NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICES
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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.
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.
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.
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.
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
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:
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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.
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•
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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.
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•
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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.
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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.
On
January 10, 2019
, in connection with the completion of the Merger, the New York Stock Exchange (NYSE) filed with the SEC a notification of removal from listing on Form 25 to delist and deregister the publicly traded 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.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2026 Senior Notes and 2028 Senior Notes as defined and discussed in
Note 6
. We also terminated (i) our Revolver as defined and discussed in
Note 6
, (ii) our equity distribution agreement related to our ATM Program as defined and discussed in
Note 11
, and (iii) our 2013 ICP as defined and discussed in
Note 12
.
In connection with the following acquisitions, we entered into various agreements with Valero, including additional schedules to our commercial agreements, an amended and restated omnibus agreement, an amended and restated services and secondment agreement, and lease agreements. See
Note 4
for a summary of the terms of these agreements.
Acquisitions in 2017
Red River Crude System
On
January 18, 2017
, we acquired a
40
percent undivided interest in (i) the Hewitt segment of Plains All American Pipeline, L.P.’s (Plains) Red River pipeline (the Hewitt segment), (ii)
two
150,000
shell barrel capacity tanks located at Hewitt Station in Hewitt, Oklahoma (the Hewitt Storage Tanks), and (iii) a pipeline connection from Hewitt Station to Wasson Station (the Wasson Interconnect) (collectively, the Red River crude system) for total cash consideration of
$71.8 million
, which we funded with available cash on hand. This acquisition was accounted for as an acquisition of assets.
The Hewitt segment consists of an approximately 138-mile, 16-inch crude oil pipeline with
150,000
barrels per day of throughput capacity that originates at Plains Marketing L.P.’s Cushing, Oklahoma terminal and ends at Hewitt Station. The pipeline supports Valero’s Ardmore Refinery and began supplying crude oil to Valero in January 2017. We retain a right to participate in any future expansions of the pipeline.
We also entered into a Joint Ownership Agreement (JOA) and an Operating and Administrative Services Agreement with Plains concurrent with this acquisition. The JOA provides us with access to the remaining
60
percent of the capacity of the Hewitt Storage Tanks and the Wasson Interconnect and continues until terminated by mutual agreement. This access arrangement is accounted for as an operating lease. The administrative agreement facilitates the day-to-day operations and management functions of the pipeline for an initial
five
-year term and automatically renews for successive
five
-year terms.
Parkway Pipeline
On
November 1, 2017
, we acquired Parkway Pipeline, a subsidiary of Valero, that owns and operates an approximately 140-mile, 16-inch refined petroleum products pipeline (Parkway Pipeline) with
110,000
barrels per day of capacity that transports refined petroleum products from Valero’s St. Charles Refinery, located in Norco, Louisiana, to Collins, Mississippi for supply into the Plantation and Colonial pipeline systems. We paid Valero cash consideration of
$200.0 million
for Parkway Pipeline. We funded the cash distribution with
$82.0 million
of our cash on hand and
$118.0 million
of borrowings under the Revolver (as defined in
Note 6
). This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Port Arthur Terminal
On
November 1, 2017
, we acquired Valero Partners Port Arthur, LLC, a subsidiary of Valero that owns certain terminaling assets (Port Arthur terminal) that support Valero’s Port Arthur Refinery for total consideration of
$308.0 million
, which consisted of (i) a cash distribution of
$262.0 million
and (ii) the issuance of
1,081,315
common units and
22,068
general partner units to Valero having an aggregate value of
$46.0 million
. We funded the cash distribution with
$262.0 million
of borrowings under the Revolver. This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.
Acquisitions in 2016
McKee Terminal Services Business
On
April 1, 2016
, we acquired from Valero a subsidiary that owns and operates a crude oil, intermediates, and refined petroleum products terminal supporting Valero’s McKee Refinery for total consideration of
$240.0 million
, which consisted of (i) a cash distribution of
$204.0 million
and (ii) the issuance of
728,775
common units and
14,873
general partner units to Valero having an aggregate value of
$36.0 million
. We funded the cash distribution with
$65.0 million
of our cash on hand and
$139.0 million
of borrowings under the Revolver. This acquisition was accounted for as a transfer of a business between entities under the common control of Valero. See Note
1
regarding the accounting and basis of presentation of this acquisition.
Meraux and Three Rivers Terminal Services Business
On
September 1, 2016
, we acquired from Valero
two
subsidiaries that own and operate crude oil, intermediates, and refined petroleum products terminals supporting Valero’s Meraux and Three Rivers Refineries for total consideration of
$325.0 million
which consisted of (i) a cash distribution of
$276.0 million
and (ii) the issuance of
1,149,905
common units and
23,467
general partner units to Valero having an aggregate value of
$49.0 million
. We funded the cash distribution with
$66.0 million
of our cash on hand and
$210.0 million
of borrowings under the Revolver. This acquisition was accounted for as a transfer of a business between entities under the common control of Valero. See Note
1
regarding the accounting and basis of presentation of this acquisition.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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4.
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RELATED-PARTY AGREEMENTS AND TRANSACTIONS
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Predecessor Transactions
Our Predecessor was part of the consolidated operations of Valero and all of our operating revenues were derived from transactions with Valero. The crude oil and refined petroleum products pipeline transportation and terminaling services we provided to Valero were settled through net parent investment, and payables and receivables related to these transactions were included as a component of net investment.
Prior to the dates of each of our business acquisitions from Valero, our operating and general and administrative expenses included charges to our Predecessor for the management of our operations and the allocation of certain overhead and shared services expenses by Valero. These charges and allocations included such items as management oversight, information technology, legal, human resources, and other financial and administrative services. These allocations do not fully reflect the expenses that would have been incurred had we been a stand-alone limited partnership. Our management believes the charges allocated to our Predecessor were a reasonable reflection of the utilization of services provided, but they cannot be presumed to be carried out on an arm’s-length basis as the requisite conditions of competitive, free-market dealings may not have existed.
Agreements with Valero
Commercial Agreements
We have transportation services agreements and a terminal services agreement (collectively, the commercial agreements) with Valero. Under these commercial agreements, we provide transportation and terminaling services to Valero and Valero pays us for minimum quarterly throughput volumes of crude oil and refined petroleum products, regardless of whether such volumes are physically delivered by Valero in any given quarter. In connection with our initial public offering (IPO) and subsequent acquisitions, we entered into schedules under these commercial agreements. Each schedule generally has an initial term of
ten
years, provides Valero an option to renew for
one
additional
five
-year term, and contains minimum throughput requirements and inflation escalators.
Effective
March 31, 2017
, we entered into a commercial agreement with Diamond Green Diesel Holdings, LLC (DGD), a joint venture consolidated by Valero, to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we constructed a new
180,000
barrel storage tank and began leasing services to DGD in April 2018. This commercial agreement, which includes both the rail loading facility and the storage tank, has an initial term that ends on
June 30, 2033
, and contains minimum commitments for DGD’s use of the assets.
Amended and Restated Omnibus Agreement
We have an amended and restated omnibus agreement with Valero, certain of its subsidiaries, and our general partner that addresses our payment of an annual administrative fee and our obligation to reimburse Valero for certain direct or allocated costs and expenses incurred by Valero on our behalf. This agreement also addresses, but is not limited to, indemnification rights of Valero and us for certain environmental and other liabilities related to our assets. As of
December 31, 2018
, the annual administrative fee was $
13.2 million
.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
So long as Valero controls our general partner, the amended and restated omnibus agreement will remain in full force and effect. If Valero ceases to control our general partner, either party may terminate the amended and restated omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.
Amended and Restated Services and Secondment Agreement
Under the terms of an amended and restated services and secondment agreement, including its amended and restated exhibits, employees of Valero are seconded to our general partner to provide operational and maintenance services for certain of our pipelines and terminals, and we reimburse our general partner for these costs. During their period of secondment, the seconded employees are under the management and supervision of our general partner.
This agreement has an initial term of
ten
years from the Service Date (as defined in the agreement) with respect to each acquisition and will automatically extend for successive renewal terms of
one
year each, unless terminated by either party upon at least
30
days’ prior written notice before the end of the initial term or any renewal term. In addition, our general partner may terminate the agreement or reduce the level of services under the agreement at any time upon
30
days’ prior written notice.
Lease Agreements
We have lease agreements with Valero with respect to the land on which certain terminals are located. Generally, each lease agreement has an initial term of
ten
years with
four
automatic successive renewal periods of
five
years each. Either party may terminate each lease agreement after the initial term by providing written notice. We also have a ground lease agreement with an initial term of
twenty
years and
no
renewal periods. Initial base rent under these lease agreements is subject to annual inflation escalators, and we are required to pay Valero a customary expense reimbursement for taxes, utilities, and similar costs incurred by Valero related to the leased premises. See
Note 9
regarding our lease commitments with Valero.
Tax Sharing Agreement
Under our tax sharing agreement with Valero, we are required to reimburse Valero for our share of state and local income and other taxes incurred by Valero as a result of our tax items and attributes being included in a combined or consolidated state tax return filed by Valero with respect to taxable periods including or beginning on or after the closing date of the IPO. The amount of any such reimbursement will be limited to any entity-level tax that we would have paid directly had we not been included in a combined group with Valero. While Valero may use its tax attributes to cause its combined or consolidated group, of which we may be a member for this purpose, to owe no tax, we are nevertheless required to reimburse Valero for the tax we would have owed had the attributes not been available or used for our benefit, even though Valero had no cash expense for that period.
Subordinated Credit Agreements
As of
December 31, 2018
, we had subordinated credit agreements with Valero as described in
Note 6
.
Summary of Transactions
Revenues
–
Related Party
Revenues – related party include revenues from lease contracts and revenues from contracts with our customer as described in
Note 7
.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Related-Party Expenses
The related-party expenses include costs of revenues, expenses, or financing activities provided to us by Valero and are reflected in the supplemental information disclosure on our statements of income.
Insurance Recoveries
During 2017, we experienced property damage losses and repair costs associated with Hurricane Harvey primarily at our Houston terminal and Port Arthur products system. As a result of these losses, we submitted claims under our insurance policies with Valero. The amount shown in our statements of income as other operating expenses reflects the uninsured portion of our losses. For the year ended December 31, 2017, we recognized $
2.7 million
of insurance recoveries, which were recorded as a reduction to other operating expenses.
Net Investment
The following is a reconciliation of the amounts presented as net transfers from Valero on our statement of partners’ capital and statement of cash flows for the year ended
December 31, 2016
(in thousands):
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|
|
|
|
|
Net transfers from Valero
per statements of partners’ capital
|
|
$
|
15,030
|
|
Less: Noncash transfers from Valero
|
|
144
|
|
Net transfers from Valero
per statements of cash flows
|
|
$
|
14,886
|
|
See
Note 14
for additional information related to our noncash transfers from (to) Valero.
Concentration Risk
All of our related-party balances resulted from transactions with Valero. Therefore, we are subject to the business risks associated with Valero’s business.
VALERO ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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5.
|
PROPERTY AND EQUIPMENT
|
Our property and equipment includes non-leased assets and assets under operating leases for which we are the lessor under U.S. GAAP. Major classes of property and equipment consisted of the following (in thousands):
|
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|
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|
|
|
|
|
December 31, 2018
|
|
|
|
Non-Leased
Assets
|
|
Assets
Leased
to Valero
|
|
Total
|
|
Land
|
|
$
|
4,672
|
|
|
$
|
—
|
|
|
$
|
4,672
|
|
|
Pipelines and related assets
|
|
225,413
|
|
|
386,596
|
|
|
612,009
|
|
|
Terminals and related assets
|
|
138,981
|
|
|
1,227,451
|
|
|
1,366,432
|
|
|
Other
|
|
14,138
|
|
|
—
|
|
|
14,138
|
|
|
Construction in progress
|
|
29,139
|
|
|
—
|
|
|
29,139
|
|
|
Property and equipment, at cost
|
|
412,343
|
|
|
1,614,047
|
|
|
2,026,390
|
|
|
Accumulated depreciation
|
|
(137,651
|
)
|
|
(479,555
|
)
|
|
(617,206
|
)
|
|
Property and equipment, net
|
|
$
|
274,692
|
|
|
$
|
1,134,492
|
|
|
$
|
1,409,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Non-Leased
Assets
|
|
Assets
Leased
to Valero
|
|
Total
|
|
Land
|
|
|
$
|
4,672
|
|
|
$
|
—
|
|
|
$
|
4,672
|
|
|
Pipelines and related assets
|
|
225,184
|
|
|
385,855
|
|
|
611,039
|
|
|
Terminals and related assets
|
|
134,362
|
|
|
1,162,718
|
|
|
1,297,080
|
|
|
Other
|
|
14,019
|
|
|
—
|
|
|
14,019
|
|
|
Construction in progress
|
|
42,423
|
|
|
—
|
|
|
42,423
|
|
|
Property and equipment, at cost
|
|
420,660
|
|
|
1,548,573
|
|
|
1,969,233
|
|
|
Accumulated depreciation
|
|
(127,136
|
)
|
|
(425,681
|
)
|
|
(552,817
|
)
|
|
Property and equipment, net
|
|
$
|
293,524
|
|
|
$
|
1,122,892
|
|
|
$
|
1,416,416
|
|
|