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 Valero L.P.'s 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 Valero L.P.'s 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) the Partnership has 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) the Partnership's adjusted operating surplus, as defined in the
partnership agreement, during such periods equals or exceeds the amount that
would have been sufficient to enable the Partnership 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.
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 the Partnership meets 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.
On February 14, 2002, the Partnership 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. The general partner's cash distribution
applicable to the fourth quarter of 2001 was $236,000.
On April 19, 2002, the Partnership declared a distribution of $0.65 per unit or
$12,515,000, payable on May 15, 2002, to unitholders representing the
distribution of available cash generated in the first quarter of 2002. The
general partner's cash distribution applicable to the first quarter of 2002 was
$343,000, of which $107,000 represented an incentive distribution.
The petroleum pipeline industry is capital-intensive, requiring significant
investments to upgrade or enhance existing operations and to meet environmental
regulations. The Partnership's capital expenditures consist primarily of:
o maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental regulations;
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.
The Partnership expects to fund its capital expenditures from cash provided by
operations and, to the extent necessary, from proceeds of borrowings under the
revolving credit facility or debt and equity offerings.
During the three months ended March 31, 2002, the Partnership incurred
maintenance capital expenditures of $789,000 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. For the remainder of 2002, the Partnership anticipates incurring
approximately $3,000,000 of additional maintenance capital expenditures for
various automation upgrades and cathodic protection.