Company Quick10K Filing
Quick10K
Valero Energy Partners
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-01-10 Enter Agreement, Leave Agreement, M&A, Shareholder Rights, Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2018-12-14 Officers
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-18 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-03-26 Other Events, Exhibits
8-K 2018-02-23 Other Events, Exhibits
8-K 2018-02-14 Regulation FD, Exhibits
8-K 2018-02-02 Earnings, Exhibits
8-K 2018-01-05 Regulation FD, Exhibits
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RASP Rasna Therapeutics 127
EMRN Emarine Global 35
USNU US Neurosurgical Holdings 2
GFA Gafisa 0
FCUV Focus Universal 0
DREM Dream Homes & Development 0
RXR Northstar/RXR New York Metro Real Estate 0
VLP 2018-12-31
Part I
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
EX-31.01 vlpexh3101-12312018.htm
EX-31.02 vlpexh3102-12312018.htm
EX-32.01 vlpexh3201-12312018.htm

Valero Energy Partners Earnings 2018-12-31

VLP 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 vlpform10-kx12312018.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
Commission file number 1-36232
VALERO ENERGY PARTNERS LP
(Exact name of registrant as specified in its charter)
Delaware
90-1006559
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One Valero Way
 
San Antonio, Texas
78249
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (210) 345-2000
 
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common units held by non-affiliates was approximately $856.3 million based on the last sales price quoted as of June 29, 2018 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.
The registrant had 46,768,586 common units and 1,413,511 general partner units outstanding as of January 31, 2019, all of which were held by wholly owned subsidiaries of Valero Energy Corporation, an affiliate of the registrant.
The registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format pursuant to General Instruction (I)(2) of Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE
None




CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i


References in this report to “Partnership,” “we,” “our,” “us,” or similar terms refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References to our “general partner” refer to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation (VLO). References in this report to “Valero” refer collectively to VLO and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.
PART I
ITEMS 1 & 2. BUSINESS and PROPERTIES
BUSINESS
Overview
Valero Energy Partners LP is a Delaware limited partnership formed in July 2013 by Valero. On December 16, 2013, we completed our initial public offering of common units representing limited partner interests. Until January 10, 2019, our common units were listed on the New York Stock Exchange (NYSE) under the trading symbol “VLP.” Our offices are located at One Valero Way, San Antonio, Texas 78249.
Our website address is www.valeroenergypartners.com. Information on our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished to the United States (U.S.) Securities and Exchange Commission (SEC) are available, free of charge, on our website (under Investor Relations > Financial Information > SEC Filings), soon after we file or furnish such information.
We were formed to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. We generate revenues from fee-based transportation and terminaling activities to transport and store crude oil and refined petroleum products using our pipelines and terminals under commercial agreements with Valero, which are described below under “—Our Commercial Agreements with Valero” and in Note 4 of Notes to Consolidated Financial Statements.
As of December 31, 2018, our assets consisted of crude oil and refined petroleum products pipeline and terminal systems in the U.S. Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries.
Recent Developments
On January 10, 2019, pursuant to that certain Agreement and Plan of Merger, dated as of October 18, 2018 (the Merger Agreement), by and among VLO, Forest Merger Sub, LLC, an indirect wholly owned subsidiary of VLO (Merger Sub), Valero Energy Partners LP, and Valero Energy Partners GP LLC, Merger Sub merged with and into the Partnership (the Merger), with the Partnership surviving and continuing to exist as a Delaware limited partnership.

Under the terms of the Merger Agreement, at the effective time of the Merger (the Effective Time), subject to the terms and conditions set forth in the Merger Agreement, each of the common units representing limited partner interests in the Partnership, other than common units owned by Valero, was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger, Valero paid aggregate merger consideration of $950.0 million. The Partnership’s incentive distribution rights (IDRs), general partner interest, and common units owned by Valero were unaffected by the Merger and no consideration was delivered in respect thereof.




1


On January 10, 2019, in connection with the completion of the Merger, the NYSE filed with the SEC a notification of removal from listing on Form 25 to delist and deregister the common units under Section 12(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and suspended trading of the common units on the NYSE prior to the opening of trading on January 10, 2019. On January 22, 2019, the Partnership filed with the SEC a Form 15 suspending the Partnership’s reporting obligations under Section 13 and Section 15(d) of the Exchange Act.
Our Commercial Agreements with Valero
Our commercial agreements with Valero prescribe rates, commitments, and other terms and conditions applicable to our pipelines and terminals. Under these commercial agreements, we provide transportation and terminaling services to Valero, and Valero pays us for minimum quarterly throughput volumes of crude oil and refined petroleum products, regardless of whether such volumes are physically delivered by Valero in any given quarter. These commercial agreements have initial 10-year terms from inception, and, with the exception of certain assets, Valero has the option to renew the agreements for one additional five-year term.
Our Assets and Operations
The following sections describe our assets and the related services that we provide. Our operations are conducted solely in the U.S. See Part II, Item 8., “Financial Statements and Supplementary Data” for financial information about our operations and assets.



2


Pipelines
The following table summarizes information with respect to our pipelines:
Pipeline
 
Diameter
(inches)
 
Length
(miles)
 
Throughput
Capacity
(thousand barrels
per day)
 
Commodity
 
Associated
Valero
Refinery
 
Significant
Third-party
System Connections
Ardmore logistics system
 
 
 
 
 
 
 
 
 
 
Hewitt segment of Red River crude oil pipeline
 
16
 
138
 
60(a)
 
crude oil
 
Ardmore
 
Plains Red River, Plains Cushing
Wynnewood refined products pipeline
 
12
 
30
 
90
 
refined petroleum products
 
Ardmore
 
Magellan Central
McKee logistics system
 
 
 
 
 
 
 
 
 
 
 
 
McKee crude system
 
multiple segments
 
145
 
72
 
crude oil
 
McKee
 
McKee products system
 
 
 
 
 
 
 
 
 
 
 
 
McKee to El Paso pipeline
 
10
 
408
 
21(b)
 
refined petroleum products
 
McKee
 
SFPP pipeline connection
 
16, 8
 
12
 
33(c)
 
refined petroleum products
 
McKee
 
Kinder Morgan SFPP System
Memphis logistics system(d)
 
 
 
 
 
 
 
 
 
 
Collierville crude system
 
 
 
 
 
 
 
 
 
 
 
 
Collierville pipeline
 
10-20
 
52
 
210
 
crude oil
 
Memphis
 
Capline; Diamond (e)
Memphis products system
 
 
 
 
 
 
 
 
 
 
 
 
Memphis Airport pipeline system
 
6
 
11
 
20
 
jet fuel
 
Memphis
 
Memphis International Airport
Shorthorn pipeline system
 
14, 12
 
9
 
120
 
refined petroleum products
 
Memphis
 
Exxon Memphis
Port Arthur logistics system
 
 
 
 
 
 
 
 
 
 
Lucas crude system
 
 
 
 
 
 
 
 
 
 
 
 
Lucas pipeline
 
30
 
12
 
400
 
crude oil
 
Port Arthur
 
Sunoco Logistics Nederland; Enterprise Beaumont; Cameron Highway; TransCanada Cushing MarketLink; Seaway
Nederland pipeline
 
32
 
5
 
600
 
crude oil
 
Port Arthur
 
Sunoco Logistics Nederland
Port Arthur products system
 
 
 
 
 
 
 
 
 
 
 
 
12-10 pipeline
 
12, 10
 
13
 
60
 
refined petroleum products
 
Port Arthur
 
Sunoco Logistics MagTex; Enterprise TE Products, Enterprise Beaumont
20-inch diesel pipeline
 
20
 
3
 
216
 
diesel
 
Port Arthur
 
Explorer; Colonial
20-inch gasoline pipeline
 
20
 
4
 
144
 
gasoline
 
Port Arthur
 
Explorer; Colonial
St. Charles logistics system
 
 
 
 
 
 
 
 
 
 
Parkway pipeline
 
16
 
140
 
110
 
refined petroleum products
 
St. Charles
 
Plantation; Colonial
Three Rivers logistics system
 
 
 
 
 
 
 
 
 
 
Three Rivers crude system
 
12
 
3
 
110
 
crude oil
 
Three Rivers
 
Harvest Arrowhead; Plains Gardendale; EOG Eagle Ford West
_______________________
(a)
Capacity shown represents our 40 percent undivided interest in the pipeline segment. Total capacity for the pipeline segment is 150,000 barrels per day.
(b)
Capacity shown represents our 33⅓ percent undivided interest in the pipeline. Total capacity for the pipeline is 63,000 barrels per day.
(c)
Capacity shown represents our 33⅓ percent undivided interest in the pipeline connection. Total capacity for the pipeline connection is 98,400 barrels per day.
(d)
Portions of our Memphis logistics system pipelines are owned by MLGW, but they are operated and maintained exclusively by us under long-term arrangements with MLGW.
(e)
The Diamond pipeline is owned 50 percent by Valero and 50 percent by Plains All American Pipeline, L.P.



3


Terminals
The following table summarizes information with respect to our terminals:
Terminal
 
Tank Storage
Capacity
(thousands of
barrels)
 
Throughput
Capacity
(thousand
barrels
per day)
 
Commodity
 
Associated
Valero
Refinery
 
Significant
Third-party
System Connections
Ardmore logistics system
 
 
 
 
 
 
 
 
 
 
Hewitt Station tanks
 
300
 
 
crude oil
 
Ardmore
 
Plains Red River
Wynnewood terminal
 
180
 
 
refined petroleum products
 
Ardmore
 
Magellan Central
Corpus Christi logistics system
 
 
 
 
 
 
 
 
 
 
Corpus Christi East terminal
 
6,241
 
 
crude oil and refined petroleum products
 
Corpus Christi East
 
Eagle Ford Pipeline LLC; NuStar North Beach terminal, Eagle Ford pipelines & South Texas pipeline network
Corpus Christi West terminal
 
3,835
 
 
crude oil and refined petroleum products
 
Corpus Christi West
 
(same as Corpus Christi East terminal)
Houston logistics system
 
 
 
 
 
 
 
 
 
 
Houston terminal
 
3,642
 
 
crude oil and refined petroleum products
 
Houston
 
HFOTCO; Magellan crude; Seaway; Kinder Morgan Pasadena & Galena Park; Magellan East Houston & Galena Park
McKee logistics system
 
 
 
 
 
 
 
 
 
 
McKee crude system
 
 
 
 
 
 
 
 
 
 
Various terminals
 
240
 
 
crude oil
 
McKee
 
McKee products system
 
 
 
 
 
 
 
 
 
 
El Paso terminal
 
166 (a)
 
 
refined petroleum products
 
McKee
 
Kinder Morgan SFPP System
El Paso terminal truck rack
 
 
10 (b)
 
refined petroleum products
 
McKee
 
McKee terminal
 
4,400
 
 
crude oil and refined petroleum products
 
McKee
 
NuStar (several); NuStar/Phillips Denver
Memphis logistics system
 
 
 
 
 
 
 
 
 
 
Collierville crude system
 
 
 
 
 
 
 
 
 
 
Collierville terminal
 
975
 
 
crude oil
 
Memphis
 
Capline
St. James crude tank
 
330
 
 
crude oil
 
Memphis
 
Capline
Memphis products system
 
 
 
 
 
 
 
 
 
 
Memphis truck rack
 
8
 
110
 
refined petroleum products
 
Memphis
 
West Memphis terminal
 
1,080
 
 
refined petroleum products
 
Memphis
 
Exxon Memphis; Enterprise TE Products
West Memphis terminal dock
 
 
4 (c)
 
refined petroleum products
 
Memphis
 
West Memphis terminal truck rack
 
 
50
 
refined petroleum products
 
Memphis
 
Meraux logistics system
 
 
 
 
 
 
 
 
 
 
Meraux terminal
 
3,900
 
 
crude oil and refined petroleum products
 
Meraux
 
LOOP; CAM; Plantation; Colonial
____________________________
 
 
 
 
 
 
 
 
 
 
See footnotes on page 5.



4


Terminal
 
Tank Storage
Capacity
(thousands of
barrels)
 
Throughput
Capacity
(thousand
barrels
per day)
 
Commodity
 
Associated
Valero
Refinery
 
Significant
Third-party
System Connections
Port Arthur logistics system
 
 
 
 
 
 
 
 
 
 
Lucas crude system
 
 
 
 
 
 
 
 
 
 
Lucas terminal
 
1,915
 
 
crude oil
 
Port Arthur
 
Sunoco Logistics Nederland; Enterprise Beaumont; Cameron Highway; TransCanada Cushing MarketLink; Seaway
Seaway connection
 
 
750
 
crude oil
 
Port Arthur
 
Seaway
TransCanada connection
 
 
400
 
crude oil
 
Port Arthur
 
TransCanada Cushing MarketLink
Port Arthur products system
 
 
 
 
 
 
 
 
 
 
El Vista terminal
 
1,210
 
 
gasoline
 
Port Arthur
 
Explorer; Colonial
PAPS terminal
 
1,144
 
 
diesel
 
Port Arthur
 
Explorer; Colonial
Port Arthur terminal
 
8,500
 
 
crude oil and refined petroleum products
 
Port Arthur
 
Sunoco Logistics Nederland; Explorer; Colonial; Sunoco Logistics MagTex; Cameron Highway; TransCanada Cushing MarketLink; Enterprise Beaumont
St. Charles logistics system
 
 
 
 
 
 
 
 
 
 
St. Charles terminal
 
10,004
 
 
crude oil and refined petroleum products
 
St. Charles
 
LOOP; CAM; Plantation; Colonial
Diamond Green Diesel tank
 
180
 
 
 
renewable diesel
 
n/a
 
n/a
Three Rivers logistics system
 
 
 
 
 
 
 
 
 
 
Three Rivers terminal
 
2,250
 
 
crude oil and refined petroleum products
 
Three Rivers
 
NuStar South Texas; Harvest Arrowhead; Plains Gardendale; EOG Eagle Ford West
____________________________
(a)
Capacity shown represents our 33⅓ percent undivided interest in the terminal. Total storage capacity is 499,000 barrels.
(b)
Capacity shown represents our 33⅓ percent undivided interest in the truck rack. Total capacity is 30,000 barrels per day.
(c)
Dock throughput is reflected in thousands of barrels per hour.
Our Relationship with Valero
Valero is an independent petroleum refiner and ethanol producer. Valero’s assets include 15 petroleum refineries located in the U.S., Canada, and the United Kingdom, with a combined total throughput capacity of approximately 3.1 million barrels per day and 14 ethanol plants located in the U.S. Mid-Continent region with a combined production capacity of approximately 1.73 billion gallons per year. Valero also has a substantial portfolio of transportation and logistics assets. For the years ended December 31, 2018, 2017, and 2016, Valero accounted for all of our revenues. Valero owns our general partner, all of our limited partner interests, and all of our IDRs.
Employees
We do not have any employees and our general partner does not have any employees. We are managed by the executive officers of our general partner under the oversight of our board of directors. All of the personnel that conduct our business are employed by Valero, and their services are provided to us pursuant to our omnibus agreement and services and secondment agreement with Valero.



5


PROPERTIES
General
Our principal properties are described above under “—Our Assets and Operations,” and those descriptions are incorporated herein by reference. We believe that our properties and facilities are generally adequate for our operations and that our facilities are maintained in a good state of repair. As of December 31, 2018, we were the lessee under a number of cancelable and noncancelable leases for certain properties. Our leases are discussed in Notes 4 and 9 of Notes to Consolidated Financial Statements.
Utilization of Our Facilities
Operating highlights for our pipelines and terminals—including pipeline transportation revenues, pipeline transportation throughput volumes, terminaling revenues, terminaling throughput volumes, and storage revenues—are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations,” which is incorporated herein by reference.
Item 1A. RISK FACTORS
Risks Related to Our Business
Valero accounts for all of our revenues. Therefore, we are subject to the business risks associated with Valero’s business. Furthermore, if Valero changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes transported through our pipelines or terminals, our revenues would decline as well as our financial condition, results of operations, and cash flows.
Valero accounts for all of our revenues. We expect to continue to derive a substantial amount of our revenues from Valero for the foreseeable future, and as a result, any event, whether in our areas of operation or elsewhere, that materially and adversely affects Valero’s business may adversely affect our financial condition, results of operations, and cash flows. Accordingly, we are indirectly subject to the operational and business risks of Valero, the most significant of which include the following:
disruption of Valero’s ability to obtain crude oil;
interruptions at Valero’s refineries and other facilities;
any decision by Valero to temporarily or permanently curtail or shut down operations at one or more of its refineries or other facilities and reduce or terminate its obligations under our commercial agreements;
competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage over Valero;
the ability to obtain credit and financing on acceptable terms, which could also adversely affect the financial strength of business partners;
the costs to comply with environmental laws and regulations;
significant losses resulting from the hazards and risks of operations may not be fully covered by insurance, and could adversely affect Valero’s operations and financial results;
large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns;



6


interruptions of supply and increased costs as a result of Valero’s reliance on third-party transportation of crude oil and refined petroleum products;
potential losses from Valero’s derivative transactions; and
the effects of changing commodity and refined product prices.
The volumes of crude oil and refined petroleum products that we transport and terminal depend substantially on Valero’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstocks and refined petroleum products. These prices are affected by numerous factors beyond our or Valero’s control, including the global supply and demand for crude oil, gasoline and other refined petroleum products, competition from alternative energy sources, and the impact of new and more stringent regulations affecting the energy industry. A material decrease in the refining margins at Valero’s refineries supported by our assets could cause Valero to reduce the volumes we transport and terminal for Valero, which could materially and adversely affect our financial condition and results of operations.
Our and Valero’s operations are subject to many risks and operational hazards. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our financial condition, results of operations, and cash flows could be materially and adversely affected.
Our operations are subject to all of the risks and operational hazards inherent in transporting, terminaling, and storing crude oil and refined petroleum products, including:
damages to facilities, equipment, and surrounding properties caused by third parties, severe weather, natural disasters, and acts of terrorism;
maintenance, repairs, mechanical or structural failures at our or Valero’s facilities or at third-party facilities on which our or Valero’s operations are dependent, including electrical shortages, power disruptions, and power grid failures;
damages to and loss of availability of interconnecting third-party pipelines, terminals, and other means of delivering crude oil, feedstocks, and refined petroleum products;
disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack;
curtailments of operations due to severe seasonal weather; and
riots, work stoppages, slowdowns or strikes, as well as other industrial disturbances.
These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material and adverse effect on our financial condition, results of operations, and cash flows. In addition, Valero’s refining operations supported by our assets, on which our operations are substantially dependent and over which we have no control, are subject to similar operational hazards and risks inherent in refining crude oil.
Our insurance policies do not cover all losses, costs, or liabilities that we may experience, and insurance companies that currently insure companies in the energy industry may cease to do so or substantially increase premiums.
We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We maintain insurance policies for certain property damage, business interruption, and third-party liabilities, which includes pollution



7


liabilities, and are subject to policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material and adverse effect on our financial condition, results of operations, and cash flows. Insurance companies may reduce the insurance capacity they are willing to offer or may demand significantly higher premiums or deductibles to cover these facilities. If significant changes in the number or financial solvency of insurance underwriters for the energy industry occur, we may be unable to obtain and maintain adequate insurance at a reasonable cost. We cannot provide assurance that our insurers will renew our insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The unavailability of full insurance coverage to cover events in which we suffer significant losses could have a material and adverse effect on our financial condition, results of operations, and cash flows.
We do not own all of the land on which our assets are located, which could result in disruptions to our operations.
We do not own all of the land on which our assets are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our assets on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew leases, right-of-way contracts or otherwise, could have a material and adverse effect on our financial condition, results of operations, and cash flows.
We are dependent upon third parties to operate some of our assets.
Certain of our assets are operated by third parties. Success in jointly owned assets depends in large part on whether our partners, over whom we may have little or no control, satisfy their contractual obligations. If such third parties fail to operate such assets in accordance with the terms of any applicable operating agreement with them or otherwise fail to meet their contractual obligations, such failures could result in our inability to meet our commitments to our customers, which in turn could result in a reduction in our revenues, or in us becoming liable to our customers for any losses they may sustain by reason of our failure to comply, which losses may not be recoverable by us. Differences in opinions or views between us and our partners can result in delayed decision-making or failure to agree on material issues that could adversely affect the business and operations of such assets. Additionally, the failure by a partner to comply with applicable laws, regulations, or client requirements could negatively impact our business.
Compliance with and changes in environmental and pipeline integrity and safety laws could adversely affect our performance.
The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive environmental laws and regulations, including those relating to the discharge and remediation of materials in the environment, greenhouse gas emissions, waste management, species and habitat preservation, pollution prevention, pipeline integrity and other safety-related regulations, and characteristics and composition of fuels. Certain of these laws and regulations could impose obligations to conduct assessment or remediation efforts at our facilities or third-party sites where we take wastes for disposal or where our wastes migrated. Environmental laws and regulations also may impose liability on us for the conduct of third parties or for actions that complied with applicable requirements when taken, regardless of negligence or fault. If we violate or fail to comply with these laws and regulations, it could lead to administrative, civil, or criminal penalties or liability and the imposition of injunctions, operating restrictions, or the loss of permits.



8


We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.
Our facilities operate under a number of federal and state permits, licenses, and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. These permits, licenses, approval limits, and standards require a significant amount of monitoring, record keeping, and reporting in order to demonstrate compliance with the underlying permit, license, approval limit, or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties, and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material and adverse effect on our ability to continue operations and on our financial condition, results of operations, and cash flows.
Many of our assets have been in service for many years and, as a result, our maintenance or repair costs may increase in the future. In addition, there could be service interruptions due to unknown events or conditions or increased downtime associated with our pipelines that could have a material and adverse effect on our financial condition, results of operations, and cash flows.
Our pipelines and terminals are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position, or cash flows.
The tariff rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenues.
We own pipeline assets in Texas, New Mexico, Tennessee, Louisiana, Mississippi, Arkansas, and Oklahoma, and we provide both interstate and intrastate transportation services for refined petroleum products and crude oil. Many of our pipelines are common carriers and may be required to provide service to any shipper that requests transportation services on our pipelines.
Many of our pipelines provide interstate transportation services that are subject to regulation by Federal Energy Regulatory Commission (FERC) under the Interstate Commerce Act (ICA). FERC uses prescribed rate methodologies for developing and changing regulated rates for interstate pipelines. Shippers may protest (and FERC may investigate) the lawfulness of existing, new, or changed tariff rates. FERC can suspend new or changed tariff rates for up to seven months and can allow new rates to be implemented subject to refund of amounts collected in excess of the rate ultimately found to be just and reasonable. If FERC finds a rate to be unjust and unreasonable, it may order payment of reparations for up to two years prior to the filing of a complaint or investigation, and FERC may prescribe new rates prospectively. We may also be required to respond to requests for information from government agencies, including compliance audits conducted by the FERC.
State agencies may regulate the rates, terms, and conditions of service for our pipelines offering intrastate transportation services, and such agencies could limit our ability to increase our rates or order us to reduce our rates and pay refunds to shippers. State agencies have generally not been aggressive in regulating common carrier pipelines, have generally not investigated the rates, terms, and conditions of service of intrastate pipelines in the absence of shipper complaints, and generally resolve complaints informally.
Under our commercial agreements, we and Valero have agreed to the base tariff rates for all of our pipelines and a mechanism to modify those rates during the term of the agreements. Valero has also agreed not to



9


challenge the base tariff rates or changes to those rates during the term of the agreements, except to the extent such changes are inconsistent with the agreements. These agreements do not, however, prevent any other new or prospective shipper, FERC, or a state agency from challenging our tariff rates or our terms and conditions of service, and due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of any of our rates, or any changes to FERC’s approved rate or index methodologies, could adversely affect our revenues. Similarly, if state agencies in the states in which we offer intrastate transportation services change their policies or aggressively regulate our rates or terms and conditions of service, it could also materially and adversely affect our financial condition, results of operations, and cash flows.
The FERC’s ratemaking policies are subject to change and may impact the rates charged and revenues received on our interstate oil pipelines. The cost of service rates of any interstate liquids pipeline could be affected to the extent the FERC proposes new rates or changes its existing rates or if its rates are subject to complaint or are challenged by the FERC.
In addition, there is not always a clear boundary between interstate and intrastate pipeline transportation services, and such determinations are fact-dependent and made on a case-by-case basis. Our undivided interest in the McKee to El Paso pipeline currently provides transportation services pursuant to an intrastate tariff that is subject to regulation by the Texas Railroad Commission. Because a portion of this pipeline crosses New Mexico and our transportation services may be interstate in nature, we applied for a waiver of the tariff filing and reporting requirements of the ICA for our portion of the pipeline, which the FERC conditionally granted. The FERC’s conditions for granting the waiver include that we maintain all books and records in a manner consistent with the Uniform System of Accounts and that we immediately report any change in the circumstances on which the waiver was granted.
Terrorist or cyber-attacks and threats, or escalation of military activity in response to these attacks, could have a material and adverse effect on our financial condition, results of operations, and cash flows.
Terrorist attacks and threats, cyber-attacks, or escalation of military activity in response to these attacks, may have significant effects on general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist or cyber-attacks than other targets in the U.S. We do not maintain specialized insurance for possible liability or loss resulting from a cyber-attack on our assets that may shut down all or part of our business. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital including our ability to repay or refinance debt. It is possible that any of these occurrences, or a combination of them, could have a material and adverse effect on our financial condition, results of operations, and cash flows.
A significant interruption related to our information technology systems could adversely affect our business.
Our information technology systems and network infrastructure may be subject to unauthorized access or attack, which could result in a loss of intellectual property, proprietary information or employee, customer or vendor data; public disclosure of sensitive information; increased costs to prevent, respond to or mitigate cybersecurity events; systems interruption; or the disruption of our business operations. A breach could also originate from, or compromise, our customers’ and vendors’ or other third-party networks outside of our control. A breach may also result in legal claims or proceedings against us by our employees, customers and vendors. There can be no assurance that our infrastructure protection technologies and disaster recovery plans can prevent a technology systems breach or systems failure, which could have a material adverse effect on our financial position or results of operations. Furthermore, the continuing and evolving threat of cyber-



10


attacks has resulted in increased regulatory focus on prevention. To the extent we face increased regulatory requirements, we may be required to expend significant additional resources to meet such requirements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
We incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note 9 of Notes to Consolidated Financial Statements under the caption “Litigation Matters.
Environmental Enforcement Matters
While it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decided against us, we believe that there would be no material effect on our financial position, results of operations, or liquidity. We are reporting these proceedings to comply with the SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.

Texas Commission on Environmental Quality (TCEQ) and Harris County Pollution Control Services Department (HCPCS) (Houston Terminal). We currently have a Notice of Enforcement from the TCEQ and a Violation Notice from the HCPCS alleging excess emissions from Tank 003 that occurred during Hurricane Harvey. We are working with the relevant governmental authorities to resolve these matters.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.



11


PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Unit Price and Cash Distributions
Our common units were listed on the NYSE under the trading symbol “VLP.” On January 10, 2019, the NYSE filed with the SEC a notification of removal from listing on Form 25 to delist and deregister the common units under Section 12(b) of the Exchange Act, and suspended trading of the common units on the NYSE prior to the opening of trading on January 10, 2019. As of January 31, 2019, there were 2 holders of record of our common units, both of which are wholly owned by Valero, and Valero owned all of our general partner units and IDRs. There is no established trading market for our general partner units or, following the closing of the Merger, our common units. Our common units represent limited partner interests in us that entitle the holders to the rights and privileges specified in our partnership agreement.

Securities Authorized for Issuance Under Equity Compensation Plans
On January 10, 2019, in connection with the completion of the Merger, the Partnership terminated the Valero Energy Partners LP 2013 Incentive Compensation Plan (2013 ICP). As a result of the termination of the 2013 ICP, from and after the Effective Time, no equity awards or other rights with respect to the common units will be granted or be outstanding under the 2013 ICP. On January 10, 2019, the Partnership filed a Post-Effective Amendment No. 1 to Form S-8 Registration Statement for the 2013 ICP (Registration Statement) to remove from registration any of the securities that had been registered for issuance and remained unsold under the Registration Statement.

ITEM 6. SELECTED FINANCIAL DATA
Information for this item has been omitted pursuant to the reduced disclosure format as set forth in General Instruction (I)(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Items 1 and 2., “Business and Properties,” Item 1A., “Risk Factors,” and Item 8., “Financial Statements and Supplementary Data,” included in this report.
Information for this item has been omitted pursuant to the reduced disclosure format as set forth in General Instruction (I)(2)(a) of Form 10-K.
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” and similar expressions.
Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and trends to differ materially from those



12


made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:
the suspension, reduction, cessation, or termination of Valero’s obligation under our commercial agreements, omnibus agreement, and services and secondment agreement;
changes in global economic conditions on Valero’s business and the business of its suppliers, customers, business partners, and credit lenders;
a material decrease in Valero’s profitability;
disruptions due to equipment interruption or failure at our facilities, Valero’s facilities, or third-party facilities on which our business or Valero’s business is dependent;
the risk of contract cancellation, non-renewal, or failure to perform by Valero’s customers, and Valero’s inability to replace such contracts and/or customers;
Valero’s and our ability to remain in compliance with the terms of its and our outstanding indebtedness;
the timing and extent of changes in commodity prices and demand for Valero’s refined petroleum products;
actions of customers and competitors;
changes in our cash flows from operations;
changes in state and federal policies and regulations relating to tariffs, environmental, economic, health and safety, energy, and other matters;
legal or regulatory investigations, delays, or other factors beyond our control;
operational hazards inherent in refining operations and in transporting and storing crude oil and refined petroleum products;
earthquakes or other natural disasters affecting operations;
changes in capital requirements or in execution of planned capital projects;
the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;
changes in the cost or availability of third-party vessels, pipelines, and other means of delivering and transporting crude oil, feedstocks, and refined petroleum products;
direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;
weather conditions affecting our or Valero’s operations or the areas in which Valero markets its refined petroleum products;
seasonal variations in demand for refined petroleum products;
adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any accruals, which affect us or Valero;
risks related to labor relations and workplace safety;
changes in insurance markets impacting costs and the level and types of coverage available; and
political developments.

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



13


All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
OVERVIEW
Recent Developments
Merger with Valero
On January 10, 2019, the Merger was completed, and we became a wholly owned subsidiary of Valero and ceased to be a publicly held partnership. Under the terms of the Merger Agreement, at the Effective Time, subject to the terms and conditions set forth in the Merger Agreement, each common unit representing limited partner interests in us, other than common units owned by Valero, was converted into the right to receive $42.25 per common unit in cash without any interest thereon, and all such publicly traded common units were automatically canceled and ceased to exist. Upon completion of the Merger, Valero paid aggregate merger consideration of $950.0 million. Our IDRs, general partner interest, and common units owned by Valero were unaffected by the Merger and no consideration was delivered in respect thereof.

In connection with the completion of the Merger, we entered into an agreement under which VLO unconditionally and irrevocably guaranteed the prompt payment, when due, of any amount owed to the holders of our 2028 Senior Notes (as defined below under “Senior Notes”) and 2026 Senior Notes as defined and discussed in Note 6 of Notes to Consolidated Financial Statements. We also terminated (i) our $750.0 million senior unsecured revolving credit facility agreement (Revolver) as discussed in Note 6 of Notes to Consolidated Financial Statements, (ii) our equity distribution agreement related to our ATM Program as defined and discussed in Note 11 of Notes to Consolidated Financial Statements, and (iii) our 2013 ICP as discussed in Note 12 of Notes to Consolidated Financial Statements.

Senior Notes
On March 29, 2018, we issued $500.0 million of 4.5 percent Senior Notes due March 15, 2028 (2028 Senior Notes). Gross proceeds from the debt issuance totaled $498.3 million before deducting the underwriting discount and other debt issuance costs. As discussed in Note 6 of Notes to Consolidated Financial Statements, we used the proceeds to repay the outstanding balance of $410.0 million under our Revolver and $85.0 million of the outstanding balance under one of the subordinated credit agreements with Valero (the Loan Agreements).

2018 Results
We reported net income of $264.1 million for the year ended December 31, 2018. This compares to net income of $238.4 million for the year ended December 31, 2017.

The increase in net income of $25.7 million was due primarily to a $43.5 million increase in operating income driven by contributions from our Port Arthur terminal and Parkway pipeline, which we acquired from Valero in November 2017, as described in Note 3 of Notes to Consolidated Financial Statements. The increase in operating income was partially offset by a $19.1 million increase in “interest and debt expense, net of capitalized interest” that resulted from incremental borrowings of $380.0 million used to fund a portion of the amount paid to acquire the Port Arthur terminal and Parkway pipeline, as well as a higher effective interest rate in 2018 due to higher interest rates on our variable rate debt.

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



14


RESULTS OF OPERATIONS
The following tables highlight our results of operations and our operating performance for the years ended December 31, 2018 and 2017. The narrative following these tables provides an analysis of our results of operations.
Results of Operations
(in thousands, except per unit amounts)
 
 
Year Ended December 31,
 
 
2018
 
2017
 
Change
Revenues – related party:
 
 
 
 
 
 
Revenues from lease contracts
 
$
436,609

 
$
351,532

 
$
85,077

Revenues from contracts with customer
 
109,818

 
100,473

 
9,345

Total revenues – related party
 
546,427

 
452,005

 
94,422

Costs and expenses:
 
 
 
 
 
 
Cost of revenues from lease contracts (excluding depreciation expense reflected below)
 
104,776

 
83,332

 
21,444

Cost of revenues from contracts with customer (excluding depreciation expense reflected below)
 
26,319

 
25,042

 
1,277

Depreciation expense associated with lease contracts
 
63,499

 
40,950

 
22,549

Depreciation expense associated with contracts with customer
 
12,629

 
11,525

 
1,104

Other operating expenses
 

 
577

 
(577
)
General and administrative expenses
 
20,702

 
15,549

 
5,153

Total costs and expenses
 
227,925

 
176,975

 
50,950

Operating income
 
318,502

 
275,030

 
43,472

Other income, net
 
2,214

 
753

 
1,461

Interest and debt expense, net of capitalized interest
 
(55,068
)
 
(36,015
)
 
(19,053
)
Income before income tax expense
 
265,648

 
239,768

 
25,880

Income tax expense
 
1,553

 
1,335

 
218

Net income
 
264,095

 
238,433

 
25,662

Less: General partner’s interest in net income
 
54,108

 
49,113

 
4,995

Limited partners’ interest in net income
 
$
209,987

 
$
189,320

 
$
20,667

 
 
 
 
 
 
 
Net income per limited partner common unit – basic and diluted
 
$
3.03

 
$
2.77

 
 
 
 
 
 
 
 
 
Weighted average limited partner common units outstanding –basic and diluted
 
69,250

 
68,220

 
 



15


Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)

 
 
Year Ended December 31,
 
 
2018
 
2017
 
Change
Operating highlights:
 
 
 
 
 
 
Pipeline transportation:
 
 
 
 
 
 
Pipeline transportation revenues
 
$
124,151

 
$
100,631

 
$
23,520

Pipeline transportation throughput (BPD) (a)
 
1,091,529

 
964,198

 
127,331

Average pipeline transportation revenue per barrel (b)
 
$
0.31

 
$
0.29

 
$
0.02

 
 
 
 
 
 
 
Terminaling:
 
 
 
 
 
 
Terminaling revenues
 
$
415,117

 
$
347,996

 
$
67,121

Terminaling throughput (BPD)
 
3,593,818

 
2,889,361

 
704,457

Average terminaling revenue per barrel (b)
 
$
0.32

 
$
0.33

 
$
(0.01
)
 
 
 
 
 
 
 
Storage and other revenues
 
$
7,159

 
$
3,378

 
$
3,781

 
 
 
 
 
 
 
Total revenues – related party
 
$
546,427

 
$
452,005

 
$
94,422

 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
Maintenance
 
$
10,739

 
$
8,954

 
$
1,785

Expansion
 
13,477

 
29,562

 
(16,085
)
Total capital expenditures
 
24,216

 
38,516

 
(14,300
)
 
 
 
 
 
 
 
Other financial information:
 
 
 
 
 
 
Distribution declared per unit
 
$
1.6295

 
$
1.8700

 


 
 
 
 
 
 
 
Distribution declared:
 
 
 
 
 
 
Limited partner units – public
 
$
36,653

 
$
42,051

 
 
Limited partner units – Valero
 
76,209

 
86,503

 
 
General partner units – Valero
 
52,126

 
47,897

 
 
Total distribution declared
 
$
164,988

 
$
176,451

 
 
______________
(a)
Represents the sum of volumes transported through each separately tariffed pipeline segment divided by the number of days in the period.
(b)
Average revenue per barrel is calculated as revenue divided by throughput for the period. Throughput is derived by multiplying the throughput barrels per day (BPD) by the number of days in the period.



16


Total revenues – related party increased $94.4 million, or 21 percent, in 2018 compared to 2017. The increase was due primarily to the following:

Revenues and throughput from a terminal and pipeline acquired from Valero in November 2017. We generated incremental revenues of $53.1 million and $21.9 million in 2018 from the operations of our Port Arthur terminal and Parkway pipeline, respectively. The volumes handled at and transported through these assets were the primary contributors to the increase in our overall terminaling and pipeline transportation throughput in 2018 compared to 2017. Average pipeline transportation revenue per barrel was higher in 2018 compared to 2017 due primarily to higher revenue per barrel generated by our Parkway pipeline compared to the average revenue per barrel generated by our other pipelines. Average terminaling revenue per barrel was lower in 2018 compared to 2017 due primarily to lower revenue per barrel generated by our Port Arthur terminal compared to the average revenue per barrel generated by our other terminals.
Higher throughput volumes. We experienced a 4 percent and 6 percent increase in volumes handled at our other terminals and pipeline systems, respectively, in 2018 compared to 2017. The increase in volumes had a favorable impact to our operating revenues of $15.6 million.
Incremental revenues from our DGD rail loading facility and storage tank placed in service in May 2017 and April 2018, respectively. Our DGD rail loading facility and new storage tank generated combined incremental revenues of $3.8 million in 2018 compared to 2017.
Total cost of revenues (excluding depreciation expense) increased $22.7 million, or 21 percent, in 2018 compared to 2017 due primarily to expenses of $13.6 million and $7.2 million related to the operations of our Port Arthur terminal and Parkway pipeline, respectively, which were acquired in November 2017.
Total depreciation expense increased $23.7 million, or 45 percent, in 2018 compared to 2017 due primarily to depreciation expense of $13.1 million and $6.8 million associated with the assets that compose our Port Arthur terminal and Parkway pipeline, respectively, which were acquired in November 2017.
Other operating expenses reflects the uninsured portion of our property damage losses and repair costs incurred in 2017 as a result of damages caused by Hurricane Harvey primarily at our Houston terminal and Port Arthur products system.
General and administrative expenses increased $5.2 million, or 33 percent, in 2018 compared to 2017 due primarily to professional fees of $3.9 million incurred in connection with the Merger; an increase of $685,000 in expenses associated with our ATM Program; and incremental costs of $575,000 related to the management fee charged to us by Valero for additional services provided to us as a result of our acquisitions of the Port Arthur terminal and Parkway pipeline, which were acquired in November 2017.
“Interest and debt expense, net of capitalized interest” increased $19.1 million in 2018 compared to 2017 due primarily to the following:
Incremental borrowings in connection with acquisitions. In connection with the acquisitions of the Port Arthur terminal and Parkway pipeline in November 2017, we borrowed $380.0 million under the Revolver. Interest expense on the incremental borrowings was $11.0 million in 2018.
Higher interest rates in 2018. Borrowings under the Loan Agreements with Valero bore interest at variable rates. We incurred additional interest of $3.4 million in 2018 on these borrowings due to higher interest rates in 2018 compared to 2017.



17


Incremental interest expense on the 2028 Senior Notes. In March 2018, we issued $500.0 million of 2028 Senior Notes. We used the gross proceeds of $498.3 million to repay the outstanding balance of $410.0 million under the Revolver and $85.0 million on a portion of the outstanding balance under one of the Loan Agreements with Valero. The interest rate on the 2028 Senior Notes is higher than the interest rates on the Revolver and the Loan Agreements with Valero, thereby increasing our effective interest rate in 2018. Incremental interest expense resulting from the 2028 Senior Notes was approximately $3.3 million in 2018.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices. Because we do not take ownership of or receive any payments based on the value of the crude oil or refined petroleum products that we handle and do not engage in the trading of any commodities, we have no direct exposure to commodity price fluctuations.
Our commercial agreements with Valero are indexed to inflation to mitigate our exposure to increases in the cost of labor and materials used in our business.
The following table provides information about our debt obligations (dollars in thousands), the fair values of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.
 
 
 
December 31, 2018
 
 
 
Expected Maturity Dates
 
 
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
There-
after
 
Total (a)
 
Fair
Value
Fixed rate
 
$

 
$

 
$

 
$

 
$

 
$
1,000,000

 
$
1,000,000

 
$
986,290

Average interest rate
 
%
 
%
 
%
 
%
 
%
 
4.44
%
 
4.44
%
 
 
Variable rate
 
$

 
$
285,000

 
$

 
$

 
$

 
$

 
$
285,000

 
$
285,000

Average interest rate
 
%
 
3.85
%
 
%
 
%
 
%
 
%
 
3.85
%
 
 
 
 
 
December 31, 2017
 
 
 
Expected Maturity Dates
 
 
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
There-
after
 
Total (a)
 
Fair
Value
Fixed rate
 
$

 
$

 
$

 
$

 
$

 
$
500,000

 
$
500,000

 
$
523,800

Average interest rate
 
%
 
%
 
%
 
%
 
%
 
4.38
%
 
4.38
%
 
 
Variable rate
 
$

 
$

 
$
780,000

 
$

 
$

 
$

 
$

 
$
780,000

Average interest rate
 
%
 
%
 
2.87
%
 
%
 
%
 
%
 
2.87
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Excludes unamortized discount and deferred issuance costs.




18


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero Energy Partners LP. Our management evaluated the effectiveness of Valero Energy Partners LP’s internal control over financial reporting as of December 31, 2018. In its evaluation, management used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management believes that as of December 31, 2018, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 21 of this report.




19


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Unitholders of Valero Energy Partners LP and
the Board of Directors of Valero Energy Partners GP LLC:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valero Energy Partners LP and subsidiaries (the Partnership) as of December 31, 2018 and 2017 , the related consolidated statements of income, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2019 expressed an unqualified opinion on the effectiveness of the Partnership’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP
We have served as the Partnership’s auditor since 2013.
San Antonio, Texas
February 25, 2019



20


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Unitholders of Valero Energy Partners LP and
the Board of Directors of Valero Energy Partners GP LLC:
Opinion on Internal Control Over Financial Reporting
We have audited Valero Energy Partners LP’s (the Partnership) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2018 and 2017, the related consolidated statements of income, partners’ capital, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the



21


company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

San Antonio, Texas
February 25, 2019



22


VALERO ENERGY PARTNERS LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
December 31,
 
 
 
2018
 
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
152,106

 
$
42,052

Receivables – related party
 
47,768

 
46,496

Receivables
 
805

 
781

Prepaid expenses and other
 
891

 
720

Total current assets
 
201,570

 
90,049

Property and equipment, at cost
 
2,026,390

 
1,969,233

Accumulated depreciation
 
(617,206
)
 
(552,817
)
Property and equipment, net
 
1,409,184

 
1,416,416

Deferred charges and other assets, net
 
8,855

 
10,887

Total assets
 
$
1,619,609

 
$
1,517,352

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
14,406

 
$
18,633

Accounts payable – related party
 
13,730

 
3,944

Accrued liabilities
 
858

 
1,007

Accrued liabilities – related party
 
425

 
1,128

Accrued interest payable
 
7,474

 
2,558

Accrued interest payable – related party
 
884

 
911

Taxes other than income taxes payable
 
4,349

 
5,141

Total current liabilities
 
42,126

 
33,322

Debt
 
989,857

 
905,283

Notes payable – related party
 
285,000

 
370,000

Other long-term liabilities
 
3,923

 
2,950

Commitments and contingencies
 


 


Partners’ capital:
 
 
 
 
Limited partners:
 
 
 
 
Common unitholders – public
(22,493,484 and 22,487,586 units outstanding)
 
620,137

 
596,047

Common unitholder – Valero
(46,768,586 and 46,768,586 units outstanding)
 
(300,457
)
 
(382,652
)
General partner – Valero
(1,413,511 and 1,413,391 units outstanding)
 
(20,977
)
 
(7,598
)
Total partners’ capital
 
298,703

 
205,797

Total liabilities and partners’ capital
 
$
1,619,609

 
$
1,517,352

See Notes to Consolidated Financial Statements.



23


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per unit amounts)
 
 
 
Year Ended December 31,
 
 
 
2018
 
2017
 
2016
Revenues – related party:
 
 
 
 
 
 
Revenues from lease contracts
 
$
436,609

 
$
351,532

 
$
273,730

Revenues from contracts with customer
 
109,818

 
100,473

 
88,889

Total revenues – related party
 
546,427

 
452,005

 
362,619

Costs and expenses:
 

 

 

Cost of revenues from lease contracts (excluding depreciation expense reflected below) (a)
 
104,776

 
83,332

 
75,380

Cost of revenues from contracts with customer (excluding depreciation expense reflected below) (b)
 
26,319

 
25,042

 
20,735

Depreciation expense associated with lease contracts
 
63,499

 
40,950

 
33,961

Depreciation expense associated with contracts with customer
 
12,629

 
11,525

 
12,004

Other operating expenses
 

 
577

 

General and administrative expenses (c)
 
20,702

 
15,549

 
15,965

Total costs and expenses
 
227,925

 
176,975

 
158,045

Operating income
 
318,502

 
275,030

 
204,574

Other income, net
 
2,214

 
753

 
284

Interest and debt expense, net of capitalized interest (d)
 
(55,068
)
 
(36,015
)
 
(14,915
)
Income before income tax expense
 
265,648

 
239,768

 
189,943

Income tax expense
 
1,553

 
1,335

 
1,112

Net income
 
264,095

 
238,433

 
188,831

Less: Net loss attributable to Predecessor
 

 

 
(15,422
)
Net income attributable to partners
 
264,095

 
238,433

 
204,253

Less: General partner’s interest in net income
 
54,108

 
49,113

 
23,553

Limited partners’ interest in net income
 
$
209,987

 
$
189,320

 
$
180,700

 
 
 
 
 
 
 
Net income per limited partner unit – basic and diluted:
 
 
 
 
 
 
Common units
 
$
3.03

 
$
2.77

 
$
2.85

Subordinated units
 
$

 
$

 
$
2.38

Weighted-average limited partner units outstanding – basic and diluted:
 
 
 
 
 
 
Common units
 
69,250

 
68,220

 
48,817

Subordinated units
 

 

 
17,463

 
 
 
 
 
 
 
 
Supplemental information – each income statement line item reflected below includes expenses incurred for services or financing provided by related party as follows:
(a) Cost of revenues from lease contracts (excluding depreciation expense) – related party
 
$
70,930

 
$
59,953

 
$
56,138

(b) Cost of revenues from contracts with customer (excluding depreciation expense) – related party
 
$
8,313

 
$
7,114

 
$
5,511

(c) General and administrative expenses – related party
 
$
13,445

 
$
12,858

 
$
12,539

(d) Interest and debt expense – related party
 
$
10,693

 
$
9,658

 
$
6,608

See Notes to Consolidated Financial Statements.



24


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands)
 
 
Limited Partners
 
 
 
 
 
 
 
 
Common
Unitholders
Public
 
Common
Unitholder
Valero
 
Subordinated
Unitholder
Valero
 
General
Partner
Valero
 
Net
Investment
 
Total
Balance as of December 31, 2015
$
581,489

 
$
28,430

 
$
(313,961
)
 
$
(5,805
)
 
$
103,999

 
$
394,152

Net income (loss):
 
 
 
 
 
 
 
 
 
 
 
Attributable to Predecessor

 

 

 

 
(15,422
)
 
(15,422
)
Attributable to partners
58,688

 
76,690

 
45,322

 
23,553

 

 
204,253

Net transfers from Valero Energy Corporation

 

 

 

 
15,030

 
15,030

Allocation of Valero Energy Corporation’s net investment in acquisitions

 
67,800

 
32,758

 
3,049

 
(103,607
)
 

Acquisitions of businesses from Valero Energy Corporation:
 
 
 
 
 
 
 
 
 
 
 
Cash paid for carrying value of acquired businesses

 
(67,800
)
 
(32,758
)
 
(3,049
)
 

 
(103,607
)
Cash paid in excess of carrying value of acquired businesses

 
(246,759
)
 
(120,309
)
 
(9,325
)
 

 
(376,393
)
Conversion of subordinated units

 
(406,374
)
 
406,374

 

 

 

Unit issuance
11,091

 

 

 
198

 

 
11,289

Transfers to (from) partners
(72,452
)
 
76,584

 

 
(4,132
)
 

 

Noncash capital contributions from Valero Energy Corporation

 
22,730

 
12,084

 
918

 

 
35,732

Cash distributions to unitholders and distribution equivalent right payments ($1.41 per unit)
(30,393
)
 
(33,498
)
 
(29,510
)
 
(16,005
)
 

 
(109,406
)
Unit-based compensation
196

 

 

 

 

 
196

Balance as of December 31, 2016
548,619

 
(482,197
)
 

 
(10,598
)
 

 
55,824

Net income attributable to partners
62,014

 
127,306

 

 
49,113

 

 
238,433

Cash paid in excess of the carrying value of assets acquired from Valero Energy Corporation

 
(53,045
)
 

 
(1,573
)
 

 
(54,618
)
Unit issuance
33,428

 

 

 
748

 

 
34,176

Transfers to (from) partners
(8,773
)
 
15,957

 

 
(7,184
)
 

 

Noncash capital contributions from Valero Energy Corporation

 
90,666

 

 
2,341

 

 
93,007

Cash distributions to unitholders and distribution equivalent right payments ($1.769 per unit)
(39,507
)
 
(81,339
)
 

 
(40,445
)
 

 
(161,291
)
Unit-based compensation
266

 

 

 

 

 
266

Balance as of December 31, 2017
596,047


(382,652
)



(7,598
)


 
205,797

Net income attributable to partners
68,171

 
141,816

 

 
54,108

 

 
264,095

Unit issuance

 

 

 
5

 

 
5

Transfers to (from) partners
3,730

 
(2,396
)
 

 
(1,334
)
 

 

Noncash capital contributions from Valero Energy Corporation

 
42,785

 

 
873

 

 
43,658

Cash distributions to unitholders and distribution equivalent right payments ($2.137 per unit)
(48,069
)
 
(99,944
)
 

 
(67,030
)
 

 
(215,043
)
Unit-based compensation
258

 

 

 

 

 
258

Other

 
(66
)
 

 
(1
)
 

 
(67
)
Balance as of December 31, 2018
$
620,137

 
$
(300,457
)
 
$

 
$
(20,977
)
 
$

 
$
298,703

See Notes to Consolidated Financial Statements.



25


VALERO ENERGY PARTNERS LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Year Ended December 31,
 
 
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
264,095

 
$
238,433

 
$
188,831

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation expense
 
76,128

 
52,475

 
45,965

Changes in current assets and current liabilities
 
6,217

 
(3,730
)
 
(5,956
)
Changes in deferred charges and credits and other operating activities, net
 
4,102

 
1,753

 
1,054

Net cash provided by operating activities
 
350,542

 
288,931

 
229,894

Cash flows from investing activities:
 
 
 
 
 
 
Capital expenditures
 
(24,216
)
 
(38,516
)
 
(23,156
)
Acquisition of undivided interest in Red River crude system
 

 
(71,793
)
 

Acquisitions from Valero Energy Corporation
 

 
(407,844
)
 
(103,607
)
Other investing activities, net
 
8

 
302

 
31

Net cash used in investing activities
 
(24,208
)
 
(517,851
)

(126,732
)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from debt borrowings
 

 
380,000

 
349,000

Proceeds from issuance of senior notes
 
498,300

 

 
499,795

Repayment of debt and capital lease obligations
 
(410,000
)
 

 
(494,913
)
Repayment of notes payable – related party
 
(85,000
)
 

 

Payment of debt issuance costs
 
(4,542
)
 
(492
)
 
(4,462
)
Proceeds from issuance of common units
 

 
35,728

 
9,724

Proceeds from issuance of general partner units
 
5

 
748

 
198

Payment of offering costs
 

 
(594
)
 
(883
)
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets
 

 
(54,618
)
 
(376,393
)
Cash distributions to unitholders and distribution equivalent right payments
 
(215,043
)
 
(161,291
)
 
(109,406
)
Net transfers from Valero Energy Corporation
 

 

 
14,886

Net cash provided by (used in) financing activities
 
(216,280
)
 
199,481

 
(112,454
)
Net increase (decrease) in cash and cash equivalents
 
110,054

 
(29,439
)
 
(9,292
)
Cash and cash equivalents at beginning of year
 
42,052

 
71,491

 
80,783

Cash and cash equivalents at end of year
 
$
152,106

 
$
42,052

 
$
71,491

See Notes to Consolidated Financial Statements.



26


VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

We were formed by Valero in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other logistics assets. See Note 2 regarding our merger with Valero that occurred on January 10, 2019. Our assets consist of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries. We generate revenues from fee-based transportation and terminaling services.

Basis of Presentation
General
These consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP) and with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).
Acquisitions from Valero
Certain of our acquisitions from Valero, as described in Note 3, were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, we recorded these business acquisitions on our balance sheet at Valero’s carrying value as of the beginning of the period of transfer, and we retrospectively adjusted prior period financial statements and financial information to furnish comparative information. We refer to the historical results of the transferred businesses from Valero prior to their transfer to us as those of our “Predecessor.”
The combined financial statements of our Predecessor were derived from the consolidated financial statements and accounting records of Valero and reflect the combined historical financial position, results of operations, and cash flows of our Predecessor as if the acquisitions from Valero had been combined for periods prior to the effective dates of each acquisition.
There were no transactions between the operations of our Predecessor; therefore, there were no intercompany transactions or accounts to be eliminated in connection with the combination of those operations. In addition, our Predecessor’s statements of income include direct charges for the management and operation of our assets and certain expenses allocated by Valero for general corporate services, such as treasury, accounting, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Prior to the acquisitions from Valero, our Predecessor transferred cash to Valero daily and Valero funded our Predecessor’s operating and investing activities as needed. Therefore, transfers of cash to and from Valero’s cash management system are reflected as a component of net investment and are reflected as a financing activity in our statements of cash flows. In addition, interest expense was not included on the net cash transfers from Valero.



27





VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The acquisitions of Parkway Pipeline LLC (Parkway Pipeline) and the Port Arthur terminal (as defined in Note 3) from Valero on November 1, 2017 were accounted for as transfers of assets between entities under the common control of Valero. Accordingly, we recorded these asset acquisitions on our balance sheet at Valero’s carrying value as of the acquisition date, and our prior period financial statements and financial information were not retrospectively adjusted for these acquisitions.
The financial information presented for the periods after the effective dates of each acquisition represents the consolidated financial position, results of operations, and cash flows of the Partnership.
Reclassifications
In connection with our adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” (Topic 606) on January 1, 2018, which is described below, we have separately reflected (i) revenues from lease contracts and (ii) revenues from contracts with our customer. Because of this presentation of our revenues, we have also separately reflected cost of revenues and depreciation expense associated with lease contracts and contracts with our customer and have reclassified prior period amounts to conform to the 2018 presentation.

In addition, certain prior year amounts have been reclassified to conform to the 2018 presentation.

Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include the accounts of the Partnership, our subsidiaries, and our Predecessor. All intercompany items and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Cash Equivalents
Our cash equivalents are highly liquid investments that have a maturity of three months or less when acquired.
Receivables Related Party
Receivables – related party include trade receivables from Valero for transportation and terminaling services provided under various agreements with Valero, as described in Note 4. These receivables are recorded at the original invoice amount.
Property and Equipment
The cost of property and equipment purchased or constructed, including betterments of property and equipment, is capitalized. However, the cost of repairs to and normal maintenance of property and equipment is expensed when incurred. Betterments of property and equipment are those that extend the useful lives of the property and equipment or improve the safety of our operations. The cost of property and equipment constructed includes interest and certain overhead costs allocable to the construction activities. Property and equipment also includes our undivided interest in certain assets.



28





VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

When property and equipment are retired or replaced, the cost and related accumulated depreciation are eliminated, with any gain or loss reflected in depreciation expense, unless such amounts are reported separately due to materiality.
Depreciation of property and equipment is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset.
Impairment of Assets
Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the long-lived asset exceeds its fair value, with fair value determined based on discounted estimated net cash flows or other appropriate methods.
Asset Retirement Obligations
We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.
Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties and have not been measured on a discounted basis.
Net Investment
Net investment represents Valero’s historical investment in our Predecessor, its accumulated net earnings after taxes, and the net effect of transactions and allocations between our Predecessor and Valero. There were no terms of settlement or interest charges associated with the net investment balance.
Revenue Recognition
General
We generate revenues from fee-based transportation and terminaling activities to transport and store crude oil and refined petroleum products using our pipelines and terminals under commercial agreements with Valero. Certain schedules under these agreements are classified as operating leases under existing lease accounting standards, with such revenues reflected as revenues from lease contracts on our statements of income. The remaining schedules under these agreements are service arrangements accounted for as revenues from contracts with our customer, and are reflected as revenues from contracts with customer on our statements of income.



29





VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue from Lease Contracts
Lease revenues are recognized on a straight-line basis over the lease term. Contingent lease revenues are recognized for volumes in excess of minimum throughput commitments.

Revenue from Contracts with Customer
The FASB issued Topic 606, which clarifies the principles for recognizing revenue and supersedes previous revenue recognition requirements under “Revenue Recognition (Topic 605).” We adopted the provisions of Topic 606 on January 1, 2018 using the modified retrospective method of adoption as permitted by the standard. Under this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of partners’ capital, and revenues reported in the periods prior to the date of adoption are not changed. We elected to apply the transition guidance for Topic 606 to individual contracts with our customer that were not completed as of the date of adoption. There was no material impact to our financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to partners’ capital as of January 1, 2018. Additionally, there was no material impact to our financial position or results of operations as of and for the year ended December 31, 2018. See Note 7 for information on our revenues. As a result of our adoption of Topic 606, our revenue recognition accounting policy has been revised.

At contract inception, we assess the services promised in our contracts and identify a performance obligation for each promise to transfer to our customer a service (or bundle of services) that is distinct. Revenue from contracts with our customer is recognized over time at the amount of consideration we expect to receive as our performance obligation is satisfied.

Our service primarily includes the delivery of crude oil and refined petroleum products that are ratably lifted by or delivered to our customer for its future use or future sale to its end customers. Under our transportation service agreements, the service provided is the delivery of crude oil and refined petroleum products to various points in our pipeline system. Although the products are delivered on a batch basis, we deliver a series of similar goods consecutively over time, therefore, the service is treated as a single performance obligation. Under our terminaling service agreement, the services provided for each terminal are the receipt, storage, and delivery of crude oil and refined petroleum products. These services are treated as a single performance obligation as we perform the service with the same pattern of transfer to our customer over time for which progress towards satisfying the performance obligation can be measured uniformly. The above performance obligations under the transportation service agreements and the terminaling service agreement are satisfied over time because (i) our customer simultaneously receives and consumes the benefits provided by our performance and (ii) another entity would not need to substantially reperform the work that we have completed to date.
Our transaction price is based on a contractual rate, which may vary depending on volumes transported on a quarterly basis within each quarterly period. Some schedules contain a quarterly tier-pricing structure, whereby one rate is charged for volumes up to a certain number of average barrels per day and a reduced rate is charged for excess average barrels per day. For schedules that include such variable consideration, we estimate the factors driving the variable consideration to determine the transaction price. Our schedule with our customer states the final terms of the sale, including the description, quantity, and price of each service delivered. We invoice our customer the contractual rate based on the greater of throughput volumes or minimum throughput commitments. Payment is typically due in full within 10 days of receipt of billing, which occurs monthly. In the normal course of business, we do not have obligations for returns or refunds.



30





VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes
Our operations are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of taxable income. Therefore, we have excluded income taxes from these financial statements, except for state taxes that apply to partnerships, specifically the margin tax in Texas. Our Predecessor’s taxable income was included in the consolidated U.S. federal income tax returns of Valero and in certain consolidated state income tax returns.
Income taxes are accounted for under the asset and liability method, as if we were a separate taxpayer rather than a member of Valero’s consolidated tax return. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.
We classify any interest expense and penalties related to the underpayment of income taxes in income tax expense.
Net Income per Limited Partner Unit
Basic and diluted net income per limited partner unit is determined pursuant to the two-class method for master limited partnerships as described in Note 10.
Comprehensive Income
We have not reported comprehensive income due to the absence of items of other comprehensive income in the years presented.
Segment Reporting
Our operations consist of one reportable segment. All of our operations are conducted and all of our assets are located in the U.S.
Financial Instruments
Our financial instruments include cash and cash equivalents, receivables, receivables – related party, accounts payable, accounts payable – related party, debt, and notes payable – related party. The estimated fair values of these financial instruments approximate their carrying amounts, except for certain debt as discussed in Note 15.
Business Combinations
We adopted the provisions of Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” issued by the FASB, on January 1, 2017. This ASU provides a more robust framework to evaluate whether transactions should be accounted for as acquisitions (dispositions) of assets or businesses. Our adoption of this ASU resulted in the acquisitions of Parkway Pipeline and the Port Arthur terminal being accounted for as acquisitions of assets, which are discussed in Note 3. In addition, more of our future acquisitions may be accounted for as acquisitions of assets in accordance with this ASU.
Accounting Pronouncement Adopted on January 1, 2019
In February 2016, the FASB issued Topic 842 “Leases” (Topic 842) to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new standard is effective for annual reporting



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VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods, with early adoption permitted. We adopted this new standard on January 1, 2019 using the optional transition method; however, we did not have a cumulative-effect adjustment to the opening balance of partners’ capital at the date of adoption. The adoption of this standard did not have a material affect on our financial position.

The new standard provides a number of optional practical expedients and we elected the following:

Transition Elections. We elected the package of practical expedients that permits us to not reassess our prior conclusions about lease identification, lease classification, and initial direct costs under the new standard, as well as the practical expedient that permits us to not assess existing land easements under the new standard.

Lessee Accounting Policy Elections. We elected the short-term lease recognition exemption whereby right-of-use assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year, and the practical expedient to not separate lease and non-lease components for all classes of underlying assets other than the real estate asset class.

Lessor Accounting Policy Election. We elected the practical expedient to account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets.

2.
MERGER WITH VALERO

On January 10, 2019, pursuant to that certain Agreement and Plan of Merger, dated as of October 18, 2018 (the Merger Agreement), by and among VLO, Forest Merger Sub, LLC, an indirect wholly owned subsidiary of VLO (Merger Sub), Valero Energy Partners LP, and Valero Energy Partners GP LLC, Merger Sub merged with and into the Partnership (the Merger), with the Partnership surviving and continuing to exist as a Delaware limited partnership.

Under the terms of the Merger Agreement, at the effective time of the Merger (the