017 compared to the third quarter of 2016 was due primarily to the operating results generated by our Meraux and Three Rivers terminals in the third quarter of 2017 as Valero did not historically charge for these services. The increase is also attributable to the results of the Red River crude system that we acquired in January 2017 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements.

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

First Nine Months Results

We reported net income and net income attributable to partners of $174.2 million in the first nine months of 2017. This compares to net income of $129.0 million and net income attributable to partners of $144.5 million in the first nine months of 2016.

The increase in net income of $45.1 million was due primarily to $46.7 million of revenues generated by our McKee, Meraux, and Three Rivers terminals in the first nine months of 2017. We acquired the McKee terminal from Valero in April 2016 and the Meraux and Three Rivers terminals from Valero in September 2016. As previously noted, Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the first nine months of 2017 compared to the first nine months of 2016 was due primarily to the revenues associated with services provided by these terminals in the first nine months of 2017.

As previously noted, net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the McKee, Meraux, and Three Rivers terminals for the periods prior to the dates we acquired these businesses from Valero. The increase in net income attributable to partners of $29.7 million in the first nine months of 2017 compared to the first nine months of 2016 is due primarily to the operating results generated by our McKee, Meraux, and Three Rivers terminals in the first nine months of 2017 as Valero did not historically charge for these services. The increase is also attributable to the results of the Red River crude system that we acquired in January 2017 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements.

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

OUTLOOK

Substantially all of our operating revenues are generated from fee-based arrangements with Valero, and the amount of operating revenues we generate depends on the volumes of crude oil and refined petroleum products owned by Valero that we transport through our pipelines and handle at our terminals. These volumes are primarily affected by the reliability of Valero’s refineries served by our pipelines and terminals as well as the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. However, our arrangements with Valero contain minimum volume commitments that require Valero to ship minimum volumes during each calendar quarter or pay us for the shortfall. Shortfall payments are recognized as revenue in future quarters as they are used for volumes shipped in excess of minimum volume commitments or when we determine that is it not probable that Valero will ship volumes in excess of its minimum volume commitments prior to the expiration of Valero’s use of those payments. Valero has historically met or exceeded most of its minimum volume commitments, and we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals in 2017 generally consistent with historical levels at our existing assets.

Effective March 31, 2017, we entered into an agreement with DGD, a joint venture consolidated by Valero, to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we have agreed to construct a new 180,000 barrel storage tank and provide storage services to DGD. The construction of the new tank is expected to be completed in the first quarter of 2018. This agreement contains minimum commitments

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for DGD’s use of the assets. We expect our revenues to increase in 2017 from the operations of the rail loading facility.

Effective November 1, 2017, we acquired Parkway Pipeline and the Port Arthur terminal for total consideration of $200.0 million and $308.0 million, respectively. See Note 2 for further discussion of these acquisitions. We expect our throughput volumes and revenues to increase in 2017 from the operations of Parkway Pipeline and the Port Arthur terminal.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance for the three and nine months ended September 30, 2017 and 2016. 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,
	2017			2016			Change
Operating revenues – related party	$	109,340		$	92,040		$	17,300
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below)	26,478			24,089			2,389
Depreciation expense	12,113			11,319			794
Other operating expenses	537			—			537
General and administrative expenses	3,865			4,094			(229		)
Total costs and expenses	42,993			39,502			3,491
Operating income	66,347			52,538			13,809
Other income, net	300			76			224
Interest and debt expense, net of capitalized interest	(8,747		)	(3,672		)	(5,075		)
Income before income taxes	57,900			48,942			8,958
Income tax expense	311			235			76
Net income	57,589			48,707			8,882
Less: Net loss attributable to Predecessor	—			(3,002		)	3,002
Net income attributable to partners	57,589			51,709			5,880
Less: General partner’s interest in net income	13,037			6,634			6,403
Limited partners’ interest in net income	$	44,552		$	45,075		$	(523	)

Net income per limited partner unit – basic and diluted:
Common units	$	0.65		$	0.77
Subordinated units	$	—		$	0.29

Weighted-average limited partner units outstanding – basic and diluted:
Common units	68,163			53,899
Subordinated units	—			12,517

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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,
	2017		2016		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	23,042	$	18,371	$	4,671
Pipeline transportation throughput (BPD) ^(a)	859,473		778,369		81,104
Average pipeline transportation revenue per barrel ^(b)	$	0.29	$	0.26	$	0.03

Terminaling:
Terminaling revenues	$	85,157	$	73,534	$	11,623
Terminaling throughput (BPD)	2,693,788		2,394,292		299,496
Average terminaling revenue per barrel ^(b)	$	0.34	$	0.33	$	0.01

Storage and other revenues	$	1,141	$	135	$	1,006

Total operating revenues – related party	$	109,340	$	92,040	$	17,300

Capital expenditures:
Maintenance	$	921	$	3,352	$	(2,431	)
Expansion	8,136		953		7,183
Total capital expenditures	9,057		4,305		4,752
Less: Capital expenditures attributable to Predecessor	—		1,113		(1,113		)
Capital expenditures attributable to Partnership	$	9,057	$	3,192	$	5,865

Other financial information:
Distribution declared per unit	$	0.4800	$	0.3850

Distribution declared:
Limited partner units – public	$	10,794	$	8,341
Limited partner units – Valero	22,449		17,590
General partner units – Valero	12,999		6,244
Total distribution declared	$	46,242	$	32,175

____________________


(a)	Represents the sum of volumes transported through each separately tariffed pipeline segment divided by the number of days in the period.


(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 $17.3 million, or 19 percent, in the third quarter of 2017 compared to the third quarter of 2016. The increase was due primarily to the following:

•

Incremental operating revenues from acquired businesses. We experienced an 11 percent increase in operating revenues in the third quarter of 2017 compared to the third quarter of 2016 as a result of revenues generated by the Meraux and Three Rivers terminals we acquired from Valero in September 2016. The incremental throughput volumes at these terminals had a favorable impact to our operating revenues of $10.0 million.


•	Incremental operating revenues from the Red River crude system. The Red River crude system, which was acquired in January 2017, generated operating revenues of $2.6 million. The higher transportation revenue per barrel generated by this system also contributed to a higher average pipeline transportation revenue per barrel in the third quarter of 2017 compared to the third quarter of 2016.


•	Higher average revenue per barrel. We experienced an increase in the average pipeline transportation and terminaling revenue per barrel of 12 percent and 3 percent, respectively, in the third quarter of 2017 compared to the third quarter of 2016. The increase in the average revenue per barrel had a favorable impact to our operating revenues of $1.9 million.


•	Higher throughput volumes. We experienced a 10 percent increase in volumes transported through our other pipeline systems in the third quarter of 2017 compared to the third quarter of 2016. The increase in volumes had a favorable impact to our operating revenues of $1.8 million.


•	Incremental operating revenues from the DGD rail loading facility. The DGD rail loading facility, which was placed in service in May 2017, generated operating revenues of $1.0 million in the third quarter of 2017.

Cost of revenues (excluding depreciation expense) increased $2.4 million, or 10 percent, in the third quarter of 2017 compared to the third quarter of 2016 due primarily to incremental costs of $570,000 to operate our Red River crude system and $735,000 to operate the rail loading facility at our St. Charles terminal. In addition, we incurred higher maintenance expenses of $879,000 at our Houston and St. Charles terminals due primarily to inspection activity.

Depreciation expense increased $794,000, or 7 percent, in the third quarter of 2017 compared to the third quarter of 2016 due primarily to depreciation expense recognized on the assets that compose our Red River crude system, which was acquired in January 2017.

Other operating expenses reflect the uninsured portion of our property damage losses and repair costs incurred in the third quarter of 2017 as a result of damages caused by Hurricane Harvey primarily at our Houston terminal and Port Arthur products system.

General and administrative expenses decreased $229,000, or 6 percent, in the third quarter of 2017 compared to the third quarter of 2016 due primarily to acquisition costs (legal and investment advisor fees) of $418,000 incurred in connection with our acquisition of the Meraux and Three Rivers terminals in September 2016. The decrease in acquisition costs was partially offset by higher professional fees of $114,000.

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“Interest and debt expense, net of capitalized interest” increased $5.1 million in the third quarter of 2017 compared to the third quarter of 2016 due primarily to the following:

•

Incremental interest expense incurred on the Senior Notes. In December 2016, we issued $500.0 million of 4.375% senior notes due December 2026 (the Senior Notes). We used the proceeds of the Senior Notes to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $2.0 million in the third quarter of 2017.


•	Higher interest rates in 2017. We incurred additional interest of $1.9 million in the third quarter of 2017 on borrowings that have variable interest rates and were outstanding during 2016 and 2017.


•	Incremental borrowings in connection with the Meraux and Three Rivers terminals acquisition. In connection with the acquisition of the Meraux and Three Rivers terminals from Valero in September 2016, we borrowed $210.0 million under the Revolver. Interest expense on the incremental borrowings was approximately $979,000 in the third quarter of 2017.


•	Fees and amortization of deferred debt issuance costs. The remaining increase of $261,000 in the third quarter of 2017 compared to the third quarter of 2016 is primarily attributed to fees associated with the Revolver and the amortization of deferred debt issuance costs.

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Results of Operations

(in thousands, except per unit amounts)



	Nine Months Ended September 30,
	2017			2016			Change
Operating revenues – related party	$	325,701		$	258,471		$	67,230
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below)	77,078			72,461			4,617
Depreciation expense	36,393			34,652			1,741
Other operating expenses	537			—			537
General and administrative expenses	11,558			12,174			(616		)
Total costs and expenses	125,566			119,287			6,279
Operating income	200,135			139,184			60,951
Other income, net	546			210			336
Interest and debt expense, net of capitalized interest	(25,587		)	(9,582		)	(16,005		)
Income before income taxes	175,094			129,812			45,282
Income tax expense	925			780			145
Net income	174,169			129,032			45,137
Less: Net loss attributable to Predecessor	—			(15,422		)	15,422
Net income attributable to partners	174,169			144,454			29,715
Less: General partner’s interest in net income	33,923			15,351			18,572
Limited partners’ interest in net income	$	140,246		$	129,103		$	11,143

Net income per limited partner unit – basic and diluted:
Common units	$	2.06		$	2.08
Subordinated units	$	—		$	1.73

Weighted-average limited partner units outstanding – basic and diluted:
Common units	67,997			42,597
Subordinated units	—			23,326

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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,
	2017		2016		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	71,076	$	57,934	$	13,142
Pipeline transportation throughput (BPD) ^(a)	941,289		849,015		92,274
Average pipeline transportation revenue per barrel ^(b)	$	0.28	$	0.25	$	0.03

Terminaling:
Terminaling revenues	$	252,460	$	200,132	$	52,328
Terminaling throughput (BPD)	2,760,000		2,131,113		628,887
Average terminaling revenue per barrel ^(b)	$	0.34	$	0.34	$	—

Storage and other revenues	$	2,165	$	405	$	1,760

Total operating revenues – related party	$	325,701	$	258,471	$	67,230

Capital expenditures:
Maintenance	$	4,294	$	9,063	$	(4,769	)
Expansion	20,003		6,848		13,155
Total capital expenditures	24,297		15,911		8,386
Less: Capital expenditures attributable to Predecessor	—		3,394		(3,394		)
Capital expenditures attributable to Partnership	$	24,297	$	12,517	$	11,780

Other financial information:
Distribution declared per unit	$	1.3625	$	1.0900

Distribution declared:
Limited partner units – public	$	30,635	$	23,510
Limited partner units – Valero	62,768		48,989
General partner units – Valero	32,993		14,196
Total distribution declared	$	126,396	$	86,695

____________________


(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 by the number of days in the period.

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Operating revenues increased $67.2 million, or 26 percent, in the first nine months of 2017 compared to the first nine months of 2016. The increase was due primarily to the following:

•

Incremental operating revenues from acquired businesses. We experienced an 18 percent increase in operating revenues in the first nine months of 2017 compared to the first nine months of 2016 as a result of revenues generated by the McKee, Meraux, and Three Rivers terminals we acquired from Valero in April 2016 and September 2016. As previously noted, Valero did not charge for services provided by these terminals prior to our acquisitions; therefore, these terminals generated incremental operating revenues of $46.7 million in the first nine months of 2017.

•

Incremental operating revenues from the Red River crude system. The incremental throughput volumes from the Red River crude system generated operating revenues of $7.2 million. The higher transportation revenue per barrel generated by this system also contributed to a higher average pipeline transportation revenue per barrel in the first nine months of 2017 compared to the first nine months of 2016.


•	Higher throughput volumes. We experienced a 7 percent increase in volumes handled at our other terminals and pipeline systems in the first nine months of 2017 compared to the first nine months of 2016. The increase in volumes had a favorable impact to our operating revenues of $10.8 million.


•	Incremental operating revenues from the DGD rail loading facility. The DGD rail loading facility, which was placed in service in May 2017, generated operating revenues of $1.8 million in the first nine months of 2017.


•	Higher average pipeline transportation revenue per barrel. We experienced an increase in average pipeline transportation revenue per barrel of 12 percent in the first nine months of 2017 compared to the first nine months of 2016. The increase in average pipeline transportation revenue per barrel had a favorable impact to our operating revenues of $772,000.

Cost of revenues (excluding depreciation expense) increased $4.6 million, or 6 percent, for the first nine months of 2017 compared to the first nine months of 2016 due primarily to incremental costs of $1.5 million to operate our Red River crude system and $1.3 million to operate the rail loading facility at our St. Charles terminal. In addition, we incurred higher maintenance expenses of $879,000 at our Houston terminal due primarily to inspection activity.

Depreciation expense increased $1.7 million, or 5 percent, in the first nine months of 2017 compared to the first nine months of 2016 due primarily to depreciation expense recognized on the assets that compose our Red River crude system, which was acquired in January 2017.

Other operating expenses reflect the uninsured portion of our property damage losses and repair costs incurred in the first nine months of 2017 as a result of damages caused by Hurricane Harvey primarily at our Houston terminal and Port Arthur products system.

General and administrative expenses decreased $616,000, or 5 percent, for the first nine months of 2017 compared to the first nine months of 2016 due primarily to acquisition costs (legal and investment advisor fees) of $805,000 incurred in connection with our acquisitions of the McKee, Meraux, and Three Rivers terminals in 2016. The decrease in acquisition costs in the first nine months of 2017 was partially offset by incremental costs of $204,000 related to the management fee charged to us by Valero in connection with the acquired businesses and higher professional fees of $135,000.

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“Interest and debt expense, net of capitalized interest” increased $16.0 million in the first nine months of 2017 compared to the first nine months of 2016 due to the following:

•

Incremental interest expense incurred on the Senior Notes. As previously noted in the analysis of third quarter results, we issued the Senior Notes in December 2016 and used the proceeds to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $6.8 million in the first nine months of 2017.


•	Higher interest rates in 2017. We incurred additional interest of $4.1 million in the first nine months of 2017 on borrowings that have variable interest rates and were outstanding during 2016 and 2017.

•

Incremental borrowings in connection with the 2016 acquisitions. In connection with the acquisition of the McKee terminal in April 2016 and the Meraux and Three Rivers terminals in September 2016 from Valero, we borrowed $139.0 million and $210.0 million, respectively, under the Revolver. Interest expense on the incremental borrowings was approximately $4.3 million in the first nine months of 2017.


•	Fees and amortization of deferred debt issuance costs. The remaining increase of $786,000 in the first nine months of 2017 compared to the first nine months of 2016 is primarily attributed to fees associated with the Revolver and the amortization of deferred debt issuance costs.

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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 the Revolver, 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.

ATM Program

On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). During the nine months ended September 30, 2017, we issued 742,897 common units under our ATM Program and received proceeds of $35.2 million, which is net of $542,000 of expenses incurred with respect to the sale of these units. Concurrent with the issuance of common units under our ATM Program, our general partner contributed $748,000 in exchange for 15,602 general partner units to maintain its 2.0 percent general partner interest in the Partnership.

Distributions

On October 19, 2017, the board of directors of our general partner declared a distribution of $0.48 per unit applicable to the third quarter of 2017, which equates to $46.2 million in total distributions to unitholders of record as of November 1, 2017. 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, 2016:

Quarterly
Period
Ended

Total
Quarterly
Distribution
(Per Unit)

Total Cash
Distribution
(In Thousands)

Declaration
Date

Record
Date

Distribution
Date

September 30, 2017

0.4800

46,242

October 19, 2017

November 1, 2017

November 9, 2017

June 30, 2017

0.4550

42,111

July 19, 2017

August 1, 2017

August 10, 2017

March 31, 2017

0.4275

38,043

April 20, 2017

May 2, 2017

May 11, 2017

December 31, 2016

0.4065

34,895

January 20, 2017

February 2, 2017

February 10, 2017

September 30, 2016

0.3850

32,175

October 24, 2016

November 3, 2016

November 10, 2016

June 30, 2016

0.3650

28,912

July 21, 2016

August 1, 2016

August 9, 2016

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

Revolver

The Revolver consists of aggregate commitments of $750.0 million and matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit up to $100.0 million. As of September 30, 2017, we had $30.0 million of borrowings and no letters of credit outstanding under the Revolver. As a result, we had $720 million of available capacity.

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Effective November 1, 2017, we borrowed $380.0 million under the Revolver in connection with the acquisitions of Parkway Pipeline and the Port Arthur terminal, as disclosed in Note 2 of Condensed Notes to Consolidated Financial Statements.

Cash Flows Summary

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



	Nine Months Ended September 30,
	2017			2016
Cash flows provided by (used in):
Operating activities	$	219,819		$	162,212
Investing activities	(95,948		)	(119,489		)
Financing activities	(79,607		)	(88,107		)
Net increase (decrease) in cash and cash equivalents	$	44,264		$	(45,384	)

Cash Flows for the Nine Months Ended September 30, 2017

Our operations generated $219.8 million of cash in the first nine months of 2017, driven primarily by net income of $174.2 million plus noncash adjustments (mainly for depreciation expense) of $37.6 million and a favorable change in working capital of $8.0 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of an increase in accrued interest payable of $5.2 million, an increase in “accrued interest payable – related party” of $0.8 million, an increase in accounts payable of $1.4 million, and an increase in “accounts payable – related party” of $1.4 million, partially offset by a decrease in “deferred revenue – related party” of $3.1 million. The change in our working capital is further described in Note 10 of Condensed Notes to Consolidated Financial Statements. The increase in accrued interest was due primarily to the interest expense incurred on the Senior Notes, which is paid semi-annually on June 15 and December 15. The increase in accounts payable was due primarily to the timing of project expenditures. The increase in “accounts payable – related party” was attributable primarily to the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment agreement. The decrease in “deferred revenue – related party” was due to Valero’s use of deficiency payments that it had paid to us in previous periods associated with its minimum volume commitments to us.

The $219.8 million of cash generated by our operations, along with $36.5 million in proceeds received in connection with our ATM Program, were used mainly to:


•	pay $115.0 million in cash distributions to limited partners and our general partner;


•	fund the $71.8 million acquisition of the Red River crude system;


•	fund $24.3 million in capital expenditures; and


•	pay $1.0 million in debt issuance and offering costs.

Cash Flows for the Nine Months Ended September 30, 2016

Our operations generated $162.2 million of cash in the first nine months of 2016, driven primarily by net income of $129.0 million plus noncash adjustments (primarily for depreciation expense) of $35.4 million, partially offset by an unfavorable change in working capital of $2.2 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of an increase in “accounts receivable – related party” of $7.7 million, partially offset by an increase in “deferred revenue – related party” of $3.7 million. The change in our working capital is further described

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in Note 10 of Condensed Notes to Consolidated Financial Statements. The increase in “accounts receivable – related party” was attributable primarily to billings related to our McKee, Meraux, and Three Rivers terminals, which were acquired in 2016. The increase in “deferred revenue – related party” was due to higher deficiency payments made by Valero associated with its minimum volume commitments to us.

The $162.2 million of cash generated by our operations, along with $349.0 million in borrowings under the Revolver, $14.9 million of net cash transferred from Valero related to the cash flows associated with our Predecessor, and the $2.9 million in proceeds received in connection with our ATM Program, were used mainly to:


•	fund $480.0 million for the acquisition from Valero of the McKee, Meraux, and Three Rivers terminals ($103.6 million represented Valero’s carrying value in the net assets transferred to us and was reflected as an investing activity, and $376.4 million represented the excess purchase price paid over the carrying value and was reflected as a financing activity);


•	pay $77.2 million in cash distributions to limited partners and our general partner;


•	fund $15.9 million in capital expenditures;


•	make debt repayments of $868,000 on our capital lease obligations; and


•	pay $412,000 in offering costs.

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):



	Nine Months Ended September 30,
	2017		2016
Maintenance	$	4,294	$	9,063
Expansion (a)	20,003		6,848
Total capital expenditures	$	24,297	$	15,911

(a) This table excludes amounts paid for our acquisitions. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.

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Our capital expenditures in the first nine months of 2017 were primarily for:


•	the construction of a rail loading facility and new tank at the St. Charles terminal;


•	the construction of a new tank at our and Port Arthur products system; and


•	the improvement of assets at our Corpus Christi terminals.

Our capital expenditures in the first nine months of 2016 were primarily for:


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


•	the improvement of assets at our Meraux, Three Rivers, St. Charles, and Houston terminals to extend the useful lives of the tanks; and


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

For 2017, we expect our capital expenditures to be approximately $49.0 million. Our estimate consists of approximately $14.0 million for maintenance capital expenditures and approximately $35.0 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 acquisitions.

In addition to the above-mentioned capital expenditures, Valero funded $28.0 million of capital projects primarily related to the St. Charles, Meraux, Corpus Christi, Three Rivers, McKee, and Houston terminals. Valero agreed to fund these projects in connection with the acquisitions from Valero. See Note 10 of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.

Contractual Obligations

As of September 30, 2017, our contractual obligations included debt 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 nine months ended September 30, 2017.

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, 2016.

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 nine months ended September 30, 2017.

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, 2017, 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, 2016 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.

The following table provides information about our debt obligations (dollars in thousands), the fair values of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.



	September 30, 2017
	Expected Maturity Dates
	2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	516,305
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Variable rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000
Average interest rate	—		%	—		%	—		%	2.74		%	—		%	—		%	2.74		%



	December 31, 2016
	Expected Maturity Dates
	2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	506,670
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Variable rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000
Average interest rate	—		%	—		%	—		%	2.27		%	—		%	—		%	2.27		%

(a) Excludes unamortized discount and deferred issuance costs.

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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, 2017.


(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, 2016.

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Item 6. Exhibits



Exhibit No.		Description

10.01		Purchase and Sale Agreement (Parkway Pipeline), dated November 1, 2017, by and between Valero Terminaling and Distribution Company and Valero Energy Partners LP - incorporated by reference to Exhibit 10.01 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

10.02		Contribution Agreement (Port Arthur), dated November 1, 2017, by and between Valero Terminaling and Distribution Company and Valero Energy Partners LP - incorporated by reference to Exhibit 10.02 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

10.03		Amendment and Restatement of Schedules to Amended and Restated Omnibus Agreement, dated November 1, 2017, by and among the various parties thereto - incorporated by reference to Exhibit 10.04 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

10.04		Amendment and Restatement of Exhibits to Amended and Restated Services and Secondment Agreement, dated November 1, 2017, by and among Valero Services, Inc., Valero Refining Company-Tennessee, L.L.C., Valero Refining-Texas, L.P., and Valero Energy Partners GP LLC - incorporated by reference to Exhibit 10.06 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

*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 8, 2017

VALERO ENERGY PARTNERS LP - FORM 10-Q - November 8, 2017

Attached files

VALERO ENERGY PARTNERS LP Reports