VALERO ENERGY PARTNERS LP - FORM 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



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

For the fiscal year ended December 31, 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		78249
(Address of principal executive offices)		(Zip Code)
	Registrant’s telephone number, including area code: (210) 345-2000

Securities registered pursuant to Section 12(b) of the Act: Common units representing limited partnership interests listed on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 aggregate market value of the voting and non-voting common units held by non-affiliates was approximately $1.0 billion based on the last sales price quoted as of June 30, 2017 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.

The registrant had 69,262,070 common units and 1,413,511 general partner units outstanding at January 31, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

None

CONTENTS



		PAGE
PART I		1
Items 1 & 2.	Business and Properties	1
	Business	1
	Properties	16
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	43
Item 3.	Legal Proceedings	43
Item 4.	Mine Safety Disclosures	43

PART II		44
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44
Item 6.	Selected Financial Data	47
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 8.	Financial Statements and Supplementary Data	66
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	103
Item 9A.	Controls and Procedures	103
Item 9B.	Other Information	103

PART III		104
Item 10.	Directors, Executive Officers and Corporate Governance	104
Item 11.	Executive Compensation	108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	112
Item 13.	Certain Relationships and Related Transactions, and Director Independence	114
Item 14.	Principal Accountant Fees and Services	116

PART IV		117
Item 15.	Exhibits and Financial Statement Schedules	117

Signature		121

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References in this report to “Partnership,” “we,” “our,” “us,” or similar terms refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References to our “general partner” refer to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation. 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.

PART I

ITEMS 1 & 2. BUSINESS and PROPERTIES

BUSINESS

Overview

Valero Energy Partners LP is a Delaware limited partnership formed in July 2013 by Valero. On December 16, 2013, we completed our initial public offering (IPO) of common units representing limited partner interests. Our common units are listed on the New York Stock Exchange (NYSE) under the symbol “VLP.” Our offices are located at One Valero Way, San Antonio, Texas 78249.

Our website address is www.valeroenergypartners.com. Information on our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished to the United States (U.S.) Securities and Exchange Commission (SEC) are available, free of charge, on our website (under Investor Relations > Financial Information > SEC Filings), soon after we file or furnish such information.

We are a master limited partnership formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. We generate operating revenues by providing fee-based transportation and terminaling services to transport and store crude oil and refined petroleum products using our pipelines and terminals.

Our assets consist of certain crude oil and refined petroleum products pipelines, terminals, and other logistics assets. During 2017, we acquired the Red River crude system, the Parkway pipeline, and the Port Arthur terminal. See Note 2 of Notes to Consolidated Financial Statements for discussion of our acquisitions. As of December 31, 2017, our assets include crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries.

We expect Valero to serve as a critical source of our future growth by providing us opportunities to purchase additional logistics assets that it currently owns or may acquire or develop in the future. Our agreements with Valero are discussed more fully in other sections of this report.

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Organizational Structure

The following simplified diagram depicts our organizational structure as of January 31, 2018.

Segments

Our operations consist of one reportable segment and are conducted solely in the U.S. See Part II, Item 8., “Financial Statements and Supplementary Data” for financial information about our operations and assets.

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Our Assets and Operations

The following sections describe our assets and the related services that we provide.

Ardmore Logistics System

Our Ardmore logistics system includes our 40 percent undivided interest in the Hewitt Segment of the Red River crude oil pipeline and our Wynnewood products system.

Hewitt Segment of Red River Pipeline (Red River crude system). We own a 40 percent undivided interest in the Hewitt segment of the Plains Red River pipeline. The Hewitt segment is an approximately 138-mile, 16-inch crude oil pipeline with a capacity of 150,000 barrels per day (of which 60,000 barrels per day of capacity are allocable to our 40 percent undivided interest). It originates at Plains Marketing, L.P.’s Cushing, Oklahoma terminal and ends at Hewitt Station in Hewitt, Oklahoma. The pipeline supports Valero’s Ardmore Refinery with a connection from Hewitt Station to Wasson Station. We also own a 40 percent undivided interest in two 150,000 shell barrel capacity tanks located at Hewitt Station, and we lease the remaining 60 percent capacity from the joint owner.

Wynnewood Products System. The Wynnewood products system is the primary distribution outlet for refined petroleum products from Valero’s Ardmore Refinery. The system consists of a 30-mile, 12-inch refined petroleum products pipeline with 90,000 barrels per day of capacity and two tanks with a total of 180,000 barrels of storage capacity. The system connects Valero’s Ardmore Refinery to the Magellan Central refined products pipeline system.

Corpus Christi Logistics System

Our Corpus Christi logistics system includes the operations of our Corpus Christi East and West terminals, which are crude oil, intermediates, and refined products terminals in Corpus Christi, Texas.

Corpus Christi East Terminal. Our Corpus Christi East terminal supports Valero’s Corpus Christi East Refinery. The Corpus Christi East terminal is located on the Corpus Christi ship channel and has storage tanks with 6.2 million barrels of storage capacity.

Corpus Christi West Terminal. Our Corpus Christi West terminal supports Valero’s Corpus Christi West Refinery. The Corpus Christi West terminal is located on the Corpus Christi ship channel and has storage tanks with 3.8 million barrels of storage capacity.

Our Corpus Christi terminals are connected via pipeline. The terminals can receive crude oil via the refineries’ docks, the Eagle Ford Pipeline LLC pipeline, the NuStar North Beach terminal, and NuStar’s Eagle Ford pipelines. The terminals can distribute products across their docks and through NuStar’s South Texas pipeline network.

Houston Logistics System

Our Houston logistics system includes the operations of our Houston terminal, which is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Houston Refinery. The terminal is located on the Houston ship channel and has storage tanks with 3.6 million barrels of storage capacity. The terminal receives waterborne crude oil via the refinery’s docks and a connection to Houston Fuel Oil Terminal Company (HFOTCO), and the terminal receives pipeline crude oil through the Magellan and Seaway systems. The terminal can distribute refined petroleum products across the refinery’s docks and into the Magellan South pipeline system. Also, the terminal can access the Colonial, TEPPCO, and Explorer pipeline systems via the Kinder Morgan Pasadena terminal.

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McKee Logistics System

Our McKee logistics system is a crude oil and refined petroleum products pipeline and terminal system supporting Valero’s McKee Refinery. Our McKee logistics system includes our McKee crude system, McKee products system, and the McKee terminal.

McKee Crude System. Our McKee crude system supplies crude oil to Valero’s McKee Refinery. The system has a throughput capacity of approximately 72,000 barrels per day and consists of 145 miles of pipelines located in the Texas panhandle, 20 crude oil truck unloading sites with lease automatic custody transfer units, and approximately 240,000 barrels of storage capacity.

McKee Products System. Our McKee products system transports refined petroleum products from Valero’s McKee Refinery to our refined petroleum products terminal in El Paso, Texas and on to Kinder Morgan’s SFPP system for marketing in the southwest U.S. We own a 33⅓ percent undivided interest in the system. Capacity on the McKee products system is allocated between the other interest owner and us according to our respective ownership interests. Our McKee products system comprises the following assets:


•	McKee to El Paso Pipeline. Our McKee to El Paso pipeline consists of 408 miles of 10-inch pipeline that delivers diesel and gasoline produced at Valero’s McKee Refinery to our El Paso terminal. The pipeline has a total capacity of 63,000 barrels per day (of which 21,000 barrels per day of capacity are allocable to our 33⅓ percent undivided interest).


•	SFPP Pipeline Connection. Our SFPP pipeline connection consists of 12 miles of 16- and 8-inch pipelines that deliver diesel and gasoline from our El Paso terminal to Kinder Morgan’s SFPP system. The SFPP pipeline connection has 98,400 barrels per day of capacity (of which 33,000 barrels per day of capacity are allocable to our 33⅓ percent undivided interest).

•

El Paso Terminal. Our El Paso terminal is located on 117 acres and consists of 10 storage tanks with 499,000 barrels of storage capacity (of which 166,000 barrels of capacity are allocable to our 33⅓ percent undivided interest). The El Paso terminal receives refined petroleum products delivered to the terminal through our McKee to El Paso pipeline and delivers refined petroleum products to our four-bay truck rack at our El Paso terminal and to Kinder Morgan’s SFPP system through our SFPP pipeline connection. Our El Paso terminal truck rack has 30,000 barrels per day of capacity (of which 10,000 barrels per day of capacity are allocable to our 33⅓ percent undivided interest).

McKee Terminal. Our McKee terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s McKee Refinery in Sunray, Texas. Our McKee terminal has storage tanks with 4.4 million barrels of storage capacity. The terminal receives pipeline crude oil from the Wichita Falls, Dixon, and Hooker pipelines owned by NuStar Logistics, L.P. (NuStar) in addition to our McKee crude system. The terminal can distribute refined petroleum products through its truck racks, rail rack, and several pipelines including NuStar’s Southlake, Amarillo, and Colorado Springs pipelines, the Phillips/NuStar Denver pipeline, and our McKee to El Paso pipeline.

Memphis Logistics System

Our Memphis logistics system includes our Collierville crude system and our Memphis products system.

Collierville Crude System. Our Collierville crude system delivers crude oil from the Capline and Diamond pipelines to Valero’s Memphis Refinery. Our Collierville crude system comprises the following assets:


•	Collierville Pipeline System. Our Collierville pipeline system consists of 52 miles of 10- to 20-inch pipelines with 210,000 barrels per day of capacity that deliver crude oil to Valero’s Memphis Refinery. We lease an approximate 13 mile portion of this pipeline, which runs from the Mississippi

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state line to Valero’s Memphis Refinery, from Memphis Light, Gas and Water (MLGW). The initial term of the lease, along with renewal periods available at our option, extend through 2046.


•	Collierville Terminal. Our Collierville terminal is located in Byhalia, Mississippi on 60 acres. The facility consists of three storage tanks with 975,000 barrels of storage capacity. The Collierville terminal receives crude oil delivered to the terminal through the Capline pipeline.


•	St. James Crude Tank. We own a 330,000 barrel crude oil storage tank in St. James, Louisiana located on land we lease from Marathon Pipe Line LLC. The tank can be used to aggregate crude oil volumes to batch deliveries through the Capline pipeline to our Collierville terminal.

Memphis Products System. Our Memphis products system is the primary outlet for refined petroleum products produced at Valero’s Memphis Refinery. Distribution of these products occurs through our Memphis truck rack and our terminal in West Memphis, Arkansas, for further distribution via truck and barge to marketing outlets along the central Mississippi River, to Exxon’s Memphis refined petroleum products terminal, and to the Memphis International Airport. Our Memphis products system comprises the following assets:

•

Memphis Airport Pipeline System. Our Memphis Airport pipeline system consists of a nine-mile, six-inch pipeline that delivers jet fuel produced at Valero’s Memphis Refinery to the Swissport Fueling, Inc. terminal located at the Memphis International Airport and a two-mile, six-inch pipeline that delivers jet fuel from Valero’s Memphis Refinery to the FedEx jet fuel terminal located at the Memphis International Airport. The Memphis Airport pipeline system has a total capacity of 20,000 barrels per day. Both six-inch pipelines are owned by MLGW and we have an agreement with MLGW under which we are the exclusive operator of both pipelines. Our agreement with MLGW automatically renews and MLGW does not have a right to terminate.

•

Shorthorn Pipeline System. Our Shorthorn pipeline system consists of seven miles of 14-inch pipeline that delivers diesel and gasoline produced at Valero’s Memphis Refinery to our West Memphis terminal and two miles of 12-inch pipeline that delivers diesel and gasoline from our West Memphis terminal and Valero’s Memphis Refinery to Exxon’s Memphis refined petroleum products terminal. We lease the 14-inch pipeline from MLGW. The initial term of the lease, along with renewal periods available at our option, extend through 2046. The Shorthorn pipeline system has a total capacity of 120,000 barrels per day.


•	Memphis Truck Rack. Our Memphis truck rack is located on five acres of land adjacent to Valero’s Memphis Refinery. The facility consists of a high-capacity seven-bay truck rack and five biodiesel storage tanks with 8,000 barrels of storage capacity. The truck rack has a capacity of 110,000 barrels per day.

•

West Memphis Terminal. Our West Memphis terminal is located in West Memphis, Arkansas on 75 acres. The facility consists of 18 storage tanks with over one million barrels of storage capacity, a truck rack, and a barge dock on the Mississippi River. Our West Memphis terminal receives refined petroleum products through our Shorthorn pipeline system and through a biodiesel truck unloading rack located at the terminal. The terminal delivers refined petroleum products to the five-bay, 50,000 barrels per day truck rack at the terminal, our two-berth, 4,000 barrels per hour barge dock on the Mississippi River, and our Shorthorn pipeline system for deliveries to Exxon’s Memphis terminal.

Meraux Logistics System

Our Meraux logistics system includes the operations of our Meraux terminal, which is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Meraux Refinery located in

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Meraux, Louisiana. The terminal is located southeast of New Orleans along the Mississippi River and has storage tanks with 3.9 million barrels of storage capacity. The terminal can receive crude oil via the refinery’s docks, from LOOP, and from the CAM pipeline system. The terminal can distribute refined petroleum products across the refinery’s truck rack, docks, and into the T&M Terminal Company pipeline, which connects to the Plantation and Colonial pipelines.

Port Arthur Logistics System

Our Port Arthur logistics system includes our Lucas crude system, Port Arthur products system, and the Port Arthur terminal.

Lucas Crude System. Our Lucas crude system supports diverse and flexible crude oil supply options for Valero’s Port Arthur Refinery. Our Lucas crude system comprises the following assets:


•	Lucas Pipeline. Our Lucas pipeline is a 12-mile, 30-inch pipeline with 400,000 barrels per day of capacity that delivers crude oil from our Lucas terminal to Valero’s Port Arthur Refinery.


•	Nederland Pipeline. Our Nederland pipeline is a five-mile, 32-inch pipeline with 600,000 barrels per day of capacity that delivers crude oil to our Lucas terminal from the Sunoco Logistics Nederland marine terminal.

•

Lucas Terminal. Our Lucas terminal is located 12 miles from Valero’s Port Arthur Refinery on 495 acres. The facility consists of seven storage tanks with an aggregate of 1.9 million barrels of storage capacity. The Lucas terminal receives crude oil through our Nederland pipeline, which connects to the Sunoco Logistics Partners L.P. marine terminal in Nederland, Texas, as well as through connections to the Cameron Highway crude oil pipeline and Enterprise’s Beaumont marine terminal. The terminal connects to TransCanada Cushing MarketLink pipeline via our TransCanada connection and to the Seaway crude oil pipeline via our Seaway connection. The Lucas terminal delivers crude oil to Valero’s Port Arthur Refinery through our Lucas pipeline.


•	Seaway Connection. Our Seaway connection has 750,000 barrels per day of capacity and connects our Lucas terminal to the Seaway crude oil pipeline.


•	TransCanada Connection. Our TransCanada connection has 400,000 barrels per day of capacity and connects our Lucas terminal to TransCanada’s Cushing MarketLink pipeline.

Port Arthur Products System. Our Port Arthur products system transports refined petroleum products from Valero’s Port Arthur Refinery to major third-party pipeline systems, including the Explorer, Colonial, Sunoco Logistics MagTex and Enterprise TE Products refined petroleum products pipeline systems, for delivery to various marketing outlets, and to Enterprise’s Beaumont marine terminal for exports. Our Port Arthur products system comprises the following assets:


•	12-10 Pipeline. Our 12-10 pipeline consists of 13 miles of 12-inch and 10-inch pipeline with 60,000 barrels per day of capacity that delivers refined petroleum products from Valero’s Port Arthur Refinery to the Enterprise TE Products pipeline connection, the Sunoco Logistics MagTex pipeline connection, and Enterprise’s Beaumont marine terminal.

•

Port Arthur Products Pipelines (PAPS–El Vista). Our Port Arthur products pipelines consist of a four-mile, 20-inch pipeline with 144,000 barrels per day of capacity that delivers gasoline from Valero’s Port Arthur Refinery to our El Vista terminal and a three-mile, 20-inch pipeline with 216,000 barrels per day of capacity that delivers diesel from Valero’s Port Arthur Refinery to our Port Arthur Products Station (PAPS) terminal.

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•

PAPS and El Vista Terminals. Our PAPS terminal consists of nine tanks with 1,144,000 barrels of diesel storage capacity, and our El Vista terminal consists of eight tanks with 1.2 million barrels of gasoline storage capacity. Our PAPS terminal also contains storage tanks owned by Colonial, which serves as the operator of our PAPS terminal. Each party owns its own tanks at the PAPS terminal and its own external pipelines connecting to the terminal, but certain equipment and improvements located at and serving the terminal are jointly owned. We own all of the El Vista terminal assets.

Port Arthur Terminal. Our Port Arthur terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Port Arthur Refinery. The Port Arthur terminal has 47 storage tanks with 8.5 million barrels of storage capacity. The terminal can receive domestic and foreign crude oil from pipelines and water. The terminal is directly connected to the Valero Pleasure Island crude offloading dock for waterborne crude oil. The Port Arthur terminal can also receive, via our Lucas terminal, domestic, Canadian, and other imported crude oil from the TransCanada Cushing MarketLink pipeline, the Seaway pipeline, and the Sunoco Logistics Nederland terminal. Refined petroleum products can be loaded onto ships at Valero’s Port Arthur Refinery docks or be delivered to the Explorer, Colonial, and Sunoco Logistics MagTex pipelines via our PAPS and El Vista terminals.

St. Charles Logistics System

Our St. Charles logistics system includes Parkway pipeline and our St. Charles terminal.

Parkway Pipeline. Our Parkway pipeline is an approximately 140-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 to Collins, Mississippi for supply into the Plantation and Colonial pipeline systems.

St. Charles Terminal. Our St. Charles terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s St. Charles Refinery in Norco, Louisiana. The terminal is located on the Mississippi River and has storage tanks with 10 million barrels of storage capacity. The terminal receives crude oil via the refinery’s docks, from Louisiana Offshore Oil Port (LOOP), and from the Clovelly-Alliance-Meraux (CAM) pipeline system, which connects to multiple domestic pipelines. The terminal can distribute refined petroleum products across the refinery’s docks and into the Plantation (via Parkway) and Colonial (via Bengal) pipeline systems. The terminal can also load renewable diesel onto railcars.

Three Rivers Logistics System

Our Three Rivers logistics system includes our Three Rivers crude system and our Three Rivers terminal.

Three Rivers Crude System. Our Three Rivers crude system supports Valero’s Three Rivers Refinery and is located in the Eagle Ford shale region in South Texas. The system consists of 11 crude oil truck unloading sites with lease automatic custody transfer units and three 1-mile, 12-inch pipelines with a capacity of 110,000 barrels per day. The system delivers crude oil received from the truck unloading sites and pipeline connections to tanks at Valero’s Three Rivers Refinery. The system also receives locally produced crude oil via connections to the Harvest Arrowhead pipeline system and the Plains Gardendale pipeline for processing at Valero’s Three Rivers Refinery or for shipment through third-party pipelines to Valero’s refineries in Corpus Christi, Texas. The system has a connection to the EOG Eagle Ford West Pipeline and supporting pipeline infrastructure, which segregate and connect Eagle Ford crude oil production to Valero’s Three Rivers Refinery.

Three Rivers Terminal. Our Three Rivers terminal is a crude oil, intermediates, and refined petroleum products terminal that supports Valero’s Three Rivers Refinery. The terminal is located in South Texas between Corpus Christi and San Antonio and has storage tanks with 2.3 million barrels of storage capacity. The terminal receives crude oil from our Three Rivers crude system and transports crude oil to Corpus Christi through an outbound connection to NuStar’s Three Rivers/Corpus Christi crude pipeline. The terminal can distribute

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refined petroleum products through its truck rack and NuStar’s Pettus North, San Antonio South, and Laredo pipelines.

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Pipelines

The following table summarizes information with respect to our pipelines described above:

Pipeline

Diameter

(inches)

Length

(miles)

Throughput

Capacity

(thousand barrels

per day)

Commodity

Associated

Valero

Refinery

Significant

Third-party

System Connections

Ardmore logistics system

Hewitt segment of Red River crude oil pipeline

138

60^(a)

crude oil

Ardmore

Plains Red River, Plains Cushing

Wynnewood refined products pipeline

refined petroleum products

Ardmore

Magellan Central

McKee logistics system

McKee crude system

multiple segments

145

crude oil

McKee

—

McKee products system

McKee to El Paso pipeline

408

21^(b)

refined petroleum products

McKee

—

SFPP pipeline connection

16, 8

33^(c)

refined petroleum products

McKee

Kinder Morgan SFPP System

Memphis logistics system^(d)

Collierville crude system

Collierville pipeline

10-20

210

crude oil

Memphis

Capline; Diamond ^(e)

Memphis products system

Memphis Airport pipeline system

jet fuel

Memphis

Memphis International Airport

Shorthorn pipeline system

14, 12

120

refined petroleum products

Memphis

Exxon Memphis

Port Arthur logistics system

Lucas crude system

Lucas pipeline

400

crude oil

Port Arthur

Sunoco Logistics Nederland; Enterprise Beaumont; Cameron Highway; TransCanada Cushing MarketLink; Seaway

Nederland pipeline

600

crude oil

Port Arthur

Sunoco Logistics Nederland

Port Arthur products system

12-10 pipeline

12, 10

refined petroleum products

Port Arthur

Sunoco Logistics MagTex; Enterprise TE Products, Enterprise Beaumont

20-inch diesel pipeline

216

diesel

Port Arthur

Explorer; Colonial

20-inch gasoline pipeline

144

gasoline

Port Arthur

Explorer; Colonial

St. Charles logistics system

Parkway pipeline

140

110

refined petroleum products

St. Charles

Plantation; Colonial

Three Rivers logistics system

Three Rivers crude system

110

crude oil

Three Rivers

Harvest Arrowhead; Plains Gardendale; EOG Eagle Ford West

_______________________


(a)	Capacity shown represents our 40 percent undivided interest in the pipeline segment. Total capacity for the pipeline segment is 150,000 barrels per day.


(b)	Capacity shown represents our 33⅓ percent undivided interest in the pipeline. Total capacity for the pipeline is 63,000 barrels per day.


(c)	Capacity shown represents our 33⅓ percent undivided interest in the pipeline connection. Total capacity for the pipeline connection is 98,400 barrels per day.


(d)	Portions of our Memphis logistics system pipelines are owned by MLGW, but they are operated and maintained exclusively by us under long-term arrangements with MLGW.


(e)	The Diamond pipeline is owned 50 percent by Valero and 50 percent by Plains All American Pipeline, L.P.

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Terminals

The following table summarizes information with respect to our terminals described above:



Terminal	Tank Storage Capacity (thousands of barrels)	Throughput Capacity (thousand barrels per day)	Commodity	Associated Valero Refinery	Significant Third-party System Connections
Ardmore logistics system
Hewitt Station tanks	300	—	crude oil	Ardmore	Plains Red River
Wynnewood terminal	180	—	refined petroleum products	Ardmore	Magellan Central
Corpus Christi logistics system
Corpus Christi East terminal	6,241	—	crude oil and refined petroleum products	Corpus Christi East	Eagle Ford Pipeline LLC; NuStar North Beach terminal, Eagle Ford pipelines & South Texas pipeline network
Corpus Christi West terminal	3,835	—	crude oil and refined petroleum products	Corpus Christi West	(same as Corpus Christi East terminal)
Houston logistics system
Houston terminal	3,642	—	crude oil and refined petroleum products	Houston	HFOTCO; Magellan crude; Seaway; Kinder Morgan Pasadena & Galena Park; Magellan East Houston & Galena Park
McKee logistics system
McKee crude system
Various terminals	240	—	crude oil	McKee	—
McKee products system
El Paso terminal	166 ^(a)	—	refined petroleum products	McKee	Kinder Morgan SFPP System
El Paso terminal truck rack	—	10 ^(b)	refined petroleum products	McKee	—
McKee terminal	4,400	—	crude oil and refined petroleum products	McKee	NuStar (several); NuStar/Phillips Denver
Memphis logistics system
Collierville crude system
Collierville terminal	975	—	crude oil	Memphis	Capline
St. James crude tank	330	—	crude oil	Memphis	Capline
Memphis products system
Memphis truck rack	8	110	refined petroleum products	Memphis	—
West Memphis terminal	1,080	—	refined petroleum products	Memphis	Exxon Memphis; Enterprise TE Products
West Memphis terminal dock	—	4 ^(c)	refined petroleum products	Memphis	—
West Memphis terminal truck rack	—	50	refined petroleum products	Memphis	—
Meraux logistics system
Meraux terminal	3,900	—	crude oil and refined petroleum products	Meraux	LOOP; CAM; Plantation; Colonial
____________________________
See footnotes on page 11.

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Terminal	Tank Storage Capacity (thousands of barrels)	Throughput Capacity (thousand barrels per day)	Commodity	Associated Valero Refinery	Significant Third-party System Connections
Port Arthur logistics system
Lucas crude system
Lucas terminal	1,915	—	crude oil	Port Arthur	Sunoco Logistics Nederland; Enterprise Beaumont; Cameron Highway; TransCanada Cushing MarketLink; Seaway
Seaway connection	—	750	crude oil	Port Arthur	Seaway
TransCanada connection	—	400	crude oil	Port Arthur	TransCanada Cushing MarketLink
Port Arthur products system
El Vista terminal	1,210	—	gasoline	Port Arthur	Explorer; Colonial
PAPS terminal	1,144	—	diesel	Port Arthur	Explorer; Colonial
Port Arthur terminal	8,500	—	crude oil and refined petroleum products	Port Arthur	Sunoco Logistics Nederland; Explorer; Colonial; Sunoco Logistics MagTex; Cameron Highway; TransCanada Cushing MarketLink; Enterprise Beaumont
St. Charles logistics system
St. Charles terminal	10,004	—	crude oil and refined petroleum products	St. Charles	LOOP; CAM; Plantation; Colonial
Three Rivers logistics system
Three Rivers terminal	2,250	—	crude oil and refined petroleum products	Three Rivers	NuStar South Texas; Harvest Arrowhead; Plains Gardendale; EOG Eagle Ford West

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(a)	Capacity shown represents our 33⅓ percent undivided interest in the terminal. Total storage capacity is 499,000 barrels.


(b)	Capacity shown represents our 33⅓ percent undivided interest in the truck rack. Total capacity is 30,000 barrels per day.


(c)	Dock throughput is reflected in thousands of barrels per hour.

Our Commercial Agreements with Valero

General

Our commercial agreements with Valero prescribe rates, commitments, and other terms and conditions applicable to our pipelines and terminals. Under these commercial agreements, we provide transportation and terminaling services to Valero, and Valero pays us for minimum quarterly throughput volumes of crude oil and refined petroleum products, regardless of whether such volumes are physically delivered by Valero in any given quarter. These commercial agreements have initial 10-year terms from inception, and, with the exception of certain assets, Valero has the option to renew the agreements for one additional five-year term.

Minimum Quarterly Throughput Commitments and Tariff Rates—Pipelines

Our transportation agreements with Valero contain minimum volume commitments that require Valero to ship minimum volumes during each calendar quarter or pay us for the shortfall using a tariff rate with respect to such volumes. Tariff rates with respect to our pipeline systems may be adjusted annually at our discretion in accordance with the Federal Energy Regulatory Commission’s (FERC) indexing methodology. For any pipelines that may be subject to a jurisdictional tariff, we and Valero have agreed not to commence or support any tariff filing, application, protest, complaint, petition, motion, or other proceeding before FERC for the purpose of requesting that FERC accept or set tariff rates that would be inconsistent with the terms of our transportation services agreements, provided that Valero will continue to have the right under FERC regulations to challenge any proposed changes in our base tariff rates to the extent the changes are inconsistent with FERC’s indexing methodology or other rate changing methodologies, or to the extent the challenge is

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in response to any proceeding brought against us by a third party that could affect our ability to provide transportation services to Valero under our transportation services agreements or the applicable tariff.

Minimum Quarterly Throughput Commitments and Fees—Terminals

Under our terminal services agreement, Valero is obligated to throughput minimum volumes of crude oil and refined petroleum products and pay us throughput fees, as well as fees for providing related ancillary services such as ethanol, biodiesel and renewable diesel blending, and additive injection (except at the Wynnewood terminal, where Valero agrees to pay us a monthly fee as a base storage charge whether or not Valero actually uses any of the storage or other services made available by us at the terminal). Valero provides and pays for its own inventory of ethanol, biodiesel and renewable diesel blending, and additives to be blended or injected at the terminals, where applicable.

Throughput fees with respect to our terminals (or the base storage charge, with respect to our Wynnewood terminal) are increased on July 1 of each year during the term of the applicable terminal service schedule, and other fees with respect to our terminals may be increased annually at our discretion, in each case by a percentage not to exceed the corresponding percentage change in the applicable inflation index during the 12-month period ending on March 31 of such year. If such index decreases during any period, we are not required to reduce our fees, but any subsequent increases in fees based on an increase in the index will be limited to the amount by which such increase exceeds the aggregate amount of cumulative decreases during the intervening periods.

Quarterly Deficiency Payments

If Valero fails to meet its minimum quarterly throughput commitments under our commercial agreements in any given quarter, it is obligated to pay a deficiency payment equal to the volume deficiency multiplied by the applicable tariff and/or fee with respect to such asset. We refer to this payment as a “quarterly deficiency payment.” Quarterly deficiency payments may be applied as a credit for amounts owed on throughput volumes in excess of Valero’s minimum quarterly throughput commitment with respect to such asset during any of the following four quarters, after which time any unused credits will expire.

Minimum Capacity

Under each of our commercial agreements, we are obligated to provide Valero access to capacity of at least the minimum quarterly throughput commitment for our assets. If the minimum capacity of any of our assets falls below the level of Valero’s minimum quarterly throughput commitment at any time due to events affecting such assets (whether planned or unplanned) or if capacity on any of our assets is required to be allocated among users because volume nominations exceed available capacity, Valero’s minimum quarterly throughput commitments with respect to such assets may be proportionately reduced during the period for which capacity is less than Valero’s minimum quarterly throughput commitment.

Product Gains and Losses

Under each of our commercial agreements, other than those commercial agreements covering assets that may be subject to a jurisdictional tariff or are operated by a third party and such tariff or third-party operating agreement specifically provides otherwise, we have no liability for physical losses except to the extent such losses result from our gross negligence or willful misconduct. In the event a terminal or pipeline asset is equipped to measure volume gains and losses through the installation of custody transfer meters and we begin to accept third-party volumes for throughput, we are required to negotiate provisions regarding loss allowance and allocate gains and losses among us and our customers in accordance with standard industry practices.

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Termination and Suspension

Valero is permitted under our commercial agreements (except for the Parkway pipeline transportation agreement) to suspend, reduce, or terminate its obligations under certain circumstances. If Valero determines to totally or partially suspend refining operations at a refinery that is supported by our assets for a period of at least 12 consecutive months, we and Valero are required to negotiate in good faith to agree upon a reduction of Valero’s minimum quarterly throughput commitments under the applicable commercial agreement(s), and if we are unable to agree to an appropriate reduction, then after Valero has made a public announcement of such suspension, Valero may terminate the applicable agreement(s) upon 12 months’ notice to us (unless in the interim Valero publicly announces its intent to resume operations at the refinery, in which case its termination notice is deemed revoked). If a force majeure event with respect to our assets prevents us from performing any of our obligations under a commercial agreement, Valero’s obligations with respect to the affected assets under the applicable commercial agreement, including its minimum quarterly throughput commitments, will be suspended to the extent we cannot perform our obligations. In addition, if a force majeure event prevents Valero from fulfilling any of its obligations under our commercial agreements for more than 60 days, Valero’s applicable obligations with respect to the affected assets, including its minimum quarterly throughput commitments, under our commercial agreements will be suspended for the remainder of the force majeure event.

Turnarounds or other planned outages at a refinery are not force majeure events. If a force majeure event prevents any party from performing its obligations under a commercial agreement for a period of more than 12 consecutive months, then either party may terminate the agreement with respect to the affected assets. If Valero elects to terminate or suspend any of our commercial agreements, our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders may be materially and adversely affected. We cannot assure you that Valero will continue to use our assets or that we will be able to generate additional revenues from third parties.

Our Relationship with Valero

Valero is an independent petroleum refiner and ethanol producer. Valero’s assets include 15 petroleum refineries located in the U.S., Canada, and the United Kingdom, with a combined total throughput capacity of approximately 3.1 million barrels per day and 11 ethanol plants located in the U.S. Mid-Continent region with a combined production capacity of approximately 1.45 billion gallons per year. Valero also has a substantial portfolio of transportation and logistics assets.

The loss of Valero as a customer would have a material and adverse effect on us. For the years ended December 31, 2017, 2016, and 2015, Valero accounted for all of our revenues. We expect to continue to derive a substantial amount of our revenues from Valero for the foreseeable future.

Valero owns 100 percent of our general partner, a 66.2 percent limited partner interest in us, and all of our incentive distribution rights. We believe Valero will promote and support the successful execution of our business strategies given its significant ownership in us, the importance of our assets to Valero’s refining and marketing operations, and its stated intention to use us as its primary vehicle to expand the transportation and logistics assets supporting its business.

In addition to our commercial agreements with Valero, we entered into several agreements with Valero in connection with the IPO, many of which we have amended in connection with subsequent acquisitions. These agreements include an amended and restated omnibus agreement, an amended and restated services and secondment agreement, a tax sharing agreement, and several lease and access agreements. These agreements are described in Note 3 of Notes to Consolidated Financial Statements, and the descriptions of these agreements in Note 3 are incorporated herein by reference.

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Employees

We do not have any employees and our general partner does not have any employees. We are managed by the executive officers of our general partner under the oversight of our board of directors. All of the personnel that conduct our business are employed by Valero, and their services are provided to us pursuant to our omnibus agreement and services and secondment agreement with Valero.

Pipeline Control Operations

Our pipeline systems, other than the El Paso pipeline and the Hewitt Segment (which are operated by third- parties), are operated from a central control room located in San Antonio, Texas. The control center operates with a supervisory control and data acquisition system equipped with computer systems designed to monitor operational data continuously. Monitored data includes pressures, temperatures, gravities, flow rates, and alarm conditions. The control center operates remote pumps, motors, and valves associated with the receipt and delivery of crude oil and refined petroleum products, and provides for the remote-controlled shutdown of pump stations on the pipeline system. A fully functional back-up operations center is also maintained and routinely operated throughout the year to ensure safe and reliable operations.

Seasonality

The volumes of crude oil and refined petroleum products transported in our pipelines and stored in our terminals are directly affected by the levels of supply and demand for crude oil and refined petroleum products in the markets served directly or indirectly by our assets. Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. As a result, Valero’s operating results are generally lower for the first and fourth quarters of each year. Unfavorable weather conditions during the spring and summer months and a resulting lack of the expected seasonal upswings in traffic and sales could adversely affect Valero’s business, financial condition, and results of operations, which may adversely affect our business, financial condition, and results of operations. However, many effects of seasonality on our revenues will be substantially mitigated through the use of our fee-based commercial agreements with Valero that include minimum quarterly throughput commitments.

Competition

As a result of our contractual relationship with Valero under our commercial agreements and our direct connections to ten of Valero’s refineries, we believe that our pipelines and terminals will not face significant competition from other pipelines and terminals for Valero’s crude oil or refined petroleum products transportation requirements to and from the refineries we support.

If Valero’s customers reduce their purchases of refined petroleum products from Valero due to the increased availability of less expensive products from other suppliers or for other reasons, Valero may ship only the minimum volumes through our pipelines (or pay the shortfall payment if it does not ship the minimum volumes), which would cause a decrease in our revenues. Valero competes with integrated petroleum companies, which have their own crude oil supplies and distribution and marketing systems, as well as with independent refiners, many of which also have their own distribution and marketing systems. Valero also competes with other suppliers that purchase refined petroleum products for resale. Competition in any particular geographic area is affected significantly by the volume of products produced by refineries in that area and by the availability of products and the cost of transportation to that area from distant refineries.

Environmental Matters

Our operations are subject to extensive environmental regulations by governmental authorities relating to the discharge and remediation of materials in the environment, greenhouse gas emissions, waste management, pollution prevention, species and habitat preservation, pipeline integrity, and other safety-related regulations, and characteristics and composition of fuels. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or

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proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our operating facilities could require material additional expenditures to comply with environmental laws and regulations.

Rate and Other Regulations

FERC and Common Carrier Regulations

We own pipeline assets in Texas, New Mexico, Tennessee, Louisiana, Mississippi, Arkansas, and Oklahoma, and we provide both interstate and intrastate transportation services. Our common carrier pipeline systems are subject to regulation by various federal, state, and local agencies.

FERC regulates interstate transportation on our common carrier pipeline systems under the Interstate Commerce Act (ICA), the Energy Policy Act of 1992 (EPAct), and the rules and regulations promulgated under those laws. FERC regulations require that rates for interstate service pipelines that transport crude oil and refined petroleum products (collectively referred to as petroleum pipelines) and certain other liquids, be just and reasonable and must not be unduly discriminatory or confer any undue preference upon any shipper. FERC’s regulations also require interstate common carrier petroleum pipelines to file with FERC and publicly post tariffs stating their interstate transportation rates and terms and conditions of service. Under the ICA, FERC or interested persons may challenge existing or changed rates or services. FERC is authorized to investigate such charges and may suspend the effectiveness of a new rate for up to seven months. A successful rate challenge could result in a common carrier paying refunds together with interest for the period that the rate was in effect. FERC may also order a pipeline to change its rates, and may require a common carrier to pay shippers reparations for damages sustained for a period up to two years prior to the filing of a complaint.

Intrastate services provided by certain of our pipeline systems are subject to regulation by state regulatory authorities, such as the Texas Railroad Commission (TRRC), which currently regulates our portion of the McKee to El Paso pipeline. The TRRC uses a complaint-based system of regulation, both as to matters involving rates and priority of access. FERC and state regulatory commissions generally have not investigated rates, unless the rates are the subject of a protest or a complaint. However, FERC or a state commission could investigate our rates on its own initiative or at the urging of a third party.

If our rate levels were investigated by FERC or a state commission, the inquiry could result in a comparison of our rates to those charged by others or to an investigation of our costs. We do not anticipate any complaints against our rates or any investigation by FERC or a state regulatory commission related to our rates or terms of service. Valero has agreed not to contest our tariff rates or terms of service for the term of our transportation services agreements, provided that our tariff changes and rate increases are consistent with the terms of the transportation services agreements. Even so, FERC or a state commission could order us to change our rates or terms of service or require us to pay shippers reparations, together with interest and subject to the applicable statute of limitations, if it were determined that an established rate or terms of service were unjust or unreasonable.

Pipeline Safety

Our assets are subject to increasingly strict safety laws and regulations. The transportation and storage of crude oil and refined petroleum products involve a risk that hazardous liquids may be released into the environment, potentially causing harm to the public or the environment. In turn, such incidents may result in substantial expenditures for response actions, significant government penalties, liability to government agencies for natural resources damages, and significant business interruption. The Department of Transportation (DOT) and Pipeline and Hazardous Materials Safety Administration have adopted safety regulations with respect to the design, construction, operation, maintenance, inspection, and management of our assets. These regulations contain requirements for the development and implementation of pipeline

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integrity management programs, which include the inspection and testing of pipelines and necessary maintenance or repairs. These regulations also require that pipeline operation and maintenance personnel meet certain qualifications and that pipeline operators develop comprehensive spill response plans.

Product Quality Standards

Refined petroleum products that we transport are generally sold by Valero for consumption by the public. Various federal, state, and local agencies have the authority to prescribe product quality specifications for products. Changes in product quality specifications or blending requirements could reduce our throughput volumes, require us to incur additional handling costs, or require capital expenditures. For example, different product specifications for different markets affect the fungibility of the products in our system and could require the construction of additional storage. If we are unable to recover these costs through increased revenues, our cash flows and ability to make distributions could be adversely affected. In addition, changes in the product quality of the products we receive on our product pipeline systems or at our terminals could reduce or eliminate our ability to blend products.

Security

We are also subject to Department of Homeland Security (DHS) Chemical Facility Anti-Terrorism Standards, which are designed to regulate the security of high-risk chemical facilities, and to the Transportation Security Administration’s Pipeline Security Guidelines. We have an internal program of inspection designed to monitor and enforce compliance with all of these requirements. We believe that we are in material compliance with all applicable laws and regulations regarding the security of our facilities.

While we are not currently subject to governmental standards for the protection of computer-based systems and technology from cyber threats and attacks, proposals to establish such standards are being considered by the U.S. Congress and by U.S. Executive Branch departments and agencies, including the DHS, and we may become subject to such standards in the future. We are currently implementing our own cybersecurity programs and protocols; however, we cannot guarantee their effectiveness. A significant cyber-attack could have a material effect on our operations and those of our customer.

PROPERTIES

General

The location and general character of our principal properties are described above under “—Our Assets and Operations,” and those descriptions are incorporated herein by reference. We believe that our properties and facilities are generally adequate for our operations and that our facilities are maintained in a good state of repair. As of December 31, 2017, we were the lessee under a number of cancelable and noncancelable leases for certain properties. Our leases are discussed more fully in Notes 3 and 7 of Notes to Consolidated Financial Statements.

Utilization of Our Facilities

Operating highlights for our pipelines and terminals—including pipeline transportation revenues, pipeline transportation throughput volumes, terminaling revenues, terminaling throughput volumes, and storage revenues—are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—2017 Compared to 2016” and “—2016 Compared to 2015,” and are incorporated herein by reference.

Title to Properties and Permits

Substantially all of our pipelines are constructed on rights-of-way granted by the apparent record owners of the property and in some instances these rights-of-way are revocable at the election of the grantor. In many instances, lands over which rights-of-way have been obtained are subject to prior liens that have not been subordinated to the right-of-way grants. We have obtained permits from public authorities to cross over or

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under, or to lay facilities in or along, watercourses, county roads, municipal streets, and state highways and, in some instances, these permits are revocable at the election of the grantor. We have also obtained permits from railroad companies to cross over or under lands or rights-of-way, many of which are also revocable at the grantor’s election. In some states and under some circumstances, we have the right of eminent domain to acquire rights-of-way and lands necessary for our common carrier pipelines.

Under our omnibus agreement, Valero will indemnify us for certain title defects and for failures to obtain certain consents and permits necessary to conduct our business. Although title to these properties is subject to encumbrances in some cases, such as customary interests generally retained in connection with acquisition of real property, liens that can be imposed in some jurisdictions for government-initiated action to clean up environmental contamination, liens for current taxes and other burdens, and easements, restrictions, and other encumbrances to which the underlying properties were subject at the time of acquisition, we believe that none of these burdens should materially detract from the value of these properties or from our interest in these properties or should materially interfere with their use in the operation of our business.

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Item 1A. RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this Annual Report on Form 10-K in evaluating us and our common units. Some of these risks relate principally to our business and the industry in which we operate, while others relate principally to the business and operations of Valero, tax matters, ownership of our common units, and securities markets generally.

Our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders could be materially and adversely affected by these risks, and, as a result, the trading price of our common units could decline.

Risks Related to Our Business

Valero accounts for all of our revenues. Therefore, we are subject to the business risks associated with Valero’s business. Furthermore, if Valero changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes transported through our pipelines or terminals, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.

Valero accounts for all of our revenues. We expect to continue to derive a substantial amount of our revenues from Valero for the foreseeable future, and as a result, any event, whether in our areas of operation or elsewhere, that materially and adversely affects Valero’s business may adversely affect our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of Valero, the most significant of which include the following:


•	disruption of Valero’s ability to obtain crude oil;


•	interruptions at Valero’s refineries and other facilities;


•	any decision by Valero to temporarily or permanently curtail or shut down operations at one or more of its refineries or other facilities and reduce or terminate its obligations under our commercial agreements;


•	competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage over Valero;


•	the ability to obtain credit and financing on acceptable terms, which could also adversely affect the financial strength of business partners;


•	the costs to comply with environmental laws and regulations;


•	significant losses resulting from the hazards and risks of operations may not be fully covered by insurance, and could adversely affect Valero’s operations and financial results;


•	large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns;


•	interruptions of supply and increased costs as a result of Valero’s reliance on third-party transportation of crude oil and refined petroleum products;


•	potential losses from Valero’s derivative transactions; and

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•	the effects of changing commodity and refined product prices.

The volumes of crude oil and refined petroleum products that we transport and terminal depend substantially on Valero’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstocks and refined petroleum products. These prices are affected by numerous factors beyond our or Valero’s control, including the global supply and demand for crude oil, gasoline and other refined petroleum products, competition from alternative energy sources, and the impact of new and more stringent regulations affecting the energy industry. A material decrease in the refining margins at Valero’s refineries supported by our assets could cause Valero to reduce the volumes we transport and terminal for Valero, which could materially and adversely affect our financial condition, results of operations, and ability to make distributions to our unitholders.

We may not have sufficient distributable cash flow following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to maintain or increase our quarterly distributions to our unitholders.

We may not generate sufficient cash flows each quarter to enable us to maintain or increase distributions. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things, our throughput volumes, tariff rates and fees, and prevailing economic conditions. In addition, the actual amount of cash flows we generate will also depend on other factors, some of which are beyond our control, including:


•	the amount of our operating expenses and general and administrative expenses, including reimbursements to Valero, which are not subject to any caps or other limits, in respect of those expenses;


•	the amount and timing of capital expenditures and acquisitions we make;


•	our debt service requirements and other liabilities, and restrictions contained in our revolving credit facility and other debt agreements;


•	fluctuations in our working capital needs; and


•	the amount of cash reserves established by our general partner.

If we are unable to obtain needed capital or financing on satisfactory terms to fund expansions of our asset base, our ability to make quarterly distributions may be diminished or our financial leverage could increase. We do not have any commitment with any of our affiliates to provide any direct or indirect financial assistance to us.

If we do not make sufficient or effective expansion capital expenditures, we will be unable to expand our business operations and may be unable to maintain or raise the level of our quarterly distributions. We will be required to use cash from our operations, incur borrowings or access the capital markets in order to fund our expansion capital expenditures. Our ability to incur indebtedness or access the capital markets may be limited by our financial condition at such time as well as the covenants in our debt agreements, general economic conditions and contingencies, and uncertainties that are beyond our control. The terms of any such financing could also limit our ability to make distributions to our common unitholders. Incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant common unitholder dilution and increase the aggregate amount of cash required to maintain the then-current distribution rate, which could materially decrease our ability to pay distributions at the then-current distribution rate.

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If Valero satisfies only its minimum quarterly throughput commitments under, or if Valero terminates or we are unable to renew or extend, our commercial agreements with Valero, our ability to make distributions to our unitholders will be reduced.

Valero is not obligated to use our services with respect to volumes of crude oil or refined petroleum products in excess of the minimum quarterly throughput commitments under our commercial agreements. During refinery turnarounds, which typically last 30 to 60 days and are performed every four to five years, we expect that Valero will satisfy only its minimum quarterly throughput commitments under our commercial agreements. Our commercial agreements with Valero generally have initial terms of 10 years from the date of acquisition of the related asset (the earliest of which begin to expire in 2023), and with the exception of certain assets, Valero has the option to renew the agreements for one additional five-year term. If Valero fails to use our facilities and services after expiration of those agreements and we are unable to generate additional revenues from third parties, our ability to make distributions to our unitholders will be reduced.

Further, Valero may suspend, reduce or terminate its obligations under our commercial agreements if certain events occur, such as Valero’s determination to totally or partially suspend refining operations at one of its refineries that our assets support for a period that will continue for at least 12 months, or a force majeure event that impacts one of Valero’s refineries for more than 60 days. Any such reduction, suspension, or termination of Valero’s obligations would have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

We may not be able to obtain third-party revenues due to competition and other factors outside our control, which could limit our ability to grow and may extend our dependence on Valero.

Our ability to obtain third-party revenues is subject to numerous factors beyond our control, including competition from third parties, availability of potential acquisition opportunities, and the extent to which we have available capacity when third-party shippers require it. We can provide no assurance that we will be able to materially increase third-party revenues. Our efforts to establish our reputation and attract new unaffiliated customers may be adversely affected by our relationship with Valero and our desire to provide services pursuant to fee-based contracts. Our potential customers may prefer to obtain services under contracts through which we could be required to assume direct commodity exposure.

Our ability to acquire transportation and logistics assets from Valero is subject to risks and uncertainty, and ultimately we may not further acquire any assets from Valero.

Our present growth strategy depends significantly on acquiring assets from Valero. The consummation and timing of any future acquisitions will depend upon, among other things, Valero’s willingness to offer assets for sale, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to such assets, and our ability to obtain financing on acceptable terms. We have no control over Valero’s decision to offer us the ability to acquire any of its assets. We can provide no assurance that we will be able to successfully consummate any future acquisitions from Valero, and Valero is under no obligation to accept any offer that we may choose to make. In addition, we may decide not to acquire additional assets from Valero, and any such decision will not be subject to unitholder approval. In addition, our right of first offer with respect to certain of Valero’s assets under our omnibus agreement may be terminated by Valero at any time in the event that it no longer controls our general partner.

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If we are unable to make acquisitions on economically acceptable terms from Valero or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

Our strategy to grow our business and increase distributions to unitholders is dependent in part on our ability to make acquisitions that result in an increase in distributable cash flow per unit. Our growth strategy is based in part on our expectation of ongoing divestitures by industry participants, including our right of first offer from Valero. The consummation and timing of any future acquisitions will depend upon, among other things, whether:


•	we are able to identify attractive acquisition candidates;


•	we are able to negotiate acceptable purchase agreements;


•	we are able to obtain financing for these acquisitions on economically acceptable terms; and


•	we are outbid by competitors.

We can provide no assurance that we will be able to consummate any future acquisitions, whether from Valero or any third parties. If we are unable to make future acquisitions, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit as a result of incorrect assumptions in our evaluation of such acquisitions, unforeseen consequences, or other external events beyond our control. Acquisitions involve numerous risks, including difficulties in integrating acquired businesses or assets, inefficiencies, and unexpected costs and liabilities.

Our ability to expand may be limited if Valero does not grow its business.

Our growth strategy depends in part on the growth of Valero’s business. We believe our growth will be driven in part by identifying and executing organic expansion projects that will result in increased throughput volumes from Valero and third parties. If Valero focuses on other growth areas or does not make capital expenditures to fund the growth of its business, we may not be able to fully execute our growth strategy.

Our and Valero’s operations are subject to many risks and operational hazards. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our financial condition, results of operations, and cash flows and our ability to sustain or increase distributions to our unitholders could be materially and adversely affected.

Our operations are subject to all of the risks and operational hazards inherent in transporting, terminaling, and storing crude oil and refined petroleum products, including:


•	damages to facilities, equipment, and surrounding properties caused by third parties, severe weather, natural disasters, and acts of terrorism;


•	maintenance, repairs, mechanical or structural failures at our or Valero’s facilities or at third-party facilities on which our or Valero’s operations are dependent, including electrical shortages, power disruptions, and power grid failures;


•	damages to and loss of availability of interconnecting third-party pipelines, terminals, and other means of delivering crude oil, feedstocks, and refined petroleum products;


•	disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack;

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•	curtailments of operations due to severe seasonal weather; and


•	riots, work stoppages, slowdowns or strikes, as well as other industrial disturbances.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders. In addition, Valero’s refining operations supported by our assets, on which our operations are substantially dependent and over which we have no control, are subject to similar operational hazards and risks inherent in refining crude oil.

Our insurance policies do not cover all losses, costs, or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.

We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We maintain insurance policies for certain property damage, business interruption, and third-party liabilities, which includes pollution liabilities, and are subject to policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders. Insurance companies may reduce the insurance capacity they are willing to offer or may demand significantly higher premiums or deductibles to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, we may be unable to obtain and maintain adequate insurance at a reasonable cost. We cannot provide assurance that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer significant losses could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

We are exposed to the credit risks, and certain other risks, of our customers, and any material nonpayment or nonperformance by our customers could reduce our ability to make distributions to our unitholders.

We are subject to the risks of loss resulting from nonpayment or nonperformance by our customers. If Valero or any other significant customer defaults on its obligations to us, our financial results could be adversely affected. Our customers may be highly leveraged and subject to their own operating and regulatory risks. Any material nonpayment or nonperformance by our customers could reduce our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal, and economic risks, which could adversely affect our operations and financial condition.

In order to optimize our existing asset base, we intend to evaluate and capitalize on organic opportunities for expansion projects in order to increase revenues on our pipelines and terminals. The expansion of existing pipelines or terminals, such as by adding horsepower, pump stations, or loading racks, or the construction or expansion of new transportation and logistics assets, involves numerous regulatory, environmental, political, and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient

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long-term contractual commitments from customers to provide the revenues needed to support such projects and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or make such interconnections, we may not realize an increase in revenues for an extended period of time. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially and adversely affect our financial condition, results of operations, and cash flows and our ability in the future to make distributions to our unitholders.

We do not own all of the land on which our assets are located, which could result in disruptions to our operations.

We do not own all of the land on which our assets are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our assets on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew leases, right-of-way contracts or otherwise, could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

We are dependent upon third parties to operate some of our assets.

Certain of our assets are operated by third parties. Success in jointly owned assets depends in large part on whether our partners, over whom we may have little or no control, satisfy their contractual obligations. If such third parties fail to operate such assets in accordance with the terms of any applicable operating agreement with them or otherwise fail to meet their contractual obligations, such failures could result in our inability to meet our commitments to our customers, which in turn could result in a reduction in our revenues, or in us becoming liable to our customers for any losses they may sustain by reason of our failure to comply, which losses may not be recoverable by us. Differences in opinions or views between us and our partners can result in delayed decision-making or failure to agree on material issues that could adversely affect the business and operations of such assets. Additionally, the failure by a partner to comply with applicable laws, regulations, or client requirements could negatively impact our business.

Our substantial indebtedness and the restrictions in our revolving credit facility, senior notes, and subordinated credit agreements with Valero could adversely affect our business, financial condition, results of operations, ability to make distributions to our unitholders, and the value of our units.

As of December 31, 2017, our total debt, which includes notes payable – related party, was $1.275 billion. Our substantial indebtedness and the additional debt we may incur in the future for potential acquisitions may adversely affect our liquidity and therefore our ability to make interest payments on our notes.

We are dependent upon the earnings and cash flows generated by our operations in order to meet any debt service obligations and to allow us to make distributions to our unitholders. Our substantial indebtedness and the restrictions in the agreements governing our indebtedness could restrict our ability to finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make distributions to our unitholders. For example, our revolving credit facility and subordinated credit agreements contain covenants that require us to maintain a ratio of total debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) for the prior four fiscal quarters of not greater than 5.0 to 1.0 as of the last day of each fiscal quarter (or 5.5 to 1.0 during specified periods following certain acquisitions).

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Our substantial indebtedness and the restrictions in our revolving credit facility, senior notes, and subordinated credit agreements could affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our debt agreements could result in an event of default, which would enable our lenders to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our other debt agreements, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity” for additional information about the agreements governing our indebtedness.

A downgrade of our credit ratings, which are determined by independent third parties, could impact our financial position, results of operations, and liquidity.

Our access to credit and capital markets depends on the credit ratings assigned to our debt by independent credit rating agencies. We currently maintain investment-grade ratings by Standard & Poor’s Ratings Services (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch) on our notes. Ratings from credit agencies are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated independently of any other rating. We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Specifically, if ratings agencies were to downgrade our long-term rating, particularly below investment grade, our borrowing costs would increase, which could adversely affect our ability to attract potential investors and our funding sources could decrease. In addition, we may not be able to obtain favorable credit terms from our suppliers or they may require us to provide collateral, letters of credit, or other forms of security, which would increase our operating costs. As a result, a downgrade below investment grade in our credit ratings could have a material adverse impact on our financial position, results of operations, and liquidity.

Increases in interest rates could adversely impact the price of our common units, our ability to issue equity, or incur debt for acquisitions or other purposes and our ability to make distributions at our intended levels.

In the future, the interest rates on our indebtedness could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by our level of distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board, which increased its targeted federal funds rate several times in 2017 and may continue to do so. As the Federal Reserve Board increases its target federal funds rate, overall interest rates will likely rise and a rising interest rate environment could have an adverse impact on the price of our common units, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make distributions at our intended levels.

Compliance with and changes in environmental and pipeline integrity and safety laws could adversely affect our performance.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive environmental laws and

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regulations, including those relating to the discharge and remediation of materials in the environment, greenhouse gas emissions, waste management, species and habitat preservation, pollution prevention, pipeline integrity and other safety-related regulations, and characteristics and composition of fuels. Certain of these laws and regulations could impose obligations to conduct assessment or remediation efforts at our facilities or third-party sites where we take wastes for disposal or where our wastes migrated. Environmental laws and regulations also may impose liability on us for the conduct of third parties or for actions that complied with applicable requirements when taken, regardless of negligence or fault. If we violate or fail to comply with these laws and regulations, it could lead to administrative, civil, or criminal penalties or liability and the imposition of injunctions, operating restrictions, or the loss of permits.

Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of expenditures required for environmental matters could increase in the future. Current and future legislative action and regulatory initiatives could result in changes to operating permits, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods we transport, and decreased demand for products we handle that cannot be assessed with certainty at this time. We may be required to make expenditures to modify operations or install pollution control equipment or release prevention and containment systems that could materially and adversely affect our business, financial condition, results of operations, and liquidity if these expenditures, as with all costs, are not ultimately reflected in the tariffs and other fees we receive for our services.

For example, the U.S. Environmental Protection Agency (EPA) has, in recent years, adopted final rules making more stringent the National Ambient Air Quality Standards (NAAQS) for ozone, sulfur dioxide, and nitrogen dioxide. Emerging rules and permitting requirements implementing these revised standards may require us to install more stringent controls at our facilities, which may result in increased capital expenditures. Governmental restrictions on greenhouse gas emissions, including those that have been or may be imposed in various states or at the federal level, could also result in material increased compliance costs, additional operating restrictions or permitting delays for our business, and an increase in the cost of, and reduction in demand for, the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity. For example, in May 2016, the EPA finalized new rules for volatile organic compound and methane emissions from the oil and gas production, processing, transmission and storage industry. In June 2017, the EPA proposed to stay those requirements for 90 days. The 90-day stay was vacated in July 2017. The EPA also proposed a two-year stay to those requirements in June 2017, and that two-year stay has not yet been finalized. Prior to the inauguration of President Trump, the EPA announced that it intends to develop methane emission standards for existing sources and issued information collection requests to companies with production, gathering and boosting, gas processing, storage, and transmission facilities. In addition, in 2015, the U.S. participated in the United Nations Conference on Climate Change, which led to the creation of the Paris Agreement. The Paris Agreement, which was signed by the U.S. in April 2016, requires countries to review and “represent a progression” in their intended nationally determined contributions, which set greenhouse gas emission reduction goals, every five years beginning in 2020. While the Trump Administration announced its intent to withdraw from the Paris Agreement in June 2017, there are no guarantees that it will not be implemented.

Further, certain of our pipeline facilities may be subject to the pipeline integrity and safety regulations of various federal and state regulatory agencies. In recent years, increased regulatory focus on pipeline integrity and safety has resulted in various proposed or adopted regulations. For example, in June 2016, President Obama signed the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016 (2016 Pipeline Safety Act) that extends statutory mandate of the Department of Transportation’s Pipeline and Hazardous Materials Administration (PHMSA) under prior legislation through 2019 and, among other things, requires PHMSA to complete certain of its outstanding mandates and develop new safety standards for natural gas

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storage facilities by June 22, 2018. The 2016 Pipeline Safety Act also empowers PHMSA to address imminent hazards by imposing emergency restrictions, prohibitions and safety measures on owners and operators of gas or hazardous liquid pipeline facilities without prior notice or an opportunity for a hearing. Additionally, on January 13, 2017, PHMSA announced the issuance of the Pipeline Safety: Safety of Hazardous Liquids Pipelines final rule. However, this was withdrawn following the Trump Administration’s January 20, 2017, announcement that all regulations that had been sent to the Office of the Federal Register, but not yet published, be immediately withdrawn for further review. Compliance with pipeline safety laws and regulations could have a material adverse effect on our results of operations. Further, should we fail to comply with pipeline safety regulations, we could be subject to penalties and fines. PHMSA has the authority to impose civil penalties for pipeline safety violations up to a maximum of approximately $200,000 per day for each violation and approximately $2,000,000 for a related series of violations. This maximum penalty authority established by statute has been and will continue to be adjusted periodically to account for inflation. The implementation of these regulations, and the adoption of future regulations, could require us to make additional capital expenditures, including to install new or modified safety measures, or to conduct new or more extensive maintenance programs at our pipeline facilities.

Severe weather events may have an adverse effect on our assets and operations.

Some members within the scientific community believe that the increasing concentrations of greenhouse gas emissions in the Earth’s atmosphere, among other reasons, may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts and floods and other climatic events. If any such climatic events were to occur, they could have an adverse effect on our assets and operations.

We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.

Our facilities operate under a number of federal and state permits, licenses, and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. These permits, licenses, approval limits, and standards require a significant amount of monitoring, record keeping, and reporting in order to demonstrate compliance with the underlying permit, license, approval limit, or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties, and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material and adverse effect on our ability to continue operations and on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

Many of our assets have been in service for many years and, as a result, our maintenance or repair costs may increase in the future. In addition, there could be service interruptions due to unknown events or conditions or increased downtime associated with our pipelines that could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

Our pipelines and terminals are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position, or cash flows, as well as our ability to make distributions to our unitholders.

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The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenues and our ability to make distributions to our unitholders.

We own pipeline assets in Texas, New Mexico, Tennessee, Louisiana, Mississippi, Arkansas, and Oklahoma, and we provide both interstate and intrastate transportation services for refined petroleum products and crude oil. Many of our pipelines are common carriers and may be required to provide service to any shipper that requests transportation services on our pipelines.

Many of our pipelines provide interstate transportation services that are subject to regulation by FERC under the ICA. FERC uses prescribed rate methodologies for developing and changing regulated rates for interstate pipelines. Shippers may protest (and FERC may investigate) the lawfulness of existing, new, or changed tariff rates. FERC can suspend new or changed tariff rates for up to seven months and can allow new rates to be implemented subject to refund of amounts collected in excess of the rate ultimately found to be just and reasonable. If FERC finds a rate to be unjust and unreasonable, it may order payment of reparations for up to two years prior to the filing of a complaint or investigation, and FERC may prescribe new rates prospectively. We may also be required to respond to requests for information from government agencies, including compliance audits conducted by the FERC.

State agencies may regulate the rates, terms, and conditions of service for our pipelines offering intrastate transportation services, and such agencies could limit our ability to increase our rates or order us to reduce our rates and pay refunds to shippers. State agencies have generally not been aggressive in regulating common carrier pipelines, have generally not investigated the rates, terms, and conditions of service of intrastate pipelines in the absence of shipper complaints, and generally resolve complaints informally.

Under our commercial agreements, we and Valero have agreed to the base tariff rates for all of our pipelines and a mechanism to modify those rates during the term of the agreements. Valero has also agreed not to challenge the base tariff rates or changes to those rates during the term of the agreements, except to the extent such changes are inconsistent with the agreements. These agreements do not, however, prevent any other new or prospective shipper, FERC, or a state agency from challenging our tariff rates or our terms and conditions of service, and due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of any of our rates, or any changes to FERC’s approved rate or index methodologies, could adversely affect our revenues and our ability to make distributions to our unitholders. Similarly, if state agencies in the states in which we offer intrastate transportation services change their policies or aggressively regulate our rates or terms and conditions of service, it could also materially and adversely affect our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

The FERC’s ratemaking policies are subject to change and may impact the rates charged and revenues received on our interstate oil pipelines. In July 2016, in United Airlines, Inc. v. FERC, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated a pair of FERC orders to the extent they permitted an interstate petroleum products pipeline owned by a master limited partnership to include an income tax allowance in its cost-of-service-based rates. The D.C. Circuit held that the FERC had failed to demonstrate that the inclusion of an income tax allowance in the pipeline’s rates would not lead to an over-recovery of costs attributable to regulated service. The D.C. Circuit instructed the FERC on remand to fashion a remedy to ensure that the pipeline’s rates do not allow it to over-recover its costs. In response to the D.C. Circuit’s remand, in December 2016, the FERC issued a Notice of Inquiry seeking comments regarding how to address any potential double recovery resulting from the FERC’s current income tax allowance and rate of return policies. Initial comments were filed in March 2017 with reply comments filed in April 2017. We cannot currently predict when the FERC will issue an order in the Notice of Inquiry proceeding or what

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action the FERC may take in any such order. Depending upon the resolution of these issues, the cost of service rates of any interstate liquids pipeline could be affected to the extent it proposes new rates or changes its existing rates or if its rates are subject to complaint or are challenged by the FERC.

In addition, there is not always a clear boundary between interstate and intrastate pipeline transportation services, and such determinations are fact-dependent and made on a case-by-case basis. Our undivided interest in the McKee to El Paso pipeline currently provides transportation services pursuant to an intrastate tariff that is subject to regulation by the TRRC. Because a portion of this pipeline crosses New Mexico and our transportation services may be interstate in nature, we applied for a waiver of the tariff filing and reporting requirements of the ICA for our portion of the pipeline, which the FERC conditionally granted. The FERC’s conditions for granting the waiver include that we maintain all books and records in a manner consistent with the Uniform System of Accounts and that we immediately report any change in the circumstances on which the waiver was granted.

If Valero fails to provide the personnel necessary to conduct our operations, our ability to manage our business and continue our growth could be negatively impacted.

Valero is responsible for providing the personnel necessary to conduct our operations, including the executive officers of our general partner. We depend on the services of these individuals. If their services are unavailable to us for any reason, we may be required to hire other personnel to manage and operate our company. We cannot assure our unitholders that we would be able to locate or employ such qualified personnel on acceptable terms or at all.

Terrorist or cyber-attacks and threats, or escalation of military activity in response to these attacks, could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

Terrorist attacks and threats, cyber-attacks, or escalation of military activity in response to these attacks, may have significant effects on general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist or cyber-attacks than other targets in the U.S. We do not maintain specialized insurance for possible liability or loss resulting from a cyber-attack on our assets that may shut down all or part of our business. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt. It is possible that any of these occurrences, or a combination of them, could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

A significant interruption related to our information technology systems could adversely affect our business.

Our information technology systems and network infrastructure may be subject to unauthorized access or attack, which could result in a loss of intellectual property, proprietary information or employee, customer or vendor data; public disclosure of sensitive information; increased costs to prevent, respond to or mitigate cybersecurity events; systems interruption; or the disruption of our business operations. A breach could also originate from, or compromise, our customers’ and vendors’ or other third-party networks outside of our control. A breach may also result in legal claims or proceedings against us by our unitholders, employees, customers and vendors. There can be no assurance that our infrastructure protection technologies and disaster recovery plans can prevent a technology systems breach or systems failure, which could have a material adverse effect on our financial position or results of operations. Furthermore, the continuing and evolving threat of cyber-attacks has resulted in increased regulatory focus on prevention. To the extent we face

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increased regulatory requirements, we may be required to expend significant additional resources to meet such requirements.

Our customers’ operating results are seasonal and generally lower in the first and fourth quarters of the year. Our customers depend on favorable weather conditions in the spring and summer months.

Demand for gasoline is generally higher during the summer months than during the winter months due to seasonal increases in motor vehicle traffic. As a result, our customers’ operating results are generally lower for the first and fourth quarters of each year. Unfavorable weather conditions during the spring and summer months and a resulting lack of the expected seasonal upswings in traffic and sales could adversely affect our customers’ business, financial condition, and results of operations, which may adversely affect our business, financial conditions, and results of operations.

The level and terms of Valero’s indebtedness and its credit ratings could adversely affect our ability to grow our business and our ability to make distributions to our unitholders and our credit ratings and profile.

If the level of Valero’s indebtedness increases significantly in the future, it would increase the risk that Valero may default on its obligations to us under our commercial agreements. The terms of Valero’s indebtedness may limit its ability to borrow additional funds and may impact our operations in a similar manner. If Valero were to default under its debt obligations, Valero’s creditors could attempt to assert claims against our assets during the litigation of their claims against Valero. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. If these claims were successful, our ability to meet our obligations to our creditors, make distributions, and finance our operations could be materially and adversely affected. If one or more credit rating agencies were to downgrade Valero’s credit rating, we could experience an increase in our borrowing costs or difficulty accessing the capital markets. Such a development could adversely affect our ability to grow our business and to make distributions to our unitholders.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including Valero, have conflicts of interest with us and limited duties to us and our unitholders, and they may favor their own interests to the detriment of us and our unitholders. Additionally, we have no control over the business decisions and operations of Valero, and Valero is under no obligation to adopt a business strategy that favors us.

As of January 31, 2018, Valero owned a 66.2 percent limited partner interest in us and owns and controls our general partner. Although our general partner has a duty to manage us in a manner that is not adverse to the best interests of us and our unitholders, because it is a wholly owned subsidiary of Valero, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is beneficial to Valero. Conflicts of interest may arise between Valero and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Valero, over the interests of our common unitholders. These conflicts include, among others, the following situations:


•	neither our partnership agreement nor any other agreement requires Valero to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by Valero to increase or decrease refinery production, shut down or reconfigure a refinery, shift the focus of its investment and growth to areas not served by our assets, or undertake acquisition opportunities for itself;

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•	Valero has an economic incentive to cause us to not seek higher rates and fees, even if such higher rates and fees would reflect those that could be obtained in arm’s-length, third-party transactions;


•	Valero’s directors and officers have a fiduciary duty to make decisions beneficial to the stockholders of Valero, which may be contrary to our interests; in addition, many of the officers and directors of our general partner are also officers and/or directors of Valero and will owe fiduciary duties to Valero and its stockholders;


•	Valero may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;


•	our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities, and restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;


•	except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;


•	disputes may arise under our commercial agreements with Valero;


•	our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;


•	our general partner will determine the amount and timing of many of our capital expenditures and whether a capital expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash that is distributed to our unitholders;


•	our general partner will determine which costs incurred by it are reimbursable by us;


•	our general partner may cause us to borrow funds in order to permit the payment of distributions, even if the purpose or effect of the borrowing is to make incentive distributions;


•	our partnership agreement permits us to classify up to $50 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings, or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions to our general partner in respect of the general partner units or the incentive distribution rights;


•	our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;


•	our general partner intends to limit its liability regarding our contractual and other obligations;


•	our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80 percent of the common units. As of January 31, 2018, Valero owned 67.5 percent of our common units, and, as a result, Valero did not have the ability to exercise the limited call right;


•	our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including under the omnibus agreement and our commercial agreements with Valero;


•	our general partner decides whether to retain separate counsel, accountants, or others to perform services for us; and

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•

our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights or the elimination of our incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. Any such action may result in lower distributions to our common unitholders in certain situations.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors, and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement, or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity, or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders.

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Our partnership agreement requires that we distribute all of our available cash to our unitholders and we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

In addition, because we intend to distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our debt agreements on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.

Our general partner has certain incentive distribution rights that reduce the amount of our cash available for distribution to our common unitholders.

Our general partner currently holds a general partner interest in us that entitles it to receive two percent of all distributions paid to our common unitholders and incentive distribution rights that entitle it to receive an increasing percentage (13 percent, 23 percent and 48 percent) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and certain target distribution levels have been achieved. Throughout 2017, our general partner was at the top tier of the incentive distribution rights scale. Because a higher percentage of our cash is allocated to our general partner due to our incentive distribution rights, it is more difficult for us to increase the amount of distributions to our unitholders and our cost of capital is higher, making investments, capital expenditures and acquisitions, and therefore, future growth, more costly.

The fees and reimbursements due to our general partner and its affiliates, including Valero, for services provided to us or on our behalf will reduce our distributable cash flow. In certain cases, the amount and

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timing of such reimbursements will be determined by our general partner and its affiliates, including Valero.

Pursuant to our partnership agreement, we reimburse our general partner and its affiliates, including Valero, for expenses they incur and payments they make on our behalf. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Pursuant to the amended and restated omnibus agreement, as amended, we pay an annual fee of $13.2 million to Valero for general and administrative services and reimburse Valero for any out-of-pocket costs and expenses incurred by Valero in providing these services to us. In the event we acquire additional assets from Valero in the future, we may agree to increase such annual fee. In addition, we are required to reimburse our general partner for its payments to Valero pursuant to the services and secondment agreement for the wages, benefits, and other costs of Valero employees seconded to our general partner to perform operational and maintenance services at certain of our pipeline and terminal systems. Each of these payments will be made prior to making any distributions on our common units. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates reduces our cash flows, and, as a result, reduces our ability to make distributions to our unitholders. There is no limit on the fees and expense reimbursements that we may be required to pay to our general partner and its affiliates.

Our partnership agreement restricts the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement provides that:

•

whenever our general partner (acting in its capacity as our general partner), the board of directors of our general partner, or any committee thereof (including the conflicts committee) makes a determination or takes, or declines to take, any other action in their respective capacities, our general partner, the board of directors of our general partner, and any committee thereof (including the conflicts committee), as applicable, is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the decision was not adverse to our best interests, and, except as specifically provided by our partnership agreement, will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;


•	our general partner is not liable to us or our unitholders for decisions made in its capacity as a general partner so long as such decisions are made in good faith;

•

our general partner and its officers and directors are not liable to us or our limited partners for monetary damages resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and


•	our general partner is not in breach of its obligations under the partnership agreement (including any duties to us or our unitholders) if a transaction with an affiliate or the resolution of a conflict of interest is:


◦	approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval;


◦	approved by the vote of a majority of our outstanding common units, excluding any common units owned by our general partner and its affiliates;

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◦	determined by the board of directors of our general partner to be on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or


◦	determined by the board of directors of our general partner to be fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner or the conflicts committee must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in the third and fourth subbullet points above, then it will be presumed that, in making its decision, the board of directors of our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership challenging such determination, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.

If a unitholder is not an “Eligible Holder,” the unitholder’s common units may be subject to redemption.

Our partnership agreement includes certain requirements regarding those investors who may own our common units. “Eligible Holders” are limited partners whose (a) federal income tax status is not reasonably likely to have a material and adverse effect on the rates that can be charged by us on assets that are subject to regulation by FERC or an analogous regulatory body and (b) nationality, citizenship, or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If the unitholder is not an Eligible Holder, in certain circumstances as set forth in our partnership agreement, the unitholder’s units may be redeemed by us at the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.

Our partnership agreement restricts the voting rights of unitholders owning 20 percent or more of our common units.

Unitholders’ voting rights are further restricted by a provision of our partnership agreement providing that any units held by a person that owns 20 percent or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be used to vote on any matter.

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike a holder of stock in a public corporation, our unitholders do not have “say on pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the sole member of our general partner, which is a wholly owned subsidiary of Valero. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

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Even if holders of our common units are dissatisfied, they cannot remove our general partner without its consent.

Our unitholders are not able to remove our general partner without its consent because our general partner and its affiliates own sufficient units to be able to prevent its removal. The vote of the holders of at least 66⅔ percent of all outstanding common units is required to remove our general partner. As of January 31, 2018, Valero owned 67.5 percent of our common units (excluding common units held by officers and directors of our general partner and Valero).

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest in us without a vote of our unitholders to an affiliate or another person in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such person. Furthermore, our partnership agreement does not restrict the ability of Valero to transfer all or a portion of its ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own designees and thereby exert significant control over the decisions made by the board of directors and officers.

The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party, it will have less incentive to grow our partnership and increase distributions. A transfer of incentive distribution rights by our general partner could reduce the likelihood of Valero selling or contributing additional assets to us, which in turn would impact our ability to grow our asset base.

We may issue additional units without unitholder approval, which would dilute unitholder interests.

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:


•	our existing unitholders’ proportionate ownership interest in us will decrease;


•	the amount of cash we have available to distribute on each unit may decrease;


•	because the amount payable to holders of incentive distribution rights is based on a percentage of total available cash, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on common units remains the same;


•	the ratio of taxable income to distributions may increase;

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•	the relative voting strength of each previously outstanding unit may be diminished; and


•	the market price of our common units may decline.

Valero may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

As of January 31, 2018, Valero held 46,768,586 of our common units. Additionally, we have agreed to provide Valero with certain registration rights under applicable securities laws. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to unitholders.

Our partnership agreement requires our general partner to deduct from operating surplus the cash reserves that it determines are necessary to fund our future operating expenditures. In addition, our partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of our distribution to unitholders.

Our general partner has a limited call right that may require the unitholders to sell common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80 percent of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment. Unitholders may also incur a tax liability upon a sale of their units. As of January 31, 2018, our general partner and its affiliates owned less than 80 percent of our outstanding common units, but in the future, we may engage in transactions with Valero pursuant to which we may issue additional common units to Valero.

Our general partner, or any transferee holding a majority of the incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to the incentive distribution rights, without the approval of the conflicts committee of our general partner or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Our general partner has the right, at any time when the holders have received incentive distributions at the highest level to which they are entitled (48 percent) for each of the prior four consecutive fiscal quarters (and the amount of each such distribution did not exceed adjusted operating surplus for each such quarter), to reset the minimum quarterly distribution and the initial target distribution levels at higher levels based on our cash distribution at the time of the exercise of the reset election. Given our distribution history, our general partner is currently able to exercise this right. Following a reset election, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution per unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution. Our general partner has the right to

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transfer the incentive distribution rights at any time, in whole or in part, and any transferee holding a majority of the incentive distribution rights shall have the same rights as our general partner with respect to resetting target distributions.

In the event of a reset of the minimum quarterly distribution and the target distribution levels, the holders of the incentive distribution rights will be entitled to receive, in the aggregate, the number of common units equal to that number of common units that would have entitled the holders to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain the same percentage general partner interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal expansion projects that would not otherwise be sufficiently accretive to distributions per common unit. It is possible, however, that our general partner or a transferee could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the distributions it receives related to its incentive distribution rights and may therefore desire to be issued common units rather than retain the right to receive incentive distribution payments based on target distribution levels that are less certain to be achieved in the then-current business environment. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience dilution in the amount of distributions that they would have otherwise received had we not issued common units to our general partner in connection with resetting the target distribution levels.

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement permits our general partner to limit its liability, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replace those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:


•	how to allocate corporate opportunities among us and its other affiliates;


•	whether to exercise its limited call right;

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•	whether to seek approval of the resolution of a conflict of interest by the conflicts committee of the board of directors of our general partner;


•	how to exercise its voting rights with respect to the units it owns;


•	whether to exercise its registration rights;


•	whether to elect to reset target distribution levels;


•	whether to transfer the incentive distribution rights to a third party; and


•	whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement.

By purchasing a common unit, a common unitholder agrees to become bound by the provisions in our partnership agreement, including the provisions discussed above.

If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which could have a material and adverse impact on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

We are required to disclose material changes made in our internal control over financial reporting on a quarterly basis and we are required to assess the effectiveness of our controls annually. Effective internal controls are necessary for us to provide reliable and timely financial reports, to prevent fraud, and to operate successfully as a publicly traded limited partnership. We may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 requires us, among other things, annually to review and report on the effectiveness of our internal control over financial reporting. Any failure to develop, implement, or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have a material and adverse effect on our financial condition, results of operations, and cash flows and our ability to make distributions to our unitholders.

A unitholder’s liability may not be limited if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. A unitholder could be liable for any and all of our obligations as if a unitholder were a general partner if a court or government agency were to determine that (i) we were conducting business in a state but had not complied with that particular state’s partnership statute; or (ii) a unitholder’s right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement, or to take other actions under our partnership agreement constitute “control” of our business.

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Our unitholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable both for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are nonrecourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

Because we are a publicly traded limited partnership, the NYSE does not require us to have, and we do not have or intend to have, a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to our affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements.

Tax Risks

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of additional entity-level taxation, then our distributable cash flow would be substantially reduced.

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 21 percent for taxable years beginning on or after January 1, 2018, and 35 percent to the extent we were treated as a corporation in any taxable years ending prior to January 1, 2018, and would likely pay state and local income tax at varying rates. Distributions generally would be taxed again to our unitholders as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. In addition, changes in current state law may subject us to additional entity-level taxation by individual states.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for

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federal, state, or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

The present federal income tax treatment of publicly traded limited partnerships, including us, or an investment in our common units may be modified by administrative or judicial interpretation, or legislative change, at any time, and potentially retroactively. We are unable to predict whether any such modifications will ultimately occur.

Unitholders may be required to pay taxes on their share of our taxable income even if they do not receive any cash distributions from us. A unitholder’s share of our taxable income, and its relationship to any distributions we make, may be affected by a variety of factors, including our economic performance, transactions in which we engage or changes in law, and may be substantially different from any estimate we make in connection with a unit offering.

A unitholder’s allocable share of our taxable income will be taxable to it, which may require the unitholder to pay federal income taxes and, in some cases, state and local income taxes, even if the unitholder receives cash distributions from us that are less than the actual tax liability that results from that income or no cash distributions at all.

A unitholder’s share of our taxable income, and its relationship to any distributions we make, may be affected by a variety of factors, including our economic performance, which may be affected by numerous business, economic, regulatory, legislative, competitive and political uncertainties beyond our control, and certain transactions in which we might engage. For example, we may engage in transactions that produce substantial taxable income allocations to some or all of our unitholders without a corresponding increase in cash distributions to our unitholders, such as a sale or exchange of assets, the proceeds of which are reinvested in our business or used to reduce our debt, or an actual or deemed satisfaction of our indebtedness for an amount less than the adjusted issue price of the debt. A unitholder’s ratio of its share of taxable income to the cash received by it may also be affected by changes in law. For instance, under the recently enacted tax reform law known as the Tax Cuts and Jobs Act of 2017, the net interest expense deductions of certain business entities, including us, are limited to 30 percent of such entity’s “adjusted taxable income,” which is generally taxable income with certain modifications. If the limit applies, a unitholder’s taxable income allocations will be more (or its net loss allocations will be less) than would have been the case absent the limitation.

From time to time, in connection with an offering of our units, we may state an estimate of the ratio of federal taxable income to cash distributions that a purchaser of units in that offering may receive in a given period. These estimates depend in part on factors that are unique to the offering with respect to which the estimate is stated, so the expected ratio applicable to other units will be different, and in many cases less favorable, than these estimates. Moreover, even in the case of units purchased in the offering to which the estimate relates, the estimate may be incorrect due to the uncertainties described above, challenges by the IRS to tax reporting positions which we adopt, or other factors. The actual ratio of taxable income to cash distributions could be higher or lower than expected, and any differences could be material and could materially affect the value of the common units.

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If the IRS makes audit adjustments to our income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from us, in which case we may require our unitholders and former unitholders to reimburse us for such taxes (including any applicable penalties or interest) or, if we are required to bear such payment, our cash available for distribution to our unitholders might be substantially reduced.

If the IRS makes audit adjustments to income tax returns for tax years beginning after 2017, it may assess and collect taxes (including any applicable penalties and interest) directly from us. We will generally have the ability to shift any such tax liability to our general partner and our unitholders in accordance with their interests in us during the year under audit, but there can be no assurance that we will be able to do so (and will choose to do so) under all circumstances, or that we will be able to (or choose to) effect corresponding shifts in state income or similar tax liability resulting from the IRS adjustment in states in which we do business in the year under audit or in the adjustment year. If we make payments of taxes, penalties and interest resulting from audit adjustments, we may require our unitholders and former unitholders to reimburse us for such taxes (including any applicable penalties or interest) or, if we are required to bear such payment, our cash available for distribution to our unitholders might be substantially reduced. In addition, because payment would be due for the taxable year in which the audit is completed, unitholders during that taxable year would bear the expense of the adjustment even if they were not unitholders during that taxable year.

Tax gain or loss on the disposition of our common units could be more or less than expected.

Unitholders who sell common units will recognize gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income decrease the unitholder’s tax basis in its common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income to the unitholder due to potential recapture items, including depreciation recapture.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. Any tax-exempt entity or non-U.S. person should consult a tax advisor before investing in our common units.

Under the recently enacted tax reform law, if a unitholder sells or otherwise disposes of a common unit, the transferee is required to withhold 10 percent of the amount realized by the transferor unless the transferor certifies that it is not a foreign person, and we are required to deduct and withhold from the transferee amounts that should have been withheld by the transferee but were not withheld. However, the Department of the Treasury and the IRS have determined that this withholding requirement should not apply to any disposition of a publicly traded interest in a publicly traded partnership (such as us) until regulations or other guidance

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have been issued clarifying the application of this withholding requirement to dispositions of interests in publicly traded partnerships. Accordingly, while this new withholding requirement does not currently apply to interests in us, there can be no assurance that such requirement will not apply in the future.

We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns.

We prorate our items of income, gain, loss, and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Although simplifying conventions are contemplated by the Code and most publicly traded partnerships use similar simplifying conventions, the use of this proration method may not be permitted under existing or proposed Treasury Regulations. The U.S. Department of the Treasury recently adopted final Treasury Regulations allowing a similar monthly simplifying convention for taxable years beginning on or after August 3, 2015. However, such regulations do not specifically authorize the use of the proration method we have currently adopted. If the IRS were to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss, and deduction among our unitholders.

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, the unitholder may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss, or deduction with respect to those common units may not be reportable by the unitholder and any distributions received by the unitholder as to those common units could be fully taxable as ordinary income.

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We have adopted certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss, and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss, and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. The IRS may challenge our valuation methods and allocations of taxable income, gain, loss, and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

As a result of investing in our common units, a unitholder may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if the unitholders do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. We conduct business and/or control assets in Arkansas, Louisiana, Mississippi, New Mexico, Oklahoma, Tennessee, and Texas. Except for Texas, all of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is each unitholder’s responsibility to file all federal, state, and local tax returns. Unitholders should consult their own tax advisors regarding such matters. Under the tax laws of some states where we conduct business, we may be required to withhold a percentage from amounts to be distributed to a unitholder who is not a resident of that state.

The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial, or administrative changes and differing interpretations, possibly on a retroactive basis.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units, may be modified by administrative, legislative, or judicial interpretation at any time. For example, from time to time, the President and members of the U.S. Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships, including elimination of partnership tax treatment for publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively. Moreover, any such modification could make it more difficult or impossible for us to meet the exception that allows publicly traded partnerships that generate qualifying income to be treated as partnerships (rather than corporations) for U.S. federal income tax purposes, affect or cause us to change our business activities, or affect the tax consequences of an investment in our common units. We are unable to predict whether any such changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

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Compliance with and changes in tax law could adversely affect our performance.

We are subject to extensive tax laws and regulations, including federal and state income tax laws and transactional taxes such as excise, sales/use, franchise and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 3. LEGAL PROCEEDINGS

We incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note 7 of Notes to Consolidated Financial Statements under the caption “Litigation Matters.”

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Unit Price and Cash Distributions

Our common units are listed on the NYSE under the symbol “VLP.” As of January 31, 2018, there were 7 holders of record of our common units and Valero owned all of our general partner units. There is no established trading market for our general partner units. Our common units represent limited partner interests in us that entitle the holders to the rights and privileges specified in our partnership agreement.

The following table sets forth the range of the daily high and low sales prices per common unit and cash distributions to common unitholders for each quarter of 2017 and 2016.



Quarter Ended	High Sale Price		Low Sale Price		Quarterly Cash Distribution per Unit		Record Date	Distribution Date
2017:
December 31	$	45.06	$	39.52	$	0.5075	February 5, 2018	February 13, 2018
September 30	47.50		40.00		0.4800		November 1, 2017	November 9, 2017
June 30	48.90		41.15		0.4550		August 1, 2017	August 10, 2017
March 31	51.00		44.21		0.4275		May 2, 2017	May 11, 2017
2016:
December 31	44.86		38.90		0.4065		February 2, 2017	February 10, 2017
September 30	47.33		40.14		0.3850		November 3, 2016	November 10, 2016
June 30	49.55		42.31		0.3650		August 1, 2016	August 9, 2016
March 31	52.20		39.02		0.3400		May 2, 2016	May 10, 2016

Distributions of Available Cash

Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:


•	less, the amount of cash reserves established by our general partner to:


◦	provide for the proper conduct of our business (including reserves for our future capital expenditures and anticipated future credit needs requirements and refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter);


◦	comply with applicable law, any of our or our subsidiaries’ debt instruments or other agreements; or


◦	provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for

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distributions if the effect of the establishment of such reserves will prevent us from paying the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);


•	plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners, and with the intent of the borrower to repay such borrowings within 12 months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

We intend to make at least the minimum quarterly distribution to holders of our common units of $0.2125 per unit, or $0.85 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.

General Partner Interest and Incentive Distribution Rights

Our general partner is currently entitled to 2.0 percent of all quarterly distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute up to a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2.0 percent interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0 percent general partner interest.

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48 percent, of the cash we distribute from operating surplus (as defined in our partnership agreement) in excess of $0.244375 per unit per quarter. The maximum distribution of 48 percent does not include any distributions that our general partner or its affiliates may receive on common or general partner units that they own.

Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution per Unit Target Amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0 percent general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2.0 percent general partner interest, our general partner has not transferred its incentive distribution rights, and that there are no arrearages on common units.

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	Total Quarterly Distribution per Unit Target Amount	Marginal Percentage Interest in Distributions
	Total Quarterly Distribution per Unit Target Amount	Unitholders	General Partner
Minimum Quarterly Distribution	$0.2125	98%	2%
First Target Distribution	above $0.2125 up to $0.244375	98%	2%
Second Target Distribution	above $0.244375 up to $0.265625	85%	15%
Third Target Distribution	above $0.265625 up to $0.31875	75%	25%
Thereafter	$0.31875	50%	50%

Securities Authorized for Issuance Under Equity Compensation Plans

The information appearing in Part III, Item 12., “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Securities Authorized for Issuance Under Equity Compensation Plans,” is incorporated herein by reference.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data shown in the table below was derived from the consolidated financial statements of the Partnership and from the combined financial statements of our Predecessor (defined below). We completed our IPO of common units representing limited partner interests on December 16, 2013. Since the IPO, we have acquired businesses and assets from Valero. Each business acquisition was accounted for as the transfer of a business between entities under the common control of Valero. Accordingly, this financial data has been retrospectively adjusted to include the historical results of those business acquisitions for all periods presented prior to the effective dates of each acquisition. We refer to the historical results prior to the IPO and the effective dates of each acquisition from Valero as those of our “Predecessor.” During 2017, we acquired assets from Valero that were accounted for as transfers of assets between entities under the common control of Valero. Our prior period financial statements and financial information were not retrospectively adjusted for these asset acquisitions. See Note 2 in Notes to Consolidated Financial Statements for further discussion of our acquisitions from Valero.

The following table should be read together with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes in Item 8., “Financial Statements and Supplementary Data.” The amounts below are presented in thousands, except per unit amounts. Net income per unit is only calculated after the IPO, as no units were outstanding prior to December 16, 2013.



	Year Ended December 31,
	2017		2016		2015		2014			2013
Operating revenues – related party	$	452,005	$	362,619	$	243,624	$	129,180		$	124,985
Net income (loss)	238,433		188,831		71,312		(33,361		)	(25,403		)
Net income attributable to partners	238,433		204,253		131,878		59,281			2,041
Limited partners’ interest in net income	189,320		180,700		125,809		57,902			2,000
Net income per limited partner unit – basic and diluted:
Common units	2.77		2.85		2.12		1.01			0.03
Subordinated units	—		2.38		2.07		1.01			0.03
Cash distribution declared per unit	1.8700		1.4965		1.1975		0.9410			0.0370
Cash and cash equivalents	42,052		71,491		80,783		236,579			375,118
Total assets (a)	1,517,352		979,257		962,121		1,082,464			1,127,124
Debt and capital lease obligations, net of current portion	905,283		525,355		175,246		1,519			3,079
Notes payable – related party	370,000		370,000		370,000		—			—

(a) Amounts reported as of December 31, 2016, 2015, and 2014 have been reclassified to conform to the 2017 presentation, which reflects the gross presentation of receivables – related party and accounts payable – related party.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Items 1 and 2., “Business and Properties,” Item 1A., “Risk Factors,” and Item 8., “Financial Statements and Supplementary Data,” included in this report.

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report, 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 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;

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•	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 petroleum products;


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


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


•	seasonal variations in demand for refined petroleum products;


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


•	risks related to labor relations and workplace safety;


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


•	political developments.

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

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

OVERVIEW

We are a master limited partnership formed by Valero to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. We generate operating revenues by providing fee-based transportation and terminaling services. During 2017, we acquired businesses and assets and began receiving fees for services provided by these businesses and assets commencing on the effective date of each acquisition. See Note 2 of Notes to Consolidated Financial Statements for further discussion of our acquisitions. Our assets consist of crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries.

We reported net income and net income attributable to partners of $238.4 million for the year ended December 31, 2017. This compares to net income of $188.8 million and net income attributable to partners of $204.3 million for the year ended December 31, 2016.

The increase in net income of $49.6 million was due primarily to a $70.5 million increase in operating income driven by contributions from our McKee, Meraux, Three Rivers, and Port Arthur terminals, which we acquired from Valero in April 2016, September 2016, and November 2017, as further described in Note 2 of Notes to Consolidated Financial Statements. The increase in operating income was offset by a $21.1 million increase in “interest and debt expense, net of capitalized interest” as a result of incremental borrowings and a higher effective interest rate in 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 McKee, Meraux, and Three

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Rivers terminals for the periods prior to the dates we acquired these businesses from Valero and represent only the costs of operating the terminals. See Note 1 of 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 $34.2 million in 2017 compared to 2016 is due primarily to the operating results generated by our McKee, Meraux, Three Rivers, and Port Arthur terminals and our Red River crude system and Parkway pipeline in 2017. See Note 2 of Notes to Consolidated Financial Statements for discussion of our acquisitions.

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

OUTLOOK

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 a deficiency payment. Deficiency payments are applied as a credit for volumes transported on the applicable pipeline or terminal system in excess of its minimum volume commitment during the following four quarters. If it is remote that Valero will utilize these payments, the amount of the expected unused credits will be recognized as operating revenues in the period when that determination is made. 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 2018 generally consistent with historical levels.

Effective March 31, 2017, we entered into an agreement with Diamond Green Diesel Holdings, LLC (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 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 for DGD’s use of the assets.

On November 1, 2017, we acquired our Parkway pipeline and Port Arthur terminal from Valero for total consideration of $200.0 million and $308.0 million, respectively. See Note 2 of Notes to Consolidated Financial Statements for further discussion of these acquisitions. We expect our throughput volumes and revenues to increase in 2018 from the full year of operations of these assets.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance for the years ended December 31, 2017, 2016, and 2015. The narrative following these tables provides an analysis of our results of operations.

2017 Compared to 2016

Results of Operations

(in thousands, except per unit amounts)



	Year Ended December 31,
	2017			2016			Change
Operating revenues – related party	$	452,005		$	362,619		$	89,386
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below)	108,374			96,115			12,259
Depreciation expense	52,475			45,965			6,510
Other operating expenses	577			—			577
General and administrative expenses	15,549			15,965			(416		)
Total costs and expenses	176,975			158,045			18,930
Operating income	275,030			204,574			70,456
Other income, net	753			284			469
Interest and debt expense, net of capitalized interest	(36,015		)	(14,915		)	(21,100		)
Income before income tax expense	239,768			189,943			49,825
Income tax expense	1,335			1,112			223
Net income	238,433			188,831			49,602
Less: Net loss attributable to Predecessor	—			(15,422		)	15,422
Net income attributable to partners	238,433			204,253			34,180
Less: General partner’s interest in net income	49,113			23,553			25,560
Limited partners’ interest in net income	$	189,320		$	180,700		$	8,620

Net income per limited partner unit – basic and diluted:
Common units	$	2.77		$	2.85
Subordinated units	$	—		$	2.38

Weighted average limited partner units outstanding – basic and diluted:
Common units	68,220			48,817
Subordinated units	—			17,463

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Operating Highlights and Other Financial Information

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



	Year Ended December 31,
	2017		2016		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	100,631	$	78,451	$	22,180
Pipeline transportation throughput (BPD) ^(a)	964,198		829,269		134,929
Average pipeline transportation revenue per barrel ^(b)	$	0.29	$	0.26	$	0.03

Terminaling:
Terminaling revenues	$	347,996	$	283,628	$	64,368
Terminaling throughput (BPD)	2,889,361		2,265,150		624,211
Average terminaling revenue per barrel ^(b)	$	0.33	$	0.34	$	(0.01	)

Storage and other revenues	$	3,378	$	540	$	2,838

Total operating revenues – related party	$	452,005	$	362,619	$	89,386

Capital expenditures:
Maintenance	$	8,954	$	13,027	$	(4,073	)
Expansion	29,562		10,129		19,433
Total capital expenditures	38,516		23,156		15,360
Less: Capital expenditures attributable to Predecessor	—		3,394		(3,394		)
Capital expenditures attributable to Partnership	$	38,516	$	19,762	$	18,754

Other financial information:
Distribution declared per unit	$	1.8700	$	1.4965

Distribution declared:
Limited partner units – public	$	42,051	$	32,382
Limited partner units – Valero	86,503		67,560
General partner units – Valero	47,897		21,648
Total distribution declared	$	176,451	$	121,590

______________


(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 $89.4 million, or 25 percent, in 2017 compared to 2016. The increase was due primarily to the following:

•

Incremental throughput from acquired businesses and assets. We generated incremental terminaling revenues of $56.2 million in 2017 from our McKee, Meraux, Three Rivers, and Port Arthur terminals. The McKee terminal was acquired in April 2016, the Meraux and Three Rivers terminals were acquired in September 2016, and the Port Arthur terminal was acquired in November 2017. In addition, we generated incremental pipeline revenues of $14.6 million in 2017 from our Red River crude system and our Parkway pipeline, which were acquired in January 2017 and November 2017, respectively.


•	Higher throughput volumes. We experienced an 8 percent and 10 percent increase in volumes handled at our other terminals and pipeline systems, respectively, in 2017 compared to 2016. The increase in volumes had a favorable impact to our operating revenues of $15.8 million.


•	Operating revenues from our DGD rail loading facility. Our DGD rail loading facility, which was placed in service in May 2017, generated operating revenues of $2.8 million in 2017.

Cost of revenues (excluding depreciation expense reflected below) increased $12.3 million, or 13 percent, in 2017 compared to 2016. The increase was due primarily to operating expenses of $3.9 million related to our Parkway pipeline and Port Arthur terminal, which were acquired in November 2017; $2.2 million related to our Red River crude system, which was acquired in January 2017; and $2.0 million related to our DGD rail loading facility, which began operations in May 2017. We also incurred higher maintenance expense of $4.1 million at our Houston and Corpus Christi terminals and our Lucas and Collierville crude systems due primarily to inspection activity.

Depreciation expense increased $6.5 million, or 14 percent, in 2017 compared to 2016 due primarily to depreciation expense recognized on the assets that compose our Red River crude system, Parkway pipeline, and Port Arthur terminal, which were acquired in 2017.

Other operating expenses reflects the uninsured portion of our property damage losses and repair costs incurred in 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 $416,000, or 3 percent, in 2017 compared to 2016 due primarily to acquisition costs (legal and investment advisor fees) of $832,000 incurred in 2016 in connection with our acquisitions of the McKee, Meraux, and Three Rivers terminals. The decrease in acquisition costs in 2017 was partially offset by incremental costs of $319,000 related to the management fee charged to us by Valero in connection with acquired businesses and assets.

“Interest and debt expense, net of capitalized interest” increased $21.1 million in 2017 compared to 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 percent senior notes due December 2026 (Senior Notes). We used the proceeds of the Senior Notes to repay $494.0 million of outstanding borrowings under our revolving credit facility. The interest rate on the Senior Notes is higher than our revolving credit facility, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $8.9 million in 2017.

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•	Incremental borrowings in connection with acquisitions. In connection with the acquisition of the McKee, Meraux, Three Rivers, and Port Arthur terminals and the Parkway pipeline, we borrowed $729.0 million under our revolving credit facility. Interest expense on the incremental borrowings was approximately $6.1 million in 2017.


•	Higher interest rates in 2017. Borrowings on our revolving credit facility and subordinated credit agreements with Valero bear interest at variable rates. We incurred additional interest of $5.1 million in 2017 on these borrowings due to higher interest rates in 2017 compared to 2016.

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2016 Compared to 2015

Results of Operations

(in thousands, except per unit amounts)



	Year Ended December 31,
	2016			2015			Change
Operating revenues – related party	$	362,619		$	243,624		$	118,995
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below)	96,115			105,973			(9,858		)
Depreciation expense	45,965			45,678			287
General and administrative expenses	15,965			14,520			1,445
Total costs and expenses	158,045			166,171			(8,126		)
Operating income	204,574			77,453			127,121
Other income, net	284			223			61
Interest and debt expense, net of capitalized interest	(14,915		)	(6,113		)	(8,802		)
Income before income tax expense	189,943			71,563			118,380
Income tax expense	1,112			251			861
Net income	188,831			71,312			117,519
Less: Net loss attributable to Predecessor	(15,422		)	(60,566		)	45,144
Net income attributable to partners	204,253			131,878			72,375
Less: General partner’s interest in net income	23,553			6,069			17,484
Limited partners’ interest in net income	$	180,700		$	125,809		$	54,891

Net income per limited partner unit – basic and diluted:
Common units	$	2.85		$	2.12
Subordinated units	$	2.38		$	2.07

Weighted average limited partner units outstanding – basic and diluted:
Common units	48,817			31,222
Subordinated units	17,463			28,790

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Operating Highlights and Other Financial Information

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



	Year Ended December 31,
	2016		2015		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	78,451	$	81,435	$	(2,984	)
Pipeline transportation throughput (BPD) ^(a)	829,269		949,884		(120,615		)
Average pipeline transportation revenue per barrel ^(b)	$	0.26	$	0.23	$	0.03

Terminaling:
Terminaling revenues	$	283,628	$	161,649	$	121,979
Terminaling throughput (BPD)	2,265,150		1,340,407		924,743
Average terminaling revenue per barrel ^(b)	$	0.34	$	0.33	$	0.01

Storage and other revenues	$	540	$	540	$	—

Total operating revenues – related party	$	362,619	$	243,624	$	118,995

Capital expenditures:
Maintenance	$	13,027	$	10,828	$	2,199
Expansion	10,129		27,281		(17,152		)
Total capital expenditures	23,156		38,109		(14,953		)
Less: Capital expenditures attributable to Predecessor	3,394		29,632		(26,238		)
Capital expenditures attributable to Partnership	$	19,762	$	8,477	$	11,285

Other financial information:
Distribution declared per unit	$	1.4965	$	1.1975

Distribution declared:
Limited partner units – public	$	32,382	$	22,028
Limited partner units – Valero	67,560		51,566
General partner units – Valero	21,648		5,003
Total distribution declared	$	121,590	$	78,597

______________


(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 $119.0 million, or 49 percent, in 2016 compared to 2015. The increase was due primarily to the following:

•

Incremental terminaling throughput from businesses acquired from Valero. We experienced a 111 percent increase in terminaling revenues in 2016 compared to 2015 as a result of revenues generated from the operations of the McKee, Meraux, and Three Rivers terminals, which were acquired from Valero in 2016. The incremental throughput volumes at these terminals had a favorable impact to our operating revenues of $124.1 million in 2016.

•

Lower operating revenues at systems owned or acquired prior to 2015. We estimate that a decrease in throughput volumes at our other pipelines and terminals had an unfavorable impact to our operating revenues of approximately $5.1 million. The decrease is due primarily to a decrease of 25 percent in pipeline transportation throughput volumes and 21 percent in terminaling throughput volumes at our Port Arthur logistics system in 2016 compared to 2015. The decrease in volumes was primarily a result of planned turnaround activity at Valero’s Port Arthur refinery in September and October 2016, during which time the refinery was largely shut down. In addition, we experienced a decrease of 26 percent in pipeline transportation throughput volumes at our McKee crude system in 2016 compared to 2015 due to decreased crude oil production in the region. Average pipeline transportation revenue per barrel was higher in 2016 compared to 2015 due primarily to the recognition of $2.2 million of deferred revenue associated with unused minimum volume credits by Valero.

Cost of revenues (excluding depreciation expense reflected below) decreased $9.9 million, or 9 percent, in 2016 compared to 2015. The decrease was due primarily to lower maintenance expense of $4.7 million at our Corpus Christi terminals related to inspection activity in 2015. Additionally, waste handling costs at our Corpus Christi and St. Charles terminals decreased $2.3 million in 2016.

Depreciation expense increased $287,000, or 1 percent, in 2016 compared to 2015 due primarily to additional depreciation expense related to assets placed into service in the latter part of 2015 and 2016, including expansion and improvement projects at our Corpus Christi, Houston, Meraux, and St. Charles terminals, partially offset by $2.8 million in accelerated depreciation related to the retirement of certain assets of our McKee crude system in 2015.

General and administrative expenses increased $1.4 million, or 10 percent, in 2016 compared to 2015 due primarily to incremental costs of $843,000 related to the management fee charged to us by Valero as a result of additional administrative services provided to us in connection with our acquisitions from Valero in 2015 and 2016 and an increase of $470,000 in public company costs.

“Interest and debt expense, net of capitalized interest” increased $8.8 million in 2016 compared to 2015 due primarily to interest expense incurred on borrowings under our revolving credit facility and subordinated credit agreements with Valero entered into in connection with the acquisitions. Additionally, we issued the Senior Notes in December 2016 and used the proceeds to repay $494.0 million of outstanding borrowings under our revolving credit facility. The interest on the Senior Notes is higher than our revolving credit facility, thereby increasing the effective interest rate for 2016. See Notes 2 and 6 of Notes to Consolidated Financial Statements for further discussion. Interest expense on the incremental borrowings was $8.2 million in 2016.

Our income tax expense is associated with the Texas margin tax. During 2016, the relative amount of operating revenues we generated in Texas increased in connection with the acquisitions of the Corpus Christi, McKee, Meraux, and Three Rivers terminals. As a result, our income tax expense has increased.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

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

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”). We have sold common units having an aggregate value of $45.5 million under our ATM Program, resulting in $304.5 million remaining available as of December 31, 2017. See Note 10 of Notes to Consolidated Financial Statements for a description of the ATM Program.

Revolving Credit Facility

We have a $750.0 million senior unsecured revolving credit facility (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. As of December 31, 2017, we had $410.0 million of borrowings and no letters of credit outstanding under the Revolver. As a result, we had $340.0 million of available capacity. See Note 5 of Notes to Consolidated Financial Statements for a description of the Revolver.

Cash Flows Summary

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



	Year Ended December 31,
	2017			2016			2015
Cash flows provided by (used in):
Operating activities	$	288,931		$	229,894		$	108,376
Investing activities	(517,851		)	(126,732		)	(428,171		)
Financing activities	199,481			(112,454		)	163,999
Net decrease in cash and cash equivalents	$	(29,439	)	$	(9,292	)	$	(155,796	)

Cash Flows for the Year Ended December 31, 2017

Our operations generated $288.9 million of cash in 2017, driven primarily by net income of $238.4 million and noncash adjustments (primarily for depreciation expense) of $54.2 million, partially offset by unfavorable changes in working capital of $3.7 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in our working capital is further described in Note 13 of Notes to Consolidated Financial Statements and mainly resulted from:


•	an increase in receivables – related party of $9.6 million attributable primarily to billings related to our Red River crude system, Parkway pipeline, and the Port Arthur terminal, which were acquired in 2017; and

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•	a decrease in accounts payable – related party of $3.4 million due primarily to the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment agreement; partially offset by


•	an increase in accounts payable of $7.4 million attributable primarily to payables related to our Parkway pipeline, which was acquired in 2017; and


•	an increase in accrued interest payable of $1.3 million due primarily to interest expense incurred on the $380.0 million borrowed under the Revolver in connection with the acquisitions of the Parkway pipeline and the Port Arthur terminal.

The $288.9 million of cash generated by our operations, along with (i) $380.0 million of borrowings under the Revolver and (ii) $36.5 million in proceeds received in connection with unit issuances under our ATM Program, were used mainly to:


•	fund $462.5 million in acquisitions from Valero consisting of the Parkway pipeline and the Port Arthur terminal;


•	pay $161.3 million in cash distributions to limited partners and our general partner;


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


•	fund $38.5 million in capital expenditures.

Cash Flows for the Year Ended December 31, 2016

Our operations generated $229.9 million of cash in 2016, driven primarily by net income of $188.8 million and noncash adjustments (primarily for depreciation expense) of $47.0 million, partially offset by unfavorable changes in working capital of $6.0 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in our working capital is further described in Note 13 of Notes to Consolidated Financial Statements and mainly resulted from:


•	an increase in receivables – related party of $10.8 million attributable primarily to billings related to our newly acquired McKee, Meraux, and Three Rivers terminals; partially offset by


•	an increase in deferred revenue – related party of $3.4 million due to deficiency payments associated with minimum volume commitments.

The $229.9 million of cash generated by our operations, along with (i) $848.8 million in proceeds from the issuance of debt (including gross proceeds of $499.8 million from the issuance of our Senior Notes and $349.0 million of borrowings under the Revolver of as discussed in Note 5 of Notes to Consolidated Financial Statements), (ii) $14.9 million of net cash transferred from Valero related to the cash flows associated with our Predecessor, and (iii) $9.9 million in proceeds received in connection with our ATM Program, were used mainly to:


•	fund $480.0 million in acquisitions from Valero consisting of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business;


•	make debt repayments of $494.9 million, of which $494.0 million related to the Revolver;


•	pay $109.4 million in cash distributions to limited partners and our general partner;


•	fund $23.2 million in capital expenditures; and


•	pay $5.3 million in debt issuance and offering costs.

Cash Flows for the Year Ended December 31, 2015

Our operations generated $108.4 million of cash in 2015, driven primarily by net income of $71.3 million and noncash adjustments (primarily for depreciation expense) of $46.0 million, partially offset by unfavorable changes in working capital of $9.0 million. See “RESULTS OF OPERATIONS” for further

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discussion of our operations. The change in our working capital is further described in Note 13 of Notes to Consolidated Financial Statements and mainly resulted from:


•	an increase in receivables – related party of $15.6 million due primarily to activity related to our newly acquired Houston, St. Charles, and Corpus Christi terminals; partially offset by


•	an increase in accounts payable – related party of $6.0 million, also attributable primarily to activity related to our newly acquired terminals.

The $108.4 million of cash generated by our operations, along with (i) $755.0 million in proceeds from the issuance of debt ($555.0 million from the two subordinated credit agreements with Valero (Loan Agreements) in connection with businesses acquired in 2015 and borrowings under the Revolver of $200.0 million as discussed in Note 5 of Notes to Consolidated Financial Statements), (ii) $189.7 million in proceeds from the 2015 Offering (net of the underwriting discount), (iii) $77.3 million of net cash transferred from Valero related to the cash flows associated with our Predecessor, and (iv) $4.0 million from the issuance of general partner units, were used mainly to:


•	fund $966.2 million in acquisitions from Valero consisting of the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business;


•	make debt repayments of $211.2 million, of which $185.0 million related to the Loan Agreements and $25.0 million related to the Revolver;


•	pay $71.7 million in cash distributions to limited partners and our general partner;


•	fund $38.1 million in capital expenditures; and


•	pay $3.0 million in debt issuance and offering costs.

Capital Resources

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):



	Years Ended December 31,
	2017		2016		2015
Maintenance	$	8,954	$	13,027	$	10,828
Expansion (a)	29,562		10,129		27,281
Total capital expenditures	$	38,516	$	23,156	$	38,109

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

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Our capital expenditures in 2017 were primarily for:


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


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


•	the expansion and improvement of assets at our Corpus Christi and Meraux terminals.

Our capital expenditures in 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 expansion of assets at our Port Arthur products system and St. Charles terminal.

Our capital expenditures in 2015 were primarily for:


•	the expansion and improvement of assets at our Corpus Christi, Meraux, and Three Rivers terminals;


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


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

In addition to the above-mentioned capital expenditures, $41.4 million of capital projects were funded by Valero in 2017 primarily related to our St. Charles, Corpus Christi, Meraux, Three Rivers, Port Arthur, McKee, and Houston terminals. Valero agreed to fund these projects in connection with the acquisitions from Valero.

For 2018, we expect our capital expenditures to range from $35.0 million to $45.0 million. Our estimate consists of approximately $20.0 million to $25.0 million for maintenance capital expenditures and approximately $15.0 million to $20.0 million for expansion capital expenditures. We continuously evaluate our capital budget and make changes as conditions warrant. We anticipate that these capital expenditures will be funded from cash flows from operations. The foregoing capital expenditure estimate does not include any amounts related to strategic business acquisitions that may occur.

Distributions

On January 24, 2018, the board of directors of our general partner declared a distribution of $0.5075 per unit applicable to the fourth quarter of 2017, which equates to $50.1 million in total distributions to unitholders of record as of February 5, 2018. This quarterly distribution per unit is more than the minimum quarterly distribution of $0.2125 per unit.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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Contractual Obligations

A summary of our contractual obligations as of December 31, 2017 is shown in the table below (in thousands):



	Payments Due by Period
	2018		2019		2020		2021		2022		Thereafter		Total
Debt and notes payable – related party (a)	$	—	$	—	$	780,000	$	—	$	—	$	500,000	$	1,280,000
Operating lease obligations	14,097		14,289		14,258		14,215		14,214		301,606		372,679
Purchase obligations	65,780		65,780		65,780		65,780		65,780		555,639		884,539
Other long-term liabilities	—		—		—		—		—		1,203		1,203
Total	$	79,877	$	80,069	$	860,038	$	79,995	$	79,994	$	1,358,448	$	2,538,421

__________________


(a)	Excludes amounts related to unamortized discount and debt issuance costs. These items are further described in Note 5 of Notes to Consolidated Financial Statements.

Debt and Notes Payable – Related Party

Our debt and notes payable – related party are described in Note 5 of Notes to Consolidated Financial Statements.

Our Revolver and Loan Agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt by the ratings agencies, the cost of borrowings under our Revolver and Loan Agreements would increase. All of our ratings on our senior unsecured debt are at or above investment grade level as follows:



Rating Agency		Rating
Moody’s Investors Service		Baa3 (stable outlook)
Standard & Poor’s Ratings Services		BBB- (stable outlook)
Fitch Ratings		BBB- (stable outlook)

We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities and may be revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other rating. Any future reduction below investment grade or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.

Operating Lease Obligations

In connection with the acquisitions, we entered into lease and access agreements with Valero with respect to the land on which each terminal is located. See Note 3 of Notes to Consolidated Financial Statements for additional information regarding our agreements with Valero. Additionally, we have long-term operating lease commitments with third parties for land used in the storage and transportation of crude oil and refined petroleum products. Operating lease obligations include all operating leases that have initial or remaining noncancelable terms in excess of one year.

Purchase Obligations

A purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum, or variable price provisions, and (iii) the approximate timing of the transaction. The purchase obligation

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amounts shown in the table above include purchase obligations under our amended and restated (i) omnibus agreement, (ii) services and secondment agreement, and (iii) lease and access agreement with Valero. See Note 3 of Notes to Consolidated Financial Statements for additional information regarding our agreements with Valero. Our purchase obligations are determined based on contractual, fixed-rate fees for periods that are reasonably assured based on current market conditions.

Other Long-term Liabilities

Our other long-term liabilities consist primarily of asset retirement obligations as described in Note 6 of Notes to Consolidated Financial Statements, and noncurrent deferred tax liabilities. Because the noncurrent deferred tax liabilities are not contractual commitments, we have excluded them from the table above. For our asset retirement obligations, we made our best estimate of expected payments based on the information available as of December 31, 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 FERC under the ICA and EPAct. Our pipelines and terminal operations are also subject to safety regulations adopted by the DOT, as well as to state regulations. For more information on federal and state regulations affecting our business, please read Item 1., “Business—Rate and Other Regulations—FERC and Common Carrier Regulations.”

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.

Future expenditures may be required to comply with federal, state, and local laws and regulations for our various sites, including our pipeline and terminal systems. The impact of these legislative and regulatory developments, if enacted or adopted, could result in increased compliance costs and additional operating restrictions on our business, each of which could have an adverse impact on our financial position, results of operations, and liquidity. For a further description about future expenditures that may be required to comply with these requirements, please read Item 1., “Business—Environmental Matters.”

If these expenditures, as with all costs, are not ultimately reflected in the tariffs and other fees we receive for our services, our operating results will be adversely affected. We believe that substantially all of our competitors must comply with similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including, but not limited to, the age and location of its operating facilities.

We accrue for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. New or expanded environmental requirements, which could increase our environmental costs, may arise in the future. We believe we comply with all legal requirements regarding the environment, but since not all of them are fixed or presently determinable (even under existing legislation)

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and may be affected by future legislation or regulations, it is not possible to predict all of the ultimate costs of compliance, including remediation costs that may be incurred and penalties that may be imposed.

NEW ACCOUNTING PRONOUNCEMENTS

As discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements became effective January 1, 2018, or will become effective in the future. The effect on our financial statements upon adoption of these pronouncements is discussed in the above-referenced note.

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. The following summary provides further information about our critical accounting policies that involve critical accounting estimates, and should be read in conjunction with Note 1 of Notes to Consolidated Financial Statements, which summarizes our significant accounting policies. The following accounting policies involve estimates that are considered critical due to the level of subjectivity and judgment involved, as well as the impact on our financial position and results of operations. We believe that all of our estimates are reasonable.

Depreciation

We calculate depreciation expense on a straight-line basis over the estimated useful lives of the related property and equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. Changes in the estimated useful lives of the property and equipment could have a material adverse effect on our results of operations.

Asset Retirement Obligations

We have asset retirement obligations with respect to certain of our pipelines and terminals that we are required to perform under law or contract once the asset is retired from service, and we have recognized obligations to restore certain leased properties to substantially the same condition as when such property was delivered to us or to its improved condition as prescribed by the lease agreements. Estimating the future asset removal costs necessary for this accounting calculation is difficult. Most of these removal obligations are years in the future and the contracts often have vague descriptions of what removal practices and criteria must be met when the removal event actually occurs. Asset removal technologies and costs, regulatory, and other compliance considerations, expenditure timing, and other inputs into valuation of the obligation, including discount and inflation rates, are also subject to change.

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ITEM 7A. 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.



	December 31, 2017
	Expected Maturity Dates
	2018			2019			2020			2021			2022			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	523,800
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Variable rate	$	—		$	—		$	780,000		$	—		$	—		$	—		$	780,000		$	780,000
Average interest rate	—		%	—		%	2.87		%	—		%	—		%	—		%	2.87		%



	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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero Energy Partners LP. Our management evaluated the effectiveness of Valero Energy Partners LP’s internal control over financial reporting as of December 31, 2017. In its evaluation, management used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management believes that as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 68 of this report.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The unitholders of Valero Energy Partners LP and

the board of directors of Valero Energy Partners GP LLC:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Valero Energy Partners LP and subsidiaries (the Partnership) as of December 31, 2017 and 2016, the related consolidated statements of income, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2018 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Partnership’s auditor since 2013.

San Antonio, Texas

February 22, 2018

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The unitholders of Valero Energy Partners LP and

the board of directors of Valero Energy Partners GP LLC:

Opinion on Internal Control Over Financial Reporting

We have audited Valero Energy Partners LP’s (the Partnership) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2017 and 2016, the related consolidated statements of income, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the

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company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

San Antonio, Texas

February 22, 2018

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VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(in thousands)



	December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	42,052		$	71,491
Receivables – related party	46,496			36,889
Receivables	781			1,682
Prepaid expenses and other	720			997
Total current assets	90,049			111,059
Property and equipment, at cost	1,969,233			1,216,288
Accumulated depreciation	(552,817		)	(351,208		)
Property and equipment, net	1,416,416			865,080
Deferred charges and other assets, net	10,887			3,118
Total assets	$	1,517,352		$	979,257
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable	$	18,633		$	10,652
Accounts payable – related party	3,944			7,348
Accrued liabilities	1,007			870
Accrued liabilities – related party	202			192
Accrued interest payable	2,558			1,280
Accrued interest payable – related party	911			47
Taxes other than income taxes payable	5,141			2,457
Deferred revenue – related party	926			3,525
Total current liabilities	33,322			26,371
Debt	905,283			525,355
Notes payable – related party	370,000			370,000
Other long-term liabilities	2,950			1,707
Commitments and contingencies
Partners’ capital:
Common unitholders – public (22,487,586 and 21,738,692 units outstanding)	596,047			548,619
Common unitholder – Valero (46,768,586 and 45,687,271 units outstanding)	(382,652		)	(482,197		)
General partner – Valero (1,413,391 and 1,375,721 units outstanding)	(7,598		)	(10,598		)
Total partners’ capital	205,797			55,824
Total liabilities and partners’ capital	$	1,517,352		$	979,257

See Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per unit amounts)



	Year Ended December 31,
	2017			2016			2015
Operating revenues – related party	$	452,005		$	362,619		$	243,624
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below) (a)	108,374			96,115			105,973
Depreciation expense	52,475			45,965			45,678
Other operating expenses	577			—			—
General and administrative expenses (b)	15,549			15,965			14,520
Total costs and expenses	176,975			158,045			166,171
Operating income	275,030			204,574			77,453
Other income, net	753			284			223
Interest and debt expense, net of capitalized interest (c)	(36,015		)	(14,915		)	(6,113		)
Income before income tax expense	239,768			189,943			71,563
Income tax expense	1,335			1,112			251
Net income	238,433			188,831			71,312
Less: Net loss attributable to Predecessor	—			(15,422		)	(60,566		)
Net income attributable to partners	238,433			204,253			131,878
Less: General partner’s interest in net income	49,113			23,553			6,069
Limited partners’ interest in net income	$	189,320		$	180,700		$	125,809

Net income per limited partner unit – basic and diluted:
Common units	$	2.77		$	2.85		$	2.12
Subordinated units	$	—		$	2.38		$	2.07

Weighted-average limited partner units outstanding – basic and diluted:
Common units	68,220			48,817			31,222
Subordinated units	—			17,463			28,790

Cash distribution declared per unit	$	1.8700		$	1.4965		$	1.1975

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	$	67,067		$	61,649		$	55,649
(b) General and administrative expenses – related party	$	12,858		$	12,539		$	11,695
(c) Interest and debt expense – related party	$	9,658		$	6,608		$	3,190

See Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in thousands)



	Partnership
	Common Unitholders Public			Common Unitholder Valero			Subordinated Unitholder Valero			General Partner Valero			Net Investment			Total
Balance as of December 31, 2014	$	374,954		$	58,844		$	146,804		$	4,617		$	484,375		$	1,069,594
Net income (loss):
Attributable to Predecessor	—			—			—			—			(60,566		)	(60,566		)
Attributable to partners	37,183			28,548			60,078			6,069			—			131,878
Net transfers from Valero Energy Corporation	—			—			—			—			70,334			70,334
Allocation of Valero Energy Corporation’s net investment in acquisitions	—			111,433			267,700			11,011			(390,144		)	—
Acquisitions of businesses from Valero Energy Corporation:
Cash paid for carrying value of acquired businesses	—			(111,433		)	(267,700		)	(11,011		)	—			(390,144		)
Cash paid in excess of carrying value of acquired businesses	—			(52,506		)	(505,985		)	(17,585		)	—			(576,076		)
Unit issuance	188,915			—			—			4,011			—			192,926
Noncash contributions from Valero Energy Corporation	—			8,898			18,063			787			—			27,748
Cash distributions to unitholders and distribution equivalent right payments	(19,736		)	(15,354		)	(32,921		)	(3,704		)	—			(71,715		)
Unit-based compensation	173			—			—			—			—			173
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	58,688			76,690			45,322			23,553			—			204,253
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		)	—
Acquisitions of businesses from Valero Energy Corporation:
Cash paid for carrying value of acquired businesses	—			(67,800		)	(32,758		)	(3,049		)	—			(103,607		)
Cash paid in excess of carrying value of acquired businesses	—			(246,759		)	(120,309		)	(9,325		)	—			(376,393		)
Conversion of subordinated units	—			(406,374		)	406,374			—			—			—
Unit issuance	11,091			—			—			198			—			11,289
Transfers to (from) partners	(72,452		)	76,584			—			(4,132		)	—			—
Noncash contributions from Valero Energy Corporation	—			22,730			12,084			918			—			35,732
Cash distributions to unitholders and distribution equivalent right payments	(30,393		)	(33,498		)	(29,510		)	(16,005		)	—			(109,406		)
Unit-based compensation	196			—			—			—			—			196
Balance as of December 31, 2016	548,619			(482,197		)	—			(10,598		)	—			55,824
Net income attributable to partners	62,014			127,306			—			49,113			—			238,433
Cash paid in excess of the carrying value of assets acquired from Valero Energy Corporation	—			(53,045		)	—			(1,573		)	—			(54,618		)
Unit issuance	33,428			—			—			748			—			34,176
Transfers to (from) partners	(8,773		)	15,957			—			(7,184		)	—			—
Noncash contributions from Valero Energy Corporation	—			90,666			—			2,341			—			93,007
Cash distributions to unitholders and distribution equivalent right payments	(39,507		)	(81,339		)	—			(40,445		)	—			(161,291		)
Unit-based compensation	266			—			—			—			—			266
Balance as of December 31, 2017	$	596,047		$	(382,652	)	$	—		$	(7,598	)	$	—		$	205,797

See Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Year Ended December 31,
	2017			2016			2015
Cash flows from operating activities:
Net income	$	238,433		$	188,831		$	71,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	52,475			45,965			45,678
Changes in current assets and current liabilities	(3,730		)	(5,956		)	(8,973		)
Changes in deferred charges and credits and other operating activities, net	1,753			1,054			359
Net cash provided by operating activities	288,931			229,894			108,376
Cash flows from investing activities:
Capital expenditures	(38,516		)	(23,156		)	(38,109		)
Acquisition of undivided interest in Red River crude system	(71,793		)	—			—
Acquisitions from Valero Energy Corporation	(407,844		)	(103,607		)	(390,144		)
Other investing activities, net	302			31			82
Net cash used in investing activities	(517,851		)	(126,732		)	(428,171		)
Cash flows from financing activities:
Proceeds from debt borrowings	380,000			349,000			200,000
Proceeds from issuance of senior notes	—			499,795			—
Proceeds from notes payable – related party	—			—			555,000
Repayment of debt and capital lease obligations	—			(494,913		)	(26,200		)
Repayment of notes payable – related party	—			—			(185,000		)
Payment of debt issuance costs	(492		)	(4,462		)	(2,322		)
Proceeds from issuance of common units	35,728			9,724			189,683
Proceeds from issuance of general partner units	748			198			4,011
Payment of offering costs	(594		)	(883		)	(666		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets	(54,618		)	(376,393		)	(576,076		)
Cash distributions to unitholders and distribution equivalent right payments	(161,291		)	(109,406		)	(71,715		)
Net transfers from Valero Energy Corporation	—			14,886			77,284
Net cash provided by (used in) financing activities	199,481			(112,454		)	163,999
Net decrease in cash and cash equivalents	(29,439		)	(9,292		)	(155,796		)
Cash and cash equivalents at beginning of year	71,491			80,783			236,579
Cash and cash equivalents at end of year	$	42,052		$	71,491		$	80,783

See Notes to Consolidated Financial Statements.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Description of Business

As used in this report, the terms “Partnership,” “we,” “our,” or “us” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References to our “general partner” refer to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation. References in this report to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.

We are a master limited partnership formed by Valero in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. 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 consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission.

Acquisitions from Valero

Certain of our acquisitions from Valero, as described in Note 2, were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, we recorded these business 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 the historical results of the transferred businesses 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 LLC (Parkway Pipeline) and the Port Arthur terminal (defined in Note 2) from Valero on November 1, 2017 were accounted for as transfers of assets between entities under

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the common control of Valero. Accordingly, we recorded these asset acquisitions on our balance sheet at Valero’s carrying value as of the acquisition date, and our prior period financial statements and financial information were not retrospectively adjusted for these acquisitions.

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 prior year amounts have been reclassified to conform to the 2017 presentation.

Significant Accounting Policies

Principles of Consolidation

Our consolidated financial statements include the accounts of the Partnership, our subsidiaries, and our Predecessor. All intercompany items and transactions have been eliminated.

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.

Cash Equivalents

Our cash equivalents are highly liquid investments that have a maturity of three months or less when acquired.

Receivables – Related Party

Receivables – related party include trade receivables from Valero for transportation and terminaling services provided under various agreements with Valero, as more fully described in Note 3. These receivables are recorded at the original invoice amount.

Property and Equipment

The cost of property and equipment purchased or constructed, including betterments of property and equipment, is capitalized. However, the cost of repairs to and normal maintenance of property and equipment is expensed when incurred. Betterments of property and equipment are those that extend the useful lives of the property and equipment or improve the safety of our operations. The cost of property and equipment constructed includes interest and certain overhead costs allocable to the construction activities. Property and equipment also includes our undivided interest in certain assets.

When property and equipment are retired or replaced, the cost and related accumulated depreciation are eliminated, with any gain or loss reflected in depreciation expense, unless such amounts are reported separately due to materiality.

Depreciation of property and equipment is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset.

Impairment of Assets

Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.

Asset Retirement Obligations

We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.

Environmental Matters

Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.

Net Investment

Net investment represents Valero’s historical investment in our Predecessor, its accumulated net earnings after taxes, and the net effect of transactions and allocations between our Predecessor and Valero. There were no terms of settlement or interest charges associated with the net investment balance.

Revenue Recognition

We generate operating revenues by providing fee-based transportation and terminaling services to transport and store crude oil and refined petroleum products using our pipelines and terminals under long-term commercial agreements (defined in Note 3). Operating revenues are recognized upon completion of the transportation or terminaling service. Certain of these commercial agreements are considered operating leases under U.S. GAAP. Lease revenue is recognized over the lease term and contingent lease revenue is recognized after minimum monthly volume commitment requirements on these leases have been met.

As further described in Note 3, certain of our commercial agreements contain minimum volume commitments. Under these commercial agreements, if our customer fails to transport its minimum throughput volumes during any quarter, then the customer will pay us a deficiency payment equal to the volume of the deficiency multiplied by the contractual rate then in effect. The deficiency payment is initially recorded as deferred revenue – related party on our balance sheets.

Our customer may apply the amount of any such deficiency payments as a credit for volumes transported on the applicable pipeline or terminal system in excess of its minimum volume commitment during the following four quarters under the terms of the applicable agreement. We recognize operating revenues for the deficiency payments when credits are used for volumes transported in excess of minimum volume commitments. If we determine, based on all available information, that it is remote that our customer will utilize these payments, the amount of the expected unused credits will be recognized as operating revenues in the period when that determination is made. The use or recognition of the credits is a reduction to deferred revenue – related party.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes

Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these financial statements, except for state taxes that apply to partnerships, specifically the margin tax in Texas. Our Predecessor’s taxable income was included in the consolidated U.S. federal income tax returns of Valero and in certain consolidated state income tax returns.

Income taxes are accounted for under the asset and liability method, as if we were a separate taxpayer rather than a member of Valero’s consolidated tax return. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.

We classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.

Net Income per Limited Partner Unit

Basic and diluted net income per limited partner unit is determined pursuant to the two-class method for master limited partnerships as further described in Note 9.

Comprehensive Income

We have not reported comprehensive income due to the absence of items of other comprehensive income in the years presented.

Segment Reporting

Our operations consist of one reportable segment. All of our operations are conducted and all of our assets are located in the U.S.

Financial Instruments

Our financial instruments include cash and cash equivalents, receivables, receivables – related party, accounts payable, accounts payable – related party, debt, and notes payable – related party. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 14.

Business Combinations

We adopted the provisions of Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” issued by the Financial Accounting Standards Board (FASB), on January 1, 2017. This ASU provides a more robust framework to evaluate whether transactions should be accounted for as acquisitions (dispositions) of assets or businesses. Our adoption of this ASU resulted in the acquisitions of Parkway Pipeline and the Port Arthur terminal being accounted for as acquisitions of assets. See further discussion of these acquisitions in Note 2. In addition, more of our future acquisitions may be accounted for as acquisitions of assets in accordance with this ASU.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Pronouncements Adopted on January 1, 2018

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 adopted this standard on January 1, 2018, and it will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. We generate operating revenues by providing fee-based transportation and terminaling services to transport and store crude oil and refined petroleum products using our pipelines and terminals under long-term commercial agreements. Revenues from contracts with customers are recognized over time as our performance obligation is satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for providing the service. Certain of our commercial agreements are considered operating leases under U.S. GAAP. The scope of this new standard 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 but will be reflected in a separate revenue line item on our statements of income.

We adopted this new standard on January 1, 2018 using the modified retrospective method, as permitted by the standard. Under this 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. Because the adoption of this standard did not materially impact the manner in which we recognize revenues, we will not make such an adjustment to partners’ capital. We continue to develop our revenue disclosures and have enhanced our accounting systems to enable the preparation of such disclosures.

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 year of adoption. The adoption of this ASU effective January 1, 2018 did not affect our financial position nor will it affect our results of operations, but it will result in revised disclosures.

Accounting Pronouncements Not Yet Adopted

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. We are enhancing our contracting and lease evaluation systems and related processes, and we are developing a new lease accounting system to capture our leases and support the required disclosures. During 2018, we will continue to monitor the adoption process to ensure compliance with the accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, and we will make modifications to the related procurement and

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payment processes. We anticipate this standard will have a material impact on our financial position, but we do not expect adoption to have a material impact on our results of operations or liquidity. While we continue to assess potential impacts of the standard, we currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases.


2.	ACQUISITIONS

In connection with the following acquisitions, we entered into various agreements with Valero, including additional schedules to our commercial agreements, an amended and restated omnibus agreement, an amended and restated services and secondment agreement, and lease agreements. See Note 3 for a summary of the terms of these agreements.

Acquisitions in 2017

Red River Crude System

On January 18, 2017, we acquired a 40 percent undivided interest in (i) the Hewitt segment of Plains All American Pipeline, L.P.’s (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, which we funded with available cash on hand. This acquisition was accounted for as an acquisition of assets.

The Hewitt segment consists of an approximately 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.

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.

Parkway Pipeline

On November 1, 2017, we acquired Parkway Pipeline, a subsidiary of Valero, that owns and operates an approximately 140-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. This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.

Port Arthur Terminal

On November 1, 2017, we 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

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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. This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.

Acquisitions in 2016

McKee Terminal Services Business

On 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 a transfer of a business between entities under the common control of Valero. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

Meraux and Three Rivers Terminal Services Business

On 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 a transfer of a business between entities under the common control of Valero. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

Acquisitions in 2015

Houston and St. Charles Terminal Services Business

On March 1, 2015, we acquired from Valero two subsidiaries that own and operate crude oil, intermediates, and refined petroleum products terminals supporting Valero’s Houston and St. Charles Refineries for total consideration of $671.2 million, which consisted of (i) a cash distribution of $571.2 million and (ii) the issuance of 1,908,100 common units and 38,941 general partner units to Valero having an aggregate value of $100.0 million. We funded the cash distribution to Valero with $211.2 million of our cash on hand, $200.0 million of borrowings under our revolving credit facility, and $160.0 million of proceeds from a subordinated credit agreement with Valero. See Note 5 for further discussion of the borrowings under our revolving credit facility and subordinated credit agreement. This acquisition was accounted for as a transfer of a business between entities under the common control of Valero. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

Corpus Christi Terminal Services Business

On October 1, 2015, we acquired from Valero two subsidiaries that own and operate crude oil, intermediates, and refined petroleum products at terminals supporting Valero’s Corpus Christi East and West Refineries for total consideration of $465.0 million, which consisted of (i) a cash distribution of $395.0 million and (ii) the issuance of 1,570,513 common units and 32,051 general partner units to Valero having an aggregate value of $70.0 million. We funded the cash distribution to Valero with $395.0 million of proceeds from a

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

subordinated credit agreement with Valero. See Note 5 for further discussion of the borrowings under our subordinated credit agreement. This acquisition was accounted for as a transfer of a business between entities under the common control of Valero. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.


3.	RELATED-PARTY AGREEMENTS AND TRANSACTIONS

Predecessor Transactions

Our Predecessor was part of the consolidated operations of Valero and all of our operating revenues were derived from transactions with Valero. The crude oil and refined petroleum products pipeline transportation and terminaling services we provided to Valero were settled through net parent investment, and payables and receivables related to these transactions were included as a component of net investment.

Prior to the dates of each of our business acquisitions from Valero, our operating and general and administrative expenses included charges to our Predecessor for the management of our operations and the allocation of certain overhead and shared services expenses by Valero. These charges and allocations included such items as management oversight, information technology, legal, human resources, and other financial and administrative services. These allocations do not fully reflect the expenses that would have been incurred had we been a stand-alone limited partnership. Our management believes the charges allocated to our Predecessor were a reasonable reflection of the utilization of services provided, but they cannot be presumed to be carried out on an arm’s-length basis as the requisite conditions of competitive, free-market dealings may not have existed.

Agreements with Valero

Commercial Agreements

We have transportation services agreements and a terminal services agreement (collectively, the commercial agreements) with Valero. Under these commercial agreements, we provide transportation and terminaling services to Valero and Valero pays us for minimum quarterly throughput volumes of crude oil and refined petroleum products, regardless of whether such volumes are physically delivered by Valero in any given quarter. In connection with the IPO and subsequent acquisitions, we entered into schedules under these commercial agreements. Each schedule generally has an initial term of ten years, provides Valero an option to renew for one additional five-year term, and contains minimum throughput requirements and inflation escalators.

Effective March 31, 2017, we entered into a commercial agreement with Diamond Green Diesel Holdings, LLC (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. The agreement has an initial term that ends on June 30, 2033. The agreement contains minimum commitments for DGD’s use of the assets.

Amended and Restated Omnibus Agreement

We have an amended and restated omnibus agreement with Valero, certain of its subsidiaries, and our general partner that addresses our payment of an annual administrative fee and our obligation to reimburse Valero for certain direct or allocated costs and expenses incurred by Valero on our behalf. This agreement also

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addresses, but is not limited to, indemnification rights of Valero and us for certain environmental and other liabilities related to our assets. As of December 31, 2017, the annual administrative fee was $13.2 million.

So long as Valero controls our general partner, the amended and restated omnibus agreement will remain in full force and effect. If Valero ceases to control our general partner, either party may terminate the amended and restated omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.

Amended and Restated Services and Secondment Agreement

Under the terms of an amended and restated services and secondment agreement, including its amended and restated exhibits, employees of Valero are seconded to our general partner to provide operational and maintenance services for certain of our pipelines and terminals, and we reimburse our general partner for these costs. During their period of secondment, the seconded employees are under the management and supervision of our general partner.

This agreement has an initial term of ten years from the Service Date (as described in the agreement) with respect to each acquisition and will automatically extend for successive renewal terms of one year each, unless terminated by either party upon at least 30 days’ prior written notice before the end of the initial term or any renewal term. In addition, our general partner may terminate the agreement or reduce the level of services under the agreement at any time upon 30 days’ prior written notice.

Lease Agreements

We have lease agreements with Valero with respect to the land on which certain terminals are located. Generally, each lease agreement has an initial term of ten years with four automatic successive renewal periods of five years each. Either party may terminate each lease agreement after the initial term by providing written notice. We also have a ground lease agreement with an initial term of twenty years and no renewal periods. Initial base rent under these lease agreements is subject to annual inflation escalators, and we are required to pay Valero a customary expense reimbursement for taxes, utilities, and similar costs incurred by Valero related to the leased premises. See Note 7 for further discussion about our lease commitments with Valero.

Tax Sharing Agreement

Under our tax sharing agreement with Valero, we are required to reimburse Valero for our share of state and local income and other taxes incurred by Valero as a result of our tax items and attributes being included in a combined or consolidated state tax return filed by Valero with respect to taxable periods including or beginning on or after the closing date of the IPO. The amount of any such reimbursement will be limited to any entity-level tax that we would have paid directly had we not been included in a combined group with Valero. While Valero may use its tax attributes to cause its combined or consolidated group, of which we may be a member for this purpose, to owe no tax, we are nevertheless required to reimburse Valero for the tax we would have owed had the attributes not been available or used for our benefit, even though Valero had no cash expense for that period.

Subordinated Credit Agreements

We have subordinated credit agreements with Valero as further described in Note 5.

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Summary of Transactions

Operating Revenues

Operating revenues – related party disaggregated by activity type were as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Pipeline transportation revenues	$	100,631	$	78,451	$	81,435
Terminaling revenues	347,996		283,628		161,649
Storage and other revenues	3,378		540		540
Total operating revenues – related party	$	452,005	$	362,619	$	243,624

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):



	Year Ended December 31,
	2017		2016		2015
Minimum rental revenues	$	292,034	$	232,211	$	128,468
Contingent rental revenues	59,498		41,519		22,949
Total lease revenues	$	351,532	$	273,730	$	151,417

As of December 31, 2017, future minimum rentals to be received related to these noncancelable commercial agreements were as follows (in thousands):



2018	$	359,842
2019	359,842
2020	360,828
2021	359,842
2022	359,842
Thereafter	2,899,476
Total minimum rental payments	$	4,699,672

Related Party Expenses

The expenses incurred for services or financing provided to us by Valero are reflected in the supplemental information disclosure on our statements of income.

Insurance Recoveries

During 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

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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. For the year ended December 31, 2017, we recognized $2.7 million of insurance recoveries, which were recorded as a reduction to other operating expenses. As of December 31, 2017, we had an $828,000 receivable from Valero related to these property damage claims that was included in receivables – related party.

Net Investment

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



	Year Ended December 31,
	2017		2016		2015
Net transfers from Valero per statements of partners’ capital	$	—	$	15,030	$	70,334
Less: Noncash transfers from (to) Valero	—		144		(6,950		)
Net transfers from Valero per statements of cash flows	$	—	$	14,886	$	77,284

See Note 13 for additional information related to our noncash transfers from (to) Valero.

Concentration Risk

All of our related party balances resulted from transactions with Valero. Therefore, we are subject to the business risks associated with Valero’s business.

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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. The increases in property and equipment as of December 31, 2017 were primarily due to the asset acquisitions as described in Note 2.

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



	December 31, 2017
	Non-Leased Assets			Assets Leased to Valero			Total
Land	$	4,672		$	—		$	4,672
Pipelines and related assets	225,184			385,855			611,039
Terminals and related assets	134,362			1,162,718			1,297,080
Other	14,019			—			14,019
Construction in progress	42,423			—			42,423
Property and equipment, at cost	420,660			1,548,573			1,969,233
Accumulated depreciation	(127,136		)	(425,681		)	(552,817		)
Property and equipment, net	$	293,524		$	1,122,892		$	1,416,416



	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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5.	DEBT AND NOTES PAYABLE – RELATED PARTY

Debt

Debt, at stated values, consisted of the following (in thousands):



	Final Maturity	December 31,
	Final Maturity	2017			2016
Revolving credit facility	2020	$	410,000		$	30,000
Senior Notes, 4.375%	2026	500,000			500,000
Net unamortized discount and debt issuance costs		(4,717		)	(4,645		)
Total debt		$	905,283		$	525,355

Revolving Credit Facility

Outstanding borrowings under the Revolver bear interest, at our option, at either (a) the adjusted LIBO rate (as defined in the Revolver) for the applicable interest period in effect from time to time plus the applicable margin or (b) the alternate base rate (as defined in the Revolver) plus the applicable margin. As of December 31, 2017 and 2016, the variable rate was 2.875 percent and 2.3125 percent, respectively. Accrued interest is payable in arrears on each Interest Payment Date (as defined in the Revolver) and on the maturity date. The Revolver also requires payments for customary fees, including commitment fees, letter of credit participation fees, and administrative agent fees.

The Revolver contains certain restrictive covenants, including a covenant that requires us to maintain a ratio of total debt to EBITDA (as defined in the Revolver) for the prior four fiscal quarters of not greater than 5.0 to 1.0 as of the last day of each fiscal quarter (5.5 to 1.0 during the specified period following certain acquisitions). The Revolver contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for an agreement of this type that could, among other things, limit our ability to pay distributions to our unitholders. As a result of the Partnership obtaining an investment grade rating with respect to the issuance of its senior notes (described below) in December 2016, our directly owned subsidiary, Valero Partners Operating Co. LLC, was released of its guarantee under the Revolver.

During the year ended December 31, 2017, we borrowed $118.0 million and $262.0 million under the Revolver in connection with the acquisitions of Parkway Pipeline and the Port Arthur terminal, respectively, as described in Note 2.

During the year ended December 31, 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, as described in Note 2, and repaid $494.0 million under the Revolver from proceeds received on the issuance of the senior notes described below.

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During the year ended December 31, 2015, we borrowed $200.0 million under the Revolver in connection with the acquisition of the Houston and St. Charles Terminal Services Business as described in Note 2, and we repaid $25.0 million under the Revolver.

As of December 31, 2017 and 2016, we had no letters of credit outstanding and we incurred no debt issuance costs in connection with the Revolver.

Senior Notes

During the year ended December 31, 2016, we issued in a public offering $500.0 million aggregate principal amount of our 4.375 percent Senior Notes due December 15, 2026 (Senior Notes). Gross proceeds from this debt issuance totaled $499.8 million before deducting the underwriting discount and other debt issuance costs totaling $4.5 million. Interest is payable semi-annually on June 15 and December 15.

The Senior Notes are unsecured and contain various customary restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to create or permit to exist liens, or to enter into any sale and leaseback transactions, with respect to principal properties, and limit our ability to merge or consolidate with any other entity or transfer or dispose of all or substantially all of our assets. These covenants will be subject to a number of important qualifications and limitations. The Senior Notes are not currently guaranteed by any of our subsidiaries. If in the future any of our subsidiaries becomes a borrower or guarantor under, or grants any lien to secure any obligations pursuant to, the Revolver, then we will cause such subsidiary to guarantee the Senior Notes.

Notes Payable – Related Party

During 2015, we entered into two subordinated credit agreements with Valero (the Loan Agreements) under which we borrowed $160.0 million and $395.0 million (collectively, the loans) to finance a portion of the acquisitions of the Houston and St. Charles Terminal Services Business and the Corpus Christi Terminal Services Business, respectively, as described in Note 2. The loans mature on March 1 and October 1, 2020, respectively, and may be prepaid at any time without penalty. We are not permitted to reborrow amounts. The loans bear interest at the LIBO Rate (as defined in the Loan Agreements) plus the applicable margin. As of December 31, 2017 and 2016, this variable rate was 2.86069 percent and 2.27 percent, respectively. Accrued interest is payable in arrears on each Interest Payment Date (as defined in the Loan Agreements) and on each maturity date. As a result of obtaining an investment grade rating with respect to the issuance of our Senior Notes in December 2016, our directly owned subsidiary, Valero Partners Operating Co. LLC, was released of its guarantee under the Loan Agreements.

There was no activity under the Loan Agreements for the years ended December 31, 2017 and 2016. During the year ended December 31, 2015, we paid down $185.0 million under one of the loans maturing on October 1, 2020. The outstanding balance of these Loan Agreements was $370.0 million as of December 31, 2017 and 2016.

The payment of amounts owed under the Loan Agreements are subordinated to our obligations under our Revolver with third-party lenders and our Senior Notes. The Loan Agreements contain customary terms regarding covenants, representations, default, and remedies, including covenants that limit the creation of liens, the incurrence of debt by us or our subsidiaries, the payment of distributions, and the entry into securitization transactions, sale/leaseback transactions, certain restrictive agreements, consolidations, mergers, and the sale of all or substantially all of our assets. The Loan Agreements also include covenants that require, as of the last day of each fiscal quarter, the ratio of Consolidated Total Debt (as defined in the

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Loan Agreements) to Consolidated EBITDA (as defined in the Loan Agreements) for the four-quarter period ending on such day not to exceed 5.0 to 1.0 (or 5.5 to 1.0 during a specified acquisition period).

Other Disclosures

Interest and debt expense, net of capitalized interest was as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Interest and debt expense incurred	$	36,634	$	14,997	$	6,144
Less: Capitalized interest	619		82		31
Interest and debt expense, net of capitalized interest	$	36,015	$	14,915	$	6,113

Principal maturities of our debt obligations and notes payable – related party as of December 31, 2017 were $780.0 million in 2020 and $500.0 million in 2026.


6.	ASSET RETIREMENT OBLIGATIONS

We have asset retirement obligations with respect to certain of our leased pipelines and terminals that require us to perform under law or contract once the asset is retired from service, and we have recognized obligations to restore these leased properties to substantially the same condition as when such property was delivered to us or to its improved condition as prescribed by the lease agreements. With respect to all other property and equipment, it is our practice and current intent to maintain these other property assets and continue to make improvements as warranted. As a result, we believe that these other property assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time; therefore, no asset retirement obligations have been recorded for these other property assets as of December 31, 2017 and 2016. We will recognize a liability at such time when sufficient information exists to estimate a range of potential settlement dates that is needed to employ a present value technique to estimate fair value.

Changes in our asset retirement obligations were as follows (in thousands):



	December 31,
	2017		2016		2015
Balance as of beginning of year	$	1,069	$	1,021	$	975
Accretion expense	30		48		46
Balance as of end of year	$	1,099	$	1,069	$	1,021

We do not expect any short-term spending and, as a result, there is no current liability reported for asset retirement obligations as of December 31, 2017 and 2016. Accretion expense is reflected in depreciation expense.

There are no assets that are legally restricted for purposes of settling our asset retirement obligations.

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7.	COMMITMENTS AND CONTINGENCIES

Operating Leases – Lessee

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 December 31, 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
2018	$	13,241	$	856	$	14,097
2019	13,177		1,112		14,289
2020	13,147		1,111		14,258
2021	13,116		1,099		14,215
2022	13,115		1,099		14,214
Thereafter	276,967		24,639		301,606
Total minimum rental payments	$	342,763	$	29,916	$	372,679

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



	Year Ended December 31,
	2017		2016		2015
Minimum rental expenses – related party	$	10,308	$	8,946	$	5,803
Minimum rental expenses – others	1,392		815		1,327
Total minimum rental expenses	$	11,700	$	9,761	$	7,130

Purchase Obligations

We have purchase obligations under our amended and restated (i) omnibus agreement, (ii) services and secondment agreement, and (iii) lease and access agreement with Valero. See Note 3 for additional information regarding our agreements with Valero. Our purchase obligations are determined based on contractual, fixed-rate fees for periods that are reasonably assured based on current market conditions. None of these obligations are associated with suppliers’ financing arrangements. These purchase obligations are not reflected as liabilities.

Litigation Matters

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

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time, and we believe that any changes to the recorded liabilities will not be material to our financial position, results of operations, or liquidity.


8.	CASH DISTRIBUTIONS

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

Quarterly

Period

Ended

Total

Quarterly

Distribution

(Per Unit)

Total Cash

Distribution

(In Thousands)

Declaration

Date

Record

Date

Distribution

Date

December 31, 2017

0.5075

50,055

January 24, 2018

February 5, 2018

February 13, 2018

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

September 30, 2015

0.3075

20,164

October 15, 2015

November 2, 2015

November 10, 2015

June 30, 2015

0.2925

18,456

July 24, 2015

August 3, 2015

August 11, 2015

March 31, 2015

0.2775

17,266

April 21, 2015

May 1, 2015

May 12, 2015

December 31, 2014

0.2660

15,829

January 26, 2015

February 5, 2015

February 12, 2015

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects the allocation of total cash distributions to the general and limited partners and distribution equivalent right (DER) payments (see Notes 9 and 11 for a description of DERs) applicable to the period in which the distributions and DERs were earned (in thousands):



	Year Ended December 31,
	2017		2016		2015
General partner’s distributions:
General partner’s distributions	$	3,363	$	2,294	$	1,572
General partner’s incentive distribution rights (IDRs)	44,534		19,354		3,431
Total general partner’s distributions	47,897		21,648		5,003
Limited partners’ distributions:
Common – public	42,029		32,362		22,016
Common – Valero	86,503		47,263		17,090
Subordinated – Valero	—		20,297		34,476
Total limited partners’ distributions	128,532		99,922		73,582
DERs	22		20		12
Total cash distributions, including DERs	$	176,451	$	121,590	$	78,597


9.	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 2013 ICP (defined in Note 11) that receive DERs, as further discussed in Note 11. 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 years ended December 31, 2017, 2016, and 2015, we used the two-class method to determine diluted net income per limited partner unit. We did not have any potentially dilutive instruments outstanding during the years ended December 31, 2017, 2016, and 2015.

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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 10 for further discussion of the conversion of subordinated units.

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



	Year Ended December 31, 2017
	General Partner		Limited Partner Common Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	3,363	$	128,532	$	—	$	131,895
General partner’s IDRs	44,534		—		—		44,534
DERs	—		—		22		22
Distributions and DERs declared	47,897		128,532		22		176,451
Undistributed earnings	1,216		60,756		10		61,982
Net income available to limited partners – basic and diluted	$	49,113	$	189,288	$	32	$	238,433

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			68,220

Net income per limited partner unit – basic and diluted			$	2.77

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	Year Ended December 31, 2016
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	2,294	$	79,625	$	20,297	$	—	$	102,216
General partner’s IDRs	19,354		—		—		—		19,354
DERs	—		—		—		20		20
Distributions and DERs declared	21,648		79,625		20,297		20		121,590
Undistributed earnings	1,905		59,452		21,289		17		82,663
Net income available to limited partners – basic and diluted	$	23,553	$	139,077	$	41,586	$	37	$	204,253

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			48,817		17,463

Net income per limited partner unit – basic and diluted			$	2.85	$	2.38

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	Year Ended December 31, 2015
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	1,572	$	39,106	$	34,476	$	—	$	75,154
General partner’s IDRs	3,431		—		—		—		3,431
DERs	—		—		—		12		12
Distributions and DERs declared	5,003		39,106		34,476		12		78,597
Undistributed earnings	1,066		27,162		25,045		8		53,281
Net income available to limited partners – basic and diluted	$	6,069	$	66,268	$	59,521	$	20	$	131,878

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			31,222		28,790

Net income per limited partner unit – basic and diluted			$	2.12	$	2.07

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10.	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, 2014	17,255,208	11,539,989	28,789,989		1,175,102	58,760,288
Unit-based compensation	4,443	—	—		—	4,443
Units issued in connection with acquisitions (see Note 2)	—	3,478,613	—		70,992	3,549,605
Unit issuance	4,250,000	—	—		—	4,250,000
General partner units issued to maintain 2% interest	—	—	—		86,735	86,735
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	223,083	—	—		—	223,083
General partner units issued to maintain 2% interest	—	—	—		4,552	4,552
Balance as of December 31, 2016	21,738,692	45,687,271	—		1,375,721	68,801,684
Unit-based compensation (see Note 11)	5,997	—	—		—	5,997
Units issued in connection with acquisitions (see Note 2)	—	1,081,315	—		22,068	1,103,383
Units issued under ATM Program	742,897	—	—		—	742,897
General partner units issued to maintain 2% interest	—	—	—		15,602	15,602
Balance as of December 31, 2017	22,487,586	46,768,586	—		1,413,391	70,669,563

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”). As of December 31, 2017, we have sold common units having an aggregate value of $45.5 million under our ATM Program, resulting in $304.5 million remaining available.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table 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 (in thousands, except unit amounts):



	Units Issued	Total Proceeds		Offering Costs		Net Proceeds
Year ended December 31, 2017:
Common – public	742,897	$	35,728	$	594	$	35,134
General partner	15,602	748		—		748

Year ended December 31, 2016:
Common – public	223,083	9,724		107		9,617
General partner	4,552	198		—		198

The 2015 Offering

On November 24, 2015, we completed a public offering (the 2015 Offering) of 4,250,000 of our common units at a price of $46.25 per unit and received gross proceeds of $196.6 million. After deducting the underwriting discount and other offering costs totaling $7.7 million, our net proceeds were $188.9 million. Concurrent with the 2015 Offering, our general partner contributed $4.0 million in exchange for 86,735 general partner units to maintain its 2.0 percent general partner interest in the Partnership.

Subordinated Unit Conversion

The requirements under our partnership agreement for the conversion of all of our outstanding subordinated units into common units were satisfied upon the payment of our quarterly cash distribution on August 9, 2016. Therefore, 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. The transfers to (from) partners resulted from the issuance of equity to Valero in connection with our acquisitions from Valero (as described in Note 2) and the issuance of equity under our ATM Program.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


11.	UNIT-BASED COMPENSATION

Overview

Our general partner maintains the Valero Energy Partners LP 2013 Incentive Compensation Plan (2013 ICP) under which various unit and unit-based awards may be granted to employees and non-employee directors. Awards under the 2013 ICP may include, but are not limited to, options to purchase common units, performance awards that vest upon the achievement of an objective performance goal, unit appreciation rights, and restricted units that vest over a period determined by the plan. The 2013 ICP was approved by the board of directors and the sole member of our general partner on November 26, 2013. As of December 31, 2017, 2,978,394 common units were available to be awarded under the 2013 ICP.

Restricted Units

Restricted units have been granted to each of our three independent directors (i.e., participants) in tandem with an equal number of DERs. The restricted units vest in accordance with individual written agreements between the participants and us, usually in equal one-third increments on each anniversary of the restricted units’ grant date. The DERs entitle the participant to a cash payment equal to the cash distribution per unit paid on our outstanding common units and is paid to the participant in cash as of each record payment date during the period the restricted units are outstanding.

Unit-based compensation expense associated with these restricted units was $266,000, $196,000, and $173,000 for the years ended December 31, 2017, 2016, and 2015, respectively, and is recorded within general and administrative expenses on our statements of income.


12.	INCOME TAXES

Components of income tax expense were as follows (in thousands):



	Year Ended December 31,
	2017		2016		2015
Current U.S. state	$	942	$	704	$	479
Deferred U.S. state	393		408		(228		)
Income tax expense	$	1,335	$	1,112	$	251

We are not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income generally are borne by our partners through the allocation of taxable income. Our income tax expense results from state laws that apply to entities organized as partnerships, specifically in the state of Texas. The difference between income tax expense recorded by us and income taxes computed by applying the statutory federal income tax rate (35 percent for all years presented) to income before income tax expense is due to the fact that the majority of our income is not subject to federal income tax at the entity level as described above.

As of December 31, 2017 and 2016, we had no liability reported for unrecognized tax benefits. We did not have any interest or penalties related to income taxes during the years ended December 31, 2017, 2016, and 2015.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


13.	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):



	Year Ended December 31,
	2017			2016			2015
Decrease (increase) in current assets:
Receivables – related party	$	(9,607	)	$	(10,786	)	$	(15,588	)
Receivables	(781		)	—			—
Prepaid expenses and other	277			(365		)	95
Increase (decrease) in current liabilities:
Accounts payable	7,411			586			(631		)
Accounts payable – related party	(3,404		)	(667		)	5,999
Accrued liabilities	137			34			(87		)
Accrued liabilities – related party	10			40			21
Accrued interest payable	1,278			1,054			226
Accrued interest payable – related party	864			(429		)	476
Taxes other than income taxes payable	2,684			1,181			511
Deferred revenue – related party	(2,599		)	3,396			5
Changes in current assets and current liabilities	$	(3,730	)	$	(5,956	)	$	(8,973	)

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



	Year Ended December 31,
	2017		2016		2015
Interest paid	$	33,355	$	13,873	$	5,367
Income taxes paid	719		505		441

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our investing and financing cash outflows in connection with the acquisitions from Valero as 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
Year ended December 31, 2017:
Parkway Pipeline	$	200,249	$	—	$	200,249
Port Arthur terminal	207,595		54,618		262,213
	$	407,844	$	54,618	$	462,462
Year ended December 31, 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
Year ended December 31, 2015:
Houston and St. Charles Terminal Services Business	$	296,109	$	275,111	$	571,220
Corpus Christi Terminal Services Business	94,035		300,965		395,000
	$	390,144	$	576,076	$	966,220

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncash investing and financing activities that affected recognized assets or liabilities were as follows (in thousands):



	Year Ended December 31,
	2017		2016			2015
Transfer (from) to Valero for:
Deferred income taxes	$	—	$	(190	)	$	(282	)
Change in accrued capital expenditures	—		46			7,232
Noncash contributions from Valero:
Excess of carrying value over purchase price paid for acquisition of Parkway Pipeline (see Note 2)	51,702		—			—
Capital projects	41,305		35,732			27,748
Increase in accounts payable related to capital expenditures	570		904			5,496
Units issued to Valero in connection with acquisitions (see Note 2)	46,000		85,000			170,000
Offering costs included in accounts payable	—		—			(102		)
Units issued under ATM Program included in receivables	—		1,682			—

In addition to the activities in the preceding table, noncash financing activities included:


•	the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the issuance of equity (i) to Valero in connection with our acquisitions from Valero as described in Note 2 and (ii) under our ATM Program as described in Note 10 for the years ended December 31, 2017 and 2016; and


•	the conversion of all of our outstanding subordinated units into common units having an aggregate value of $406.4 million described in Note 10 for the year ended December 31, 2016.

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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


14.	FAIR VALUE OF FINANCIAL INSTRUMENTS

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



	December 31, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	42,052	$	42,052	$	71,491	$	71,491
Financial liabilities:
Debt:
Revolver	410,000		410,000		30,000		30,000
Senior Notes	495,283		523,800		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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VALERO ENERGY PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.	QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables summarize quarterly financial data for the years ended December 31, 2017 and 2016 (in thousands, except per unit amounts):



	2017 Quarter Ended
	March 31		June 30		September 30		December 31
Operating revenues – related party	$	105,816	$	110,545	$	109,340	$	126,304
Gross profit (a)	70,496		70,985		70,749		78,926
Operating income	66,666		67,122		66,347		74,895
Net income	58,137		58,443		57,589		64,264
Net income attributable to partners	58,137		58,443		57,589		64,264
Limited partners’ interest in net income	48,670		47,024		44,552		49,074
Net income per limited partner unit – basic and diluted:
Common units	0.72		0.69		0.65		0.71



	2016 Quarter Ended
	March 31		June 30		September 30		December 31
Operating revenues – related party	$	78,767	$	87,664	$	92,040	$	104,148
Gross profit (a)	42,969		51,757		56,632		69,181
Operating income	38,604		48,042		52,538		65,390
Net income	35,780		44,545		48,707		59,799
Net income attributable to partners	43,298		49,447		51,709		59,799
Limited partners’ interest in net income	39,794		44,234		45,075		51,597
Net income per limited partner unit – basic and diluted:
Common units	0.61		0.67		0.77		0.77
Subordinated units	0.61		0.67		0.29		—

(a) Gross profit is calculated as operating revenues – related party less cost of revenues (excluding depreciation expense) and depreciation expense.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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 December 31, 2017.

Internal Control over Financial Reporting

(a) Management’s Report on Internal Control over Financial Reporting

The management report on the Partnership’s internal control over financial reporting required by Item 9A appears in Item 8 on page 66 of this report, and is incorporated herein by reference.

(b) Attestation Report of the Independent Registered Public Accounting Firm

KPMG LLP’s report on the Partnership’s internal control over financial reporting appears in Item 8 beginning on page 68 of this report, and is incorporated herein by reference.

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.

We continue the implementation process to prepare for the adoption of ASU No. 2016-02, “Leases (Topic 842),” which we discuss more fully in Note 1 of Notes to Consolidated Financial Statements. We expect that there will be changes affecting our internal control over financial reporting in conjunction with adopting this standard. The most significant changes we expect relate to the implementation of a lease evaluation system and a lease accounting system, including the integration of our lease accounting system with our general ledger and modifications to the related procurement and payment processes.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Management of Valero Energy Partners LP

We are managed by our general partner, Valero Energy Partners GP LLC. Our general partner is not elected by our unitholders and will not be subject to re-election by our unitholders in the future. Valero indirectly owns all of the membership interests in our general partner. Our general partner has a board of directors (the Board). Our unitholders are not entitled to elect the directors or participate in our management or operations.

We do not have any employees. Our general partner and our subsidiaries do not have any employees. All of the personnel who conduct our business are employed by Valero, and their services are provided to us pursuant to our omnibus agreement and services and secondment agreement with Valero.

Directors and Executive Officers of Valero Energy Partners GP LLC

Our directors are elected by the sole member of our general partner and hold office until their successors have been elected or qualified or until their earlier death, resignation, removal or disqualification. Our executive officers are appointed by, and serve at the discretion of, the Board. The directors and executive officers of our general partner are listed below.



Name	Age *	Position with Valero Energy Partners GP LLC
Joseph W. Gorder	60	Chairman of the Board and Chief Executive Officer
Richard F. Lashway	54	Director, President and Chief Operating Officer
Donna M. Titzman	54	Director, Senior Vice President, Chief Financial Officer and Treasurer
Jay D. Browning	59	Executive Vice President and General Counsel
Robert S. Beadle	68	Director
Timothy J. Fretthold	68	Director
Randall J. Larson	60	Director
R. Lane Riggs	52	Director

* as of December 31, 2017

Joseph W. Gorder. Mr. Gorder is Chairman of the Board and Chief Executive Officer of our general partner. Mr. Gorder was elected Chairman on April 17, 2014. He has served as a Director and as CEO since September 2013. Mr. Gorder has 28 years of service with Valero (including with Ultramar Diamond Shamrock Corporation prior to its merger with Valero in 2001) (UDS) and serves as Chairman of the Board, President and CEO of Valero. He became Valero’s CEO on May 1, 2014, and Valero’s Chairman of the Board on December 31, 2014. He formerly served as Valero’s Chief Operating Officer and earlier led Valero’s European operations from its London office. Mr. Gorder also has served as Valero’s Executive Vice President–Marketing and Supply following his tenure as Senior Vice President for Corporate Development and Strategic Planning. Prior to that, he held several positions with Valero and UDS with responsibilities for corporate development and marketing. Mr. Gorder also serves on the board of directors of Anadarko Petroleum Corporation. We believe that Mr. Gorder is a suitable member of the Board because of his extensive industry experience, particularly his experience in overseeing transportation and logistics assets during his tenure at Valero.

Richard F. Lashway. Mr. Lashway was appointed Director, President and Chief Operating Officer of our general partner in September 2013. Mr. Lashway has 20-plus years of service with Valero (including with

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UDS) and serves as Senior Vice President of Commercial Development and Logistics Operations for the Valero family of companies where he is responsible for developing and managing logistics projects. Mr. Lashway has held critical leadership positions in the commercial and corporate development groups and has been an integral part of key transportation and logistics projects, including the initial public offering of Shamrock Logistics L.P., the predecessor to NuStar Energy L.P., and its acquisition of Kaneb Pipe Line Partners L.P. We believe that Mr. Lashway is a suitable member of the Board because of his extensive operational experience with transportation and logistics assets including his executive oversight and leadership of these assets at Valero.

Donna M. Titzman. Ms. Titzman was appointed Director, Senior Vice President, Chief Financial Officer and Treasurer of our general partner in September 2013. Ms. Titzman also currently serves as Senior Vice President and Treasurer of Valero where she has responsibility for banking, cash management, customer credit, investment management, and risk management. Effective May 3, 2018, Ms. Titzman will begin serving as Executive Vice President and Chief Financial Officer of Valero and our general partner. She joined Valero in 1986 and held various leadership positions before being appointed Treasurer in 1998, and Vice President and Treasurer in 2001. Ms. Titzman is a Certified Public Accountant. We believe that Ms. Titzman is a suitable member of the Board because of her extensive industry experience and the knowledge of industry financial practices that she has gained as Treasurer of Valero.

Jay D. Browning. Mr. Browning was elected Executive Vice President and General Counsel of our general partner on February 26, 2016; he was elected Senior Vice President and General Counsel in September 2013. Mr. Browning has 24 years of service with Valero. He has served as Executive Vice President and General Counsel of Valero since 2014, and is responsible for Valero’s legal department, corporate governance, and safety and environmental affairs. He was elected Senior Vice President and General Counsel of Valero in November 2012, and previously served as Senior Vice President–Corporate Law and Secretary from 2006 to 2012. Mr. Browning was first elected as a Vice President of Valero in 2002.

Robert S. Beadle. Mr. Beadle became a member of the Board on December 19, 2013; he serves as Lead Director of the Board’s independent directors. Mr. Beadle retired from Valero in 2006 as a Senior Vice President in charge of crude oil and feedstock supply and trading. He joined Diamond Shamrock Corporation in 1976, and served in various sales, marketing and business management positions, as well as in strategic planning and development. In 1987, he was elected Vice President of Diamond Shamrock Inc., and held other executive responsibilities there and at successor companies. He joined Valero effective December 31, 2001, with its acquisition of UDS. We believe that Mr. Beadle is a suitable member of the Board because of his extensive knowledge, experience, and management skills in the refining and related logistics businesses.

Timothy J. Fretthold. Mr. Fretthold became a member of the Board on December 19, 2013; he chairs the Board’s conflicts committee. He previously served as Executive Vice President/Chief Administrative & Legal Officer of UDS from 1997 until December 31, 2001, when Valero acquired UDS. He had served as Senior Vice President/Group Executive & General Counsel of Diamond Shamrock Inc., from 1987 to 1996. We believe that Mr. Fretthold is a suitable member of the Board because of his extensive knowledge, experience, and management skills in the refining and related logistics businesses.

Randall J. Larson. Mr. Larson joined the Board on December 10, 2013, and chairs the Board’s audit committee. Mr. Larson also serves on the board of directors of ONEOK, Inc. where he is chairman of the audit committee and serves on the corporate governance committee. Mr. Larson previously served as a director of the general partner of MarkWest Energy Partners, L.P. (MarkWest) from July 2011 through the date of the merger of MarkWest with and into MPLX LP on December 4, 2015, and served as a director of the general partner of Oiltanking Partners, L.P. from August 2011 to February 2014. Mr. Larson was Chief Executive Officer of the general partner of TransMontaigne Partners L.P. from September 2006 until

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August 2009, and its Chief Financial Officer from January 2003 until September 2006, and Controller from May 2002 to January 2003. From July 1994 to May 2002, Mr. Larson was a partner with KPMG LLP in its Silicon Valley and National (New York City) offices. From July 1992 to July 1994, Mr. Larson served as a Professional Accounting Fellow in the Office of Chief Accountant of the Securities and Exchange Commission. We believe that Mr. Larson is a suitable member of the Board because of his extensive expertise in financial, accounting, and governance matters relating to master limited partnerships.

R. Lane Riggs. Mr. Riggs joined the Board on April 14, 2014. Since May 1, 2014, he has served as Valero’s Executive Vice President–Refining Operations and Engineering. From 2011 to 2014, Mr. Riggs was Senior Vice President–Refining Operations of Valero. Prior to that, he was an officer of various Valero subsidiary companies having responsibilities for process engineering, refining operations, feedstock supply, and optimization. We believe that Mr. Riggs is a suitable member of the Board because of his extensive knowledge, experience, and management skills in the refining and related logistics businesses.

Director Independence

Because we are a limited partnership, we rely on an exemption from the provisions of Section 303A.01 of the NYSE Listed Company Manual that would otherwise require our Board to be composed of a majority of independent directors. We are not required to have a compensation committee or a nominating and governance committee. We are, however, required to have an audit committee of at least three members who meet the independence and experience tests established by the NYSE and the Exchange Act. Our board has determined that Messrs. Beadle, Fretthold, and Larson are independent under the independence standards of the NYSE.

Committees of the Board of Directors

The Board has an audit committee and a conflicts committee, and may have such other committees as the Board may determine from time to time. The audit committee and the conflicts committee are composed entirely of independent directors.

Audit Committee

Messrs. Larson, Beadle, and Fretthold are members of our audit committee, and Mr. Larson serves as chair. Based on the attributes, education, and experience requirements set forth in the rules of the SEC, the Board has determined that Mr. Larson is an “audit committee financial expert” (as defined by the SEC). Each of the members of the audit committee is independent as independence is defined in the Exchange Act, as well as the general independence requirements of the NYSE.

Our audit committee assists the board in its oversight of the integrity of our financial statements and our compliance with legal and regulatory requirements and corporate policies and controls. Our audit committee has the sole authority to retain and terminate our independent registered public accounting firm and approve all auditing services and related fees and the terms thereof.

Our audit committee has a written charter adopted by the Board, which is available on our website at www.valeroenergypartners.com > Investor Relations > Corporate Governance > Governance Highlights > Committee Charters > Audit Committee.

Conflicts Committee

Our conflicts committee operates under the parameters set forth in our partnership agreement. Messrs. Fretthold, Beadle, and Larson are members of our conflicts committee, and Mr. Fretthold serves as chair. The conflicts committee, upon request by our general partner, determines the resolution of certain transactions that may be deemed conflicts of interest. Our partnership agreement does not require the Board to seek approval from the conflicts committee to determine the resolution of any conflict of interest between us and Valero or any other person. Members of the conflicts committee (i) may not be officers or employees of our

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general partner or directors, officers, or employees of its affiliates, (ii) may not hold an ownership interest in the general partner or its affiliates other than common units or awards under any long-term incentive plan, equity compensation plan, or similar plan implemented by the general partner or the partnership, and (iii) must meet the independence and experience standards of the NYSE and the SEC to serve on an audit committee of a board of directors.

Lead Director and Meetings of Non-Management Directors

The Board has appointed independent director Robert S. Beadle to preside at executive sessions of the non-management and independent directors of the Board. The Lead Director, working with the committee chairs, sets agendas and leads the discussion of regular meetings of directors outside the presence of management, provides feedback regarding these meetings to the Chairman of the Board, and otherwise serves as liaison between the independent directors and the Chairman. At least annually, all of the independent directors of our general partner meet in executive session without management participation or participation by non-independent directors.

Communications with the Board of Directors of Our General Partner

Unitholders or other interested parties may communicate with our Board, our independent directors, any Board committee, or the Chairman of the Board by submitting a communication in care of the Secretary of our general partner (at Valero Energy Partners LP, One Valero Way, San Antonio, Texas 78249). The envelope should be marked clearly to identify the intended recipient of the communication. The Secretary of our general partner will forward to the directors all communications that, in the Secretary’s judgment, are appropriate for consideration by the directors. Examples of communications that would not be considered appropriate include commercial solicitations.

Codes of Ethics

We adopted a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial officer and controller. The code charges these officers with responsibilities regarding honest and ethical conduct, the preparation and quality of the disclosures in documents and reports we file with the SEC, and compliance with applicable laws, rules, and regulations. We also adopted a Code of Business Conduct and Ethics that applies to our officers and directors.

Website Availability of Our Governance Documents

We post the following governance documents on our website at www.valeroenergypartners.com > Investor Relations > Corporate Governance > Governance Highlights. A printed copy of any of these documents is available to any unitholder upon request. Requests for documents must be in writing and directed to Valero Energy Partners LP, Attn: Secretary, One Valero Way, San Antonio, Texas 78249.


•	Governance Guidelines,


•	Code of Business Conduct and Ethics,


•	Code of Ethics for Senior Financial Officers, and


•	Audit Committee charter.

Section 16 Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the directors and executive officers of our general partner and persons who own more than 10 percent of a registered class of our equity securities, to file reports of beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4 or 5 with the SEC. Based on our review of the reporting forms and written representations provided to us from the persons required to file reports, we believe that each of the directors and executive officers of our general partner and persons who own more than 10 percent of a registered class of our equity securities has complied with the Section 16 reporting requirements for transactions in our securities during the fiscal year ended December 31, 2017.

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ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

We do not have any employees, and our general partner and our subsidiaries do not have any employees. Valero is responsible for providing and compensating the personnel necessary to conduct our operations, including the executive officers of our general partner. Under our amended and restated omnibus agreement with Valero, we pay to Valero a fixed fee to cover, among other things, the services provided to us by the executive officers of our general partner. The omnibus agreement is more fully described in Note 3 of Notes to Consolidated Financial Statements.

Named Executive Officer Compensation

Our “named executive officers” or “NEOs” are the following executive officers of our general partner:


•	Joseph W. Gorder, Chief Executive Officer,


•	Richard F. Lashway, President and Chief Operating Officer,


•	Jay D. Browning, Executive Vice President and General Counsel, and


•	Donna M. Titzman, Senior Vice President, Chief Financial Officer and Treasurer.

Mr. Gorder, Mr. Lashway, Mr. Browning, and Ms. Titzman devote the majority of their time to their roles at Valero, and also spend a portion of their time, as needed, managing our business and affairs. They do not receive any additional compensation for their services to our businesses or as executive officers of our general partner. Except for the fixed fee we pay to Valero under the omnibus agreement, we do not otherwise pay or reimburse any compensation amounts to or for our NEOs. Each is eligible to receive grants of unit-based awards under our incentive compensation plan, but none has to date received any awards under the plan. Our incentive compensation plan is discussed below under “—Our Incentive Compensation Plan.”

The responsibility and authority for compensation-related decisions for our NEOs remain with the compensation committee of Valero’s board of directors (the “Valero Compensation Committee”). Those compensation determinations are not subject to approval by us, our Board, or any committees thereof. Other than awards granted under our incentive compensation plan (under which the Board can grant unit-based awards), Valero has the ultimate decision-making authority with respect to the compensation of its and its subsidiaries’ executive officers and employees, including our named executive officers.

Summary Compensation Table

Except for the fixed management fee we paid to Valero under the omnibus agreement, we did not pay or reimburse any compensation amounts to or for our named executive officers in 2017.

Compensation by Valero

Valero provides compensation to its executives in the form of base salaries, annual cash incentive awards, long-term equity incentive awards, and participation in various employee benefits plans and arrangements, including broad-based and supplemental defined contribution and defined benefit retirement plans. Our NEOs do not have employment agreements with Valero. In the future, Valero may provide different or additional compensation components, benefits, or perquisites to our NEOs.

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The following sets forth a more detailed explanation of the elements of Valero’s executive compensation program.

Base Compensation

Our named executive officers earn a base salary for their services to Valero and its subsidiaries; these amounts are paid by Valero or its affiliates other than us. We incur only a fixed expense per month under the omnibus agreement with respect to the compensation paid by Valero to each of our NEOs.

Annual Cash Bonus Payments

Our NEOs are eligible to earn a cash payment from Valero under Valero’s annual incentive bonus program. Any bonus payments earned by the NEOs will be paid by Valero and will determined solely by Valero without input from us or our general partner or our Board. The amount of any bonus payments made by Valero will not result in changes to the contractually fixed fee for executive management services that we pay to Valero under the omnibus agreement.

Long-Term Equity-Based Incentive Compensation

Valero maintains a long-term incentive program pursuant to which it grants equity-based awards in Valero to its executives and key employees. Our NEOs may receive awards under Valero’s equity incentive plan from time to time as may be determined by the Valero Compensation Committee. The amount of any long-term incentive compensation made by Valero will not result in changes to the contractually fixed fee for executive management services that we will pay to Valero under the omnibus agreement.

Retirement, Health, Welfare and Additional Benefits

Our NEOs are eligible to participate in the employee benefit plans and programs that Valero offers to its employees, subject to the terms and eligibility requirements of those plans. Our NEOs are also eligible to participate in Valero’s tax-qualified defined contribution and defined benefit retirement plans to the same extent as all other Valero employees. Valero also has certain supplemental retirement plans in which its executives and key employees participate. When our NEOs participate in these programs, Valero is responsible for providing 100 percent of the benefits under these plans and programs to our NEOs.

Severance Arrangements

Valero has entered into change-of-control severance agreements with certain executives, including Mr. Gorder, Mr. Riggs, Mr. Browning, Ms. Titzman, and Mr. Lashway. The agreements are intended to assure the continued objectivity and availability of the officers in the event of any merger or acquisition activity that may threaten the job security of Valero executives. If a change of control occurs during the term of an agreement, then the agreement becomes operative for a fixed three-year period. The agreements provide generally that the named executive officers’ terms and conditions of employment will not be adversely changed during the three-year period after a change of control. Under the agreements, if an officer’s employment is terminated for “cause,” the officer will not receive any benefits or compensation other than any accrued salary or vacation pay that remained unpaid through the date of termination.

Our Incentive Compensation Plan

Our general partner adopted the Valero Energy Partners LP 2013 Incentive Compensation Plan (ICP) for directors and officers of our general partner or its affiliates and certain others who may perform services for us. The ICP has been approved by the sole member of our general partner. Our general partner may grant long-term unit-based awards to participants under the ICP. Awards under the plan are intended to compensate participants based on the performance of our common units and to align the participants’ long-term interests with those of our unit holders. We are responsible for the cost of awards granted under the ICP. All determinations with respect to awards to be made under the ICP will be made by the Board or any committee thereof established for such purpose. No awards under the ICP were made to our NEOs in 2017. Grants of

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restricted common units were made to our independent directors in 2017 (as described below under the caption, “Compensation of Our Directors”).

Pay Ratio Disclosure

We did not have any employees, and did not pay or reimburse Valero for any compensation amounts to or for our chief executive officer, in 2017. For a discussion of the ratio of the annual total compensation of Valero’s median employee to the annual total compensation of Valero’s chief executive officer for 2017, see Valero’s future filings with the SEC.

DIRECTOR COMPENSATION

This table summarizes compensation paid to our directors during the year ended December 31, 2017.



	Fees Earned or Paid in Cash		Unit Awards (a)		Other Income (c)		Total
Robert S. Beadle	$	75,000	$	90,035	$	—	$	165,035
Timothy J. Fretthold	75,000		90,035		11,769		176,804
Joseph W. Gorder	—		—		—		(b)
Randall J. Larson	75,000		90,035		—		165,035
Richard F. Lashway	—		—		—		(b)
R. Lane Riggs	—		—		—		(b)
Donna M. Titzman	—		—		—		(b)

Footnotes to Director Compensation table:

(a)

The amounts shown represent the grant date fair value of awards granted in 2017, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation–Stock Compensation (FASB ASC Topic 718). In 2017, each of our independent directors who was serving on the Board on January 5, 2017, received a grant of 1,999 restricted common units. The following table presents the number of unvested restricted common units held by each independent director as of December 31, 2017.



Name		Unvested Restricted Units
Robert S. Beadle		3,816
Timothy J. Fretthold		3,816
Randall J. Larson		3,816


(b)	Mr. Gorder, Mr. Lashway, Mr. Riggs, and Ms. Titzman do not receive any compensation as directors of our general partner, and did not receive any compensation as directors of our general partner in 2017.


(c)	The amount presented for Mr. Fretthold represents Valero’s payment in 2017 to Mr. Fretthold under a severance agreement for prior service with a predecessor of Valero. This arrangement is described in Item 13., “Certain Relationships and Related Transactions, and Director Independence—Supplemental Death Benefit Agreements and Severance Agreement.”

Compensation of Our Directors

Officers of our general partner or of Valero who serve as directors of our general partner do not receive compensation from us for their service as a director of our general partner. Directors of our general partner who are not officers or employees of our general partner or of Valero (our “independent directors”) receive the compensation described below. In addition, our independent directors are reimbursed for out-of-pocket expenses incurred for attending board and committee meetings. Each director is indemnified for actions associated with being a director to the fullest extent permitted under Delaware law.

Under our current independent director compensation program, each of our independent directors receives an annual compensation package that consists of $60,000 in annual cash compensation and $90,000 in annual

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unit-based compensation. The independent directors who chair the audit and conflicts committees receive an additional $15,000 in cash compensation, and the independent director designated as the Lead Director receives an additional $15,000 in cash compensation.

On January 5, 2017, each of Messrs. Beadle, Fretthold, and Larson received a grant of 1,999 restricted common units under the ICP, having an aggregate grant date fair value of $90,035. On January 4, 2018, each of Messrs. Beadle, Fretthold, and Larson received a grant of 1,966 restricted common units under the ICP, having an aggregate grant date fair value of $90,003. The restricted units were granted in tandem with distribution equivalent rights and are scheduled to vest in annual one-third increments over the three-year restriction period.

The following Compensation Committee Report is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any of Valero’s filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, respectively, whether made before or after the date of this proxy statement and irrespective of any general incorporation language therein.

COMPENSATION COMMITTEE REPORT *

The members of the board of directors of our general partner have reviewed and discussed the Compensation Discussion and Analysis included in this Annual Report on Form 10-K with management and, based on such review and discussions and such other matters the board deemed relevant and appropriate, the board has approved the inclusion of the Compensation Discussion and Analysis in this Annual Report on Form 10-K.

Members of the board of directors:



Joseph W. Gorder	Richard F. Lashway
Robert S. Beadle	R. Lane Riggs
Timothy J. Fretthold	Donna M. Titzman
Randall J. Larson


*	We do not have a Compensation Committee. Accordingly, the Compensation Committee Report required by Item 407(e)(5) of Regulation S-K is given by the board of directors of our general partner.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Beneficial Ownership of Valero Energy Partners LP Units

The following table presents the beneficial ownership of units of Valero Energy Partners LP known to be held by beneficial owners of five percent or more of the units, by each director and named executive officer of our general partner, and by the directors and executive officers of our general partner as a group. None of the units are pledged as security. The percentage of common units beneficially owned is based on 69,262,070 common units outstanding as of February 1, 2018.



Name of Beneficial Owner (a)	Common Units			General Partner Units			Total Partnership Interests
Name of Beneficial Owner (a)	Number	Percent		Number	Percent		Percent
Valero Energy Corporation (b)	46,768,586	67.52	%	1,413,511	100.00	%	68.17	%
Tortoise Capital Advisors, L.L.C. (c)	5,674,274	8.19	%	—	—		8.03	%
Goldman Sachs Asset Management (d)	4,235,198	6.11	%	—	—		5.99	%

Directors & Named Executive Officers
Robert S. Beadle	19,168	*		—	—		*
Jay D. Browning	5,500	*		—	—		*
Timothy J. Fretthold	19,168	*		—	—		*
Joseph W. Gorder	50,000	*		—	—		*
Randall J. Larson	29,168	*		—	—		*
Richard F. Lashway	10,000	*		—	—		*
R. Lane Riggs	5,500	*		—	—		*
Donna M. Titzman	11,000	*		—	—		*
Directors and executive officers as a group (8 persons)	149,504	*		—	—		*

^__________


^*	Less than 1 percent.


(a)	The address for the beneficial owners listed in this table is One Valero Way, San Antonio, Texas 78249.


(b)	Valero Energy Corporation directly or indirectly owns the following entities, which own the units listed below. Valero Energy Corporation may be deemed to beneficially own the units and interests held by each of the entities.

(c)

Tortoise Capital Advisors, L.L.C., 11550 Ash Street, Suite 300, Leawood, Kansas 66211, filed an amended Schedule 13G with the SEC on February 13, 2018, reporting that it or certain of its affiliates beneficially owned in the aggregate 5,674,274 Common Units, that it had sole voting and sole dispositive power over 131,568 of our Common Units, shared voting power over 4,746,908 of our Common Units, and shared dispositive power over 5,542,706 of our Common Units.

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(d)	Goldman Sachs Asset Management, 200 West Street, New York, NY 10282, filed an amended Schedule 13G with the SEC on February 8, 2018, reporting that it or certain of its affiliates beneficially owned in the aggregate 4,235,198 Common Units, and that it had shared voting and dispositive power over those Common Units.

Beneficial Ownership of Valero Energy Corporation Common Stock

The following table sets forth the number of shares of Valero common stock beneficially owned as of February 1, 2018, by each director and named executive officer of our general partner, and by the directors and executive officers of our general partner as a group. The percentage of shares beneficially owned is based on 433,176,258 shares of Valero common stock outstanding as of February 1, 2018.



Name of Beneficial Owner (a)	Shares Held (b)	Shares Under Options (c)	Total Shares of Valero Common Stock	Percent of Class
Robert S. Beadle	—	—	—	*
Jay D. Browning	218,512	34,766	253,278	*
Timothy J. Fretthold	—	—	—	*
Joseph W. Gorder	442,639	246,790	689,429	*
Randall J. Larson	—	—	—	*
Richard F. Lashway	42,828	2,333	45,161	*
R. Lane Riggs	146,820	2,667	149,487	*
Donna M. Titzman	186,780	35,123	221,903	*

All directors and executive officers as a group (8 persons)	1,037,579	321,679	1,359,258	*

^__________


^*	Less than 1 percent.


(a)	The address for all beneficial owners in this table is One Valero Way, San Antonio, Texas 78249.


(b)	Includes shares allocated under Valero’s thrift plan and shares of restricted stock (and for Mr. Browning, shares owned by his spouse).


(c)	Represents shares of Valero’s common stock that may be acquired under stock options. Stock options that may be exercised only in the event of a change of control of Valero Energy Corporation are excluded.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2017 with respect to common units that may be issued under the ICP:



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders:
Valero Energy Partners LP 2013 Incentive Compensation Plan	11,448	n/a	2,978,394

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

As of February 1, 2018, Valero owned a 66.2 percent limited partner interest in us (excluding common units held by the directors and officers of Valero and our general partner). In addition, our general partner owns an approximate 2.0 percent general partner interest in us. Transactions with our general partner and its affiliates, including Valero, are considered to be related party transactions because our general partner and its affiliates own more than five percent of our equity interests. In addition, Mr. Gorder and Mr. Browning serve as executive officers of both Valero and our general partner, and Mr. Riggs is an executive officer of Valero.

Distributions and Payments to our General Partner and its Affiliates

We generally make cash distributions of 98.0 percent to our common unitholders pro rata, including Valero, and 2.0 percent to our general partner. In addition, if distributions exceed the established minimum quarterly distribution and target distribution levels, the incentive distribution rights held by our general partner will entitle our general partner to increasing percentages of the distributions, up to 48.0 percent of the distributions above the highest target distribution level.

In 2017, we paid $121.8 million of distributions in the aggregate to our general partner and its affiliates (representing our distribution for the quarter ended December 31, 2016, and distributions for the first three quarters of 2017). On February 13, 2018, we paid $38.6 million of distributions in the aggregate to our general partner and its affiliates (representing our distribution for the quarter ended December 31, 2017).

Under our partnership agreement, we reimburse our general partner and its affiliates, including Valero, for costs and expenses they incur and payments they make on our behalf. Under our omnibus agreement with Valero, we make monthly payments on an annual fee to Valero for general and administrative services, and we reimburse Valero for any out-of-pocket costs and expenses incurred by Valero in providing these services to us. In addition, we reimburse our general partner for payments to Valero under the services and secondment agreement for the wages, benefits, and other costs of Valero employees seconded to our general partner to perform operational and maintenance services at certain of our facilities. Each of these payments are made prior to making any distributions on our common units.

Agreements with Valero

2017 Acquisition Agreements with Valero

Effective November 1, 2017, we entered into a contribution agreement with Valero for our acquisition of the Port Arthur terminal. Also effective November 1, 2017, we entered into a purchase agreement with Valero for our acquisition of Parkway Pipeline LLC. These acquisitions are further described in Note 2 of Notes to Consolidated Financial Statements, and the descriptions of these transactions in Note 2 are incorporated herein by reference.

Commercial Agreements with Valero

We have commercial agreements with Valero with respect to our pipelines and terminals. Under these commercial agreements, we provide transportation and terminaling services to Valero, and Valero has committed to pay us for minimum quarterly throughput volumes of crude oil and refined petroleum products. These commercial agreements are further described in Item 1., “Business—Our Commercial Agreements with Valero,” and the description of these agreements in Item 1. is incorporated herein by reference.

Other Related Party Agreements with Valero

In connection with the IPO and the acquisitions from Valero following the IPO (as described in Note 2 of Notes to Consolidated Financial Statements), we entered into several agreements with Valero, many of which we have amended in connection with the acquisitions. These agreements include an amended and restated

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omnibus agreement, an amended and restated services and secondment agreement, a tax sharing agreement, and several lease and access agreements. These agreements are described in Note 3 of Notes to Consolidated Financial Statements, and the descriptions of these agreements in Note 3 are incorporated herein by reference.

Supplemental Death Benefit Agreements and Severance Agreement

Valero succeeded to the obligations of Diamond Shamrock R&M, Inc. under its supplemental death benefit agreements with Messrs. Fretthold and Beadle. Each is a director of our general partner. The agreements obligate Valero to pay $1,075,000 to Mr. Fretthold’s beneficiary upon his death, and $910,000 to Mr. Beadle’s beneficiary upon his death. These agreements were assumed by Valero in the merger of Ultramar Diamond Shamrock Corporation (UDS) with and into Valero Energy Corporation on December 31, 2001 (the UDS Merger). Valero has insured most of these death benefit obligations under a group term life (GTL) policy, resulting in imputed income annually for Messrs. Fretthold and Beadle for GTL coverage in excess of $50,000. Under a severance agreement entered into between UDS and Mr. Fretthold in the UDS Merger (to which Valero has succeeded), Valero provides to Mr. Fretthold a tax gross up benefit such that Valero pays cash to Mr. Fretthold in an amount necessary to cover the tax obligation associated with his imputed income for GTL coverage in excess of $50,000. In 2017, Valero paid to Mr. Fretthold $11,769 under the terms of the severance agreement to cover his tax obligation for imputed income from GTL coverage in excess of $50,000.

Procedure for Review, Approval and Ratification of Related Person Transactions

The Board adopted a related party transactions policy. The policy provides that the board (or its authorized committee) will review all related person transactions that are required to be disclosed under SEC rules and, when appropriate, authorize or ratify all such transactions. In the event that the board or its authorized committee considers ratification of a related person transaction and determines not to so ratify, the related party transactions policy will provide that our management will make all reasonable efforts to cancel or annul the transaction.

The related party transactions policy provides that, in determining whether or not to recommend the approval or ratification of a proposed related person transaction, the Board (or its authorized committee) should consider all of the relevant facts and circumstances available, including but not limited to: (i) whether there is an appropriate business justification for the transaction; (ii) the benefits that accrue to us as a result of the transaction; (iii) the terms available to unrelated third parties entering into similar transactions; (iv) the impact of the transaction on a director’s independence (in the event the related person is a director, an immediate family member of a director or an entity in which a director or an immediate family member of a director is a partner, shareholder, member or executive officer); (v) the availability of other sources for comparable products or services; (vi) whether it is a single transaction or a series of ongoing, related transactions; and (vii) whether entering into the transaction would be consistent with our code of business conduct and ethics. In January 2017, pursuant to this policy, the Board approved our 10-year throughput agreement with Valero that we entered into concurrent with our acquisition of the Hewitt pipeline segment described in Note 2 of Notes to Consolidated Financial Statements.

Director Independence

Our disclosures in Item 10., “Directors, Executive Officers and Corporate Governance—Director Independence,” are incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

Fees for professional services rendered by our independent auditor, KPMG LLP, for 2017 and 2016 are presented in the following table (in thousands).



Category	2017		2016
Audit fees (a)	$	1,502	$	2,075
Audit-related fees	—		—
Tax fees	—		—
All other fees	—		—
Total	$	1,502	$	2,075

(a)

Represents fees for professional services rendered for the audit of the annual financial statements included in our annual reports on Form 10-K, review of our interim financial statements included in our quarterly reports on Form 10-Q, the audit of the effectiveness of our internal control over financial reporting, audits of acquired businesses, and services that are normally provided by the principal auditor (e.g., comfort letters, statutory audits, attest services, consents, and assistance with and review of documents filed with the SEC).

The Audit Committee has adopted a pre-approval policy for the pre-approval of certain services rendered to us by KPMG LLP. That policy appears in Exhibit 99.01 to this report. None of the services provided by KPMG LLP were approved by the Audit Committee under the pre-approval waiver provisions of paragraph (c)(7)(i)(C) of Rule 2-01 of SEC Regulation S-K.

Auditor Independence

The Audit Committee of the Board has considered whether KPMG LLP is independent for purposes of providing external audit services to us, and the Audit Committee has determined that KPMG LLP is independent.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements.



	Page
Management’s report on internal control over financial reporting	66
Report of independent registered public accounting firm	67
Consolidated balance sheets as of December 31, 2017 and 2016	70
Consolidated statements of income for the years ended December 31, 2017, 2016, and 2015	71
Consolidated statements of partners’ capital for the years ended December 31, 2017, 2016, and 2015	72
Consolidated statements of cash flows for the years ended December 31, 2017, 2016, and 2015	73
Notes to consolidated financial statements	74

2. Financial Statement Schedules and Other Financial Information. No financial statement schedules are submitted because either they are inapplicable or because the required information is included in the consolidated financial statements or notes thereto.

3. Exhibits. Filed as part of this Form 10-K are the following exhibits:




3.01	—	Certificate of Limited Partnership of Valero Energy Partners LP–incorporated by reference to Exhibit 3.1 to the Partnership’s Registration Statement on Form S-1 filed September 19, 2013 (SEC File No. 333-191259).

3.02	—	First Amended and Restated Agreement of Limited Partnership of Valero Energy Partners LP dated December 16, 2013–incorporated by reference to Exhibit 3.1 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

3.03	—	Amendment No. 1 to First Amended and Restated Agreement of Limited Partnership of Valero Energy Partners LP, dated December 19, 2017–incorporated by reference to Exhibit 3.01 to the Partnership’s Current Report on Form 8-K dated and filed December 19, 2017 (SEC File No. 1-36232).

3.04	—	Certificate of Formation of Valero Energy Partners GP LLC–incorporated by reference to Exhibit 3.3 to the Partnership’s Registration Statement on Form S-1 filed September 19, 2013 (SEC File No. 333-191259).

3.05	—	First Amended and Restated Limited Liability Company Agreement of Valero Energy Partners GP LLC dated December 16, 2013–incorporated by reference to Exhibit 3.2 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

4.01	—	Indenture dated November 30, 2016, between Valero Energy Partners LP and U.S. Bank National Association, as trustee–incorporated by reference to Exhibit 4.1 to the Partnership’s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (Reg. No. 333-208052) filed November 30, 2016.

4.02	—	Terms and Form of 4.375% Senior Notes due 2026–incorporated by reference to Exhibit 4.2 to the Partnership’s Current Report on Form 8-K dated and filed December 9, 2016 (SEC File No. 1-36232).

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10.01	—	Amended and Restated Omnibus Agreement dated July 1, 2014, by and among Valero Energy Corporation, Valero Marketing and Supply Company, Valero Terminaling and Distribution Company, The Premcor Refining Group Inc., The Premcor Pipeline Co., Valero Energy Partners LP, Valero Energy Partners GP LLC, Valero Partners Operating Co. LLC, Valero Partners EP, LLC, Valero Partners Lucas, LLC, Valero Partners Memphis, LLC, Valero Partners North Texas, LLC, Valero Partners South Texas, LLC, and Valero Partners Wynnewood, LLC–incorporated by reference to Exhibit 10.2 to the Partnership’s Current Report on Form 8-K dated and filed July 1, 2014 (SEC File No. 1-36232).

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

10.03	—	Amended and Restated Services and Secondment Agreement, dated March 1, 2015, 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 10.04 to the Partnership’s Current Report on Form 8-K dated March 1, 2015, and filed March 5, 2015 (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 the Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

10.05	—	Tax Sharing Agreement dated December 16, 2013 by and between Valero Energy Partners LP and Valero Energy Corporation–incorporated by reference to Exhibit 10.3 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

10.06	—	Master Transportation Services Agreement dated December 16, 2013 by and between Valero Partners Operating Co. LLC and Valero Marketing and Supply Company–incorporated by reference to Exhibit 10.6 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

10.07	—	Master Terminal Services Agreement dated December 16, 2013 by and between Valero Partners Operating Co. LLC and Valero Marketing and Supply Company–incorporated by reference to Exhibit 10.7 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

10.08	—	Contribution, Conveyance and Assumption Agreement dated December 16, 2013 by and among Valero Energy Partners LP, Valero Energy Partners GP LLC, Valero Partners Operating Co. LLC, Valero Energy Corporation, Valero Terminaling and Distribution Company, The Premcor Pipeline Co., The Premcor Refining Group Inc. and Valero Refining Company-Tennessee, L.L.C.–incorporated by reference to Exhibit 10.8 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

10.09	—	Contribution Agreement, dated April 1, 2016, by and between Valero Terminaling and Distribution Company and Valero Energy Partners LP–incorporated by reference to Exhibit 10.01 to the Partnership’s Current Report on Form 8-K dated and filed April 1, 2016 (SEC File No. 1-36232).

10.10	—	Contribution Agreement, dated September 1, 2016, by and between Valero Terminaling and Distribution Company and Valero Energy Partners LP–incorporated by reference to Exhibit 10.01 to the Partnership’s Current Report on Form 8-K dated and filed September 1, 2016 (SEC File No. 1-36232).

10.11	—	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 the Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

10.12	—	Contribution Agreement (Port Arthur terminal), 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 the Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

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+10.13	—	Valero Energy Partners LP 2013 Incentive Compensation Plan–incorporated by reference to Exhibit 10.5 to the Partnership’s Current Report on Form 8-K dated December 16, 2013, and filed December 20, 2013 (SEC File No. 1-36232).

+10.14	—	Form of Restricted Unit Award Agreement (for independent directors) (2014 grant) under the Valero Energy Partners LP 2013 Incentive Compensation Plan–incorporated by reference to Exhibit 10.09 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2013 (SEC File No. 1-36232).

+10.15	—	Form of Restricted Unit Award Agreement (for independent directors) (2015 grant) under the Valero Energy Partners LP 2013 Incentive Compensation Plan–incorporated by reference to Exhibit 10.16 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014 (SEC File No. 1-36232).

+10.16	—	Form of Restricted Unit Award Agreement (for independent directors) (2016 grant) under the Valero Energy Partners LP 2013 Incentive Compensation Plan–incorporated by reference to Exhibit 10.27 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-36232).

+10.17	—	Form of Restricted Unit Award Agreement (for independent directors) (2017 grant) under the Valero Energy Partners LP 2013 Incentive Compensation Plan–incorporated by reference to Exhibit 10.18 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016 (SEC File No. 1-36232).

*+10.18	—	Form of Restricted Unit Award Agreement (for independent directors) (2018 grant) under the Valero Energy Partners LP 2013 Incentive Compensation Plan.

10.19	—	Amended and Restated Credit Agreement, dated as of November 12, 2015, among Valero Energy Partners LP as Borrower; JPMorgan Chase Bank, N.A. as Administrative Agent; and the lenders named therein–incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated November 12, 2015, and filed November 13, 2015 (SEC File No. 1-36232).

10.20	—	Amended and Restated Subordinated Credit Agreement, dated as of November 12, 2015, by and between Valero Energy Partners LP and Valero Energy Corporation and the parties named therein (amending and restating that certain $160 million Subordinated Credit Agreement dated March 2, 2015)–incorporated by reference to Exhibit 10.29 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-36232).

10.21	—	Amended and Restated Subordinated Credit Agreement, dated as of November 12, 2015, by and between Valero Energy Partners LP and Valero Energy Corporation and the parties named therein (amending and restating that certain $395 million Subordinated Credit Agreement dated October 1, 2015)–incorporated by reference to Exhibit 10.30 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-36232).

10.22	—	Subordination Agreement dated December 9, 2016, between Valero Energy Partners LP and Valero Energy Corporation–incorporated by reference to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K dated and filed December 9, 2016 (SEC File No. 1-36232).

*12.01	—	Statements of Computation of Ratio of Earnings to Fixed Charges.

14.01	—	Code of Ethics for Senior Financial Officers–incorporated by reference to Exhibit 14.01 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2013 (SEC File No. 1-36232).

*21.01	—	List of Subsidiaries of Valero Energy Partners LP.

*23.01	—	Consent of KPMG LLP.

*24.01	—	Power of Attorney dated February 22, 2018 (on the signature page of this Form 10-K).

*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.

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**32.01	—	Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002).

99.01	—	Audit Committee Pre-Approval Policy–incorporated by reference to Exhibit 99.01 to the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 1-36232).

***101	—	Interactive Data Files

______________


*	Filed herewith.


**	Furnished herewith.


***	Submitted electronically herewith.


+	Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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/ Joseph W. Gorder
	Joseph W. Gorder
	Chief Executive Officer

Date: February 22, 2018

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Joseph W. Gorder, Donna M. Titzman, and Jay D. Browning, or any of them, each with power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all subsequent amendments and supplements to this Annual Report on Form 10-K, and to file the same, or cause to be filed the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby qualifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Signature	Title	Date

/s/ Joseph W. Gorder	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	February 22, 2018
(Joseph W. Gorder)		February 22, 2018

/s/ Donna M. Titzman	Senior Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial and Accounting Officer)	February 22, 2018
(Donna M. Titzman)		February 22, 2018

/s/ Richard F. Lashway	President, Chief Operating Officer and Director	February 22, 2018
(Richard F. Lashway)	President, Chief Operating Officer and Director	February 22, 2018

/s/ Robert S. Beadle	Director	February 22, 2018
(Robert S. Beadle)	Director	February 22, 2018

/s/ Timothy J. Fretthold	Director	February 22, 2018
(Timothy J. Fretthold)	Director	February 22, 2018

/s/ Randall J. Larson	Director	February 22, 2018
(Randall J. Larson)	Director	February 22, 2018

/s/ R. Lane Riggs	Director	February 22, 2018
(R. Lane Riggs)	Director	February 22, 2018

122

Name of Entity

Common
Units

General
Partner Units

Valero Energy Partners GP LLC

Valero Terminaling and Distribution Company

Total Valero subsidiaries