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 (Date of earliest event reported): JUNE 6, 2002
VALERO L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-16417 74-2958817
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
ONE VALERO PLACE 78212
SAN ANTONIO, TEXAS (Zip Code)
(Address of principal executive offices)
(210) 370-2000
(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS
In connection with the filing by Valero L.P. and its 100%-owned
operating subsidiary, Valero Logistics Operations, L.P., of a shelf registration
statement on Form S-3 with the Securities and Exchange Commission concurrently
with this report, in the event that Valero Logistics Operations issues any debt
securities from time to time under the registration statement, Valero L.P. will
issue full and unconditional guarantees of the senior or subordinated debt
securities, as applicable, of Valero Logistics Operations.
As required by Note 1 to paragraph (c) of Rule 3-10 of Regulation S-X,
a footnote has been added to Valero L.P.'s interim financial statements and has
been included in the Notes to Consolidated and Combined Financial Statements
previously filed with Valero L.P.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, which financial statements are filed as Exhibit
99.1 hereto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits.
99.1. Financial Statements:
(i) Consolidated and Combined Balance Sheets as of March 31, 2002
and December 31, 2001
(ii) Consolidated and Combined Statements of Income for the Three
Months Ended March 31, 2002 and 2001
(iii) Consolidated and Combined Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001
(iv) Notes to Consolidated and Combined Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Valero L.P.
By: Riverwalk Logistics, L.P.
its general partner
By: Valero GP, LLC
its general partner
Dated: June 6, 2002 By: /s/ Steven A. Blank
--------------------------------------
Steven A. Blank
Senior Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
99.1. Financial Statements:
(i) Consolidated and Combined Balance Sheets as of March 31, 2002
and December 31, 2001
(ii) Consolidated and Combined Statements of Income for the Three
Months Ended March 31, 2002 and 2001
(iii) Consolidated and Combined Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001
(iv) Notes to Consolidated and Combined Financial Statements
EXHIBIT 99.1
FINANCIAL STATEMENTS
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(unaudited, in thousands, except unit data)
RESTATED
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(note 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 7,689 $ 7,796
Receivable from parent ....................................... 6,327 6,292
Accounts receivable .......................................... 2,596 2,855
Other current assets ......................................... 460 --
------------ ------------
TOTAL CURRENT ASSETS ....................................... 17,072 16,943
------------ ------------
Property, plant and equipment ................................... 472,039 470,401
Less accumulated depreciation and amortization .................. (125,584) (121,389)
------------ ------------
Property, plant and equipment, net ........................... 346,455 349,012
Goodwill, net ................................................... 4,715 4,715
Investment in Skelly-Belvieu Pipeline Company ................... 16,399 16,492
Other noncurrent assets, net .................................... 384 384
------------ ------------
TOTAL ASSETS ............................................... $ 385,025 $ 387,546
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 416 $ 462
Accounts payable and accrued liabilities ..................... 4,107 4,215
Taxes other than income taxes ................................ 1,190 1,894
------------ ------------
TOTAL CURRENT LIABILITIES .................................. 5,713 6,571
Long-term debt, less current portion ............................ 89,660 25,660
Other long-term liabilities ..................................... -- 2
Deferred income tax liabilities ................................. -- 13,147
Commitments and contingencies
PARTNERS' EQUITY:
Common units (9,654,572 and 9,599,322
outstanding as of 2002 and 2001, respectively) ........... 168,433 169,305
Subordinated units (9,599,322 outstanding as of
2002 and 2001) ............................................ 115,429 116,399
General partner's equity ..................................... 5,790 5,831
Net parent investment in the Wichita
Falls Business ............................................ -- 50,631
------------ ------------
TOTAL PARTNERS' EQUITY ................................ 289,652 342,166
------------ ------------
TOTAL LIABILITIES AND PARTNERS' EQUITY ................ $ 385,025 $ 387,546
============ ============
See accompanying notes to consolidated and combined financial statements.
-1-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(unaudited, in thousands, except unit and per unit data)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
REVENUES ........................................................ $ 26,024 $ 23,422
------------ ------------
COSTS AND EXPENSES:
Operating expenses ............................................ 9,184 8,651
General and administrative expenses ........................... 1,789 1,172
Depreciation and amortization ................................. 4,355 3,238
------------ ------------
TOTAL COSTS AND EXPENSES .................................. 15,328 13,061
------------ ------------
OPERATING INCOME ................................................ 10,696 10,361
Equity income from Skelly-Belvieu Pipeline Company ............ 678 669
Interest expense, net ......................................... (556) (2,244)
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE ................................ 10,818 8,786
Income tax expense ............................................ 395 --
------------ ------------
NET INCOME ...................................................... $ 10,423 $ 8,786
============ ============
ALLOCATION OF NET INCOME:
General partner's interest in net income ........................ $ 195
Limited partners' interest in net income ........................ 9,578
Net income applicable to the Wichita Falls Business
for the month ended January 31, 2002 ...................... 650
------------
Net income .................................................... $ 10,423
============
Basic and diluted net income per limited
partnership unit ............................................ $ 0.50
============
Weighted average number of limited partnership
units outstanding ........................................... 19,241,617
============
See accompanying notes to consolidated and combined financial statements.
-2-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 10,423 $ 8,786
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................................. 4,355 3,238
Equity income from Skelly-Belvieu Pipeline Company ............. (678) (669)
Deferred income tax expense .................................... 54 --
Compensation recognized under the restricted unit plan ......... 132 --
Changes in operating assets and liabilities:
Increase in receivable from parent ........................... (35) (7,780)
Decrease (increase) in accounts receivable ................... 259 (674)
Increase in other current assets ............................. (460) (555)
Decrease in accounts payable, accrued liabilities
and taxes other than income taxes ........................... (782) (2,078)
Distributions received from Skelly-Belvieu Pipeline Company .... 771 639
Decrease in other long-term liabilities ........................ (2) --
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 14,037 907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maintenance capital expenditures .................................. (789) (745)
Expansion capital expenditures .................................... (1,009) (162)
Acquisition of the Wichita Falls Business ......................... (64,000) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................... (65,798) (907)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings ........................... 64,000 --
Repayment of long-term debt ....................................... (46) --
Distribution to Valero Energy in January 2002 related to the
Wichita Falls Business .......................................... (512) --
Payment of distributions to unitholders ........................... (11,788) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 51,654 --
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................... (107) --
CASH AND CASH EQUIVALENTS AS OF THE BEGINNING OF THE PERIOD ....... 7,796 4
------------ ------------
CASH AND CASH EQUIVALENTS AS OF THE END OF THE PERIOD ............. $ 7,689 $ 4
============ ============
See accompanying notes to consolidated and combined financial statements.
-3-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION
Valero L.P. is a Delaware limited partnership owned approximately 73% by Valero
Energy Corporation (Valero Energy) and approximately 27% by public unitholders.
Valero Logistics Operations, L.P. (Valero Logistics Operations) is also a
Delaware limited partnership and is a subsidiary of Valero L.P. As used in this
report, the term Partnership may refer, depending on the context, to Valero
L.P., Valero Logistics Operations or both of them taken as a whole.
The Partnership 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 a refining and marketing company with 12 refineries and
approximately 4,600 company-operated and dealer-operated convenience stores.
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 other wholesale and spot
market sales and exchange agreements.
On December 31, 2001, Valero Energy completed its acquisition of Ultramar
Diamond Shamrock Corporation (UDS) in a purchase business combination. The
assets acquired included UDS' ownership in Valero L.P. and Valero Logistics
Operations as well as ownership of Riverwalk Logistics, L.P., at that time the
general partner of both Valero L.P. and Valero Logistics Operations.
NOTE 2: BASIS OF PRESENTATION
The Partnership prepared these unaudited consolidated and combined financial
statements in accordance with United States' generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and notes required by
United States generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain previously reported amounts have been reclassified to conform
to the 2002 presentation.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The balance sheet as of December 31, 2001 has been derived from the
audited consolidated financial statements as of that date and restated to
include the balances of the Wichita Falls Business as discussed below, but does
not include all of the information and notes required by United States generally
accepted accounting principles for complete financial statements.
In addition, substantially all of the Partnership's revenues are derived from
Valero Energy and its various subsidiaries, based on the operations of Valero
Energy's McKee, Three Rivers and Ardmore refineries. Accordingly, the
Partnership's results are directly impacted by the operations of these three
Valero Energy refineries.
-4-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
These consolidated and combined financial statements should be read along with
the audited consolidated and combined financial statements and notes thereto
included in Valero L.P.'s Form 10-K/A filed on April 3, 2002 and Valero L.P.'s
Form 8-K/A dated February 1, 2002 and filed on April 16, 2002.
ACQUISITION OF THE WICHITA FALLS BUSINESS
On February 1, 2002, the Partnership acquired the Wichita Falls Crude Oil
Pipeline and Storage Business (the Wichita Falls Business) from Valero Energy
for a total cost of $64,000,000. The purchase price was funded with borrowings
under the Partnership's revolving credit facility.
The Wichita Falls Business consists of the following assets:
o A 271.7 mile pipeline originating in Wichita Falls, Texas and
ending at Valero Energy's McKee refinery in Dumas, Texas. The
pipeline has the capacity to transport 110,000 barrels per day
of crude oil gathered or acquired by Valero Energy at Wichita
Falls. The Wichita Falls crude oil pipeline connects to third
party pipelines that originate along the Texas Gulf Coast.
o Four storage tanks located in Wichita Falls, Texas with a
total capacity of 660,000 barrels.
In the fourth quarter of 2001, UDS completed an expansion project to increase
the capacity of the crude oil pipeline from 85,000 barrels per day to 110,000
barrels per day and to increase the capacity of the storage facility from
360,000 barrels to 660,000 barrels.
Since the acquisition of the Wichita Falls Business represents the transfer of a
business under the common control of Valero Energy, the balance sheet as of
December 31, 2001 and the statements of income and cash flows for the month
ended January 31, 2002 (preceding the acquisition date) have been restated to
include the Wichita Falls Business. The assumed transfer to the Partnership as
of December 31, 2001 (the earliest date on which common control existed) and the
restatement of the January 2002 statements of income and cash flows have been
recorded based on Valero Energy's historical cost, which was based on Valero
Energy's allocation of the purchase price paid for UDS. The balance sheet of the
Wichita Falls Business as of December 31, 2001, which is included in the
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
Accrued liabilities ................................. 131
Taxes other than income taxes ....................... 251
Deferred income tax liabilities ..................... 13,147
Net parent investment ............................... 50,631
-5-
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 three months
ended March 31, 2001 assumes that the Wichita Falls Business was acquired on
January 1, 2001 with borrowings under the revolving credit facility.
THREE MONTHS
ENDED
MARCH 31,
2001
---------------
(in thousands)
PRO FORMA INCOME STATEMENT INFORMATION
Revenues ............................................ $ 27,298
Costs and expenses .................................. 14,642
Operating income .................................... 12,656
Net income .......................................... 10,331
Since Valero L.P. had not completed its IPO by March 31, 2001, all the net
income for the three months ended March 31, 2001 would have been allocated to
Valero Energy (the Business's parent), and thus there was no net income per
limited partnership unit for that period.
The financial statements included in this Form 10-Q represent the consolidated
and combined financial statements of Valero L.P., Valero Logistics Operations
and the Wichita Falls Business as follows:
o consolidated financial statements of the Partnership,
including the Wichita Falls Business, as of March 31, 2002 and
for the two months ended March 31, 2002;
o combined financial statements of the Partnership and the
Wichita Falls Business as of December 31, 2001 and for the one
month ended January 31, 2002; and
o combined financial statements of Valero L.P. and Valero
Logistics Operations for the three months ended March 31,
2001.
NOTE 3: ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO. 144
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard 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 the
Partnership's 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
-6-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
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. The Partnership does not
expect that the adoption of this statement will have a material impact on its
financial position or results of operations.
NOTE 4: COMMITMENTS AND CONTINGENCIES
The Partnership's operations are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although the Partnership believes its
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, the Partnership has 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. Although
environmental costs may have a significant impact on results of operations for
any single period, the Partnership believes that such costs will not have a
material adverse effect on its financial position.
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 by Valero
Energy, Valero Energy has assumed this environmental indemnification. In
addition, as an operator or owner of the assets, the Partnership could be held
liable for pre-April 16, 2001 environmental damage should Valero Energy be
unable to fulfill its obligation. However, the Partnership believes that such a
situation is remote given Valero Energy's financial condition.
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, and as of
and for the one month ended January 31, 2002, the Wichita Falls Business did not
incur any environmental liability; thus there was no accrual on January 31,
2002.
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Partnership's financial position or results of operations.
-7-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: RELATED PARTY TRANSACTIONS
The Partnership has 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 January 1, 2001 to April 15, 2001). The receivable from parent 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 the Partnership's behalf.
The following table summarizes transactions with Valero Energy:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
------------ ------------
(in thousands)
Revenues .............................................. $ 25,910 $ 23,272
Operating expenses .................................... 3,407 2,683
General and administrative expenses ................... 1,300 1,300
Interest expense on debt due to parent ................ -- 2,154
Under the Services Agreement with the Partnership, Valero Energy has agreed to
provide the corporate functions of legal, accounting, treasury, information
technology and other services for an annual fee of $5,200,000 until July 2008.
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. This annual fee is in addition to the
incremental general and administrative costs to be incurred from third parties
as a result of the Partnership being a publicly held entity.
The Services Agreement also requires that the Partnership reimburse Valero
Energy 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 the Partnership. These employee
costs include salary, wages and benefit costs.
Under the Pipelines and Terminals Usage Agreement with the Partnership, Valero
Energy has agreed to use the Partnership's 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 the Partnership's
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 three months ended March 31, 2002, Valero Energy used the Partnership's
pipelines to transport 91% of its crude oil shipped to and 79% of the refined
products shipped from the McKee, Three Rivers and Ardmore refineries and Valero
Energy used the Partnership's terminalling services for 63% of all refined
products shipped from these refineries.
If market conditions change, either 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 the Partnership's
pipelines and terminals at the required levels, Valero Energy's obligation to
the Partnership will be suspended during the period of the change in market
conditions to the extent required to avoid the material adverse effect. The
economic-based production cutbacks at the McKee, Three Rivers and Ardmore
refineries during the first quarter of 2002 were not considered a triggering
event under the Pipelines and Terminals Usage Agreement.
-8-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: LONG-TERM DEBT
As of March 31, 2002, the Partnership had $80,000,000 outstanding under its
$120,000,000 revolving credit facility. During the first quarter of 2002, the
Partnership borrowed $64,000,000 under the revolving credit facility to purchase
the Wichita Falls Business from Valero Energy.
The revolving credit facility expires on January 15, 2006 and borrowings under
the revolving credit facility bear interest at either an alternative base rate
or the LIBOR rate at the option of the Partnership.
The revolving credit facility requires that the Partnership 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
the Partnership is in compliance with all of these ratios and covenants.
NOTE 7: NET INCOME PER LIMITED PARTNERSHIP UNIT
The following table provides details of the basic and diluted net income per
limited partnership unit computations:
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------
NET INCOME UNITS PER UNIT
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------ ------------
(in thousands)
Limited partners' interest in net income ................ $ 9,578
============
Basic net income per common and subordinated unit ....... $ 9,578 19,242 $ 0.50
============ ============ ============
Dilutive net income per common and subordinated unit .... $ 9,578 19,242 $ 0.50
============ ============ ============
The Partnership 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.
Net income prior to the Partnership's initial public offering on April 16, 2001
was allocated entirely to UDS and its affiliates and the net income related to
the Wichita Falls Business for the month ended January 31, 2002 of $650,000 was
allocated entirely to Valero Energy, the Business's parent.
NOTE 8: RESTRICTED UNITS
Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., adopted a
long-term incentive plan under which restricted units may be awarded to certain
key employees and non-employees. In January 2002, Valero GP, LLC granted a total
of 55,250 restricted units to its officers and outside directors. One-third of
the restricted units will vest at the end of each year of the three-year vesting
period. For the three months ended March 31, 2002, the Partnership recognized
$132,000 of compensation expense associated with these restricted units, which
were valued at $40.95 per unit as of January 21, 2002, the date of grant.
-9-
VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its available cash,
generally defined as cash receipts less cash disbursements and cash reserves
established by the general partner in its sole discretion. Pursuant to the
partnership agreement, the general partner is entitled to incentive
distributions if the amount the Partnership distributes with respect to any
quarter exceeds specified target levels shown below:
PERCENTAGE OF DISTRIBUTION
------------------------------------
QUARTERLY DISTRIBUTION AMOUNT PER UNIT UNITHOLDERS GENERAL 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%
On February 14, 2002, the Partnership paid the fourth quarter cash distribution
of $0.60 per unit for a total distribution of $11,788,000, including $236,000
paid to the general partner.
On April 19, 2002, the Partnership declared a quarterly distribution of $0.65
per unit payable on May 15, 2002 to unitholders of record on May 1, 2002. This
distribution, related to the first quarter of 2002, is expected to total
$12,858,000, of which $1,070,000 is an incentive distribution. The general
partner's share of the total distribution is expected to be $343,000, of which
$107,000 is an incentive distribution.
NOTE 10: SUBSEQUENT EVENTS
REORGANIZATION OF GENERAL PARTNER OWNERSHIP OF VALERO LOGISTICS OPERATIONS
As described in a Form 8-K filed by the Partnership with the Securities and
Exchange Commission on June 5, 2002, the general partner ownership of Valero
Logistics Operations was reorganized on May 30, 2002, resulting in Valero
Logistics Operations being a 100% - owned subsidiary of Valero L.P.
GUARANTEE OF VALERO LOGISTICS OPERATIONS DEBT SECURITIES BY VALERO L.P.
On June 6, 2002, the Partnership will be filing a Registration Statement on Form
S-3 (Registration Statement), and as a result, this information is being
provided to supplement information previously reported in the Partnership's Form
10-Q for the first quarter of 2002. Under the Registration Statement, the
Partnership may issue either common units of Valero L.P. or debt securities of
Valero Logistics Operations, Valero L.P.'s sole subsidiary. All operating assets
of the Partnership are owned by, and all of the related operations are accounted
for within, Valero Logistics Operations. Valero L.P. has no independent assets
or operations. Any debt securities issued by Valero Logistics Operations
pursuant to the Registration Statement will be fully and unconditionally
guaranteed by Valero L.P.
The revolving credit facility of Valero Logistics Operations contains certain
provisions that could restrict the ability of Valero L.P. to obtain funds from
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 if any default,
as defined in the revolving credit facility, exists or would result from the
distribution.
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