UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: May 15, 2002
VALERO L.P.
Organized under the laws of the State of Delaware
Commission File Number 1-16417
IRS Employer Identification No.74-2958817
One Valero Place
San Antonio, Texas 78212
Telephone number (210) 370-2000
ITEM 5. Other Events
On February 1, 2002, Valero L.P. acquired the Wichita Falls Crude Oil Pipeline
and Storage Business (the Wichita Falls Business) (except for certain retained
liabilities) from Valero Energy Corporation (Valero Energy) for $64,000,000. The
Wichita Falls Business owns and operates the Wichita Falls to McKee crude oil
pipeline and the Wichita Falls crude oil storage facility, which Valero L.P. had
an option to purchase pursuant to the Omnibus Agreement between Valero L.P. and
Ultramar Diamond Shamrock Corporation (UDS).
On December 31, 2001, Valero Energy acquired UDS, including the Wichita Falls
Business and the 73.6% ownership interest in Valero L.P. held by subsidiaries of
UDS, in a purchase business combination. As a result of Valero Energy's
acquisition of UDS, Valero Energy became the controlling owner of both the
Wichita Falls Business and Valero L.P. on December 31, 2001.
Because of Valero L.P.'s affiliate relationship with the Wichita Falls Business,
the acquisition of the Wichita Falls Business by Valero L.P. on February 1, 2002
constituted a transaction between entities under common control and, as such,
was accounted for as a reorganization of entities under common control.
Accordingly, the acquisition was recorded at Valero Energy's historical net book
value related to the Wichita Falls Business, which approximated fair value as a
result of Valero Energy's acquisition of UDS on December 31, 2001. In addition,
the consolidated financial statements and notes thereto of Valero L.P. as of
December 31, 2001 have been restated to include the Wichita Falls Business as if
it had been combined with Valero L.P. effective December 31, 2001.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial information and financial statements.
The following restated selected financial data, restated management's discussion
and analysis of financial condition and results of operations and restated
audited consolidated and combined financial statements are filed herewith as
Exhibit 99.1 and incorporated herein by reference.
Restated Selected Financial Data presented herein as of and for the years ended
December 31, 2001, 1999, 1998 and 1997 and as of and for the six months ended
December 31, 2000 and the six months ended June 30, 2000. Only the balance sheet
information as of December 31, 2001 has been restated for the impact of the
reorganization of entities under common control.
Restated Management's Discussion and Analysis of Financial Condition and Results
of Operations presented herein as of and for the years ended December 31, 2001
and 1999 and for the six months ended December 31, 2000 and the six months ended
June 30, 2000. Only the balance sheet information as of December 31, 2001 has
been restated for the impact of the reorganization of entities under common
control.
Restated Audited Consolidated and Combined Financial Statements for Valero L.P.,
Valero Logistics Operations, L.P. and the Wichita Falls Business as of December
31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999. The
consolidated and combined balance sheet as of December 31, 2001, and the
consolidated and combined statements of cash flows and partners' equity for the
year ended December 31, 2001 and certain notes to the consolidated and combined
financial statements have been restated for the impact of the reorganization of
entities under common control.
(b) Pro forma financial information.
Pro forma financial information giving effect to the February 1, 2002
acquisition of the Wichita Falls Business by Valero L.P. was included in Valero
L.P.'s Form 8-K/A dated February 1, 2002 and filed on April 16, 2002.
2
(c) Exhibits.
Exhibit No. and Description of Exhibit
23.1 Consent of Independent Public Accountants, dated May 15, 2002.
99.1 Restated Selected Financial Data, Restated Management's Discussion and
Analysis of Financial Condition and Results of Operations and Restated
Financial Statements of Valero L.P., Valero Logistics Operations, L.P.
and the Wichita Falls Business.
99.2 Required letter to Securities and Exchange Commission under Temporary
Note 3T.
3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Valero L.P.
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Valero L.P.
By: Riverwalk Logistics, L.P., its general partner
By: Valero GP, LLC, its general partner
By: /s/ Todd Walker
----------------------------------------------
Todd Walker
Secretary
Dated: May 15, 2002
4
EXHIBIT INDEX
23.1 Consent of Independent Public Accountants, dated May 15, 2002.
99.1 Restated Selected Financial Data, Restated Management's Discussion and
Analysis of Financial Condition and Results of Operations and Restated
Financial Statements of Valero L.P., Valero Logistics Operations, L.P.
and the Wichita Falls Business.
The following financial information of Valero L.P. is included in
Exhibit 99.1 of this Form 8-K dated May 15, 2002 and filed on May 15,
2002:
(1) Restated Selected Financial Data
(2) Restated Management's Discussion and Analysis of Financial
Condition and Results of Operations
(3) Restated Financial Statements
o Report of Independent Public Accountants
o Consolidated and Combined Balance Sheets as of December 31,
2001 (restated) and 2000
o Consolidated and Combined Statements of Income for the Years
Ended December 31, 2001 and 1999 and six months ended
December 31, 2000 and June 30, 2000
o Consolidated and Combined Statements of Cash Flows for the
Years Ended December 31, 2001 (restated) and 1999 and six
months ended December 31, 2000 and June 30, 2000
o Consolidated and Combined Statement of Partners' Equity for
the year ended December 31, 2001 (restated) and Combined
Statements of Partners' Equity/Net Parent Investment for the
six months ended December 31, 2000 and June 30, 2000 and the
year ended December 31, 1999
o Notes to Consolidated and Combined Financial Statements
(restated)
99.2 Required Letter to Securities and Exchange Commission under Temporary
Note 3T.
5
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated May 14, 2002 on the consolidated and combined financial statements
of Valero L.P., formerly Shamrock Logistics, L.P., and Valero Logistics
Operations, L.P., formerly Shamrock Logistics Operations, L.P. (successor to
Ultramar Diamond Shamrock Logistics Business) as of December 31, 2001 and 2000
(successor), and for the year ended December 31, 1999 and the six months ended
June 30, 2000 (predecessor) and for the six months ended December 31, 2000
(successor) included into this Form 8-K, and incorporated by reference into
Valero L.P.'s previously filed Registration Statement's File No. 333-81806 and
File No. 333-88264. It should be noted that we have not audited any financial
statements of Valero L.P. subsequent to December 31, 2001 or performed any audit
procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
May 15, 2002
6
EXHIBIT 99.1
RESTATED SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Organization
The following tables set forth selected financial data and operating data of
Valero L.P. (formerly Shamrock Logistics, L.P.), Valero Logistics Operations,
L.P. (Valero Logistics Operations, formerly Shamrock Logistics Operations,
L.P.), a subsidiary of Valero L.P., and the Wichita Falls Crude Oil Pipeline and
Storage Business (the Wichita Falls Business) as of December 31, 2001 and
selected financial data and operating data of Valero L.P. and Valero Logistics
Operations as of December 31, 2000 and for the year ended December 31, 2001 and
the six months ended December 31, 2000 (collectively referred to as the
successor to the Ultramar Diamond Shamrock Logistics Business).
The selected financial data and operating data as of and for the years ended
December 31, 1999, 1998 and 1997 and for the six months ended June 30, 2000 was
derived from the audited financial statements of the Ultramar Diamond Shamrock
Logistics Business (predecessor).
On February 1, 2002, Valero L.P. acquired the Wichita Falls Business (except for
certain retained liabilities) from Valero Energy Corporation (Valero Energy) for
$64,000,000. The Wichita Falls Business owns and operates the Wichita Falls to
McKee crude oil pipeline and the Wichita Falls crude oil storage facility, which
Valero L.P. had an option to purchase pursuant to the Omnibus Agreement between
Valero L.P. and Ultramar Diamond Shamrock Corporation (UDS).
On December 31, 2001, Valero Energy acquired UDS, including the Wichita Falls
Business and the 73.6% ownership interest in Valero L.P. held by subsidiaries of
UDS, in a purchase business combination. As a result of Valero Energy's
acquisition of UDS, Valero Energy became the controlling owner of both the
Wichita Falls Business and Valero L.P. on December 31, 2001.
Because of Valero L.P.'s affiliate relationship with the Wichita Falls Business,
the acquisition of the Wichita Falls Business by Valero L.P. on February 1, 2002
constituted a transaction between entities under common control and, as such,
was accounted for as a reorganization of entities under common control.
Accordingly, the acquisition was recorded at Valero Energy's historical net book
value related to the Wichita Falls Business, which approximated fair value as a
result of Valero Energy's acquisition of UDS on December 31, 2001. In addition,
the consolidated financial statements and notes thereto of Valero L.P. as of
December 31, 2001 have been restated to include the Wichita Falls Business as if
it had been combined with Valero L.P. effective December 31, 2001.
Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations included in the consolidated and combined financial statements in
Item 8. Financial Statements and Supplementary Data were referred to as the
Ultramar Diamond Shamrock Logistics Business as if it had existed as a single
separate entity from UDS. UDS formed Valero Logistics Operations to assume
ownership of and to operate the assets of the Ultramar Diamond Shamrock
Logistics Business. Effective July 1, 2000, UDS transferred the pipelines,
terminalling and storage assets and certain liabilities of the Ultramar Diamond
Shamrock Logistics Business to Valero Logistics Operations. This transfer
represented a reorganization of entities under common control and was recorded
at historical cost.
Effective April 16, 2001, the closing date of Valero L.P.'s initial public
offering, the ownership interests of Valero Logistics Operations held by various
subsidiaries of UDS were transferred to Valero L.P. in exchange for ownership
interests (common and subordinated units) in Valero L.P. This transfer also
represented a reorganization of entities under common control and was recorded
at historical cost.
7
Tariff Rate and Terminalling Revenue Changes
The financial data included in the tables below have been prepared utilizing the
actual pipeline tariff rates and terminalling fees in effect during the periods
presented. Effective January 1, 2000, the Ultramar Diamond Shamrock Logistics
Business filed revised tariff rates on many of its crude oil and refined product
pipelines to reflect the total cost of the pipeline, the current throughput
capacity, the current throughput utilization and other market conditions. The
tariff rates in effect before January 1, 2000 were based on initial pipeline
cost and were not revised upon subsequent expansions or increases or decreases
in throughput levels. The revised tariff rates resulted in lower tariff
revenues. Prior to 1999, the Ultramar Diamond Shamrock Logistics Business did
not charge a separate terminalling fee for terminalling services at its refined
product terminals. These costs were charged back to the related refinery.
Beginning January 1, 1999, the Ultramar Diamond Shamrock Logistics Business
began charging a separate terminalling fee at its refined product terminals.
The financial statements in Item 8. Financial Statements and Supplementary Data
and the selected financial data in the tables below do not reflect the revised
tariff rates prior to January 1, 2000 and do not reflect the establishment of
terminalling fees prior to January 1, 1999.
8
Successor Predecessor
--------------------------- ----------------------------------------------
Six Six
Months Months
Year Ended Ended Ended Years Ended December 31,
December 31, December 31, June 30, ------------------------------
2001 2000 2000 1999 1998 1997
---- ---- ---- ---- ---- ----
(in thousands, except per unit data and barrel/day information)
Statement of Income Data:
Revenues (1)................................. $ 98,827 $ 47,550 $ 44,503 $ 109,773 $ 97,883 $ 84,881
------ ------ ------ ------- ------ ------
Costs and expenses:
Operating expenses....................... 29,997 14,419 15,458 24,248 28,027 24,042
General and administrative expenses...... 5,349 2,549 2,590 4,698 4,552 4,761
Depreciation and amortization............ 13,390 5,924 6,336 12,318 12,451 11,328
Taxes other than income.................. 3,586 1,174 2,454 4,765 4,152 4,235
------ ------ ------ ------- ------ ------
Total costs and expenses..................... 52,322 24,066 26,838 46,029 49,182 44,366
Gain on sale of property, plant and
equipment (2)............................ - - - 2,478 7,005 -
------ ------ ------ ------- ------ ------
- -
Operating income............................. 46,505 23,484 17,665 66,222 55,706 40,515
Interest expense, net........................ (3,811) (4,748) (433) (777) (796) (158)
Equity income from Skelly-Belvieu............ 3,179 1,951 1,926 3,874 3,896 3,025
------ ------ ------ ------- ------ ------
Income before income taxes................... 45,873 20,687 19,158 69,319 58,806 43,382
Benefit (provision) for income
taxes (3)............................. - - 30,812 (26,521) (22,517) (16,559)
------ ------ ------ ------- ------ ------
Net income................................... $ 45,873 $ 20,687 $ 49,970 $ 42,798 $ 36,289 $ 26,823
====== ====== ====== ======= ====== ======
Basic and diluted net income per
unit (4)................................. $ 1.82
====
Cash distributions per unit.................. $ 1.70
====
Other Financial Data:
Adjusted EBITDA (5).......................... $ 62,769 $ 31,760 $ 27,223 $ 80,678 $ 65,399 $ 57,499
Distributions from Skelly-Belvieu............ 2,874 2,352 2,306 4,238 3,692 4,009
Net cash provided by (used in)
operating activities..................... 74,258 (81) 18,321 49,976 44,950 44,731
Net cash provided by (used in)
investing activities..................... (15,052) 215 (2,579) 6,865 18,395 (52,141)
Net cash provided by (used in)
financing activities..................... (51,414) (133) (15,742) (56,841) (63,345) 7,410
Maintenance capital expenditures............. 2,786 619 1,699 2,060 2,345 633
Expansion capital expenditures............... 15,140 1,518 3,186 7,313 9,952 12,359
Total capital expenditures............ 17,926 2,137 4,885 9,373 12,297 12,992
Operating Data (barrels/day):
Crude oil pipeline throughput................ 303,811 295,524 294,037 280,041 265,243 282,736
Refined product pipeline throughput.......... 308,047 306,877 312,759 297,397 268,064 257,183
Refined product terminal throughput.......... 189,172 162,904 168,433 161,340 144,093 136,454
9
Successor Predecessor
---------------------- ----------------------------------
December 31, December 31,
------------ ------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands) (in thousands)
Balance Sheet Data:
Property, plant and equipment, net........... $ 349,012 $ 280,017 $ 284,954 $ 297,121 $ 319,169
Total assets................................. 387,546 329,484 308,214 321,002 346,082
Long-term debt, including current portion
and debt due to parent................... 26,122 118,360 11,102 11,455 11,738
Partners' equity/net parent investment....... 342,166 204,838 254,807 268,497 295,403
(1) If the revised tariff rates and the terminalling fee had been implemented
effective January 1, 1997, revenues would have been as follows for the
years presented. The revised tariff rates and terminalling fee were in
effect throughout the years ended December 31, 2001 and 2000. The amounts
in the table below are unaudited.
Predecessor
------------------------------------------------
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Revenues - historical................................... $ 109,773 $ 97,883 $ 84,881
------- ------- -------
Decrease in tariff revenues......................... (21,892) (17,067) (16,197)
Increase in terminalling revenues................... - 1,649 1,778
------- ------- -------
Net decrease..................................... (21,892) (15,418) (14,419)
------- ------- -------
Revenues - as adjusted.................................. $ 87,881 $ 82,465 $ 70,462
======= ======= =======
(2) In March 1998, the Ultramar Diamond Shamrock Logistics Business
(predecessor) recognized a gain on the sale of a 25% interest in the McKee
to El Paso refined product pipeline and the El Paso refined product
terminal to Phillips Petroleum Company. In August 1999, the Ultramar
Diamond Shamrock Logistics Business (predecessor) recognized a gain on the
sale of an additional 8.33% interest in the McKee to El Paso refined
product pipeline and terminal to Phillips Petroleum Company.
(3) Effective July 1, 2000, UDS transferred most of its Mid-Continent pipeline,
terminalling and storage assets and certain related liabilities of the
Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero
Logistics Operations (successor). As a limited partnership, Valero
Logistics Operations is not subject to federal or state income taxes. Due
to this change in tax status, the deferred income tax liability of
$38,217,000 as of June 30, 2000 was written off in the statement of income
of the Ultramar Diamond Shamrock Logistics Business (predecessor) for the
six months ended June 30, 2000. The resulting net benefit for income taxes
of $30,812,000 for the six months ended June 30, 2000, includes the
write-off of the deferred income tax liability less the provision for
income taxes of $7,405,000 for the six months ended June 30, 2000. The
income tax provisions for periods prior to July 1, 2000 were based upon the
effective income tax rate for the Ultramar Diamond Shamrock Logistics
Business of 38%. The effective income tax rate exceeds the U.S. federal
statutory income tax rate due to state income taxes.
(4) Net income applicable to the limited partners, after deduction of the
general partner's 2% allocation, for the period from April 16, 2001 to
December 31, 2001, was $35,032,000 and net income applicable to the general
partner was $715,000. Net income per unit is computed by first allocating
net income to each class of unitholder, after deduction of the general
partner's 2% interest. Basic and diluted net income per unit is the same.
Net income per unit for the periods prior to April 16, 2001 is not shown as
units had not been issued.
10
(5) Adjusted EBITDA is defined as operating income, plus depreciation and
amortization, less gain on sale of property, plant and equipment, plus
distributions from Skelly-Belvieu Pipeline Company, of which Valero
Logistics Operations owns 50%, and excluding the impact of volumetric
expansions, contractions and measurement discrepancies in the pipelines.
Beginning July 1, 2000, the impact of volumetric expansions, contractions
and measurement discrepancies in the pipelines has been borne by the
shippers in our pipelines and is therefore not reflected in operating
income subsequent to July 1, 2000. The effect of volumetric expansions,
contractions and measurement discrepancies in the pipelines was a net
reduction to income before income taxes of $916,000, $378,000, $555,000 and
$1,647,000 for the six months ended June 30, 2000 and for the years ended
December 31, 1999, 1998 and 1997, respectively.
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Current Organization
Valero L.P. owns and operates most of the crude oil and refined product
pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico
and Colorado that support Valero Energy's McKee and Three Rivers refineries
located in Texas and its Ardmore refinery located in Oklahoma.
Valero Energy is one of the largest independent refining and marketing companies
in the United States. Subsequent to the acquisition of UDS by Valero Energy,
Valero Energy owns and operates 12 refineries in Texas (5), California (2),
Louisiana, Oklahoma, Colorado, New Jersey and Quebec, Canada with a combined
throughput capacity of approximately 1,900,000 barrels per day. Valero Energy
produces premium, environmentally clean products such as reformulated gasoline,
low-sulfur diesel and oxygenates and gasoline meeting specifications of the
California Air Resources Board (CARB). Valero Energy also produces conventional
gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero Energy
markets its refined products through a network of approximately 4,600 retail
outlets as well as through other wholesale and spot market sales and exchange
agreements. In the northeast United States and in eastern Canada, Valero Energy
sells, on a retail basis, home heating oil to approximately 250,000 households.
Valero Energy's refining operations include various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks, rail car loading equipment and shipping and trucking operations) that
support the refining and retail operations. A portion of the logistics assets
consists of crude oil and refined product pipelines, refined product terminals
and crude oil storage facilities located in Texas, Oklahoma, New Mexico and
Colorado that support the McKee, Three Rivers and Ardmore refineries. These
pipeline, terminalling and storage assets transport crude oil and other
feedstocks to the refineries and transport refined products from the refineries
to terminals for further distribution. Valero Energy markets the refined
products produced by these refineries primarily in Texas, Oklahoma, Colorado,
New Mexico and Arizona through a network of approximately 2,700 company-operated
and dealer-operated convenience stores, as well as through other wholesale and
spot market sales and exchange agreements.
Reorganization Related to the Wichita Falls Business
On February 1, 2002, Valero L.P. acquired the Wichita Falls Business (except for
certain retained liabilities) from Valero Energy for $64,000,000. The Wichita
Falls Business owns and operates the Wichita Falls to McKee crude oil pipeline
and the Wichita Falls crude oil storage facility, which Valero L.P. had an
option to purchase pursuant to the Omnibus Agreement between Valero L.P. and
UDS.
On December 31, 2001, Valero Energy acquired UDS, including the Wichita Falls
Business and the 73.6% ownership interest in Valero L.P. held by subsidiaries of
UDS, in a purchase business combination. As a result of Valero Energy's
acquisition of UDS, Valero Energy became the controlling owner of both the
Wichita Falls Business and Valero L.P. on December 31, 2001.
11
Because the Wichita Falls Business was an affiliate of ours at the time of its
acquisition, the acquisition was between entities under common control and, as
such, was accounted for as a reorganization of entities under common control.
Accordingly, the acquisition was recorded at Valero Energy's historical net book
value related to the Wichita Falls Business, which approximated fair value as a
result of Valero Energy's acquisition of UDS on December 31, 2001. In addition,
the consolidated financial information as of December 31, 2001 has been restated
to include the Wichita Falls Business as if it had been combined with us
effective December 31, 2001.
Acquisition of UDS by Valero Energy
On May 7, 2001, UDS announced that it had entered into an Agreement and Plan of
Merger (the acquisition agreement) with Valero Energy whereby UDS agreed to be
acquired by Valero Energy for total consideration of approximately $4.3 billion.
In September 2001, the board of directors and shareholders of both UDS and
Valero Energy approved the acquisition and, on December 31, 2001, Valero Energy
completed its purchase acquisition of UDS. Under the acquisition agreement, UDS
shareholders received, for each share of UDS common stock they held, at their
election, cash, Valero Energy common stock or a combination of cash and Valero
Energy common stock, having a value equal to the sum of $27.50 plus 0.614 shares
of Valero Energy common stock valued at $35.78 per share (based on the average
closing Valero Energy common stock price over a ten trading-day period ending
three days prior to December 31, 2001).
UDS was an independent refiner and retailer of refined products and convenience
store merchandise in the central, southwest and northeast regions of the United
States and eastern Canada. UDS owned and operated seven refineries located in
Texas (2), California (2), Oklahoma, Colorado and Quebec, Canada and marketed
its products through a network of approximately 4,500 convenience stores and 86
cardlock stations. In the northeast United States and in eastern Canada, UDS
sold, on a retail basis, home heating oil to approximately 250,000 households.
Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) were both subsidiaries of UDS. On December
31, 2001, upon Valero Energy's acquisition of UDS, Valero Energy assumed
ownership of Shamrock Logistics and Shamrock Logistics Operations. Effective
January 1, 2002, Shamrock Logistics was renamed Valero L.P. and its trading
symbol on the NYSE was changed from "UDL" to "VLI." Also, effective January 1,
2002, Shamrock Logistics Operations was renamed Valero Logistics Operations,
L.P.
Prior to the acquisition, Valero Energy owned and operated six refineries in
Texas (3), Louisiana, New Jersey and California with a combined throughput
capacity of more than 1,100,000 barrels per day. Valero Energy marketed its
gasoline, diesel fuel and other refined products in 34 states through a bulk and
rack marketing network and, in California, through approximately 350 retail
locations. Upon completion of the acquisition, Valero Energy became the ultimate
parent of Riverwalk Logistics, L.P., our general partner. In addition, Valero
Energy became the obligor under the various agreements UDS had with us,
including the Services Agreement, the Pipelines and Terminals Usage Agreement
and the environmental indemnification.
Reorganizations and Initial Public Offering
Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations discussed in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations were referred to as the Ultramar
Diamond Shamrock Logistics Business as if it had existed as a single separate
entity from UDS. UDS formed Valero Logistics Operations to assume ownership of
and to operate the assets of the Ultramar Diamond Shamrock Logistics Business.
Effective July 1, 2000, UDS transferred the crude oil and refined product
pipelines, terminalling and storage assets and certain liabilities of the
Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero Logistics
Operations (successor). The transfer of assets and certain liabilities to Valero
Logistics Operations represented a reorganization of entities under common
control and was recorded at historical cost.
Effective with the closing of an initial public offering of common units of
Valero L.P. on April 16, 2001, the ownership of Valero Logistics Operations held
by various subsidiaries of Valero Energy was transferred to Valero L.P. in
exchange for ownership interests (common and subordinated units) in Valero L.P.
This transfer also represented a reorganization of entities under common control
and was recorded at historical cost.
12
The following discussion is based on the operating results of the consolidated
and combined financial statements of Valero L.P., Valero Logistics Operations,
the Wichita Falls Business and the Ultramar Diamond Shamrock Logistics Business
as follows:
o consolidated and combined financial statements of Valero L.P., Valero
Logistics Operations (successor) and the Wichita Falls Business as of
December 31, 2001;
o consolidated financial statements of Valero L.P. and Valero Logistics
Operations (successor) for the period from April 16, 2001 to December 31,
2001;
o combined financial statements of Valero L.P. and Valero Logistics
Operations (successor) as of December 31, 2000 and for the period from July
1, 2000 to December 31, 2000 and the period from January 1, 2001 to April
15, 2001; and
o combined financial statements of Valero L.P., Valero Logistics Operations
and the Ultramar Diamond Shamrock Logistics Business (predecessor) for the
six months ended June 30, 2000 and for the year ended December 31, 1999.
This consolidated and combined financial statement presentation more clearly
reflects our financial position and results of operations as a result of the
recent reorganizations of entities under common control.
Seasonality
The operating results of Valero L.P. are affected by factors affecting the
business of Valero Energy, including refinery utilization rates, crude oil
prices, the demand for and prices of refined products and industry refining
capacity.
The throughput of crude oil we transport is directly affected by the level of,
and refiner demand for, crude oil in markets served directly by our crude oil
pipelines. Crude oil inventories tend to increase due to overproduction of crude
oil by producing companies and countries and planned maintenance turnaround
activity by refiners. As crude oil inventories increase, the market price for
crude oil declines, along with the market prices for refined products. To bring
crude oil inventories back in line with demand, refiners reduce production
levels, which also has the effect of increasing crude oil market prices.
The throughput of the refined products we transport is directly affected by the
level of, and user demand for, refined products in the markets served directly
or indirectly by our refined product pipelines. Demand for gasoline in most
markets peaks during the summer driving season, which extends from May to
September, and declines during the fall and winter months. Demand for gasoline
in the Arizona market, however, generally is higher in the winter months than
summer months due to greater tourist activity and second home usage in the
winter months. Historically, we have not experienced significant fluctuations in
throughput due to the stable demand for refined products and the growing
population base in the southwestern and Rocky Mountain regions of the United
States.
13
Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The results of operations for the year ended December 31, 2001 presented in the
following table are derived from the consolidated statement of income for Valero
L.P. and Valero Logistics Operations, L.P. for the period from April 16, 2001 to
December 31, 2001 and the combined statement of income for Valero L.P. and
Valero Logistics Operations for the period from January 1, 2001 to April 15,
2001, which in this discussion are combined and referred to as the year ended
December 31, 2001. The results of operations for the year ended December 31,
2000 presented in the following table is derived from the statement of income of
the Ultramar Diamond Shamrock Logistics Business for the six months ended June
30, 2000 and the combined statement of income of Valero L.P. and Valero
Logistics Operations for the six months ended December 31, 2000, which in this
discussion are combined and referred to as the year ended December 31, 2000.
Financial Data:
Years Ended December 31,
------------------------
2001 2000
---- ----
(in thousands)
Statement of Income Data:
Revenues................................ $ 98,827 $ 92,053
------ ------
Costs and expenses:
Operating expenses.................... 29,997 29,877
General and administrative expenses... 5,349 5,139
Depreciation and amortization......... 13,390 12,260
Taxes other than income taxes......... 3,586 3,628
------ ------
Total costs and expenses........... 52,322 50,904
------ ------
Operating income........................ 46,505 41,149
Interest expense, net................. (3,811) (5,181)
Equity income from Skelly-Belvieu..... 3,179 3,877
------ ------
Income before income taxes.............. $ 45,873 $ 39,845
====== ======
14
Operating Data:
The following table reflects throughput barrels for our crude oil and refined
product pipelines and the total throughput for all of our refined product
terminals for the years ended December 31, 2001 and 2000. The throughput barrels
for the year ended December 31, 2000 combine the barrels transported by the
Ultramar Diamond Shamrock Logistics Business for the six months ended June 30,
2000 with the barrels transported by Valero L.P. for the six months ended
December 31, 2000.
Years Ended December 31,
------------------------
2001 2000 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee.................................... 20,403 22,736 (10)%
Wasson to Ardmore (both pipelines)................ 29,612 28,003 6 %
Ringgold to Wasson................................ 13,788 10,724 29 %
Corpus Christi to Three Rivers.................... 28,689 31,271 (8)%
Other crude oil pipelines......................... 18,399 15,157 21 %
------- -------
Total crude oil pipelines....................... 110,891 107,891 3 %
======= =======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver............... 8,838 8,982 (2)%
McKee to El Paso.................................. 24,285 22,277 9 %
McKee to Amarillo (both pipelines) to Abernathy... 13,747 13,219 4 %
Amarillo to Albuquerque........................... 4,613 4,714 (2)%
McKee to Denver................................... 4,370 4,307 1 %
Ardmore to Wynnewood.............................. 20,835 20,705 1 %
Three Rivers to Laredo............................ 4,479 5,886 (24)%
Three Rivers to San Antonio....................... 10,175 9,761 4 %
Other refined product pipelines................... 21,095 23,537 (10)%
------- -------
Total refined product pipelines................. 112,437 113,388 (1)%
======= =======
Refined product terminal throughput.................. 64,522 60,629 6 %
======= =======
Revenues for the year ended December 31, 2001 were $98,827,000 as compared to
$92,053,000 for the year ended December 31, 2000, an increase of 7% or
$6,774,000. This increase in revenues is due primarily to the following items:
o revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil
pipelines increased $1,400,000 due to a combined 12% increase in throughput
barrels, resulting from UDS purchasing greater quantities of crude oil from
third parties near Ringgold instead of gathering crude oil barrels near
Wasson. In March 2001, UDS sold its Oklahoma crude oil gathering operation
which was located near Wasson;
o revenues for the Corpus Christi to Three Rivers crude oil pipeline
increased $1,390,000 despite the 8% decrease in throughput barrels for the
year ended December 31, 2001 as compared to 2000. The Corpus Christi to
Three Rivers crude oil pipeline was temporarily converted into a refined
product pipeline during the third quarter of 2001 due to the alkylation
unit shutdown at UDS' Three Rivers refinery. The increase in revenues is
primarily due to the increased tariff rate charged to transport refined
products during the third quarter of 2001. In addition, effective May 2001,
the crude oil tariff rate was increased to cover the additional costs
(dockage and wharfage fees) associated with operating a marine crude oil
storage facility in Corpus Christi;
o revenues for the McKee to El Paso refined product pipeline increased
$1,187,000 primarily due to a 9% increase in throughput barrels resulting
from an increase in UDS' sales into the Arizona market. The McKee to El
Paso refined product pipeline connects with a third party pipeline which
runs to Arizona;
15
o revenues for the Three Rivers to Laredo refined product pipeline decreased
by $464,000 due to a 24% decrease in throughput barrels partially offset by
an increase in the tariff rate effective July 1, 2001. The Laredo refined
product terminal revenues also decreased by $290,000 due to the 24%
decrease in throughput barrels. The lower throughput barrels are a result
of Pemex's expansion of its Monterrey, Mexico refinery that increased the
supply of refined products to Nuevo Laredo, Mexico, which is across the
border from Laredo, Texas;
o revenues, for the Southlake refined product terminal, acquired on July 1,
2001, increased by $1,341,000 and throughput barrels increased by 4,601,000
for the year ended December 31, 2001; and
o revenues for all refined product terminals, excluding the Southlake and
Laredo refined product terminals, increased $1,343,000 primarily due to an
increase in the terminalling fee charged at our marine-based refined
product terminals to cover the additional costs (dockage and wharfage fees)
associated with operating a marine refined product terminal and the
additional fee of $0.042 per barrel charged for blending additives into
certain refined products.
Operating expenses increased $120,000 for the year ended December 31, 2001 as
compared to the year ended December 31, 2000 primarily due to the following
items:
o during the year ended December 31, 2000, we recognized a loss of $916,000
due to the impact of volumetric expansions, contractions and measurement
discrepancies in our pipelines related to the first six months of 2000.
Beginning July 1, 2000, the impact of volumetric expansions, contractions
and measurement discrepancies in the pipelines is borne by the shippers and
is therefore no longer reflected in operating expenses;
o utility expenses increased by $1,538,000, or 17%, due to higher electricity
rates during the year ended December 31, 2001 as compared to the year ended
December 31, 2000 resulting from higher natural gas costs;
o the acquisition of the Southlake refined product terminal increased
operating expenses by $308,000;
o employee related expenses increased due to higher accruals for incentive
compensation; and
o other operating expenses decreased due to lower rental expenses for fleet
vehicles, satellite communications and safety equipment as a result of more
favorable leasing arrangements.
General and administrative expenses increased 4% for the year ended December 31,
2001 as compared to 2000 due to increased general and administrative costs
related to being a publicly held entity. Prior to July 1, 2000, UDS allocated
approximately 5% of its general and administrative expenses incurred in the
United States to its pipeline, terminalling and storage operations to cover
costs of centralized corporate functions such as legal, accounting, treasury,
engineering, information technology and other corporate services. Effective July
1, 2000, UDS entered into a Services Agreement with us to provide the general
and administrative services noted above for an annual fee of $5,200,000, payable
monthly. This annual fee is in addition to the incremental general and
administrative costs incurred from third parties as a result of our being a
publicly held entity. General and administrative expenses were as follows:
Years Ended December 31,
------------------------
2001 2000
---- ----
(in thousands)
Services Agreement............................. $ 5,200 $ 2,600
Allocation of UDS general and administrative
expenses for first six months of 2000....... - 2,839
Third party expenses........................... 730 200
Reimbursement from partners on jointly owned
pipelines................................... (581) (500)
----- -----
$ 5,349 $ 5,139
===== =====
16
Depreciation and amortization expense increased $1,130,000 for the year ended
December 31, 2001 as compared to the year ended December 31, 2000 due to the
additional depreciation related to the Southlake refined product terminal and
Ringgold crude oil storage facility acquired during 2001 and additional
depreciation related to the recently completed capital projects.
Interest expense for the year ended December 31, 2001 was $3,811,000 as compared
to $5,181,000 for 2000. During the period from January 1, 2001 to April 15,
2001, we incurred $2,513,000 of interest expense related to the $107,676,000 of
debt due to parent that we assumed on July 1, 2000 and paid off on April 16,
2001. In addition, beginning April 16, 2001, Valero Logistics Operations
borrowed $20,506,000 under the revolving credit facility resulting in $738,000
of interest expense for the eight and a half months ended December 31, 2001.
Interest expense prior to July 1, 2000 relates only to the debt due to the Port
of Corpus Christi Authority of Nueces County, Texas. Interest expense from July
1, 2000 through April 15, 2001 relates to the debt due to parent and the debt
due to the Port of Corpus Christi Authority. Interest expense subsequent to
April 16, 2001 relates to the borrowings under the revolving credit facility and
the debt due to the Port of Corpus Christi Authority.
Equity income from Skelly-Belvieu for the year ended December 31, 2001 decreased
$698,000, or 18%, as compared to 2000 due primarily to a 13% decrease in
throughput barrels in the Skellytown to Mont Belvieu refined product pipeline.
The decreased throughput in 2001 is due to both UDS and Phillips Petroleum
Company utilizing greater quantities of natural gas to run their refining
operations instead of selling the natural gas to third parties in Mont Belvieu.
Effective July 1, 2000, UDS transferred the assets and certain liabilities of
the Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero
Logistics Operations (successor). As limited partnerships, Valero L.P. and
Valero Logistics Operations are not subject to federal or state income taxes.
Due to this change in tax status, the deferred income tax liability of
$38,217,000 as of June 30, 2000 was written off in the statement of income of
the Ultramar Diamond Shamrock Logistics Business (predecessor) for the six
months ended June 30, 2000. The resulting net benefit for income taxes of
$30,812,000 for the six months ended June 30, 2000, includes the write-off of
the deferred income tax liability less the provision for income taxes of
$7,405,000 for the six months ended June 30, 2000. The income tax provision for
the six months ended June 30, 2000 was based upon the effective income tax rate
for the Ultramar Diamond Shamrock Logistics Business of 38%. The effective
income tax rate exceeds the U.S. federal statutory income tax rate due to state
income taxes.
Income before income taxes for the year ended December 31, 2001 was $45,873,000
as compared to $39,845,000 for the year ended December 31, 2000. The increase of
$6,028,000 is primarily due to the increase in revenues resulting from higher
tariff rates and higher throughput barrels in our pipelines and terminals for
2001 as compared to 2000.
17
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
The results of operations for the year ended December 31, 2000 presented in the
following table are derived from the statement of income of the Ultramar Diamond
Shamrock Logistics Business for the six months ended June 30, 2000 and the
combined statement of income of Valero L.P. and Valero Logistics Operations for
the six months ended December 31, 2000, which in this discussion are combined
and referred to as the year ended December 31, 2000. The results of operations
for the year ended December 31, 1999 presented in the following table is derived
from the statement of income for the Ultramar Diamond Shamrock Logistics
Business for the year ended December 31, 1999.
Financial Data:
Predecessor
-----------
Year Ended Year Ended
December 31, December 31,
2000 1999
---- ----
Statement of Income Data: (in thousands)
Revenues......................................... $ 92,053 $ 109,773
------ -------
Costs and expenses:
Operating expenses............................. 29,877 24,248
General and administrative expenses............ 5,139 4,698
Depreciation and amortization.................. 12,260 12,318
Taxes other than income taxes.................. 3,628 4,765
------ -------
Total costs and expenses.................... 50,904 46,029
Gain on sale of property, plant and equipment.. - 2,478
------ -------
Operating income................................. 41,149 66,222
Interest expense, net.......................... (5,181) (777)
Equity income from Skelly-Belvieu.............. 3,877 3,874
------ -------
Income before income taxes....................... $ 39,845 $ 69,319
====== =======
18
Operating Data:
The following table reflects throughput barrels for our crude oil and refined
product pipelines and the total throughput for all of our refined product
terminals for the years ended December 31, 2000 and 1999. The throughput barrels
for the year ended December 31, 2000 combine the barrels transported by the
Ultramar Diamond Shamrock Logistics Business for the six months ended June 30,
2000 with the barrels transported by Valero, L.P. for the six months ended
December 31, 2000.
Predecessor
-----------
Year Ended Year Ended
December 31, December 31,
2000 1999 % Change
---- ---- --------
(in thousands of barrels)
Crude oil pipeline throughput:
Dixon to McKee.................................... 22,736 22,305 2 %
Wasson to Ardmore (both pipelines)................ 28,003 26,339 6 %
Ringgold to Wasson................................ 10,724 10,982 (2)%
Corpus Christi to Three Rivers.................... 31,271 29,417 6 %
Other crude oil pipelines......................... 15,157 13,172 15 %
------- -------
Total crude oil pipelines....................... 107,891 102,215 6 %
======= =======
Refined product pipeline throughput:
McKee to Colorado Springs to Denver............... 8,982 9,064 (1)%
McKee to El Paso.................................. 22,277 19,767 13 %
McKee to Amarillo (both pipelines) to Abernathy... 13,219 14,995 (12)%
Amarillo to Albuquerque........................... 4,714 4,584 3 %
McKee to Denver................................... 4,307 3,924 10 %
Ardmore to Wynnewood.............................. 20,705 20,014 3 %
Three Rivers to Laredo............................ 5,886 5,381 9 %
Three Rivers to San Antonio....................... 9,761 10,154 (4)%
Other refined product pipelines................... 23,537 20,667 14 %
------- -------
Total refined product pipelines................. 113,388 108,550 4 %
======= =======
Refined product terminal throughput.................. 60,629 58,889 3 %
======= =======
Revenues for the year ended December 31, 2000 were $92,053,000 as compared to
$109,773,000 for the year ended December 31, 1999, a decrease of 16% or
$17,720,000. Effective January 1, 2000, we implemented revised tariff rates on
many of our pipelines, which resulted in lower revenues being recognized in 2000
as compared to 1999. Adjusting the revenues for the year ended December 31, 1999
using the newly established tariff rates and the throughput barrels resulted in
as adjusted revenues of $87,881,000. On a comparative basis, revenues increased
$4,172,000 or 5%. The following discussion is based on a comparison of the as
adjusted revenues for the year ended December 31, 1999 and the actual revenues
for the year ended December 31, 2000:
o revenues for the McKee to El Paso refined product pipeline increased
$1,618,000 due to a 13% increase in throughput barrels, resulting from
higher refined product demand in El Paso and the Arizona market and
temporary refinery disruptions on the West Coast;
o revenues increased $990,000 for the Corpus Christi to Three Rivers crude
oil pipeline due to a 6% increase in throughput barrels. In 2000, UDS
increased production at the Three Rivers refinery to meet the growing
demand in south Texas;
o revenues generated from the refined product terminals were $15,516,000 for
the year ended December 31, 2000 as compared to $15,238,000 for the year
ended December 31, 1999 due to a combined 3% increase in throughput at the
various terminals;
19
o revenues from the McKee to Denver refined product pipeline increased
$266,000 in 2000 as compared to 1999 as throughput increased 10% due to
increasing demand in Denver, Colorado;
o revenues from the Three Rivers to Pettus (Corpus Christi segment) refined
product pipeline increased $433,000 in 2000 as compared to 1999 as
throughput increased 112% due to rising refined product demand in south
Texas; and
o revenues for the Three Rivers to Laredo refined product pipeline increased
$260,000 for 2000 as compared to 1999 due to a 9% increase in throughput
barrels, resulting from increased refined product demand in Laredo, Texas
and its sister city of Nuevo Laredo, Mexico. Laredo, Texas is one of the
fastest growing cities in the United States and UDS is the major supplier
of refined products to this area of Texas.
Operating expenses increased $5,629,000, or 23%, in 2000 from 1999 primarily due
to the following items:
o higher operating expenses of $538,000 resulting from a loss of $916,000 in
2000 as compared to a loss of $378,000 in 1999 due to the impact of
volumetric expansions and contractions and discrepancies in the measurement
of throughput. Effective July 1, 2000, the impact of these items is borne
by the shippers in our pipelines and is therefore not reflected in
operating expenses;
o higher maintenance expenses of $1,747,000 primarily related to
discretionary environmental expenditures on terminal operations;
o utility expenses increasing $1,801,000 in 2000 as compared to 1999 as a
result of higher throughput barrels in most pipelines and terminals and
higher electricity rates in the fourth quarter of 2000 as a result of
higher natural gas costs; and
o higher salary and employee benefit expenses of $853,000 in 2000 as compared
to 1999 due to increased benefit accruals and rising salary costs.
Depreciation and amortization expense decreased $58,000 for the year ended
December 31, 2000 as compared to the year ended December 31, 1999 due to the
sale of an additional 8.33% interest in the McKee to El Paso refined product
pipeline and terminal in August 1999. Partially offsetting the decrease was
additional depreciation related to the recently completed capital projects,
including the expansion of the McKee to Colorado Springs and the Amarillo to
Albuquerque refined product pipelines.
General and administrative expenses increased 9% in 2000 as compared to 1999 due
to increased general and administrative costs at UDS while the net amount
reimbursed by partners on jointly owned pipelines in 2000 remained comparable to
1999. General and administrative expenses were as follows:
Years Ended December 31,
------------------------
2000 1999
---- ----
(in thousands)
Services Agreement............................. $ 2,600 $ -
Allocation of UDS general and administrative
expenses.................................. 2,839 5,201
Third party expenses........................... 200 -
Reimbursements from partners on jointly
owned pipelines........................... (500) (503)
----- -----
$ 5,139 $ 4,698
===== =====
Interest expense of $5,181,000 for the year ended December 31, 2000 was higher
than the $777,000 recognized during the year ended December 31, 1999 due to the
additional interest expense recognized in the third and fourth quarters of 2000
related to the $107,676,000 of debt due to parent.
20
Equity income from Skelly-Belvieu represents the 50% interest in the net income
of Skelly-Belvieu Pipeline Company, which operates the Skellytown to Mont
Belvieu refined product pipeline. Equity income from Skelly-Belvieu for the year
ended December 31, 2000 was $3,877,000 as compared to $3,874,000 for the year
ended December 31, 1999.
Effective July 1, 2000, UDS transferred the assets and certain liabilities of
the Ultramar Diamond Shamrock Logistics Business (predecessor) to Valero
Logistics Operations (successor). As limited partnerships, Valero L.P. and
Valero Logistics Operations are not subject to federal or state income taxes.
Due to this change in tax status, the deferred income tax liability of
$38,217,00 as of June 30, 2000 was written off in the statement of income of the
Ultramar Diamond Shamrock Logistics Business for the six months ended June 30,
2000. The resulting net benefit for income taxes of $30,812,000 for the six
months ended June 30, 2000, includes the write-off of the deferred income tax
liability less the provision for income taxes of $7,405,000 for the first six
months of 2000. The income tax provision for 1999 was based upon the effective
income tax rate for the Ultramar Diamond Shamrock Logistics Business of 38.3%.
The effective income tax rate exceeds the U.S. federal statutory income tax rate
due to state income taxes.
Income before income taxes for the year ended December 31, 2000 was $39,845,000
as compared to $69,319,000 for the year ended December 31, 1999. The decrease of
$29,474,000, or 43%, is primarily due to the decreased tariff revenues as a
result of the revised tariff rates that went into effect January 1, 2000, the
impact of which was $21,892,000.
Outlook for First Quarter 2002 and Remainder of 2002
Due to an unusual combination of circumstances in the first quarter of 2002,
Valero Energy significantly reduced its production at most of its refineries,
including the McKee, Three Rivers and Ardmore refineries, for economic reasons.
The exceptionally mild winter experienced throughout the United States, the
impact to the economy in general of the September 11th terrorist attacks and the
OPEC crude oil production cuts, contributed to weak refinery margins in January
and February 2002. In addition, many of Valero Energy's refineries were down for
scheduled maintenance turnarounds during this time, including the McKee and
Three Rivers refineries.
As a result of Valero Energy's reduction in refinery production during January
and February 2002, throughput in Valero L.P.'s pipelines and terminals in the
first quarter of 2002 was lower than throughput levels in the fourth quarter of
2001, excluding the throughput for the Wichita Falls crude oil pipeline
effective February 1, 2002. Accordingly, net income per unit for Valero L.P. was
$0.50 per unit for the first quarter of 2002. Based on the additional cash flow
generated from the Wichita Falls acquisition completed on February 1, 2002 and a
return to normal operating levels, the board of directors approved an increase
of $0.05 per unit in the quarterly cash distribution to $0.65 per unit for the
first quarter of 2002.
So far during the second quarter of 2002, throughput levels in the Partnership's
pipelines and terminals have returned to more normal levels since Valero Energy
increased production at the McKee, Three Rivers and Ardmore refineries. With
supply and demand fundamentals in the refining and marketing industry becoming
more balanced, the Partnership anticipates that throughput levels will continue
at normal levels for the balance of 2002; however, there can be no assurance
that throughput levels will stay at these levels.
Based on the throughput improvements, the additional cash flow generated from
the Wichita Falls Business acquired on February 1, 2002 and the additional cash
flow anticipated from a crude hydrogen pipeline to be acquired in late May 2002,
the Partnership expects to generate higher levels of distributable cash flow for
the balance of 2002.
21
Liquidity and Capital Resources
Our primary cash requirements, in addition to normal operating expenses, are for
capital expenditures (both maintenance and expansion), business and asset
acquisitions, distributions to partners and debt service. We expect to fund our
short-term needs for such items as maintenance capital expenditures and
quarterly distributions to the partners from operating cash flows. Capital
expenditures for long-term needs resulting from future expansion projects and
acquisitions are expected to be funded by a variety of sources including cash
flows from operating activities, borrowings under the revolving credit facility
and the issuance of additional common units and other capital market
transactions.
Financing
On December 15, 2000, Valero Logistics Operations entered into a five year
$120,000,000 revolving credit facility. Borrowings under the revolving credit
facility bear interest at either an alternative base rate or the LIBOR rate at
the option of Valero Logistics Operations. The revolving credit facility
requires that Valero Logistics Operations maintain certain financial ratios and
includes other restrictive covenants, including a prohibition on distributions
by Valero Logistics Operations if any default, as defined in the revolving
credit facility, exists or would result from the distribution. Management
believes that Valero Logistics Operations is in compliance with all of these
ratios and covenants.
As of December 31, 2001, the outstanding balance of borrowings under the
revolving credit facility was $16,000,000. On February 1, 2002, we borrowed
$64,000,000 under the revolving credit facility to fund the acquisition of the
Wichita Falls Business (except certain retained liabilities) from Valero Energy,
resulting in an outstanding balance of $80,000,000 as of February 1, 2002.
Initial Public Offering
On April 16, 2001, we completed our initial public offering of 5,175,000 common
units at a price of $24.50 per unit. Total proceeds were $126,787,000 before
offering costs and underwriters' commissions. In addition, we borrowed
$20,506,000 under our revolving credit facility. A summary of the use of
proceeds is as follows (in thousands):
Use of proceeds:
Underwriters' commissions....................... $ 8,875
Professional fees and other offering costs...... 6,000
Debt issuance costs............................. 436
Repayment of debt due to parent................. 107,676
Reimbursement of capital expenditures........... 20,517
-------
Total use of proceeds........................ $ 143,504
=======
The net proceeds of $3,789,000 were available for working capital and general
corporate purposes.
Distributions
Valero L.P.'s partnership agreement, as amended, sets forth the calculation to
be used to determine the amount and priority of cash distributions that the
common unitholders, subordinated unitholders and general partner will receive.
During the subordination period, the holders of our common units are entitled to
receive each quarter a minimum quarterly distribution of $0.60 per unit ($2.40
annualized) prior to any distribution of available cash to holders of our
subordinated units. The subordination period is defined generally as the period
that will end on the first day of any quarter beginning after December 31, 2005
if (1) we have distributed at least the minimum quarterly distribution on all
outstanding units with respect to each of the immediately preceding three
consecutive, non-overlapping four-quarter periods and (2) our adjusted operating
surplus, as defined in our partnership agreement, during such periods equals or
exceeds the amount that would have been sufficient to enable us to distribute
the minimum quarterly distribution on all outstanding units on a fully diluted
basis and the related distribution on the 2% general partner interest during
those periods.
22
In addition, all of the subordinated units may convert to common units on a
one-for-one basis on the first day following the record date for distributions
for the quarter ending December 31, 2005, if we meet the tests set forth in the
partnership agreement. If the subordination period ends, the rights of the
holders of subordinated units will no longer be subordinated to the rights of
the holders of common units and the subordinated units may be converted into
common units.
For the period from April 16, 2001 to December 31, 2001, we paid cash
distributions to unitholders totaling $21,571,000, which represents the required
minimum quarterly distribution for that period. In addition, in February 2002,
we paid a distribution of $0.60 per unit or $11,552,000 to unitholders
representing the distribution of available cash generated in the fourth quarter
of 2001. General partner cash distributions applicable to the period from April
16, 2001 to December 31, 2001, totaled $667,000, of which $236,000 related to
cash generated in the fourth quarter of 2001.
Capital Requirements
The petroleum pipeline industry is capital-intensive, requiring significant
investments to upgrade or enhance existing operations and to meet environmental
regulations. Our capital expenditures consist primarily of:
o maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental regulations;
and
o expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals and storage
facilities to meet Valero Energy's needs. In addition, expansion capital
expenditures will include acquisitions of pipelines, terminals or storage
assets owned by Valero Energy or other parties.
We expect to fund our capital expenditures from cash provided by operations and
to the extent necessary, from proceeds of borrowings under the revolving credit
facility and debt offerings.
During the year ended December 31, 2001, we incurred maintenance capital
expenditures of $2,786,000 primarily related to tank and automation upgrades at
the refined product terminals and cathodic (corrosion) protection and automation
upgrades for both refined product and crude oil pipelines. Also during the year
ended December 31, 2001, we incurred expansion capital expenditures of
$15,140,000 for various acquisitions and capital projects. Acquisitions included
the July 2001 acquisition of the Southlake refined product terminal from Valero
Energy for $5,600,000 and the December 2001 acquisition of the Ringgold crude
oil storage facility from Valero Energy for $5,200,000. Capital projects
included $1,813,000 for rights-of-way related to the expansion of the Amarillo
to Albuquerque refined product pipeline, which is net of Phillips Petroleum
Company's 50% share of such cost.
Effective February 1, 2002, we exercised our option to purchase the Wichita
Falls Business (except certain retained liabilities) from Valero Energy at a
cost of $64,000,000.
During the year ended December 31, 2000, we incurred $7,022,000 of capital
expenditures, including $4,704,000 relating to expansion capital projects and
$2,318,000 related to maintenance projects. Expansion capital projects included
the project to expand the capacity of the McKee to Colorado Springs refined
product pipeline from 32,000 barrels per day to 52,000 barrels per day, which
was completed in the fourth quarter of 2000.
During the year ended December 31, 1999, we incurred $9,373,000 of capital
expenditures, including $5,392,000 relating to the expansion of the capacity of
the McKee to Colorado Springs refined product pipeline from 32,000 barrels per
day to 52,000 barrels per day, and $1,565,000 relating to the expansion of the
total capacity of the McKee to El Paso refined product pipeline from 40,000
barrels per day to 60,000 barrels per day.
Partially offsetting the cash outflows related to capital expenditures are cash
inflows from our 50% interest in Skelly-Belvieu Pipeline Company, the
distributions from which totaled $2,874,000, $4,658,000 and $4,238,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
23
We anticipate that we will continue to have adequate liquidity to fund future
recurring operating, investing and financing activities. Our ability to complete
future debt and equity offerings and the timing of any such offerings will
depend upon various factors including prevailing market conditions, interest
rates and our financial condition.
Related Party Transactions
Services Agreement
Effective July 1, 2000, UDS entered into the Services Agreement with us, whereby
UDS agreed to provide the corporate functions of legal, accounting, treasury,
information technology and other services for an annual fee of $5,200,000 for a
period of eight years. The $5,200,000 is adjustable annually based on the
Consumer Price Index published by the U.S. Department of Labor, and may also be
adjusted to take into account additional service levels necessitated by the
acquisition or construction of additional assets. Management believes that the
$5,200,000 is a reasonable approximation of the general and administrative costs
related to our current pipeline, terminalling and storage operations. This
annual fee is in addition to the incremental general and administrative costs
incurred from third parties as a result of our being a publicly held entity.
The Services Agreement also requires that we reimburse UDS for various recurring
costs of employees who work exclusively within the pipeline, terminalling and
storage operations and for certain other costs incurred by Valero Energy
relating solely to us. These employee costs include salary, wages and benefit
costs. Concurrent with the acquisition of UDS by Valero Energy, Valero Energy
became the obligor under the Services Agreement.
Prior to July 1, 2000, UDS allocated approximately 5% of its general and
administrative expenses incurred in the United States to its pipeline,
terminalling and storage operations to cover costs of centralized corporate
functions and other corporate services. A portion of the allocated general and
administrative costs is passed on to partners, which jointly own certain
pipelines and terminals with us. Also, prior to July 1, 2000, the Ultramar
Diamond Shamrock Logistics Business participated in UDS' centralized cash
management program, wherein all cash receipts were remitted to UDS and all cash
disbursements were funded by UDS. Other transactions include intercompany
transportation, storage and terminalling revenues and related expenses,
administrative and support expenses incurred by UDS and allocated to the
Ultramar Diamond Shamrock Logistics Business and income taxes.
Pipelines and Terminals Usage Agreement
On April 16, 2001, UDS entered into the Pipelines and Terminals Usage Agreement
with us, whereby UDS agreed to use our pipelines to transport at least 75% of
the crude oil shipped to and at least 75% of the refined products shipped from
the McKee, Three Rivers and Ardmore refineries and to use our refined product
terminals for terminalling services for at least 50% of all refined products
shipped from these refineries until at least April, 2008. For the year ended
December 31, 2001, UDS used our pipelines to transport 78% of its crude oil
shipped to and 80% of the refined products shipped from the McKee, Three Rivers
and Ardmore refineries, and used our terminalling services for 60% of all
refined products shipped from these refineries. Valero Energy also assumed the
obligation under the Pipelines and Terminals Usage Agreement in connection with
the acquisition of UDS by Valero Energy.
Equity Ownership
As of December 31, 2001, UDS Logistics, LLC, an indirect wholly owned subsidiary
of Valero Energy, owns 4,424,322 of our outstanding common units and all
9,599,322 of our outstanding subordinated units. As a result, UDS Logistics, LLC
owns 71.6% of our outstanding equity and Riverwalk Logistics, L.P. owns the 2%
general partner interest.
In addition, prior to its acquisition by Valero L.P. on February 1, 2002, the
Wichita Falls Business was wholly owned by Valero Energy and such ownership
interest is reflected as net parent investment as of December 31, 2001 in the
combined balance sheet as of December 31, 2001.
24
Environmental
Our operations are subject to environmental laws and regulations adopted by
various federal, state and local governmental authorities in the jurisdictions
in which we operate. Although we believe our operations are in general
compliance with applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline, terminalling and storage operations,
and there can be no assurance that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations,
could result in substantial costs and liabilities. Accordingly, we have adopted
policies, practices and procedures in the areas of pollution control, product
safety, occupational health and the handling, storage, use and disposal of
hazardous materials to prevent material environmental or other damage, and to
limit the financial liability which could result from such events. However, some
risk of environmental or other damage is inherent in pipeline, terminalling and
storage operations, as it is with other entities engaged in similar businesses.
In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, UDS agreed to indemnify Shamrock Logistics Operations for environmental
liabilities that arose prior to July 1, 2000. In connection with the initial
public offering of Valero L.P. on April 16, 2001, UDS agreed to indemnify Valero
L.P. for environmental liabilities that arose prior to April 16, 2001 and are
discovered within 10 years after April 16, 2001. Excluded from this
indemnification are liabilities that result from a change in environmental law
after April 16, 2001. In addition, as an operator or owner of the assets, we
could be held liable for pre-April 16, 2001 environmental damage should Valero
Energy be unable to fulfill its obligation. However, we believe that such a
situation is remote given Valero Energy's financial condition.
Environmental exposures are difficult to assess and estimate due to unknown
factors such as the magnitude of possible contamination, the timing and extent
of remediation, the determination of our liability in proportion to other
parties, improvements in cleanup technologies and the extent to which
environmental laws and regulations may change in the future. Although
environmental costs may have a significant impact on results of operations for
any single period, we believe that such costs will not have a material adverse
effect on our financial position. As of December 31, 2001, we have not incurred
any environmental liabilities which were not covered by the environmental
indemnification.
In conjunction with the sale of the Wichita Falls Business to Valero L.P.,
Valero Energy has agreed to indemnify Valero L.P. for any environmental
liabilities that arose prior to February 1, 2002 and are discovered by April 15,
2011. As of and for the years ended December 31, 2001, 2000 and 1999, the
Wichita Falls Business did not incur any environmental liability; thus there is
no accrual as of December 31, 2001.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to select
appropriate accounting policies and to make estimates and assumptions that
affect the amounts reported in the consolidated and combined financial
statements and accompanying notes. Actual results could differ from those
estimates. See Note 2: Summary of Significant Accounting Policies on page 37 for
our significant accounting policies.
On an ongoing basis, management reviews its estimates based on currently
available information. Changes in facts and circumstances may result in revised
estimates. Any effects on our financial position or results of operations
resulting from revisions to estimates are recorded in the period in which the
facts and circumstances that give rise to the revision become known. We deem the
following estimates and accounting policies to be critical:
Tariff Rates
Tariff rates which we charge for the transportation of crude oil and refined
products in our pipelines are subject to extensive federal and/or state
regulation. Reductions to the current tariff rates we charge could have a
material adverse effect on our results of operations. Valero Energy has agreed
not to challenge our tariff rates until at least April, 2008.
25
Depreciation
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of our property, plant and equipment. Because of the
expected long useful lives of our property, plant and equipment, we depreciate
them over a 3-year to 40-year period. Changes in the estimated useful lives of
our property, plant and equipment could have a material adverse effect on our
results of operations.
Goodwill
Goodwill is the excess of cost over the fair value of net assets acquired.
Effective January 1, 2002, with the adoption of FASB Statement No. 142,
"Goodwill and Other Intangible Assets," amortization of goodwill ceased and the
unamortized balance will be tested annually for impairment. Management's
estimates will be crucial to determining whether an impairment exists and, if
so, the effect of such impairment. We believe that future reported net income
may be more volatile because impairment losses related to goodwill are likely to
occur irregularly and in varying amounts.
Environmental Liabilities
Environmental laws and regulations adopted by various federal, state and local
governmental authorities in the jurisdictions in which we operate impact our
business. Although we believe our operations are in general compliance with
applicable environmental regulations, risks of additional costs and liabilities
are inherent in pipeline, terminalling and storage operations, and there can be
no assurance that significant costs and liabilities will not be incurred.
Environmental remediation costs are expensed and the associated accrual
established when site restoration and environmental remediation and cleanup
obligations are either known or considered probable and can be reasonably
estimated. Adjustments to initial estimates are recorded, from time to time, to
reflect changing circumstances and estimates based upon additional information
developed in subsequent periods. In connection with the initial public offering
of Valero L.P., Valero Energy agreed to indemnify us for environmental
liabilities that arose prior to April 16, 2001 and are discovered within 10
years after April 16, 2001. Excluded from this indemnification are costs that
arise from changes in environmental law after April 16, 2001. In addition, as an
operator or owner of the assets, we could be held liable for pre-April 16, 2001
environmental damage should Valero Energy be unable to fulfill its obligation.
However, we believe that such a situation is remote given Valero Energy's
financial condition. As of December 31, 2001, we have not incurred any
environmental liabilities which were not covered by the environmental
indemnification.
Income Taxes
Although we are a limited partnership and not subject to federal or state income
taxes, the IRS could challenge positions we have taken for tax purposes and
could treat us as a corporation. While we believe challenges to our positions
should be rare, any changes to our tax structure could have a material adverse
effect on our results of operations.
Relationship with Valero Energy
Under the Services Agreement, we pay Valero Energy $5,200,000 per year for
performing general and administrative services and reimburse it for other costs,
including employee and third party costs as well as costs incurred by reason of
our being a public entity. The Service Agreement and other agreements with
Valero Energy are described under Related Party Transactions on page 23. From
time to time, we need to make judgments as to whether or not particular services
are covered by the $5,200,000 annual fee. These service judgments are reviewed
by our internal and independent auditors and reported to our audit committee at
least quarterly.
26
New Accounting Pronouncements
FASB Statement No. 141
In June 2001, the FASB issued Statement No. 141, " Business Combinations."
Statement No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations within the scope of Statement No. 141
are to be accounted for using the purchase method. The provisions of Statement
No. 141 apply to all business combinations initiated after June 30, 2001 and to
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. We implemented Statement No. 141
on July 1, 2001; however, the acquisition of the Southlake refined product
terminal, the Ringgold crude oil storage facility and the Wichita Falls Business
have been accounted for at historical cost because they were acquired from our
parent.
FASB Statement No. 142
Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. The statement
provides that goodwill and other intangible assets that have indefinite useful
lives will not be amortized but instead will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but such lives will not be limited to 40
years. Impairment losses for goodwill and indefinite-lived intangible assets
that arise due to the initial application of Statement No. 142 are to be
reported as resulting from a change in accounting principle. We have reviewed
the requirements of Statement No. 142 and the impact of adoption effective
January 1, 2002 resulted in the cessation of goodwill amortization beginning
January 1, 2002, which amortization approximates $300,000 annually. In addition,
we believe that future reported net income may be more volatile because
impairment losses related to goodwill are likely to occur irregularly and in
varying amounts.
FASB Statement No. 143
Also in June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
an obligation associated with the retirement of a tangible long-lived asset. An
asset retirement obligation should be recognized in the financial statements in
the period in which it meets the definition of a liability as defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements." The amount of the
liability would initially be measured at fair value. Subsequent to initial
measurement, an entity would recognize changes in the amount of the liability
resulting from (a) the passage of time and (b) revisions to either the timing or
amount of estimated cash flows. Statement No. 143 also establishes standards for
accounting for the cost associated with an asset retirement obligation. It
requires that, upon initial recognition of a liability for an asset retirement
obligation, an entity capitalize that cost by recognizing an increase in the
carrying amount of the related long-lived asset. The capitalized asset
retirement cost would then be allocated to expense using a systematic and
rational method. Statement No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002, with earlier application
encouraged. We are currently evaluating the impact of adopting this new
statement.
27
FASB Statement No. 144
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," but retains Statement No. 121's
fundamental provisions for recognition and measurement of impairment of
long-lived assets to be held and used and measurement of long-lived assets to be
disposed of by sale. This statement also supersedes APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. Statement
No. 144 does not apply to goodwill or other intangible assets, the accounting
and reporting of which is addressed in newly issued Statement No. 142, "Goodwill
and Other Intangible Assets." The provisions of Statement No. 144 are effective
for financial statements for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
There was no impact to our financial position or results of operations as a
result of adopting this statement effective January 1, 2002.
FASB Statement No. 145
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement:
o rescinds Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt,"
o rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"
o rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and
o amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of Statement No. 145 related to the
rescission of Statement No. 4 shall be applied in fiscal years beginning after
May 15, 2002 and the provisions of this statement related to the Statement No.
13 sale-leaseback inconsistency shall be effective for transactions occurring
after May 15, 2002, with early application encouraged. All other provisions of
this statement shall be effective for financial statements issued on or after
May 15, 2002, with earlier application encouraged. We do not expect that the
adoption of this statement will have a material impact on our financial position
or results of operations.
Certain Forward-Looking Statements
This current report on Form 8-K contains certain "forward-looking" statements as
such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, and information relating to us that
is based on the beliefs of management as well as assumptions made by and
information currently available to management. When used in this report, the
words "anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar expressions, as they relate to us or management, identify
forward-looking statements. Such statements reflect the current views of
management with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations, including as a result of competitive factors such as competing
pipelines, pricing pressures, changes in market conditions, reductions in
production at the refineries that we supply with crude oil and whose refined
products we transport, inability to acquire additional non-affiliated pipeline
entities, reductions in space allocated to us in interconnecting third party
pipelines, shifts in market demand, general economic conditions and other
factors.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Valero L.P. currently does not engage in interest rate, foreign currency
exchange rate or commodity price hedging transactions.
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed is interest rate risk on our
debt. We manage our debt considering various financing alternatives available in
the market. Borrowings under our revolving credit facility do not give rise to
significant interest rate risk because the interest rate on borrowings under the
revolving credit facility float with market rates. Thus the carrying amount of
outstanding borrowings under the revolving credit facility approximates fair
value. Our remaining debt is fixed rate debt with an 8% interest rate. The
estimated fair value of our fixed rate debt as of December 31, 2001 was
$11,240,000 as compared to the carrying value of $10,122,000. The fair value was
estimated using discounted cash flow analysis, based on current incremental
borrowing rates for similar types of borrowing arrangements. Because the total
of this fixed rate debt is not material to our financial position or
performance, there is currently minimal impact related to market interest rate
risk.
29
RESTATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
To the Board of Directors and Unitholders of Valero L.P.:
We have audited the accompanying consolidated and combined balance sheets of
Valero L.P., formerly Shamrock Logistics, L.P. (a Delaware limited partnership)
and Valero Logistics Operations, L.P., formerly Shamrock Logistics Operations,
L.P. successor to the Ultramar Diamond Shamrock Logistics Business (a Delaware
limited partnership) (collectively, the Partnerships) as of December 31, 2001
and 2000 (successor), and the related consolidated and combined statements of
income, cash flows, partners' equity/net parent investment for the year ended
December 31, 2001 and the six months ended December 31, 2000 (successor) and the
related combined statements of income, cash flows, partners' equity/net parent
investment for the six months ended June 30, 2000 and the year ended December
31, 1999 (predecessor). These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated and combined financial position of the
Partnerships as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
May 14, 2002
30
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(formerly Shamrock Logistics, L.P. and Shamrock Logistics Operations, L.P.)
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED BALANCE SHEETS
(in thousands)
December 31,
------------
2001 2000
---- ----
Assets (restated)
Current assets:
Cash and cash equivalents............................................... $ 7,796 $ 4
Receivable from parent.................................................. 6,292 22,348
Accounts receivable..................................................... 2,855 2,386
Other current assets.................................................... - 3,528
------- -------
Total current assets................................................. 16,943 28,266
------- -------
Property, plant and equipment.............................................. 470,401 388,537
Less accumulated depreciation and amortization............................. (121,389) (108,520)
------- -------
Property, plant and equipment, net...................................... 349,012 280,017
Goodwill, net.............................................................. 4,715 5,014
Investment in affiliate.................................................... 16,492 16,187
Other noncurrent assets, net............................................... 384 -
------- -------
Total assets........................................................... $ 387,546 $ 329,484
======= =======
Liabilities and Partners' Equity
Current liabilities:
Current portion of long-term debt....................................... $ 462 $ 608
Accounts payable and accrued liabilities................................ 4,215 2,685
Taxes other than income taxes........................................... 1,894 3,601
------- -------
Total current liabilities............................................ 6,571 6,894
Long-term debt, less current portion....................................... 25,660 10,076
Debt due to parent......................................................... - 107,676
Other long-term liabilities................................................ 2 -
Deferred income tax liabilities............................................ 13,147 -
Commitments and contingencies
Partners' equity:
Common Units (9,599,322 outstanding as of December 31, 2001)............ 169,305 -
Subordinated Units (9,599,322 outstanding as of December 31, 2001)...... 116,399 -
Limited partners' equity................................................ - 202,790
General partner equity.................................................. 5,831 2,048
Net parent investment................................................... 50,631 -
------- -------
Total partners' equity................................................ 342,166 204,838
------- -------
Total liabilities and partners' equity................................ $ 387,546 $ 329,484
======= =======
See accompanying notes to consolidated and combined financial statements.
31
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(formerly Shamrock Logistics, L.P. and Shamrock Logistics Operations, L.P.)
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(in thousands, except unit and per unit data)
Successor Predecessor
------------------------------- -----------------------------
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2001 2000 2000 1999
---- ---- ---- ----
Revenues............................................... $ 98,827 $ 47,550 $ 44,503 $ 109,773
------ ------ ------ -------
Costs and expenses:
Operating expenses.................................. 29,997 14,419 15,458 24,248
General and administrative expenses................. 5,349 2,549 2,590 4,698
Depreciation and amortization....................... 13,390 5,924 6,336 12,318
Taxes other than income taxes....................... 3,586 1,174 2,454 4,765
------ ------ ------ -------
Total costs and expenses......................... 52,322 24,066 26,838 46,029
Gain on sale of property, plant and equipment....... - - - 2,478
------ ------ ------ -------
Operating income....................................... 46,505 23,484 17,665 66,222
Interest expense, net................................ (3,811) (4,748) (433) (777)
Equity income from affiliate......................... 3,179 1,951 1,926 3,874
------ ------ ------ -------
Income before income taxes............................. 45,873 20,687 19,158 69,319
Benefit (provision) for income taxes................. - - 30,812 (26,521)
------ ------ ------ -------
Net income............................................. $ 45,873 $ 20,687 $ 49,970 $ 42,798
====== ====== ====== =======
Allocation of 2001 net income:
Net income applicable to the period January 1 to
April 15, 2001..................................... $ 10,126
Net income applicable to the period after
April 15, 2001..................................... 35,747
------
Net income..................................... $ 45,873
======
General partner interest in net income applicable
to the period after April 15, 2001................... $ 715
======
Limited partners' interest in net income applicable
to the period after April 15, 2001................... $ 35,032
======
Basic and diluted net income per unit applicable to
the period after April 15, 2001...................... $ 1.82
======
Weighted average number of units outstanding for
the period from April 16 to December 31, 2001....... 19,198,644
==========
See accompanying notes to consolidated and combined financial statements.
32
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(formerly Shamrock Logistics, L.P. and Shamrock Logistics Operations, L.P.)
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Successor Predecessor
----------------------------- ------------------------------
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2001 2000 2000 1999
---- ---- ---- ----
Cash Flows from Operating Activities: (restated)
Net income ........................................... $ 45,873 $ 20,687 $ 49,970 $ 42,798
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization....................... 13,390 5,924 6,336 12,318
Amortization of debt issuance costs................. 90 - - -
Equity income from affiliate........................ (3,179) (1,951) (1,926) (3,874)
Gain on sale of property, plant and equipment....... - - - (2,478)
(Benefit) provision for deferred income taxes....... - - (36,677) 3,622
Changes in operating assets and liabilities:
Decrease (increase) in receivable from parent...... 16,056 (22,347) - (1)
Decrease (increase) in accounts receivable......... (469) (1,676) 263 (42)
Decrease (increase) in other current assets........ 3,528 (3,528) - -
Increase (decrease) in accounts payable, accrued
liabilities and taxes other than income taxes.... (559) 2,810 492 (142)
Increase in other noncurrent assets................ (474) - - -
Increase (decrease) in other long-term liabilities. 2 - (137) (2,225)
------ ------- ------- ------
Net cash provided by (used in) operating activities. 74,258 (81) 18,321 49,976
------ ------- ------- ------
Cash Flows from Investing Activities:
Maintenance capital expenditures...................... (2,786) (619) (1,699) (2,060)
Expansion capital expenditures........................ (15,140) (1,518) (3,186) (7,313)
Distributions received from affiliate................. 2,874 2,352 2,306 4,238
Proceeds from sale of property, plant and equipment... - - - 12,000
-------- ------- -------- ------
Net cash (used in) provided by investing activities. (15,052) 215 (2,579) 6,865
-------- ------- -------- ------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings............... 25,506 - - -
Repayment of long-term debt........................... (10,068) (134) (284) (353)
Partners' contributions............................... - 1 - 1
Distributions to parent and affiliates................ (29,000) - (15,458) (56,489)
Net proceeds from sale of common units to the public.. 111,912 - - -
Distribution to affiliates of parent for
reimbursement of capital expenditures............... (20,517) - - -
Repayment of debt due to parent....................... (107,676) - - -
Payment of distributions to unitholders............... (21,571) - - -
-------- ------- ------- -------
Net cash used in financing activities............... (51,414) (133) (15,742) (56,841)
-------- ------- ------- -------
Net increase in cash and cash equivalents............. 7,792 1 - -
Cash and cash equivalents as of the beginning
of period........................................... 4 3 3 3
-------- ------- ------- -------
Cash and cash equivalents as of the end of period..... $ 7,796 $ 4 $ 3 $ 3
======== ======= ======= =======
Non-Cash Activities - Deemed contribution of the
Wichita Falls Business to Valero L.P. by Valero
Energy:
Property, plant and equipment.................... $ (64,160) $ - $ - $ -
Accrued liabilities and taxes other than income
taxes.......................................... 382 - - -
Deferred income tax liabilities.................. 13,147 - - -
Net parent investment............................ 50,631 - - -
See accompanying notes to consolidated and combined financial statements.
33
SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.
(successor to the Ultramar Diamond Shamrock Logistics Business)
COMBINED STATEMENTS OF PARTNERS' EQUITY/NET PARENT INVESTMENT
Six Months Ended December 31, 2000 and June 30, 2000
and the Year Ended December 31, 1999
(in thousands)
Balance as of January 1, 1999................................ $ 268,497
Net income.............................................. 42,798
Net change in parent advances........................... (56,489)
Partners' contributions................................. 1
--------
Balance as of December 31, 1999.............................. 254,807
Net income.............................................. 49,970
Net change in parent advances........................... (15,458)
Formalization of the terms of debt due to parent........ (107,676)
--------
Balance as of June 30, 2000.................................. 181,643
Net income.............................................. 20,687
Partners' contributions................................. 1
Environmental liabilities as of June 30, 2000 retained
by Ultramar Diamond Shamrock Corporation.............. 2,507
--------
Balance as of December 31, 2000.............................. $ 204,838
========
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(formerly Shamrock Logistics, L.P. and Shamrock Logistics Operations, L.P.)
(successor to the Ultramar Diamond Shamrock Logistics Business)
CONSOLIDATED AND COMBINED STATEMENT OF PARTNERS' EQUITY
Year Ended December 31, 2001
(in thousands)
Limited Partners' Net Total
------------------------- General Parent Partners'
Common Subordinated Partner Investment Equity
------ ------------ ------- ---------- ---------
Combined balance as of January 1, 2001......... $ 202,790 $ - $ 2,048 $ - $ 204,838
Net income applicable to the period
January 1 to April 15, 2001.................. 10,025 - 101 - 10,126
Distributions to affiliates of Ultramar
Diamond Shamrock Corporation of net
income applicable to the period July 1, 2000
to April 15, 2001............................ (28,710) - (290) - (29,000)
Distribution to affiliates of Ultramar
Diamond Shamrock Corporation for
reimbursement of capital expenditures........ (20,517) - - - (20,517)
Issuance of common and subordinated units -
for the contribution of Valero Logistics
Operations' limited partner interest......... (113,141) 109,453 3,688 -
Sale of common units to the public ............ 111,912 - - - 111,912
Net income applicable to the period
from April 16 to December 31, 2001........... 17,516 17,516 715 - 35,747
Cash distributions to unitholders.............. (10,570) (10,570) (431) - (21,571)
Adjustment for the Wichita Falls Business
transaction.................................. - - - 50,631 50,631
-------- ------- ----- ------ -------
Consolidated balance as of December 31,
2001......................................... $ 169,305 $ 116,399 $ 5,831 $ 50,631 $ 342,166
======== ======= ===== ====== =======
See accompanying notes to consolidated and combined financial statements.
34
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(formerly Shamrock Logistics, L.P. and Shamrock Logistics Operations, L.P.)
(successor to the Ultramar Diamond Shamrock Logistics Business)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Year Ended December 31, 2001 and the Six Months Ended December 31, 2000
(successor) and June 30, 2000 and the Year Ended December 31, 1999 (predecessor)
NOTE 1: Organization
Valero L.P. (formerly Shamrock Logistics, L.P.), a Delaware limited partnership
and majority-owned subsidiary of Valero Energy Corporation was formed to
ultimately acquire Valero Logistics Operations, L.P. (formerly Shamrock
Logistics Operations, L.P.)
Valero Logistics Operations, L.P. (Valero Logistics Operations), a Delaware
limited partnership and a subsidiary of Valero L.P., was formed to operate the
crude oil and refined product pipeline, terminalling and storage assets of the
Ultramar Diamond Shamrock Logistics Business.
Valero L.P. owns and operates most of the crude oil and refined product
pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico
and Colorado that support Valero Energy Corporation's (Valero Energy) McKee,
Three Rivers and Ardmore refineries located in Texas and Oklahoma.
Valero Energy is an independent refining and marketing company. Prior to the
acquisition of Ultramar Diamond Shamrock Corporation (UDS) on December 31, 2001,
Valero Energy owned and operated six refineries in Texas (3), California,
Louisiana and New Jersey with a combined throughput capacity of more than
1,100,000 barrels per day. Valero Energy produces premium, environmentally clean
products such as reformulated gasoline, low-sulfur diesel fuel and oxygenates
and gasoline meeting specifications of the California Air Resources Board
(CARB). Valero Energy also produces conventional gasoline, distillates, jet
fuel, asphalt and petrochemicals and markets its products through an extensive
wholesale bulk and rack marketing network, and through branded retail and other
retail distributor locations.
UDS was an independent refiner and retailer of refined products and convenience
store merchandise in the central, southwest and northeast regions of the United
States and eastern Canada. UDS owned and operated seven refineries located in
Texas (2), California (2), Oklahoma, Colorado and Quebec, Canada and marketed
its products through a network of approximately 4,500 convenience stores and 86
cardlock stations. In the northeast United States and in eastern Canada, UDS
sold, on a retail basis, home heating oil to approximately 250,000 households.
Valero Energy's refining operations include various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks, rail car loading equipment and shipping and trucking operations) that
support the refining and retail operations. A portion of the logistics assets
consists of crude oil and refined product pipelines, refined product terminals
and crude oil storage facilities located in Texas, Oklahoma, New Mexico and
Colorado that support the McKee, Three Rivers and Ardmore refineries located in
Texas and Oklahoma. These pipeline, terminalling and storage assets transport
crude oil and other feedstocks to the refineries and transport refined products
from the refineries to terminals for further distribution. Valero Energy markets
the refined products produced by these refineries primarily in Texas, Oklahoma,
Colorado, New Mexico and Arizona through a network of approximately 2,700
company-operated and dealer-operated convenience stores, as well as through
other wholesale and spot market sales and exchange agreements.
Reorganization Related to the Wichita Falls Business
On February 1, 2002, Valero L.P. acquired the Wichita Falls Crude Oil Pipeline
and Storage Business (the Wichita Falls Business) (except for certain retained
liabilities) from Valero Energy for $64,000,000. The Wichita Falls Business owns
and operates the Wichita Falls to McKee crude oil pipeline and the Wichita Falls
crude oil storage facility, which Valero L.P. had an option to purchase pursuant
to the Omnibus Agreement between Valero L.P. and UDS.
35
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
On December 31, 2001, Valero Energy acquired UDS, including the Wichita Falls
Business and the 73.6% ownership interest in Valero L.P. held by subsidiaries of
UDS, in a purchase business combination. As a result of Valero Energy's
acquisition of UDS, Valero Energy became the controlling owner of both the
Wichita Falls Business and Valero L.P. on December 31, 2001.
Because of Valero L.P.'s affiliate relationship with the Wichita Falls Business,
the acquisition of the Wichita Falls Business by Valero L.P. on February 1, 2002
constituted a transaction between entities under common control and, as such,
was accounted for as a reorganization of entities under common control.
Accordingly, the acquisition was recorded at Valero Energy's historical net book
value related to the Wichita Falls Business, which approximated fair value as a
result of Valero Energy's acquisition of UDS on December 31, 2001. In addition,
the consolidated financial statements and notes thereto of Valero L.P. as of
December 31, 2001 have been restated to include the Wichita Falls Business as if
it had been combined with Valero L.P. effective December 31, 2001.
Acquisition of UDS by Valero Energy
On May 7, 2001, UDS announced that it had entered into an Agreement and Plan of
Merger (the acquisition agreement) with Valero Energy whereby UDS agreed to be
acquired by Valero Energy for total consideration of approximately $4.3 billion.
In September 2001, the board of directors and shareholders of both UDS and
Valero Energy approved the acquisition and, on December 31, 2001, Valero Energy
completed its acquisition of UDS. Under the acquisition agreement, UDS
shareholders received, for each share of UDS common stock they held, at their
election, cash, Valero Energy common stock or a combination of cash and Valero
Energy common stock, having a value equal to the sum of $27.50 plus 0.614 shares
of Valero Energy common stock valued at $35.78 per share (based on the average
closing Valero Energy common stock price over a ten trading-day period ending
three days prior to December 31, 2001).
Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) were both subsidiaries of UDS. On December
31, 2001, upon Valero Energy's acquisition of UDS, Valero Energy assumed UDS'
ownership of Shamrock Logistics and Shamrock Logistics Operations. Effective
January 1, 2002, Shamrock Logistics was renamed Valero L.P. and its trading
symbol on the NYSE was changed from "UDL" to "VLI." Also, effective January 1,
2002, Shamrock Logistics Operations was renamed Valero Logistics Operations,
L.P.
Valero Energy is the ultimate parent of Riverwalk Logistics, L.P., the general
partner of both Valero L.P. and Valero Logistics Operations. In addition, Valero
Energy became the obligor under the various agreements between UDS and us,
including the Services Agreement, the Pipelines and Terminals Usage Agreement
and the environmental indemnification.
As used in these financial statements, the terms "we," "our," "us" or similar
words or phrases may refer, depending on the context, to Valero L.P. or Valero
Logistics Operations or both of them taken as a whole.
Reorganizations and Initial Public Offering
Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations included in these financial statements were referred to as the
Ultramar Diamond Shamrock Logistics Business as if it had existed as a single
separate entity from UDS. UDS formed Valero Logistics Operations to assume
ownership of and to operate the assets of the Ultramar Diamond Shamrock
Logistics Business. Effective July 1, 2000, UDS transferred the crude oil and
refined product pipelines, terminalling and storage assets and certain
liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to
Valero Logistics Operations (successor). The transfer of assets and certain
liabilities to Valero Logistics Operations represented a reorganization of
entities under common control and was recorded at historical cost.
36
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Effective with the closing of an initial public offering of common units of
Valero L.P. on April 16, 2001, the ownership of Valero Logistics Operations held
by various subsidiaries of UDS was transferred to Valero L.P. in exchange for
ownership interests (common and subordinated units) in Valero L.P. This transfer
also represented a reorganization of entities under common control and was
recorded at historical cost.
The financial statements included in this Form 8-K represent the consolidated
and combined financial statements of Valero L.P., Valero Logistics Operations,
the Wichita Falls Business and the Ultramar Diamond Shamrock Logistics Business
as follows:
o consolidated and combined financial statements of Valero L.P., Valero
Logistics Operations (successor) and the Wichita Falls Business as of
December 31, 2001;
o consolidated financial statements of Valero L.P. and Valero Logistics
Operations (successor) for the period from April 16, 2001 to December 31,
2001;
o combined financial statements of Valero L.P. and Valero Logistics
Operations (successor) as of December 31, 2000 and for the period from July
1, 2000 to December 31, 2000 and the period from January 1, 2001 to April
15, 2001; and
o combined financial statements of Valero L.P., Valero Logistics Operations
and the Ultramar Diamond Shamrock Logistics Business (predecessor) for the
six months ended June 30, 2000 and for the year ended December 31, 1999.
This consolidated and combined financial statement presentation more clearly
reflects our financial position and results of operations as a result of the
recent reorganizations of entities under common control.
Operations
Our operations include interstate pipelines, which are subject to regulation by
the Federal Energy Regulatory Commission (FERC) and intrastate pipelines, which
are subject to regulation by either the Texas Railroad Commission, the Oklahoma
Public Utility Commission or the Colorado Public Utility Commission, depending
on the location of the pipeline. These regulations include rate regulations,
which govern the tariff rates charged to pipeline customers for transportation
through a pipeline. Tariff rates for each pipeline are required to be filed with
the respective commission upon completion of a pipeline and when a tariff rate
is being revised. In addition, the regulations include annual reporting
requirements for each pipeline.
The following is a listing of our principal assets and operations:
Crude Oil Pipelines
- -------------------
Corpus Christi to Three Rivers
Wasson to Ardmore (both pipelines)
Ringgold to Wasson
Dixon to McKee
Wichita Falls to McKee
Various other crude oil pipelines
Refined Product Pipelines
- -------------------------
McKee to El Paso
McKee to Denver (operated by Phillips Pipeline Company)
McKee to Colorado Springs to Denver
McKee to Amarillo (both pipelines) to Abernathy
Amarillo to Albuquerque
Three Rivers to San Antonio
Three Rivers to Laredo
Ardmore to Wynnewood
Various other refined product pipelines
37
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Crude Oil Storage Facilities and Refined Product Terminals
- -----------------------------------------------------------
Corpus Christi crude oil storage facility
Ringgold crude oil storage facility
Wichita Falls crude oil storage facility
Southlake refined product terminal
El Paso refined product terminal
Amarillo refined product terminal
Denver refined product terminal
Colorado Springs refined product terminal
San Antonio refined product terminal
Laredo refined product terminal
Various other crude oil storage facilities and refined product terminals
Investment in Affiliate - Skelly-Belvieu Pipeline Company, LLC
- --------------------------------------------------------------
Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu) owns a
natural gas liquids pipeline that begins in Skellytown, Texas and extends to
Mont Belvieu, Texas near Houston. Skelly-Belvieu is owned 50% by Valero
Logistics Operations and 50% by Phillips Pipeline Company.
Assets Retained by Valero Energy (formerly UDS)
- -----------------------------------------------
UDS and its affiliates had retained certain pipeline, terminalling and storage
assets as of July 1, 2000 because they were either (a) undergoing construction
activities, (b) being evaluated for other developmental opportunities, or (c)
inactive. We had the option to purchase the assets that were undergoing
construction activities, which consisted of the Wichita Falls crude oil pipeline
and crude oil storage facility, the Southlake refined product terminal and the
Ringgold crude oil storage facility. The Southlake refined product terminal and
the Ringgold crude oil storage facility were purchased by us in 2001, and the
Wichita Falls crude oil pipeline and crude oil storage facility was purchased by
us on February 1, 2002 (see Note 4: Acquisitions).
NOTE 2: Summary of Significant Accounting Policies
Basis of Presentation: These consolidated and combined financial statements
include the accounts and operations of Valero L.P., Valero Logistics Operations
and the Wichita Falls Business (effective December 31, 2001). All intercompany
transactions have been eliminated. The investment in affiliate is accounted for
under the equity method. The operations of certain of the crude oil and refined
product pipelines and terminals that are jointly owned with other companies are
proportionately consolidated in the accompanying financial statements.
Use of Estimates: The preparation of financial statements in accordance with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates, including
those related to commitments, contingencies and environmental liabilities, based
on currently available information. Changes in facts and circumstances may
result in revised estimates.
Cash and Cash Equivalents: All highly liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents.
38
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
Additions to property, plant and equipment, including maintenance and expansion
capital expenditures and capitalized interest, are recorded at cost. Maintenance
capital expenditures represent capital expenditures to replace partially or
fully depreciated assets to maintain the existing operating capacity of existing
assets and extend their useful lives. Expansion capital expenditures represent
capital expenditures to expand the operating capacity of existing assets,
whether through construction or acquisition. Repair and maintenance expenses
associated with existing assets that are minor in nature and do not extend the
useful life of existing assets are charged to operating expenses as incurred.
Depreciation is provided principally using the straight-line method over the
estimated useful lives of the related assets. For certain interstate pipelines,
the depreciation rate used is based on FERC requirements and ranges from 1% to
17% of the net asset value. When property, plant and equipment is retired or
otherwise disposed of, the difference between the carrying value and the net
proceeds is recognized as gain or loss in the statement of income in the year
retired.
Goodwill: The excess of cost over the fair value of net assets acquired
(goodwill) is being amortized using the straight-line method over 20 years.
Effective January 1, 2002, amortization of goodwill ceased and the unamortized
balance will be tested annually for impairment. See the discussion of FASB
Statement No. 142 below regarding these required accounting changes.
Impairment: Long-lived assets, including goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The evaluation of recoverability is performed using
undiscounted estimated net cash flows generated by the related asset. If an
asset is deemed to be impaired, the amount of impairment is determined as the
amount by which the net carrying value exceeds discounted estimated net cash
flows. Effective January 1, 2002, impairment accounting requirements will
change. See the discussion of FASB Statement No. 144 below regarding the
required accounting change.
Environmental Remediation Costs: Environmental remediation costs are expensed
and the associated accrual established when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. Accrued liabilities are not discounted to present
value and are not reduced by possible recoveries from third parties.
Environmental costs include initial site surveys, costs for remediation and
restoration, including direct internal costs, and ongoing monitoring costs, as
well as fines, damages and other costs, when estimable. Adjustments to initial
estimates are recorded, from time to time, to reflect changing circumstances and
estimates based upon additional information developed in subsequent periods.
Revenue Recognition: Revenues are derived from interstate and intrastate
pipeline transportation, storage and terminalling of refined products and crude
oil. Transportation revenues (based on pipeline tariff rates) are recognized as
refined product or crude oil is transported through the pipelines. In the case
of crude oil pipelines, the cost of the storage operations are included in the
crude oil pipeline tariff rates. Terminalling revenues (based on a terminalling
fee) are recognized as refined products are moved into the terminal and as
additives are blended with refined products.
Operating Expenses: Operating expenses consist primarily of fuel and power
costs, telecommunication costs, labor costs of pipeline field and support
personnel, maintenance, utilities and insurance. Such expenses are recognized as
incurred.
Federal and State Income Taxes: For the periods prior to July 1, 2000, the
Ultramar Diamond Shamrock Logistics Business was included in the consolidated
federal and state income tax returns of UDS. Deferred income taxes were computed
based on recognition of future tax expense or benefits, measured by enacted tax
rates that were attributable to taxable or deductible temporary differences
between financial statement and income tax reporting bases of assets and
liabilities. The current portion of income taxes payable prior to July 1, 2000
was due to UDS and has been included in the net parent investment amount.
The Wichita Falls Business was included in UDS' (now Valero Energy's)
consolidated federal and state income tax returns. Deferred income taxes were
computed based on recognition of future tax expense or benefits, measured by
enacted tax rates that were attributable to taxable or deductible temporary
differences between financial statement and income tax reporting bases of assets
and liabilities. No recognition will be given to federal or state income taxes
associated with the Wichita Falls Business for financial statement purposes for
periods subsequent to its acquisition by Valero L.P. The deferred income tax
liabilities related to the Wichita Falls Business as of February 1, 2002 were
retained by Valero Energy and were credited to net parent investment upon the
transfer of the Wichita Falls Business to Valero L.P.
39
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Valero L.P. and Valero Logistics Operations are limited partnerships and are not
subject to federal or state income taxes. Accordingly, the taxable income or
loss of Valero L.P. and Valero Logistics Operations, which may vary
substantially from income or loss reported for financial reporting purposes, is
generally includable in the federal and state income tax returns of the
individual partners. For transfers of publicly held units subsequent to the
initial public offering, we have made an election permitted by section 754 of
the Internal Revenue Code to adjust the common unit purchaser's tax basis in our
underlying assets to reflect the purchase price of the units. This results in an
allocation of taxable income and expense to the purchaser of the common units,
including depreciation deductions and gains and losses on sales of assets, based
upon the new unitholder's purchase price for the common units.
Net Parent Investment: The net parent investment, prior to July 1, 2000,
represents a net balance as the result of various transactions between the
Ultramar Diamond Shamrock Logistics Business and UDS. There are no terms of
settlement or interest charges associated with this balance. The balance was the
result of the Ultramar Diamond Shamrock Logistics Business' participation in
UDS's central cash management program, wherein all of the Ultramar Diamond
Shamrock Logistics Business' cash receipts were remitted to UDS and all cash
disbursements were funded by UDS. Other transactions included intercompany
transportation, storage and terminalling revenues and related expenses,
administrative and support expenses incurred by UDS and allocated to the
Ultramar Diamond Shamrock Logistics Business, and income taxes. In conjunction
with the transfer of the assets and liabilities of the Ultramar Diamond Shamrock
Logistics Business to Valero Logistics Operations on July 1, 2000, Valero L.P.
and Valero Logistics Operations issued limited and general partner interests to
various UDS subsidiaries.
The net parent investment as of December 31, 2001 represents the historical cost
to Valero Energy, net of deferred income tax liabilities and certain other
accrued liabilities, related to the Wichita Falls Business. The Wichita Falls
Business is included in Valero L.P. as of December 31, 2001 due to a
reorganization of entities under common control resulting from the acquisition
of the Wichita Falls Business by Valero L.P. on February 1, 2002, for which we
paid $64,000,000 to Valero Energy and Valero Energy retained the existing
accrued liabilities and deferred income tax liabilities. There are no terms of
settlement or interest charges associated with this balance.
Partners' Equity: Effective April 16, 2001, Valero L.P.'s consolidated partners'
equity consisted of 2% general partner interest and 98% limited partners'
interest (represented by common and subordinated units). From July 1, 2000
through April 15, 2001, both Valero L.P. and Valero Logistics Operations
partners' equity consisted of a 1% general partner interest and a 99% limited
partner interest.
Net Income per Unit: The computation of basic net income per unit is based on
the weighted-average number of common and subordinated units outstanding during
the year. Diluted net income per unit is based on the weighted average number of
common and subordinated units outstanding during the year and, to the extent
dilutive, unit equivalents consisting of unit options and restricted units.
Segment Disclosures: We operate in only one segment, the petroleum pipeline
segment of the oil and gas industry.
Derivative Instruments: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends Statement No. 133. Statement No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. We adopted Statement No. 133, as amended,
effective January 1, 2001 and there was no impact as we do not hold or trade
derivative instruments.
40
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Accounting Pronouncements
FASB Statement No. 141
In June 2001, the FASB issued Statement No. 141, " Business Combinations."
Statement No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations within the scope of Statement No. 141
are to be accounted for using the purchase method. The provisions of Statement
No. 141 apply to all business combinations initiated after June 30, 2001 and to
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. We implemented Statement No. 141
on July 1, 2001; however, the acquisition of the Southlake refined product
terminal, the Ringgold crude oil storage facility and the Wichita Falls Business
have been accounted for at historical cost because they were acquired from our
parent.
FASB Statement No. 142
Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. The statement
provides that goodwill and other intangible assets that have indefinite useful
lives will not be amortized but instead will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but such lives will not be limited to 40
years. Impairment losses for goodwill and indefinite-lived intangible assets
that arise due to the initial application of Statement No. 142 are to be
reported as resulting from a change in accounting principle. We have reviewed
the requirements of Statement No. 142 and the impact of adoption effective
January 1, 2002 resulted in the cessation of goodwill amortization beginning
January 1, 2002, which amortization approximates $300,000 annually. In addition,
we believe that future reported net income may be more volatile because
impairment losses related to goodwill are likely to occur irregularly and in
varying amounts.
FASB Statement No. 143
Also in June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
an obligation associated with the retirement of a tangible long-lived asset. An
asset retirement obligation should be recognized in the financial statements in
the period in which it meets the definition of a liability as defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements." The amount of the
liability would initially be measured at fair value. Subsequent to initial
measurement, an entity would recognize changes in the amount of the liability
resulting from (a) the passage of time and (b) revisions to either the timing or
amount of estimated cash flows. Statement No. 143 also establishes standards for
accounting for the cost associated with an asset retirement obligation. It
requires that, upon initial recognition of a liability for an asset retirement
obligation, an entity capitalize that cost by recognizing an increase in the
carrying amount of the related long-lived asset. The capitalized asset
retirement cost would then be allocated to expense using a systematic and
rational method. Statement No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002, with earlier application
encouraged. We are currently evaluating the impact of adopting this new
statement.
41
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
FASB Statement No. 144
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," but retains Statement No. 121's
fundamental provisions for recognition and measurement of impairment of
long-lived assets to be held and used and measurement of long-lived assets to be
disposed of by sale. This statement also supersedes APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. Statement
No. 144 does not apply to goodwill or other intangible assets, the accounting
and reporting of which is addressed in newly issued Statement No. 142, "Goodwill
and Other Intangible Assets." The provisions of Statement No. 144 are effective
for financial statements for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
There was no impact to our financial position or results of operations as a
result of adopting this statement effective January 1, 2002.
FASB Statement No. 145
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement:
o rescinds Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt,"
o rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"
o rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and
o amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of Statement No. 145 related to the
rescission of Statement No. 4 shall be applied in fiscal years beginning after
May 15, 2002 and the provisions of this statement related to the Statement No.
13 sale-leaseback inconsistency shall be effective for transactions occurring
after May 15, 2002, with early application encouraged. All other provisions of
this statement shall be effective for financial statements issued on or after
May 15, 2002, with earlier application encouraged. We do not expect that the
adoption of this statement will have a material impact on our financial position
or results of operations.
NOTE 3: Initial Public Offering
On April 16, 2001, we completed our initial public offering of common units, by
selling 5,175,000 common units to the public at $24.50 per unit. Total proceeds
before offering costs and underwriters' commissions were $126,787,000. After the
offering, outstanding equity included 9,599,322 common units, including
4,424,322 held by UDS Logistics, LLC, a subsidiary of Valero Energy, 9,599,322
subordinated units held by UDS Logistics, LLC and a 2% general partner interest
held by Riverwalk Logistics, L.P.
Concurrent with the closing of the initial public offering, we borrowed
$20,506,000 under our existing revolving credit facility. The net proceeds from
the initial public offering and the borrowings under the revolving credit
facility were used to repay the debt due to parent, make a distribution to
affiliates of Valero Energy for reimbursement of previous capital expenditures
incurred with respect to the assets transferred to us, and for working capital
purposes.
42
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
A summary of the proceeds received and use of proceeds is as follows (in
thousands):
Proceeds received:
Sale of common units to the public................. $ 126,787
Borrowings under the revolving credit facility..... 20,506
-------
Total proceeds.................................. 147,293
-------
Use of proceeds:
Underwriters' commissions.......................... 8,875
Professional fees and other costs.................. 6,000
Debt issuance costs................................ 436
Repayment of debt due to parent.................... 107,676
Reimbursement of capital expenditures.............. 20,517
-------
Total use of proceeds........................... 143,504
-------
Net proceeds remaining.......................... $ 3,789
=======
NOTE 4: Acquisitions
On July 2, 2001, we acquired the Southlake refined product terminal located in
Dallas, Texas from UDS for $5,600,000, the option purchase price per the Omnibus
Agreement. We paid for the terminal with available cash on hand, a portion of
which was borrowed at the time of our initial public offering. During the six
months ended December 31, 2001, the Southlake refined product terminal averaged
approximately 25,000 barrels per day of throughput and increased our operating
income by approximately $750,000.
On December 1, 2001, we acquired the crude oil storage facility at Ringgold,
Texas from UDS for $5,200,000, the amended option purchase price per the Omnibus
Agreement. We borrowed $5,000,000 under our revolving credit facility to acquire
the facility. This crude oil storage facility, which has a capacity of 600,000
barrels, will improve crude oil scheduling and enhance the crude oil supply
system for Valero Energy's Ardmore and McKee refineries.
On February 1, 2002, we acquired the Wichita Falls Business, which includes the
Wichita Falls to McKee crude oil pipeline and the Wichita Falls crude oil
storage facility, from Valero Energy for $64,000,000. The acquisition was funded
with $64,000,000 of borrowings under the revolving credit facility. The
pipeline, which runs from Wichita Falls, Texas to Valero Energy's McKee
refinery, has a capacity of 110,000 barrels per day and the storage facility has
a capacity of 660,000 barrels.
The balance sheet of the Wichita Falls Business as of December 31, 2001, which
is included in the consolidated and combined balance sheet as of December 31,
2001, includes the following amounts in the respective captions.
Wichita Falls
Business
December 31,
2001
----
(in thousands)
Balance Sheet Caption:
Property, plant and equipment..................... $ 64,160
Accounts payable and accrued liabilities.......... 131
Taxes other than income taxes..................... 251
Deferred income tax liabilities................... 13,147
Net parent investment............................. 50,631
43
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The following unaudited pro forma financial information for the year ended
December 31, 2001 assumes that the Wichita Falls Business was acquired on
January 1, 2001 with borrowings under the revolving credit facility.
Pro Forma
Year Ended
December 31,
2001
----
(in thousands)
Pro Forma Income Statement Information:
Revenues........................................... $ 117,312
Total costs and expenses........................... (59,993)
Operating income................................... 57,319
Net income......................................... 53,686
Since Valero L.P. did not complete its IPO until April 16, 2001, pro forma net
income applicable to the period April 16, 2001 to December 31, 2001 would have
been $41,844,000, of which $41,007,000 would have related to the limited
partners. Pro forma net income per unit applicable to the period after April 15,
2001 would have been $2.14 per unit.
NOTE 5: Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following:
Estimated December 31,
Useful ------------
Lives 2001 2000
----- ---- ----
(years) (in thousands)
Land and land improvements..................... 0 - 20 $ 888 $ 830
Buildings...................................... 35 5,392 3,289
Pipeline and equipment......................... 3 - 40 427,227 345,761
Rights of Way.................................. 20 - 35 29,857 25,477
Construction in progress....................... - 7,037 13,180
------- --------
Total........................................ 470,401 388,537
Accumulated depreciation and amortization...... (121,389) (108,520)
-------- --------
Property, plant and equipment, net........... $ 349,012 $ 280,017
======== ========
In August 1999, upon the completion of an expansion of the McKee to El Paso
refined product pipeline, we sold an 8.33% interest in the pipeline and the El
Paso refined product terminal to Phillips Petroleum Company for $12,000,000,
resulting in a pre-tax gain of $2,478,000. The ownership interest sold in the
McKee to El Paso refined product pipeline and terminal represented excess
throughput capacity that we had not utilized, thus revenues did not decline as a
result of the sale.
Capitalized interest costs included in property, plant and equipment were
$298,000 and $115,000 for the years ended December 31, 2001 and 1999,
respectively. No interest was capitalized in the six months ended December 31,
2000 or in the six months ended June 30, 2000.
44
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 6: Investment in Affiliate
We own a 50% interest in Skelly-Belvieu, which is accounted for under the equity
method. The following presents summarized unaudited financial information
related to Skelly-Belvieu as of December 31, 2001 and 2000, for the years ended
December 31, 2001 and 1999 and for the six months ended December 31, 2000 and
June 30, 2000:
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2001 2000 2000 1999
---- ---- ---- ----
(in thousands)
Statement of Income Information:
Revenues........................................... $ 12,287 $ 6,883 $ 6,902 $ 12,133
Income before income taxes......................... 5,587 3,517 3,469 5,954
Valero Logistics Operations' share
of net income................................. 3,179 1,951 1,926 3,874
Valero Logistics Operations' share
of distributions.............................. 2,874 2,352 2,306 4,238
December 31,
-------------------
2001 2000
---- ----
(in thousands)
Balance Sheet Information:
Current assets.................................... $ 1,653 $ 1,618
Property, plant and equipment, net................ 50,195 50,649
------ ------
Total assets.................................... $ 51,848 $ 52,267
====== ======
Current liabilities............................... $ 111 $ 369
Members' equity................................... 51,737 51,898
------ ------
Total liabilities and members' equity........... $ 51,848 $ 52,267
====== ======
NOTE 7: Long-term Debt
On December 15, 2000, we entered into a five-year $120,000,000 revolving credit
facility. Borrowings under the revolving credit facility bear interest at either
an alternative base rate or the LIBOR rate at our option. The revolving credit
facility requires that we maintain certain financial ratios and includes other
restrictive covenants, including a prohibition on distributions if any default,
as defined in the revolving credit facility, exists or would result from the
distribution. Management believes that we are in compliance with all of these
ratios and covenants.
In conjunction with the initial public offering of our common units on April 16,
2001, we borrowed $20,506,000 under the revolving credit facility. The net
proceeds from the initial public offering and the borrowings under the revolving
credit facility were used to repay the debt due to parent, make a distribution
to affiliates of UDS for reimbursement of previous capital expenditures incurred
with respect to the assets transferred to us, and for working capital purposes.
We made repayments under the revolving credit facility in August 2001 of
$5,506,000 and in October 2001 of $4,000,000. In November 2001, we borrowed
$5,000,000 under the revolving credit facility to fund the purchase of the
Ringgold crude oil storage facility on December 1, 2001. The outstanding balance
as of December 31, 2001 was $16,000,000. On February 1, 2002, we borrowed
$64,000,000 under the revolving credit facility to fund the acquisition of the
Wichita Falls Business (except certain retained liabilities) from Valero Energy.
45
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into a
financing agreement with the Port of Corpus Christi Authority of Nueces County,
Texas (Port Authority of Corpus Christi) for the construction of a crude oil
storage facility. The original note totaled $12,000,000 and is due in annual
installments of $1,222,000 through December 31, 2015. Interest on the unpaid
principal balance accrues at a rate of 8% per annum. In conjunction with the
July 1, 2000 transfer of assets and liabilities to Valero Logistics Operations,
the $10,818,000 outstanding indebtedness owed to the Port of Corpus Christi
Authority was assumed by Valero Logistics Operations. The land on which the
crude oil storage facility was constructed is leased from the Port Authority of
Corpus Christi (see Note 10: Commitments and Contingencies).
The aggregate long-term debt repayments are due as follows (in thousands):
2002............................................. $ 462
2003............................................. 449
2004............................................. 485
2005............................................. 524
2006............................................. 16,566
Thereafter....................................... 7,636
------
Total repayments............................. $ 26,122
======
Interest payments totaled $1,559,000, $441,000, $433,000 and $948,000 for the
year ended December 31, 2001, the six months ended December 31, 2000 and June
30, 2000 and the year ended December 31, 1999, respectively.
NOTE 8: Debt due to Parent
UDS, through various subsidiaries, constructed or acquired the various crude oil
and refined product pipeline, terminalling and storage assets of the Ultramar
Diamond Shamrock Logistics Business. Effective June 30, 2000, in conjunction
with the initial public offering of common units of Valero L.P., the
subsidiaries of UDS which owned the various assets of the Ultramar Diamond
Shamrock Logistics Business formalized the terms under which certain
intercompany accounts and working capital loans would be settled by executing
promissory notes with an aggregate principal balance of $107,676,000. The
promissory notes required that the principal be repaid no later than June 30,
2005 and bear interest at a rate of 8% per annum on the unpaid balance.
Effective July 1, 2000, the $107,676,000 of debt due to parent was assumed by
Valero Logistics Operations. Interest expense accrued and recorded as a
reduction of receivable from parent totaled $4,307,000 for the six months ended
December 31, 2000 and $2,513,000 for the period January 1, 2001 through April
15, 2001.
Concurrent with the closing of our initial public offering on April 16, 2001, we
repaid these promissory notes using a portion of the net proceeds from the
initial public offering and borrowings under the $120,000,000 revolving credit
facility (see Note 3: Initial Public Offering).
NOTE 9: Environmental Matters
Our operations are subject to environmental laws and regulations adopted by
various federal, state and local governmental authorities in the jurisdictions
in which we operate. Although we believe our operations are in general
compliance with applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline, terminalling and storage operations,
and there can be no assurance that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations,
could result in substantial costs and liabilities. Accordingly, we have adopted
policies, practices and procedures in the areas of pollution control, product
safety, occupational health and the handling, storage, use and disposal of
hazardous materials to prevent material environmental or other damage, and to
limit the financial liability which could result from such events. However, some
risk of environmental or other damage is inherent in pipeline, terminalling and
storage operations, as it is with other entities engaged in similar businesses.
46
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The balances of and changes in accruals for environmental matters which were
included in accrued liabilities and other long-term liabilities, prior to July
1, 2000, consisted of the following:
Six Months Ended Year Ended
Ended June 30, December 31,
2000 1999
---- ----
(in thousands)
Balance at beginning of period............ $ 2,757 $ 4,319
Additions to (reductions from) accrual... 100 (1,114)
Liabilities retained by UDS.............. (2,507) -
Payments................................. (350) (448)
------ ------
Balance at end of period.................. $ - $ 2,757
====== ======
During 1999, based on the annual review of environmental liabilities, it was
determined that certain liabilities were overstated as the required cleanup
obligations were less than originally estimated. Accordingly, environmental
liabilities were reduced $1,114,000.
In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, UDS agreed to indemnify Shamrock Logistics Operations for environmental
liabilities that arose prior to July 1, 2000. In connection with the initial
public offering of Valero L.P., UDS agreed to indemnify Valero L.P. for
environmental liabilities that arose prior to April 16, 2001 and are discovered
within 10 years after April 16, 2001. Excluded from this indemnification are
liabilities that result from a change in environmental law after April 16, 2001.
Effective with the acquisition of UDS, Valero Energy has assumed this
environmental indemnification. In addition, as an operator or owner of the
assets, we could be held liable for pre-April 16, 2001 environmental damage
should Valero Energy be unable to fulfill its obligation. However, we believe
that such a situation is remote given Valero Energy's financial condition.
Environmental exposures are difficult to assess and estimate due to unknown
factors such as the magnitude of possible contamination, the timing and extent
of remediation, the determination of our liability in proportion to other
parties, improvements in cleanup technologies and the extent to which
environmental laws and regulations may change in the future. Although
environmental costs may have a significant impact on results of operations for
any single period, we believe that such costs will not have a material adverse
effect on our financial position. As of December 31, 2001, we have not incurred
any environmental liabilities which were not covered by the environmental
indemnification.
In conjunction with the sale of the Wichita Falls Business to Valero L.P.,
Valero Energy has agreed to indemnify Valero L.P. for any environmental
liabilities that arose prior to February 1, 2002 and are discovered by April 15,
2011. As of and for the years ended December 31, 2001, 2000 and 1999, the
Wichita Falls Business did not incur any environmental liability, thus there is
no accrual as of December 31, 2001.
NOTE 10: Commitments and Contingencies
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into
several agreements with the Port Authority of Corpus Christi including a crude
oil dock user agreement, a land lease agreement and a note agreement. The crude
oil dock user agreement allows us to operate and manage a crude oil dock in
Corpus Christi for a five-year period beginning August 1, 1994 and the agreement
has automatically been renewed annually since August, 1999. We share use of the
crude oil dock with two other users and operating costs are split evenly among
the three users. The crude oil dock user agreement requires that we collect
wharfage fees, based on the quantity of barrels off loaded from each vessel, and
dockage fees, based on vessels berthing at the dock. These fees are remitted to
the Port Authority of Corpus Christi monthly. The wharfage and one-half of the
dockage fees that we pay for the use of the crude oil dock reduces the annual
amount we owe to the Port Authority of Corpus Christi under the note agreement
discussed in Note 7: Long Term Debt. The wharfage and dockage fees for our use
of the crude oil dock totaled $1,449,000, $692,000, $698,000 and $1,302,000 for
the year ended December 31, 2001, the six months ended December 31, 2000 and
June 30, 2000 and the year ended December 31, 1999, respectively.
47
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Effective April 1988, the Ultramar Diamond Shamrock Logistics Business, along
with five other users entered into a refined product dock user agreement with
the Port Authority of Corpus Christi to use a refined product dock for a
two-year period and the agreement has automatically been renewed annually since
April, 1990. We also operate the refined product dock and operating costs are
split between us and one other user. We are responsible for collecting and
remitting the refined product wharfage and dockage fees to the Port Authority of
Corpus Christi. The wharfage and dockage fees for our use of the refined product
dock totaled $166,000, $86,000, $114,000 and $211,000 for the year ended
December 31, 2001, the six months ended December 31, 2000 and June 30, 2000 and
the year ended December 31, 1999, respectively.
The crude oil and the refined product docks provide Valero Energy's Three Rivers
refinery access to marine facilities to receive crude oil and deliver refined
products. For the years ended December 31, 2001, 2000 and 1999, the Three Rivers
refinery received 92%, 93% and 91%, respectively, of its crude oil requirements
from crude oil received at the crude oil dock. Also, for the years ended
December 31, 2001, 2000 and 1999, 6%, 6% and 7%, respectively, of the refined
products produced at the Three Rivers refinery were transported via pipeline to
the Corpus Christi refined product dock.
We have the following land leases related to refined product terminals and crude
oil storage facilities:
o Corpus Christi crude oil storage facility: a 20-year noncancellable
operating lease on 31.35 acres of land through 2014, at which time the
lease is renewable every five years, for a total of 20 renewable years.
o Corpus Christi refined product terminal: a 5-year noncancellable operating
lease on 5.21 acres of land through 2006, and a 5-year noncancellable
operating lease on 8.42 acres of land through 2002, at which time the
agreements are renewable for at least three five-year periods.
o Harlingen refined product terminal: a 13-year noncancellable operating
lease on 5.88 acres of land through 2008, and a 30-year noncancellable
operating lease on 9.04 acres of land through 2008.
o Colorado Springs airport terminal: a 50-year noncancellable operating lease
on 46.26 acres of land through 2043, at which time the lease is renewable
for another 50-year period.
The above land leases require monthly payments totaling $18,000 and are
adjustable every five years based on changes in the Consumer Price Index.
In addition, we lease certain equipment and vehicles under operating lease
agreements expiring through 2002. Future minimum rental payments applicable to
noncancellable operating leases as of December 31, 2001, are as follows (in
thousands):
2002................................................ $ 205
2003................................................ 188
2004................................................ 188
2005................................................ 188
2006................................................ 174
Thereafter.......................................... 1,586
-----
Future minimum lease payments................... $ 2,529
=====
Rental expense for all operating leases totaled $281,000, $53,000, $203,000 and
$315,000 for the year ended December 31, 2001, the six months ended December 31,
2000 and June 30, 2000 and the year ended December 31, 1999, respectively.
We are involved in various lawsuits, claims and regulatory proceedings
incidental to our business. In the opinion of management, the outcome of such
matters will not have a material adverse effect on our financial position or
results of operations.
48
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 11: Income Taxes
As discussed in "Note 2: Summary of Significant Accounting Policies," Valero
L.P. and Valero Logistics Operations are limited partnerships and are not
subject to federal or state income taxes. However, the operations of the
Ultramar Diamond Shamrock Logistics Business were subject to federal and state
income taxes and the results of operations prior to July 1, 2000 were included
in UDS' consolidated federal and state income tax returns. In addition, the
Wichita Falls Business is subject to federal and state income taxes prior to its
acquisition on February 1, 2002. The amounts presented below relate only to the
Ultramar Diamond Shamrock Logistics Business prior to July 1, 2000 and the
Wichita Falls Business as of December 31, 2001 and were calculated as if the
Businesses filed separate federal and state income tax returns.
The transfer of assets and liabilities from the Ultramar Diamond Shamrock
Logistics Business to Valero Logistics Operations was deemed a change in tax
status. Accordingly, the deferred income tax liability as of June 30, 2000 of
$38,217,000 was written off through the statement of income in the caption,
benefit (provision) for income taxes.
The benefit (provision) for income taxes consisted of the following:
Predecessor
-----------------------------
Six Months Year Ended
Ended June 30, December 31,
2000 1999
---- ----
(in thousands)
Current:
Federal.................................. $ (5,132) $ (20,036)
State.................................... (733) (2,863)
Deferred:
Federal.................................. (1,415) (3,327)
State.................................... (125) (295)
Write-off of the deferred income
tax liability............................ 38,217 -
------ -------
Benefit (provision) for income taxes..... $ 30,812 $ (26,521)
====== =======
Deferred income taxes arise from temporary differences between the income tax
bases of assets and liabilities and their reported amounts in the financial
statements. The components of the net deferred income tax liabilities consisted
of the following:
Ultramar
Diamond
Shamrock
Logistics
Wichita Falls Business
Business (Predecessor)
December 31, June 30,
2001 2000
---- ----
(in thousands)
Deferred income tax liabilities:
Excess of book basis over tax basis of:
Property, plant and equipment............. $ 13,147 $ 36,212
Investment in affiliate................... - 2,960
------ ------
Total deferred income tax liabilities... 13,147 39,172
Deferred income tax assets -
Accrued liabilities and payables............. - (955)
------ ------
Net deferred income tax liabilities..... $ 13,147 $ 38,217
====== ======
49
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
The differences between the Ultramar Diamond Shamrock Logistics Business'
effective income tax rate and the U.S. federal statutory rate is reconciled as
follows:
Predecessor
------------------------------
Six Months Year Ended
Ended June 30, December 31,
2000 1999
---- ----
U.S. federal statutory rate................... 35.0% 35.0%
State income taxes, net of federal taxes...... 3.1 3.1
Non-deductible goodwill....................... 0.3 0.2
---- ----
Effective income tax rate................... 38.4% 38.3%
==== ====
Income taxes paid to UDS totaled $5,865,000 and $22,899,000 for the six months
ended June 30, 2000 and for the year ended December 31, 1999, respectively. The
differences between net income and taxable net income are reconciled as follows:
Predecessor
------------------------------
Six Months Year Ended
Ended June 30, December 31,
2000 1999
---- ----
(in thousands)
Net income.................................... $ 49,970 $ 42,798
(Benefit) provision for income taxes.......... (30,812) 26,521
Tax depreciation and amortization in
excess of book depreciation and
amortization.............................. (3,076) (7,990)
Book equity income in excess of taxable
income of Skelly-Belvieu.................. (567) (790)
Other, net.................................... (983) (3,288)
------- ------
Taxable net income.......................... $ 14,532 $ 57,251
======= ======
NOTE 12: Financial Instruments and Concentration of Credit Risk
The estimated fair value of our fixed rate debt as of December 31, 2001 and 2000
was $11,240,000 and $119,220,000, respectively, as compared to the carrying
value of $10,122,000 and $118,360,000, respectively. These fair values were
estimated using discounted cash flow analysis, based on our current incremental
borrowing rates for similar types of borrowing arrangements. Valero L.P. has not
utilized derivative financial instruments related to these borrowings. Interest
rates on borrowings under the revolving credit facility float with market rates
and thus the carrying amount approximates fair value.
Substantially all of our revenues are derived from Valero Energy and its various
subsidiaries. Valero Energy transports crude oil to three of its refineries
using our various crude oil pipelines and storage facilities and transports
refined products to its company-owned retail operations or wholesale customers
using our various refined product pipelines and terminals. Valero Energy and its
subsidiaries are investment grade customers; therefore, we do not believe that
the trade receivables from Valero Energy represent a significant credit risk.
However, the concentration of business with Valero Energy, which is a large
refining and retail marketing company, has the potential to impact our overall
exposure, both positively and negatively, to changes in the refining and
marketing industry.
50
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 13: Related Party Transactions
We have related party transactions with Valero Energy for pipeline tariff and
terminalling fee revenues, certain employee costs, insurance costs,
administrative costs and interest expense on the debt due to parent (for the
period from July 1, 2000 to April 15, 2001). The receivable from parent as of
December 31, 2001 and 2000 represents the net amount due from Valero Energy for
these related party transactions and the net cash collected under Valero
Energy's centralized cash management program on our behalf, respectively.
The following table summarizes transactions with Valero Energy (formerly UDS):
Successor Predecessor
------------------------------ ------------------------------
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
2001 2000 2000 1999
---- ---- ---- ----
(in thousands)
Revenues...................................... $ 98,166 $ 47,210 $ 44,187 $ 108,467
Operating expenses............................ 11,452 5,718 5,393 9,614
General and administrative expenses........... 5,200 2,600 2,839 5,201
Interest expense on debt due to parent........ 2,513 4,307 - -
Services Agreement
Effective July 1, 2000, UDS entered into a Services Agreement with us, whereby
UDS agreed to provide the corporate functions of legal, accounting, treasury,
information technology and other services for an annual fee of $5,200,000 for a
period of eight years. The $5,200,000 is adjustable annually based on the
Consumer Price Index published by the U.S. Department of Labor, and may also be
adjusted to take into account additional service levels necessitated by the
acquisition or construction of additional assets. Management believes that the
$5,200,000 is a reasonable approximation of the general and administrative costs
related to the pipeline, terminalling and storage operations. This annual fee is
in addition to the incremental general and administrative costs to be incurred
from third parties as a result of our being a publicly held entity.
The Services Agreement also requires that we reimburse UDS for various recurring
costs of employees who work exclusively within the pipeline, terminalling and
storage operations and for certain other costs incurred by UDS relating solely
to us. These employee costs include salary, wages and benefit costs. Concurrent
with the acquisition of UDS by Valero Energy, Valero Energy became the obligor
under the Services Agreement.
Prior to July 1, 2000, UDS allocated approximately 5% of its general and
administrative expenses incurred in the United States to its pipeline,
terminalling and storage operations to cover costs of centralized corporate
functions and other corporate services. A portion of the allocated general and
administrative costs is passed on to partners, which jointly own certain
pipelines and terminals with us. The net amount of general and administrative
costs allocated to partners of jointly owned pipelines totaled $581,000,
$251,000, $249,000 and $503,000 for the year ended December 31, 2001, the six
months ended December 31, 2000 and June 30, 2000 and the year ended December 31,
1999, respectively.
51
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
Pipelines and Terminals Usage Agreement
On April 16, 2001, UDS entered into a Pipelines and Terminals Usage Agreement
with us, whereby UDS agreed to use our pipelines to transport at least 75% of
the crude oil shipped to and at least 75% of the refined products shipped from
the McKee, Three Rivers and Ardmore refineries and to use our refined product
terminals for terminalling services for at least 50% of all refined products
shipped from these refineries until at least April, 2008. For the year ended
December 31, 2001, UDS used our pipelines to transport 78% of its crude oil
shipped to and 80% of the refined products shipped from the McKee, Three Rivers
and Ardmore refineries and UDS used our terminalling services for 60% of all
refined products shipped from these refineries. Valero Energy also assumed the
obligation under the Pipelines and Terminals Usage Agreement in conjunction with
the acquisition of UDS by Valero Energy.
If market conditions change with respect to the transportation of crude oil or
refined products or to the end markets in which Valero Energy sells refined
products, in a material manner such that Valero Energy would suffer a material
adverse effect if it were to continue to use our pipelines and terminals at the
required levels, Valero Energy's obligation to us will be suspended during the
period of the change in market conditions to the extent required to avoid the
material adverse effect.
NOTE 14: Employee Benefit Plans
The employees who work in Valero L.P. are included in the various employee
benefit plans of Valero Energy. These plans include qualified, non-contributory
defined benefit retirement plans, defined contribution 401(k) plans, employee
and retiree medical, dental and life insurance plans, long-term incentive plans
(i.e. stock options and bonuses) and other such benefits.
Our share of allocated parent company employee benefit plan expenses was
$1,346,000, $662,000, $702,000 and $1,197,000 for the year ended December 31,
2001, the six months ended December 31, 2000 and June 30, 2000 and the year
ended December 31, 1999, respectively. These employee benefit plan expenses are
included in operating expenses with the related payroll costs.
NOTE 15: Impact of Tariff Rate and Terminalling Revenue Changes
Over the past several years, we have expanded the throughput capacity of several
of our crude oil and refined product pipelines. The historical tariff rates were
based on initial pipeline cost and were not revised upon subsequent expansions
or increases or decreases in throughput levels.
As a result, we filed revised tariff rates on many of our crude oil and refined
product pipelines to reflect the total cost of the pipeline, the current
throughput capacity, the current throughput utilization and other market
conditions. The revised tariff rates were implemented January 1, 2000 and the
overall impact of the tariff rate changes resulted in a decrease to revenues.
Prior to 1999, we did not charge a separate terminalling fee for terminalling
services at the refined product terminals. Terminalling revenues for 1998 and
prior years were recognized based on the total costs incurred at the terminals,
which costs were charged back to the related refinery. Effective January 1,
1999, we began charging a separate terminalling fee at the refined product
terminals. The terminalling fee was established at a rate that we believed to be
competitive with rates charged by other entities for terminalling similar
refined products. Since the terminalling fee now includes a margin of profit,
terminalling revenues increased.
If the revised tariff rates had been implemented effective January 1, 1999
revenues would have decreased approximately 20%.
52
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 16: Restricted Units
Valero GP, LLC (formerly Shamrock Logistics GP, LLC), the general partner of
Riverwalk Logistics, L.P., adopted a long-term incentive plan under which
restricted units and distribution equivalent rights (DERs) may be awarded to
certain key employees and non-employees. In July 2001, Valero GP, LLC granted
205 restricted units and DERs to each of its two outside directors. The
restricted units were to vest at the end of a three-year period and be paid in
cash. The DERs were to accumulate equivalent distributions that other
unitholders receive over the vesting period. For the year ended December 31,
2001, we recognized $2,000 of compensation expense associated with the
restricted units and DERs that were granted.
NOTE 17: Net Income per Unit
The following table provides details of the basic and diluted net income per
unit computations:
Period from April 16, 2001 to December 31, 2001
-----------------------------------------------
Net Income Units Per Unit
(Numerator) (Denominator) Amount
----------- ------------- ------
(in thousands)
Limited partners' interest in net income applicable to
the period after April 15, 2001........................ $ 35,032
======
Basic net income per common and subordinated unit......... $ 35,032 19,199 $ 1.82
====== ====== ====
Dilutive net income per common and subordinated unit...... $ 35,032 19,199 $ 1.82
====== ====== ====
We generated sufficient net income such that the amount of net income allocated
to common units was equal to the amount allocated to the subordinated units,
after consideration of the general partner interest.
NOTE 18: Allocations of Net Income and Cash Distributions
Valero L.P.'s partnership agreement, as amended, sets forth the calculation to
be used to determine the amount and priority of cash distributions that the
common unitholders, subordinated unitholders and general partner will receive.
The partnership agreement also contains provisions for the allocation of net
income and loss to the unitholders and the general partner. For purposes of
maintaining partner capital accounts, the partnership agreement specifies that
items of income and loss shall be allocated among the partners in accordance
with their respective percentage interests. Normal allocations according to
percentage interests are done after giving effect, if any, to priority income
allocations in an amount equal to incentive cash distributions allocated 100% to
the general partner.
The outstanding subordinated units are held by UDS Logistics, LLC, an affiliate
of our general partner, and there is no established public market for their
trading. During the subordination period, the holders of our common units are
entitled to receive each quarter a minimum quarterly distribution of $0.60 per
unit ($2.40 annualized) prior to any distribution of available cash to holders
of our subordinated units. The subordination period is defined generally as the
period that will end on the first day of any quarter beginning after December
31, 2005 if (1) we have distributed at least the minimum quarterly distribution
on all outstanding units with respect to each of the immediately preceding three
consecutive, non-overlapping four-quarter periods and (2) our adjusted operating
surplus, as defined in our partnership agreement, during such periods equals or
exceeds the amount that would have been sufficient to enable us to distribute
the minimum quarterly distribution on all outstanding units on a fully diluted
basis and the related distribution on the 2% general partner interest during
those periods.
53
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
In addition, all of the subordinated units may convert to common units on a
one-for-one basis on the first day following the record date for distributions
for the quarter ending December 31, 2005, if we meet the tests set forth in the
partnership agreement. If the subordination period ends, the rights of the
holders of subordinated units will no longer be subordinated to the rights of
the holders of common units and the subordinated units may be converted into
common units.
During the subordination period, our cash is distributed first 98% to the
holders of common units and 2% to our general partner until there has been
distributed to the holders of common units an amount equal to the minimum
quarterly distribution and arrearages in the payment of the minimum quarterly
distribution on the common units for any prior quarter. Any additional cash is
distributed 98% to the holders of subordinated units and 2% to our general
partner until there has been distributed to the holders of subordinated units an
amount equal to the minimum quarterly distribution.
Our general partner is entitled to incentive distributions if the amount we
distribute with respect to any quarter exceeds specified target levels shown
below:
Percentage of Distribution
----------------------------
General
Quarterly Distribution Amount per Unit Unitholders Partner
-------------------------------------- ----------- -------
Up to $0.60 98% 2%
Above $0.60 up to $0.66 90% 10%
Above $0.66 up to $0.90 75% 25%
Above $0.90 50% 50%
The quarterly cash distributions applicable to 2001 were as follows:
Amount
Year 2001 Record Date Payment Date Per Unit
--------- ----------- ------------ --------
4th Quarter February 1, 2002 February 14, 2002 $ 0.60
3rd Quarter November 1, 2001 November 14, 2001 0.60
2nd Quarter August 1, 2001 August 14, 2001 0.50
54
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)
NOTE 19: Quarterly Financial Data (Unaudited)
Successor
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands, except per unit data)
2001:
Revenues................................... $ 23,422 $ 23,637 $ 26,857 $ 24,911 $ 98,827
Operating income........................... 10,361 10,319 13,430 12,395 46,505
Net income................................. 8,786 10,356 13,771 12,960 45,873
Net income per unit (1).................... - 0.46 0.70 0.66 1.82
Pro forma net income per unit (4).......... 0.45 0.53 0.70 0.66 2.34
Cash distributions per unit (2)............ - 0.50 0.60 0.60 1.70
Predecessor Successor
-------------------- ---------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands, except per unit data)
2000:
Revenues................................... $ 21,406 $ 23,097 $ 24,903 $ 22,647 $ 92,053
Operating income........................... 8,604 9,061 12,298 11,186 41,149
Net income (3)............................. 5,695 44,275 11,041 9,646 70,657
Pro forma net income per unit (4).......... 0.29 2.26 0.56 0.49 3.60
(1) The net income per unit is based on 19,198,644 units, which was the number
of common and subordinated units issued and outstanding from April 16, 2001
(the date of our initial public offering) to December 31, 2001. Net income
in the net income per unit computation excludes net income applicable to
the 2% general partner interest.
(2) Represents cash distributions per unit that were declared for each
applicable quarter since we became a publicly held entity.
(3) Due to a change in tax status, effective July 1, 2000, the deferred income
tax liability of $38,217,000 as of June 30, 2000 was written off in the
statement of income. Net income in the second quarter of 2000 includes this
$38,217,000 write-off of the deferred income tax liability less the
provision for income taxes of $3,843,000 for the second quarter of 2000.
Net income in the first quarter of 2000 includes a provision for income
taxes of $3,562,000. Net income before income taxes was $9,257,000 and
$9,901,000 for the first and second quarters of 2000, respectively.
(4) Pro forma net income per unit is determined by dividing net income that
would have been allocated to the common and subordinated unitholders, which
is 98% of net income, by the weighted average number of common and
subordinated units outstanding for the period from April 16 to December 31,
2001. Pro forma net income per unit adjusted to eliminate the impact of
income taxes for the first and second quarters of 2000 would have been
$0.47 and $0.51, respectively.
55
NOTE 20: Subsequent Events
As a part of Valero L.P.'s initial public offering, unitholders approved the
issuance of 250,000 common units under a long-term incentive plan. On January
21, 2002, Valero GP, LLC granted 55,250 restricted units to key employees and
three outside directors. At the end of each year of the three-year vesting
period, the grantees are entitled to receive for one third of the restricted
units issued, a common unit of Valero L.P. or its fair market value in cash. The
grantees of these restricted units will also receive distributions over the
vesting period.
56
EXHIBIT 99.2
REQUIRED LETTER TO SECURITIES AND EXCHANGE COMMISSION
UNDER TEMPORARY NOTE 3T
May 15, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20001
Ladies and Gentlemen:
This letter is furnished pursuant to your March 18, 2002 release and procedures
relating to companies using Arthur Andersen LLP as their independent auditors.
Arthur Andersen LLP audited the consolidated and combined financial statements
of Valero L.P. and Valero Logistics Operations, L.P. included in this Form 8-K
filed substantially contemporaneously with this letter. In connection therewith,
Arthur Andersen LLP represented to us that its audit was subject to its quality
control system for its U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards, and that there was appropriate continuity of Arthur
Andersen LLP personnel working on the audit and availability of national office
consultation. Availability of personnel at foreign affiliates of Arthur Andersen
LLP was not relevant to the audit.
Sincerely,
Valero L.P.
By: Riverwalk Logistics, L.P., its General Partner
By: Valero GP, LLC, its General Partner
/s/ John H. Krueger, Jr.
- ------------------------------------
John H. Krueger, Jr.
Senior Vice President and Controller
57