Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References in this report to “Partnership,” “we,” “us,” or “our” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References in this report to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.
CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q, including without limitation our disclosures below under the heading “OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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,” “should,” “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 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:
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•
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the suspension, reduction, or termination of Valero’s obligation under our commercial agreements and our services and secondment agreement;
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•
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changes in global economic conditions and the effects of the global economic downturn on Valero’s business and the business of its suppliers, customers, business partners, and credit lenders;
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•
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a material decrease in Valero’s profitability;
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•
|
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;
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•
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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;
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•
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Valero’s ability to remain in compliance with the terms of its outstanding indebtedness;
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•
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the timing and extent of changes in commodity prices and demand for Valero’s refined petroleum products;
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•
|
our ability to obtain credit and financing on acceptable terms in light of uncertainty and illiquidity in credit and capital markets;
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•
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actions of customers and competitors;
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•
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changes in our cash flows from operations;
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•
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state and federal environmental, economic, health and safety, energy, and other policies and regulations, including those related to climate change and any changes therein, and any legal or regulatory investigations, delays, or other factors beyond our control;
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•
|
operational hazards inherent in refining operations and in transporting and storing crude oil and refined petroleum products;
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•
|
earthquakes or other natural disasters affecting operations;
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•
|
changes in capital requirements or in execution of planned capital projects;
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•
|
the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;
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•
|
changes in the cost or availability of third-party vessels, pipelines, and other means of delivering and transporting crude oil, feedstocks, and refined products;
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•
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direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;
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•
|
weather conditions affecting our or Valero’s operations or the areas in which Valero markets its refined petroleum products;
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•
|
seasonal variations in demand for refined petroleum products;
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•
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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;
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•
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risks related to labor relations and workplace safety;
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•
|
changes in insurance markets impacting costs and the level and types of coverage available; and
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•
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political developments.
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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.
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
We are a fee-based master limited partnership that owns and operates 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 nine of Valero’s refineries. Since our formation in 2013, we have acquired several businesses from Valero and began receiving fees for services provided by those businesses commencing on each respective acquisition date. The following businesses (collectively, the Acquisitions) were acquired from Valero in 2016 and 2015 and are further described in Note
3
of Condensed Notes to Consolidated Financial Statements:
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•
|
On April 1, 2016, we acquired the
McKee Terminal Services Business
for total consideration of
$240.0 million
.
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|
•
|
On October 1, 2015, we acquired the Corpus Christi Terminal Services Business for total consideration of
$465.0 million
.
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•
|
On March 1, 2015, we acquired the Houston and St. Charles Terminal Services Business for total consideration of
$671.2 million
.
|
The Acquisitions were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, the Partnership’s financial statements have been retrospectively adjusted to include the historical results of the acquired businesses for all periods presented prior to the effective date of each acquisition. We refer to the historical results of the acquired businesses prior to their respective acquisition dates as those of our “Predecessor.” See Notes
1
and
3
of Condensed Notes to Consolidated Financial Statements for a discussion of the basis of this presentation.
In connection with the Acquisitions, we entered into commercial agreements with Valero and began recognizing terminaling revenues. We had not charged fees for services provided to Valero prior to each acquisition; therefore, our results of operations subsequent to the Acquisitions are not comparable to our historical results of operations.
For the
second quarter
of
2016
, we reported net income and net income attributable to partners of
$49.4 million
and net income per common unit of
$0.67
. This compares to net income of
$23.5 million
, net income attributable to partners of
$33.7 million
, and net income per common unit of
$0.54
for the
second quarter
of
2015
.
|
|
•
|
The increase in net income of
$25.9 million
in the
second quarter
of 2016 compared to the
second quarter
of
2015
was due primarily to $28.2 million of revenues generated by our McKee and Corpus Christi terminals in the
second quarter
of 2016. As previously noted, the
McKee Terminal Services Business
and the
Corpus Christi Terminal Services Business
did not charge Valero for services provided, and therefore, did not generate revenues prior to our acquisition of those businesses on April 1, 2016 and October 1, 2015, respectively.
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|
•
|
Net income attributable to partners represents our results of operations and only includes the results of an acquired business for the period subsequent to the effective date of its acquisition. Therefore, the increase in net income attributable to partners of
$15.8 million
in the
second quarter
of
2016
compared to the
second quarter
of
2015
was due primarily to the comparable periods reflecting the results of operations of the
McKee Terminal Services Business
and the Corpus Christi Terminal Services Business from the date of their respective acquisition.
|
For the
first six months
of
2016
, we reported net income of
$89.7 million
, net income attributable to partners of
$92.7 million
, and net income per common unit of
$1.28
. This compares to net income of
$27.6 million
, net income attributable to partners of
$55.8 million
, and net income per common unit of
$0.91
for the
first six months
of
2015
.
|
|
•
|
The increase in net income of
$62.1 million
in the
first six months
of 2016 compared to the
first six months
of
2015
was due primarily to higher revenues of $65.1 million generated by our McKee, Corpus Christi, Houston, and St. Charles terminals. As previously noted, the
McKee Terminal Services Business
, the
Corpus Christi Terminal Services Business
, and the
Houston and St. Charles Terminal Services Business
did not charge Valero for services provided, and therefore, did not generate revenues prior to our acquisition of those businesses on April 1, 2016, October 1, 2015, and March 1, 2015, respectively.
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|
|
•
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Net income attributable to partners represents our results of operations and only includes the results of an acquired business for the period subsequent to the effective date of its acquisition. Therefore, the increase in net income attributable to partners of
$37.0 million
in the
first six months
of
2016
compared to the
first six months
of
2015
was due primarily to the comparable periods reflecting the results of operations of the
Houston and St. Charles Terminal Services Business
, the Corpus Christi Terminal Services Business, and the
McKee Terminal Services Business
from the date of their respective acquisition.
|
Additional analysis of the changes in the components of net income is provided below under “RESULTS OF OPERATIONS.”
OUTLOOK
Because our operating revenues are generated from fee-based arrangements with Valero, the amount of operating revenues we generate primarily depends on the volumes of crude oil and refined petroleum products that we transport through our pipelines and handle at our terminals. These volumes are primarily affected by refinery reliability and the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. For 2016, we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals generally consistent with historical levels.
RESULTS OF OPERATIONS
The following tables highlight our results of operations and our operating performance. The financial results for the three and six months ended
June 30, 2016
and
2015
represent our consolidated results of operations, adjusted for the Acquisitions for the periods presented prior to the effective date of each acquisition. See Notes
1
and
3
of Condensed Notes to Consolidated Financial Statements for a discussion of the basis of this presentation. The narrative following these tables provides an analysis of our results of operations.
Results of Operations
(in thousands, except per unit amounts)
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|
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|
|
|
Three Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Operating revenues – related party
|
|
$
|
87,664
|
|
|
$
|
60,245
|
|
|
$
|
27,419
|
|
Costs and expenses:
|
|
|
|
|
|
|
Operating expenses
|
|
20,520
|
|
|
22,191
|
|
|
(1,671
|
)
|
General and administrative expenses
|
|
3,578
|
|
|
3,312
|
|
|
266
|
|
Depreciation expense
|
|
10,622
|
|
|
9,904
|
|
|
718
|
|
Total costs and expenses
|
|
34,720
|
|
|
35,407
|
|
|
(687
|
)
|
Operating income
|
|
52,944
|
|
|
24,838
|
|
|
28,106
|
|
Other income, net
|
|
57
|
|
|
26
|
|
|
31
|
|
Interest and debt expense, net of capitalized interest
|
|
(3,251
|
)
|
|
(1,411
|
)
|
|
(1,840
|
)
|
Income before income taxes
|
|
49,750
|
|
|
23,453
|
|
|
26,297
|
|
Income tax expense (benefit)
|
|
303
|
|
|
(51
|
)
|
|
354
|
|
Net income
|
|
49,447
|
|
|
23,504
|
|
|
25,943
|
|
Less: Net loss attributable to Predecessor
|
|
—
|
|
|
(10,158
|
)
|
|
10,158
|
|
Net income attributable to partners
|
|
49,447
|
|
|
33,662
|
|
|
15,785
|
|
Less: General partner’s interest in net income
|
|
5,213
|
|
|
1,357
|
|
|
3,856
|
|
Limited partners’ interest in net income
|
|
$
|
44,234
|
|
|
$
|
32,305
|
|
|
$
|
11,929
|
|
|
|
|
|
|
|
|
Net income per limited partner unit – basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
|
|
|
Subordinated units
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average limited partner units outstanding – basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
37,248
|
|
|
30,698
|
|
|
|
Subordinated units
|
|
28,790
|
|
|
28,790
|
|
|
|
Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Operating highlights:
|
|
|
|
|
|
|
Pipeline transportation:
|
|
|
|
|
|
|
Pipeline transportation revenues
|
|
$
|
19,318
|
|
|
$
|
19,967
|
|
|
$
|
(649
|
)
|
Pipeline transportation throughput (BPD)
(a)
|
|
850,516
|
|
|
953,123
|
|
|
(102,607
|
)
|
Average pipeline transportation revenue per barrel
(b)
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
Terminaling:
|
|
|
|
|
|
|
Terminaling revenues
|
|
$
|
68,211
|
|
|
$
|
40,143
|
|
|
$
|
28,068
|
|
Terminaling throughput (BPD)
|
|
2,146,293
|
|
|
1,379,757
|
|
|
766,536
|
|
Average terminaling revenue per barrel
(b)
|
|
$
|
0.35
|
|
|
$
|
0.32
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
Storage revenues
|
|
$
|
135
|
|
|
$
|
135
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Total operating revenues – related party
|
|
$
|
87,664
|
|
|
$
|
60,245
|
|
|
$
|
27,419
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Maintenance
|
|
$
|
1,518
|
|
|
$
|
2,129
|
|
|
$
|
(611
|
)
|
Expansion
|
|
1,540
|
|
|
4,174
|
|
|
(2,634
|
)
|
Total capital expenditures
|
|
3,058
|
|
|
6,303
|
|
|
(3,245
|
)
|
Less: Capital expenditures attributable to Predecessor
|
|
—
|
|
|
5,229
|
|
|
(5,229
|
)
|
Capital expenditures attributable to Partnership
|
|
$
|
3,058
|
|
|
$
|
1,074
|
|
|
$
|
1,984
|
|
|
|
|
|
|
|
|
Other financial information:
|
|
|
|
|
|
|
Distribution declared per unit
|
|
$
|
0.3650
|
|
|
$
|
0.2925
|
|
|
|
|
|
|
|
|
|
|
|
Distribution declared:
|
|
|
|
|
|
|
Limited partner units – public
|
|
$
|
7,854
|
|
|
$
|
5,048
|
|
|
|
|
Limited partner units – Valero
|
|
16,256
|
|
|
12,355
|
|
|
|
|
General partner units – Valero
|
|
4,802
|
|
|
1,053
|
|
|
|
|
Total distribution declared
|
|
$
|
28,912
|
|
|
$
|
18,456
|
|
|
|
|
____________________
|
|
(a)
|
Represents the sum of volumes transported through each separately tariffed pipeline segment.
|
|
|
(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.
|
Operating revenues
increased
$27.4 million
, or
46 percent
, in the
second quarter
of
2016
compared to the
second quarter
of
2015
. The
increase
was due to higher revenues of $28.2 million generated by the McKee and Corpus Christi terminals in the second quarter of 2016 compared to the second quarter of 2015. Prior to being acquired by us, the
McKee Terminal Services Business
and the Corpus Christi Terminal Services Business did not charge Valero for services provided and, therefore, did not generate revenues. Effective with the acquisition dates, we entered into additional schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired businesses and began generating revenues with respect to these assets.
Operating expenses
decreased
$1.7 million
, or
8 percent
, in the
second quarter
of
2016
compared to the
second quarter
of
2015
due primarily to lower maintenance expense of $1.6 million at the Corpus Christi terminals related to inspection activity.
General and administrative expenses
increased
$266,000
, or
8 percent
, in the
second quarter
of
2016
compared to the
second quarter
of
2015
due primarily to incremental costs of $198,000 related to the management fee charged to us by Valero for the
McKee Terminal Services Business
and the Corpus Christi Terminal Services Business.
Depreciation expense
increased
$718,000
, or
7 percent
, in the
second quarter
of
2016
compared to the
second quarter
of
2015
due primarily to additional depreciation expense associated with assets placed into service in 2015, including expansion and improvement projects at our Corpus Christi and St. Charles terminals.
“Interest and debt expense, net of capitalized interest”
increased
$1.8 million
in the
second quarter
of
2016
compared to the
second quarter
of
2015
due primarily to interest expense incurred on borrowings under our revolving credit facility and the subordinated credit agreements with Valero entered into in connection with the acquisitions of the
McKee Terminal Services Business
and the Corpus Christi Terminal Services Business. Interest expense on these incremental borrowings was approximately $1.5 million in the
second quarter
of
2016
.
Our income tax expense (benefit) is associated with the Texas margin tax. In June 2015, the Texas margin tax rate was reduced from 1 percent to 0.75 percent, which resulted in a tax benefit in the second quarter of 2015.
Results of Operations
(in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Operating revenues – related party
|
|
$
|
166,431
|
|
|
$
|
102,131
|
|
|
$
|
64,300
|
|
Costs and expenses:
|
|
|
|
|
|
|
Operating expenses
|
|
41,397
|
|
|
46,487
|
|
|
(5,090
|
)
|
General and administrative expenses
|
|
7,806
|
|
|
7,024
|
|
|
782
|
|
Depreciation expense
|
|
21,243
|
|
|
19,343
|
|
|
1,900
|
|
Total costs and expenses
|
|
70,446
|
|
|
72,854
|
|
|
(2,408
|
)
|
Operating income
|
|
95,985
|
|
|
29,277
|
|
|
66,708
|
|
Other income, net
|
|
134
|
|
|
137
|
|
|
(3
|
)
|
Interest and debt expense, net of capitalized interest
|
|
(5,910
|
)
|
|
(2,012
|
)
|
|
(3,898
|
)
|
Income before income taxes
|
|
90,209
|
|
|
27,402
|
|
|
62,807
|
|
Income tax expense (benefit)
|
|
545
|
|
|
(177
|
)
|
|
722
|
|
Net income
|
|
89,664
|
|
|
27,579
|
|
|
62,085
|
|
Less: Net loss attributable to Predecessor
|
|
(3,081
|
)
|
|
(28,204
|
)
|
|
25,123
|
|
Net income attributable to partners
|
|
92,745
|
|
|
55,783
|
|
|
36,962
|
|
Less: General partner’s interest in net income
|
|
8,717
|
|
|
2,209
|
|
|
6,508
|
|
Limited partners’ interest in net income
|
|
$
|
84,028
|
|
|
$
|
53,574
|
|
|
$
|
30,454
|
|
|
|
|
|
|
|
|
Net income per limited partner unit –
basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
$
|
1.28
|
|
|
$
|
0.91
|
|
|
|
Subordinated units
|
|
$
|
1.28
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Weighted-average limited partner units outstanding –
basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
36,884
|
|
|
30,066
|
|
|
|
Subordinated units
|
|
28,790
|
|
|
28,790
|
|
|
|
Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
Change
|
Operating highlights:
|
|
|
|
|
|
|
Pipeline transportation:
|
|
|
|
|
|
|
Pipeline transportation revenues
|
|
$
|
39,563
|
|
|
$
|
39,842
|
|
|
$
|
(279
|
)
|
Pipeline transportation throughput (BPD)
(a)
|
|
884,725
|
|
|
966,399
|
|
|
(81,674
|
)
|
Average pipeline transportation revenue per barrel
(b)
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
Terminaling:
|
|
|
|
|
|
|
Terminaling revenues
|
|
$
|
126,598
|
|
|
$
|
62,019
|
|
|
$
|
64,579
|
|
Terminaling throughput (BPD)
|
|
1,998,077
|
|
|
1,095,173
|
|
|
902,904
|
|
Average terminaling revenue per barrel
(b)
|
|
$
|
0.35
|
|
|
$
|
0.31
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
Storage revenues
|
|
$
|
270
|
|
|
$
|
270
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Total operating revenues – related party
|
|
$
|
166,431
|
|
|
$
|
102,131
|
|
|
$
|
64,300
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Maintenance
|
|
$
|
3,520
|
|
|
$
|
6,649
|
|
|
$
|
(3,129
|
)
|
Expansion
|
|
5,805
|
|
|
11,642
|
|
|
(5,837
|
)
|
Total capital expenditures
|
|
9,325
|
|
|
18,291
|
|
|
(8,966
|
)
|
Less: Capital expenditures attributable to Predecessor
|
|
—
|
|
|
15,932
|
|
|
(15,932
|
)
|
Capital expenditures attributable to Partnership
|
|
$
|
9,325
|
|
|
$
|
2,359
|
|
|
$
|
6,966
|
|
|
|
|
|
|
|
|
Other financial information:
|
|
|
|
|
|
|
Distribution declared per unit
|
|
$
|
0.7050
|
|
|
$
|
0.5700
|
|
|
|
|
|
|
|
|
|
|
Distribution declared:
|
|
|
|
|
|
|
Limited partner units – public
|
|
$
|
15,169
|
|
|
$
|
9,838
|
|
|
|
Limited partner units – Valero
|
|
31,399
|
|
|
24,076
|
|
|
|
General partner units – Valero
|
|
7,952
|
|
|
1,808
|
|
|
|
Total distribution declared
|
|
$
|
54,520
|
|
|
$
|
35,722
|
|
|
|
____________________
|
|
(a)
|
Represents the sum of volumes transported through each separately tariffed pipeline segment.
|
|
|
(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.
|
Operating revenues
increased
$64.3 million
, or
63 percent
, for the first
six
months of
2016
compared to the first
six
months of
2015
. The
increase
was due primarily to higher revenues of $65.1 million generated by the McKee, Corpus Christi, Houston, and St.Charles terminals. Prior to being acquired by us, the
McKee Terminal Services Business
, the
Corpus Christi Terminal Services Business
, and the
Houston and St. Charles Terminal Services Business
did not charge Valero for services provided and, therefore, did not generate revenues. Effective with the acquisition dates, we entered into additional schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired businesses and began generating revenues with respect to these assets.
Operating expenses
decreased
$5.1 million
, or
11 percent
, for the first
six
months of
2016
compared to the first
six
months of
2015
due primarily to a decrease in maintenance expense of $3.9 million at our Corpus Christi and St. Charles terminals related to inspection activity. Additionally, waste handling costs at the Corpus Christi and St. Charles terminals decreased $2.0 million in the first six months of 2016. The decrease in these expenses was partially offset by an increase in insurance expense of $867,000 as a result of the acquired assets being covered under our own insurance policies. Prior to the acquisitions, our Predecessor was allocated a portion of Valero’s insurance costs.
General and administrative expenses
increased
$782,000
, or
11 percent
, for the first
six
months of
2016
compared to the first
six
months of
2015
due primarily to incremental costs of $464,000 related to the management fee charged to us by Valero and an increase of $476,000 in costs related to being a separate publicly traded limited partnership. These increases were offset by lower transaction costs (legal and investment advisor fees) of $159,000 associated with the acquisition of businesses from Valero. In 2016, we incurred transaction costs of $387,000 in connection with the April 1, 2016 acquisition of the
McKee Terminal Services Business
. In 2015, we incurred $546,000 in connection with the March 1, 2015 acquisition of the
Houston and St. Charles Terminal Services Business
.
Depreciation expense
increased
$1.9 million
, or
10 percent
, for the first
six
months of
2016
compared to the first
six
months of
2015
due to additional depreciation expense associated with assets placed into service in 2015, including expansion and improvement projects at our Corpus Christi and St. Charles terminals.
“Interest and debt expense, net of capitalized interest”
increased
$3.9 million
for the first
six
months of
2016
compared to the first
six
months of
2015
due primarily to interest expense incurred on borrowings under our revolving credit facility and the subordinated credit agreement with Valero entered into in connection with the Acquisitions. Interest expense on this indebtedness was $5.3 million in the first six months of 2016 compared to $1.7 million in the first six months of 2015.
Our income tax expense (benefit) is associated with the Texas margin tax. During the first six months of 2015, we reduced our deferred income tax liabilities due to a reduction in the relative amount of revenue we generate in Texas compared to our total revenue. This reduction was a result of the acquisition of the Houston and St. Charles Terminal Services Business (which includes operations in Louisiana). In addition, in June 2015, the Texas margin tax rate was reduced from 1 percent to 0.75 percent.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility, and issuances of additional debt and equity securities. We may also enter into financing transactions with Valero in connection with acquisitions. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.
Distributions
On
July 21, 2016
, the board of directors of our general partner declared a distribution of
$0.3650
per unit applicable to the
second quarter
of
2016
, which equates to
$28.9 million
in total distributions to unitholders of record as of
August 1, 2016
. This quarterly distribution per unit is more than the minimum quarterly distribution of $0.2125 per unit.
Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions that have been declared since January 1, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Period
Ended
|
|
Total
Quarterly
Distribution
(Per Unit)
|
|
Total Cash
Distribution
(In Thousands)
|
|
Declaration
Date
|
|
Record
Date
|
|
Distribution
Date
|
June 30, 2016
|
|
$
|
0.3650
|
|
|
$
|
28,912
|
|
|
July 21, 2016
|
|
August 1, 2016
|
|
August 9, 2016
|
March 31, 2016
|
|
0.3400
|
|
|
25,608
|
|
|
April 21, 2016
|
|
May 2, 2016
|
|
May 10, 2016
|
December 31, 2015
|
|
0.3200
|
|
|
22,711
|
|
|
January 25, 2016
|
|
February 4, 2016
|
|
February 11, 2016
|
September 30, 2015
|
|
0.3075
|
|
|
20,164
|
|
|
October 15, 2015
|
|
November 2, 2015
|
|
November 10, 2015
|
June 30, 2015
|
|
0.2925
|
|
|
18,456
|
|
|
July 24, 2015
|
|
August 3, 2015
|
|
August 11, 2015
|
March 31, 2015
|
|
0.2775
|
|
|
17,266
|
|
|
April 21, 2015
|
|
May 1, 2015
|
|
May 12, 2015
|
December 31, 2014
|
|
0.2660
|
|
|
15,829
|
|
|
January 26, 2015
|
|
February 5, 2015
|
|
February 12, 2015
|
Revolving Credit Facility
We have a
$750.0 million
senior unsecured revolving credit facility agreement (the Revolver) with a group of lenders that matures in November 2020. The Revolver includes a letter of credit sub-facility. Effective
April 1, 2016
, we borrowed
$139.0 million
under the Revolver in connection with the acquisition of the
McKee Terminal Services Business
. As of
June 30, 2016
, we had
$314.0 million
of borrowings outstanding under the Revolver. See
Note 6
of Condensed Notes to Consolidated Financial Statements for a description of the Revolver.
Subordinated Credit Agreements
During 2015, we entered into two subordinated credit agreements with Valero (the Loan Agreements) under which we borrowed
$395.0 million
and
$160.0 million
to finance a portion of the acquisitions of the Corpus Christi Terminal Services Business and the Houston and St. Charles Terminal Services Business, respectively.
As of
June 30, 2016
, we had
$370.0 million
outstanding under the Loan Agreements. See
Note 6
of Condensed Notes to Consolidated Financial Statements for a description of the Loan Agreements.
Cash Flows Summary
Components of our cash flows are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015 (a)
|
Cash flows provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
107,933
|
|
|
$
|
40,913
|
|
Investing activities
|
|
(60,668
|
)
|
|
(314,386
|
)
|
Financing activities
|
|
(60,881
|
)
|
|
88,936
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(13,616
|
)
|
|
$
|
(184,537
|
)
|
|
|
|
|
|
|
(a) Financial information has been retrospectively adjusted for the acquisition of the McKee Terminal Services Business and the Corpus Christi Terminal Services Business.
|
Operating Activities
Net cash provided by operating activities in the first
six
months of
2016
was
$107.9 million
, which included net income of
$89.7 million
plus noncash adjustments (primarily for depreciation expense) of
$21.7 million
, partially offset by unfavorable changes in working capital of
$3.4 million
. See “RESULTS OF OPERATIONS” for further discussion of our operating results. The change in working capital was composed primarily of an
increase in receivables from related party (net of offsetting payables to related party) of
$5.5 million
, as shown in
Note 11
of Condensed Notes to Consolidated Financial Statements.
The increase in receivables from related party was attributed primarily to billings related to our newly acquired McKee terminal and a decrease in the offsetting payables resulting from the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment agreement.
Net cash provided by operating activities in the first
six
months of
2015
was
$40.9 million
, which included net income of
$27.6 million
plus noncash adjustments (primarily for depreciation expense) of
$19.4 million
, partially offset by unfavorable changes in working capital of
$6.1 million
. See “RESULTS OF OPERATIONS” for further discussion of our operating results. The change in working capital was composed primarily of an increase in receivables from related party of
$6.8 million
, as shown in
Note 11
of Condensed Notes to Consolidated Financial Statements. The increase in receivables from related party was attributed primarily to an increase in billings related to the Houston and St. Charles Terminal Services Business, which had been recently acquired from Valero.
Investing Activities
Cash used for investing activities in the first
six
months of
2016
was
$60.7 million
, which was primarily impacted by the acquisition of the
McKee Terminal Services Business
on April 1, 2016. In connection with the acquisition, we paid $204.0 million in cash to Valero, and of this amount,
$51.4 million
represented Valero’s carrying value in the net assets transferred to us, which was reflected as an investing activity. The remaining cash paid of
$152.6 million
represented the excess purchase price paid over the carrying value and was reflected as a financing activity as described below.
Cash used for investing activities in the first
six
months of 2015 was
$314.4 million
, which was primarily impacted by the acquisition of the Houston and St. Charles Terminal Services Business on March 1, 2015. In connection with the acquisition, we paid $571.2 million in cash to Valero, and of this amount,
$296.1 million
represented Valero’s carrying value in the net assets transferred to us, which was reflected
as an investing activity. The remaining cash paid of
$275.1 million
represented the excess purchase price paid over the carrying value and was reflected as a financing activity as described below.
In addition, we and our Predecessor incurred capital expenditures of
$9.3 million
and
$18.3 million
for the first
six
months of 2016 and 2015, respectively. See “Capital Expenditures” below for a discussion of the various maintenance and expansion projects.
Financing Activities
Cash used for financing activities in the first
six
months of
2016
was
$60.9 million
, which consisted primarily of the
$152.6 million
of excess purchase price paid over the carrying value for the acquisition of the
McKee Terminal Services Business
as described above under “Investing Activities”, offset by the $139.0 million of borrowings under the Revolver in connection with this acquisition. In addition, we paid
$48.3 million
in cash distributions to limited partners and our general partner.
In the first
six
months of
2015
, our financing activities provided cash of
$88.9 million
, which consisted primarily of the $200.0 million of borrowings under the Revolver and $160.0 million of proceeds from the loan agreement entered into in connection with the acquisition of the Houston and St. Charles Terminal Services Business. These cash inflows were offset by the
$275.1 million
of excess purchase price paid over the carrying value for the acquisition of the Houston and St. Charles Terminal Services Business as described above under “Investing Activities,” and we reflected a net transfer from Valero of
$37.7 million
related to the cash flows associated with our Predecessor. In addition, we paid
$33.1 million
of cash distributions to limited partners and our general partner.
See Notes
3
and
11
of Condensed Notes to Consolidated Financial Statements for additional information on the acquisitions discussed above, including consideration paid and the cash and noncash elements of the acquisitions.
Capital Expenditures
Our operations can be capital intensive, requiring investments to expand, upgrade, or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures as those terms are defined in our partnership agreement. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, examples of expansion capital expenditures include those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business.
Our capital expenditures were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015 (a)
|
Maintenance
|
|
$
|
3,520
|
|
|
$
|
6,649
|
|
Expansion (b)
|
|
5,805
|
|
|
11,642
|
|
Total capital expenditures
|
|
$
|
9,325
|
|
|
$
|
18,291
|
|
|
|
|
|
|
|
(a) Financial information has been retrospectively adjusted for the acquisition of the McKee Terminal Services Business and the Corpus Christi Terminal Services Business.
|
(b) This table excludes amounts paid to Valero for the acquired businesses. See Note 3 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.
|
Our capital expenditures in the first
six
months of
2016
were primarily for:
|
|
•
|
the construction of a connection to receive crude oil from the Seaway pipeline into our Lucas crude system;
|
|
|
•
|
the improvement of assets at our St. Charles and Houston terminals to extend the useful lives of the tanks; and
|
|
|
•
|
the improvement of assets at our Lucas crude system for enhanced monitoring of pipeline shipments.
|
Our capital expenditures in the first
six
months of
2015
were primarily for:
|
|
•
|
the expansion and improvement of assets at the Corpus Christi, St. Charles, and Houston terminals; and
|
|
|
•
|
the enhancement of pipeline and terminal monitoring systems at our Memphis products system.
|
For the full year
2016
, we expect our capital expenditures to be approximately $19.0 million. Our estimate consists of approximately $11.0 million for maintenance capital expenditures and approximately $8.0 million for expansion capital expenditures. We continuously evaluate our capital budget and make changes as conditions warrant. We anticipate that these capital expenditures will be funded from cash flows from operations. The foregoing capital expenditure estimate does not include any amounts related to strategic business acquisitions.
In addition to the above-mentioned capital expenditures, Valero funded $16.0 million of capital projects primarily related to the Houston, St. Charles, and Corpus Christi terminals. Valero agreed to fund these projects in connection with the Acquisitions. See
Note 11
of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.
Contractual Obligations
As of
June 30, 2016
, our contractual obligations included debt and capital lease obligations, operating leases, purchase obligations, and other long-term liabilities. In April 2016, we borrowed
$139.0 million
under the Revolver in connection with the acquisition of the McKee Terminal Services Business. In addition, we entered into a lease and access agreement with Valero with respect to the land on which the McKee terminal is located. See Notes
4
and
6
of Condensed Notes to Consolidated Financial Statements for a full description
of the lease and access agreement and the Revolver. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the
six months ended
June 30, 2016
.
Regulatory Matters
Rate and Other Regulations
Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act. Our pipelines and terminal operations are also subject to safety regulations adopted by the Department of Transportation, as well as to state regulations. For more information on federal and state regulations affecting our business, please read our annual report on Form 10-K for the year ended December 31,
2015
.
Environmental Matters and Compliance Costs
We are subject to extensive federal, state, and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment on our equipment and facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints.
There were no significant changes to our environmental matters and compliance costs during the
six months ended
June 30, 2016
.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. As of
June 30, 2016
, there were no significant changes to our critical accounting estimates since the date our annual report on Form 10-K for the year ended December 31,
2015
was filed.
|
|
Item 3.
|
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.
Debt incurred under our Revolver and our Loan Agreement bears interest at a variable rate and exposes us to interest rate risk. Unless interest rates increase significantly in the future, our exposure to interest rate risk should be minimal. We had debt of
$314.0 million
and notes payable to related party totaling
$370 million
as of
June 30, 2016
.