Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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•
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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 and our ability to remain in compliance with the terms of its and our 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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•
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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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•
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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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•
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earthquakes or other natural disasters affecting operations;
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•
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changes in capital requirements or in execution of planned capital projects;
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•
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the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;
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•
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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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•
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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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•
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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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•
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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
Second Quarter Results
We reported net income and net income attributable to partners of
$58.4 million
in the
second quarter
of
2017
. This compares to net income of
$44.5 million
and net income attributable to partners of
$49.4 million
in the
second quarter
of
2016
.
The increase in net income of
$13.9 million
was due primarily to $14.0 million of revenues generated by our Meraux and Three Rivers terminals in the
second quarter
of
2017
. We acquired these terminals from Valero in September
2016
. Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the second quarter of 2017 compared to the second quarter of 2016 was due primarily to the revenues associated with services provided by these terminals.
Net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the Meraux and Three Rivers terminals for the periods prior to the date we acquired these businesses from Valero and represent only the costs of operating the terminals. See Note
1
of Condensed Notes to Consolidated Financial Statements for the reason that results of businesses acquired from Valero are included with our results for periods prior to their dates of acquisition. The increase in net income attributable to partners of
$9.0 million
in the
second quarter
of
2017
compared to the
second quarter
of
2016
was due primarily to the operating results generated by our Meraux and Three Rivers terminals in the second quarter of 2017 as Valero did not historically charge for these services. The increase is also attributable to the results of the Red River crude system that we acquired in January 2017 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements.
First Six Months Results
We reported net income and net income attributable to partners of
$116.6 million
in the first six months of
2017
. This compares to net income of
$80.3 million
and net income attributable to partners of
$92.7 million
in the first six months of
2016
.
The increase in net income of
$36.3 million
was due primarily to $36.6 million of revenues generated by our McKee, Meraux, and Three Rivers terminals in the first six months of
2017
. We acquired the McKee terminal from Valero in April 2016 and the Meraux and Three Rivers terminals from Valero in September 2016. As previously noted, Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the first six months of 2017 compared to the first six months of 2016 was due primarily to the revenues associated with services provided by these terminals.
As previously noted, net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the McKee, Meraux, and Three Rivers terminals for the periods prior to the dates we acquired these businesses from Valero as previously described. The increase in net income attributable to partners of
$23.8 million
in the first six months of
2017
compared to the first six months of
2016
is due primarily to the operating results generated by our McKee, Meraux, and Three Rivers terminals in the first six months of 2017 as Valero did not historically charge for these services. The increase is also attributable to the results of the Red River crude system that we acquired in January 2017 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements.
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 2017, 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 for the three and six months ended
June 30, 2017
and
2016
. 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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Three Months Ended June 30,
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2017
|
|
2016
|
|
Change
|
Operating revenues – related party
|
|
$
|
110,545
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|
|
$
|
87,664
|
|
|
$
|
22,881
|
|
Costs and expenses:
|
|
|
|
|
|
|
Operating expenses
|
|
27,055
|
|
|
24,086
|
|
|
2,969
|
|
General and administrative expenses
|
|
3,863
|
|
|
3,715
|
|
|
148
|
|
Depreciation expense
|
|
12,505
|
|
|
11,821
|
|
|
684
|
|
Total costs and expenses
|
|
43,423
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|
|
39,622
|
|
|
3,801
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|
Operating income
|
|
67,122
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|
|
48,042
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|
|
19,080
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|
Other income, net
|
|
182
|
|
|
57
|
|
|
125
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|
Interest and debt expense, net of capitalized interest
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|
(8,551
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)
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|
(3,251
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)
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(5,300
|
)
|
Income before income taxes
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|
58,753
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|
|
44,848
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|
|
13,905
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|
Income tax expense
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|
310
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|
|
303
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|
|
7
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|
Net income
|
|
58,443
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|
|
44,545
|
|
|
13,898
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Less: Net loss attributable to Predecessor
|
|
—
|
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|
(4,902
|
)
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|
4,902
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|
Net income attributable to partners
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|
58,443
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|
49,447
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|
|
8,996
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|
Less: General partner’s interest in net income
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|
11,419
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|
|
5,213
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|
|
6,206
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|
Limited partners’ interest in net income
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|
$
|
47,024
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|
|
$
|
44,234
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|
$
|
2,790
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|
Net income per limited partner unit – basic and diluted:
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|
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Common units
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|
$
|
0.69
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|
$
|
0.67
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|
|
|
|
Subordinated units
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|
$
|
—
|
|
|
$
|
0.67
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|
|
|
|
|
|
|
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|
|
Weighted-average limited partner units outstanding – basic and diluted:
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|
|
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|
Common units
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|
68,157
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|
|
37,248
|
|
|
|
Subordinated units
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|
—
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|
|
28,790
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|
|
|
Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)
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|
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|
Three Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
Change
|
Operating highlights:
|
|
|
|
|
|
|
Pipeline transportation:
|
|
|
|
|
|
|
Pipeline transportation revenues
|
|
$
|
24,859
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|
|
$
|
19,318
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|
|
$
|
5,541
|
|
Pipeline transportation throughput (BPD)
(a)
|
|
1,003,320
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|
|
850,516
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|
|
152,804
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|
Average pipeline transportation revenue per barrel
(b)
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|
$
|
0.27
|
|
|
$
|
0.25
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|
|
$
|
0.02
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|
|
|
|
|
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|
Terminaling:
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|
|
|
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|
Terminaling revenues
|
|
$
|
84,797
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|
|
$
|
68,211
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|
|
$
|
16,586
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|
Terminaling throughput (BPD)
|
|
2,852,182
|
|
|
2,146,293
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|
|
705,889
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|
Average terminaling revenue per barrel
(b)
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|
$
|
0.33
|
|
|
$
|
0.35
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
Storage and other revenues
|
|
$
|
889
|
|
|
$
|
135
|
|
|
$
|
754
|
|
|
|
|
|
|
|
|
Total operating revenues – related party
|
|
$
|
110,545
|
|
|
$
|
87,664
|
|
|
$
|
22,881
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|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Maintenance
|
|
$
|
1,335
|
|
|
$
|
2,866
|
|
|
$
|
(1,531
|
)
|
Expansion
|
|
4,888
|
|
|
1,540
|
|
|
3,348
|
|
Total capital expenditures
|
|
6,223
|
|
|
4,406
|
|
|
1,817
|
|
Less: Capital expenditures attributable to Predecessor
|
|
—
|
|
|
1,348
|
|
|
(1,348
|
)
|
Capital expenditures attributable to Partnership
|
|
$
|
6,223
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|
|
$
|
3,058
|
|
|
$
|
3,165
|
|
|
|
|
|
|
|
|
Other financial information:
|
|
|
|
|
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|
Distribution declared per unit
|
|
$
|
0.4550
|
|
|
$
|
0.3650
|
|
|
|
|
|
|
|
|
|
|
|
Distribution declared:
|
|
|
|
|
|
|
Limited partner units – public
|
|
$
|
10,231
|
|
|
$
|
7,854
|
|
|
|
|
Limited partner units – Valero
|
|
20,788
|
|
|
16,256
|
|
|
|
|
General partner units – Valero
|
|
11,092
|
|
|
4,802
|
|
|
|
|
Total distribution declared
|
|
$
|
42,111
|
|
|
$
|
28,912
|
|
|
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|
____________________
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(a)
|
Represents the sum of volumes transported through each separately tariffed pipeline segment divided by the number of days in the period.
|
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(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
$22.9 million
, or
26 percent
, in the
second quarter
of
2017
compared to the
second quarter
of
2016
. The increase was due primarily to the following:
|
|
•
|
Incremental terminaling throughput from acquired businesses.
We experienced a 16 percent increase in operating revenues in the
second quarter
of 2017 compared to the
second quarter
of 2016 generated by the Meraux and Three Rivers terminals we acquired from Valero subsequent to the second quarter of 2016. The incremental throughput volumes at these terminals had a favorable impact to our operating revenues of $14.0 million.
|
|
|
•
|
Incremental operating revenues at Red River crude system.
The incremental throughput volumes from the Red River crude system had a favorable impact to our operating revenues of $2.6 million. The higher transportation revenue per barrel generated by this system contributed to a higher average pipeline transportation revenue per barrel in the
second quarter
of 2017 compared to the
second quarter
of 2016.
|
Operating expenses
increased
$3.0 million
, or
12 percent
, in the
second quarter
of
2017
compared to the
second quarter
of
2016
due primarily to higher maintenance expense of $1.7 million at the Houston, St. Charles, Corpus Christi, and Three Rivers terminals, which was mainly related to inspection activity. In addition, we incurred total incremental operating expenses of $1.0 million related to our Red River crude system and to the rail loading facility at our St. Charles terminal, which was placed in service in the second quarter of 2017.
General and administrative expenses
increased
$148,000
, or
4 percent
, in the
second quarter
of
2017
compared to the
second quarter
of
2016
due primarily to higher public company costs of $156,000.
Depreciation expense
increased
$684,000
, or
6 percent
, in the
second quarter
of
2017
compared to the
second quarter
of
2016
due primarily to depreciation expense recognized on the assets that compose our Red River crude system, which was acquired in the first quarter of 2017.
“Interest and debt expense, net of capitalized interest”
increased
$5.3 million
in the
second quarter
of
2017
compared to the
second quarter
of
2016
due to the following:
|
|
•
|
Incremental borrowings in connection with the Meraux and Three Rivers terminals acquisition.
In connection with the acquisition of the Meraux and Three Rivers Terminal Services Business from Valero in September 2016, we borrowed $210.0 million under the Revolver. Interest expense on the incremental borrowings was approximately $1.3 million in the
second quarter
of
2017
.
|
|
|
•
|
Incremental interest expense incurred on the Senior Notes.
In December 2016, we issued $500.0 million of 4.375% senior notes due December 2026 (the Senior Notes). We used the proceeds of the Senior Notes to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $2.3 million in the
second quarter
of
2017
.
|
|
|
•
|
Higher interest rates in 2017.
We incurred additional interest of $759,000 in the second quarter of 2017 on borrowings under the Loan Agreements, which have variable interest rates, as interest rates rose during the quarter.
|
Results of Operations
(in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
Change
|
Operating revenues – related party
|
|
$
|
216,361
|
|
|
$
|
166,431
|
|
|
$
|
49,930
|
|
Costs and expenses:
|
|
|
|
|
|
|
Operating expenses
|
|
50,600
|
|
|
48,372
|
|
|
2,228
|
|
General and administrative expenses
|
|
7,693
|
|
|
8,080
|
|
|
(387
|
)
|
Depreciation expense
|
|
24,280
|
|
|
23,333
|
|
|
947
|
|
Total costs and expenses
|
|
82,573
|
|
|
79,785
|
|
|
2,788
|
|
Operating income
|
|
133,788
|
|
|
86,646
|
|
|
47,142
|
|
Other income, net
|
|
246
|
|
|
134
|
|
|
112
|
|
Interest and debt expense, net of capitalized interest
|
|
(16,840
|
)
|
|
(5,910
|
)
|
|
(10,930
|
)
|
Income before income taxes
|
|
117,194
|
|
|
80,870
|
|
|
36,324
|
|
Income tax expense
|
|
614
|
|
|
545
|
|
|
69
|
|
Net income
|
|
116,580
|
|
|
80,325
|
|
|
36,255
|
|
Less: Net loss attributable to Predecessor
|
|
—
|
|
|
(12,420
|
)
|
|
12,420
|
|
Net income attributable to partners
|
|
116,580
|
|
|
92,745
|
|
|
23,835
|
|
Less: General partner’s interest in net income
|
|
20,886
|
|
|
8,717
|
|
|
12,169
|
|
Limited partners’ interest in net income
|
|
$
|
95,694
|
|
|
$
|
84,028
|
|
|
$
|
11,666
|
|
|
|
|
|
|
|
|
Net income per limited partner unit –
basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
$
|
1.41
|
|
|
$
|
1.28
|
|
|
|
Subordinated units
|
|
$
|
—
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
Weighted-average limited partner units outstanding –
basic and diluted:
|
|
|
|
|
|
|
Common units
|
|
67,912
|
|
|
36,884
|
|
|
|
Subordinated units
|
|
—
|
|
|
28,790
|
|
|
|
Operating Highlights and Other Financial Information
(in thousands, except throughput, per barrel, and per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
Change
|
Operating highlights:
|
|
|
|
|
|
|
Pipeline transportation:
|
|
|
|
|
|
|
Pipeline transportation revenues
|
|
$
|
48,034
|
|
|
$
|
39,563
|
|
|
$
|
8,471
|
|
Pipeline transportation throughput (BPD)
(a)
|
|
982,873
|
|
|
884,725
|
|
|
98,148
|
|
Average pipeline transportation revenue per barrel
(b)
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
Terminaling:
|
|
|
|
|
|
|
Terminaling revenues
|
|
$
|
167,303
|
|
|
$
|
126,598
|
|
|
$
|
40,705
|
|
Terminaling throughput (BPD)
|
|
2,793,654
|
|
|
1,998,077
|
|
|
795,577
|
|
Average terminaling revenue per barrel
(b)
|
|
$
|
0.33
|
|
|
$
|
0.35
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
Storage and other revenues
|
|
$
|
1,024
|
|
|
$
|
270
|
|
|
$
|
754
|
|
|
|
|
|
|
|
|
Total operating revenues – related party
|
|
$
|
216,361
|
|
|
$
|
166,431
|
|
|
$
|
49,930
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Maintenance
|
|
$
|
3,373
|
|
|
$
|
5,711
|
|
|
$
|
(2,338
|
)
|
Expansion
|
|
11,867
|
|
|
5,895
|
|
|
5,972
|
|
Total capital expenditures
|
|
15,240
|
|
|
11,606
|
|
|
3,634
|
|
Less: Capital expenditures attributable to Predecessor
|
|
—
|
|
|
2,281
|
|
|
(2,281
|
)
|
Capital expenditures attributable to Partnership
|
|
$
|
15,240
|
|
|
$
|
9,325
|
|
|
$
|
5,915
|
|
|
|
|
|
|
|
|
Other financial information:
|
|
|
|
|
|
|
Distribution declared per unit
|
|
$
|
0.8825
|
|
|
$
|
0.7050
|
|
|
|
|
|
|
|
|
|
|
Distribution declared:
|
|
|
|
|
|
|
Limited partner units – public
|
|
$
|
19,841
|
|
|
$
|
15,169
|
|
|
|
Limited partner units – Valero
|
|
40,319
|
|
|
31,399
|
|
|
|
General partner units – Valero
|
|
19,994
|
|
|
7,952
|
|
|
|
Total distribution declared
|
|
$
|
80,154
|
|
|
$
|
54,520
|
|
|
|
____________________
|
|
(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 by the number of days in the period.
|
Operating revenues
increased
$49.9 million
, or
30 percent
, in the first
six
months of
2017
compared to the first
six
months of
2016
. The increase was due primarily to the following:
|
|
•
|
Incremental terminaling throughput from acquired businesses.
We experienced a 22 percent increase in operating revenues in the first
six
months of 2017 compared to the first
six
months of 2016 generated by the McKee, Meraux, and Three Rivers terminals we acquired from Valero subsequent to the first quarter of 2016. The incremental throughput volumes at these terminals had a favorable impact to our operating revenues of $36.6 million.
|
|
|
•
|
Incremental operating revenues at Red River crude system.
The incremental throughput volumes from the Red River crude system had a favorable impact to our operating revenues of $4.6 million. The higher transportation revenue per barrel generated by this system contributed to a higher average pipeline transportation revenue per barrel in the first
six
months of 2017 compared to the first
six
months of 2016.
|
Operating expenses
increased
$2.2 million
, or
5 percent
, for the first
six
months of
2017
compared to the first
six
months of
2016
due primarily to total incremental expense of $1.5 million related to our Red River crude system and to the rail loading facility at our St. Charles terminal, which was placed in service in the second quarter of 2017.
General and administrative expenses
decreased
$387,000
, or
5 percent
, for the first
six
months of
2017
compared to the first
six
months of
2016
due primarily to lower business acquisition costs (legal and investment advisor fees) of $387,000. We incurred these costs in the first six months of 2016 in connection with our acquisition of the McKee terminal in April 2016.
Depreciation expense
increased
$947,000
, or
4 percent
, in the first
six
months of
2017
compared to the first
six
months of
2016
due primarily to depreciation expense recognized on the assets that compose our Red River crude system, which was acquired in the first quarter of 2017.
“Interest and debt expense, net of capitalized interest”
increased
$10.9 million
in the first
six
months of
2017
compared to the first
six
months of
2016
due to the following:
|
|
•
|
Incremental borrowings in connection with the 2016 acquisitions.
In connection with the acquisition of the McKee Terminal Services Business in April 2016 and the Meraux and Three Rivers Terminal Services Business in September 2016 from Valero, we borrowed $139.0 million and $210.0 million, respectively, under the Revolver. Interest expense on the incremental borrowings was approximately $3.3 million in the first
six
months of
2017
.
|
|
|
•
|
Incremental interest expense incurred on the Senior Notes.
As previously noted in the analysis of second quarter results, we issued the Senior Notes in December 2016 and used the proceeds to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $4.9 million in the first
six
months of
2017
.
|
|
|
•
|
Higher interest rates in 2017.
We incurred additional interest of $1.3 million in the first
six
months of 2017 on borrowings under the Loan Agreements, which have variable interest rates, as interest rates rose during the first six months of 2017.
|
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under the Revolver, 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.
Unit Offerings
On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). During the
six
months ended
June 30, 2017
, we issued 742,897 common units under our ATM Program and received proceeds of $35.2 million, which is net of $517,000 of expenses incurred with respect to the sale of these units. Concurrent with the issuance of common units under our ATM Program, our general partner contributed $748,000 in exchange for 15,602 general partner units to maintain its 2.0 percent general partner interest in the Partnership.
Distributions
On
July 19, 2017
the board of directors of our general partner declared a distribution of
$0.455
per unit applicable to the
second quarter
of
2017
, which equates to
$42.1 million
in total distributions to unitholders of record as of
August 1, 2017
. 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, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Period
Ended
|
|
Total
Quarterly
Distribution
(Per Unit)
|
|
Total Cash
Distribution
(In Thousands)
|
|
Declaration
Date
|
|
Record
Date
|
|
Distribution
Date
|
June 30, 2017
|
|
$
|
0.4550
|
|
|
$
|
42,111
|
|
|
July 19, 2017
|
|
August 1, 2017
|
|
August 10, 2017
|
March 31, 2017
|
|
0.4275
|
|
|
38,043
|
|
|
April 20, 2017
|
|
May 2, 2017
|
|
May 11, 2017
|
December 31, 2016
|
|
0.4065
|
|
|
34,895
|
|
|
January 20, 2017
|
|
February 2, 2017
|
|
February 10, 2017
|
September 30, 2016
|
|
0.3850
|
|
|
32,175
|
|
|
October 24, 2016
|
|
November 3, 2016
|
|
November 10, 2016
|
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
|
Revolver
The Revolver consists of aggregate commitments of
$750.0 million
and matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit up to $100.0 million. As of
June 30, 2017
, we had
$30.0 million
of borrowings and no letters of credit outstanding under the Revolver. As a result, we have $720 million of available capacity.
Cash Flows Summary
Components of our cash flows are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016 (a)
|
Cash flows provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
140,982
|
|
|
$
|
100,684
|
|
Investing activities
|
|
(87,025
|
)
|
|
(62,949
|
)
|
Financing activities
|
|
(37,471
|
)
|
|
(51,351
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
16,486
|
|
|
$
|
(13,616
|
)
|
|
|
|
|
|
|
(a) Financial information has been retrospectively adjusted for the acquisition of the Meraux and Three Rivers Terminal Services Business.
|
Cash Flows for the Six Months Ended June 30, 2017
Our operations generated
$141.0 million
of cash in the first
six
months of
2017
, driven primarily by net income of
$116.6 million
plus noncash adjustments (mainly for depreciation expense) of
$25.1 million
, partially offset by an unfavorable change in working capital of
$734,000
. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of a decrease in “deferred revenue
–
related party” of
$3.2 million
, partially offset by a decrease in “accounts receivable
–
related party” of
$1.5 million
. The change in our working capital is further described in
Note 10
of Condensed Notes to Consolidated Financial Statements. The decrease in “deferred revenue
–
related party” was due to Valero’s use of deficiency payments that it had paid to us in previous periods associated with its minimum volume commitments to us. The decrease in “accounts receivable
–
related party” was attributable primarily to lower billings related to our Three Rivers terminal, which experienced lower volumes in the period as a result of planned maintenance activity at Valero’s Three Rivers Refinery.
The
$141.0 million
of cash generated by our operations, along with
$36.5 million
in proceeds received in connection with our ATM program, were used mainly to:
|
|
•
|
fund the
$71.8 million
acquisition of the Red River crude system;
|
|
|
•
|
pay
$72.9 million
in cash distributions to limited partners and our general partner;
|
|
|
•
|
fund
$15.2 million
in capital expenditures; and
|
|
|
•
|
pay
$1.0 million
in debt issuance and offering costs.
|
Cash Flows for the Six Months Ended June 30, 2016
Our operations generated
$100.7 million
of cash in the first
six
months of
2016
, driven primarily by net income of
$80.3 million
plus noncash adjustments (primarily for depreciation expense) of
$23.8 million
, partially offset by an unfavorable change in working capital of
$3.4 million
. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of an increase in “accounts receivable
–
related party” of
$2.9 million
and
a decrease in “accounts payable
–
related party” of
$2.6 million
, partially offset by an increase in “deferred revenue
–
related party” of
$1.1 million
. The change in our working capital is further described in
Note 10
of Condensed Notes to Consolidated Financial Statements. The increase in “accounts receivable
–
related party” was attributable primarily to billings related to our McKee terminal, which was acquired subsequent to the first quarter of 2016. The decrease in “accounts payable
–
related party” was attributable primarily to the timing of invoices from Valero for services provided to our general partner under our amended and restated services and
secondment agreement. The increase in “deferred revenue
–
related party” was due to higher deficiency payments made by Valero associated with its minimum volume commitments to us.
The
$100.7 million
of cash generated by our operations, along with
$139.0 million
in borrowings under the Revolver, and
$11.4 million
of net cash transferred from Valero related to the cash flows associated with our Predecessor, were used mainly to:
|
|
•
|
fund $204.0 million for the acquisition from Valero of the McKee Terminal Services Business (
$51.4 million
represented Valero’s carrying value in the net assets transferred to us and was reflected as an investing activity, and
$152.6 million
represented the excess purchase price paid over the carrying value and was reflected as a financing activity);
|
|
|
•
|
pay
$48.3 million
in cash distributions to limited partners and our general partner;
|
|
|
•
|
fund
$11.6 million
in capital expenditures;
|
|
|
•
|
make debt repayments of
$663,000
on our capital lease obligations; and
|
|
|
•
|
pay
$108,000
in offering costs.
|
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,
|
|
|
|
2017
|
|
2016 (a)
|
Maintenance
|
|
$
|
3,373
|
|
|
$
|
5,711
|
|
Expansion (b)
|
|
11,867
|
|
|
5,895
|
|
Total capital expenditures
|
|
$
|
15,240
|
|
|
$
|
11,606
|
|
|
|
|
|
|
|
(a) Financial information has been retrospectively adjusted for the acquisition of the Meraux and Three Rivers Terminal Services Business.
|
(b) This table excludes amounts paid for our acquisitions. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.
|
Our capital expenditures in the first
six
months of
2017
were primarily for:
|
|
•
|
the construction of a rail loading facility and new tank at the St. Charles terminal; and
|
|
|
•
|
the construction of a new tank at our Port Arthur products system.
|
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 Three Rivers, 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.
|
For
2017
, we expect our capital expenditures to be approximately $49.0 million. Our estimate consists of approximately $14.0 million for maintenance capital expenditures and approximately $35.0 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 acquisitions.
In addition to the above-mentioned capital expenditures, Valero funded $19.3 million of capital projects primarily related to the St. Charles, Meraux, Corpus Christi, Three Rivers, Houston, and McKee terminals. Valero agreed to fund these projects in connection with the acquisitions from Valero. See
Note 10
of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.
Contractual Obligations
As of
June 30, 2017
, our contractual obligations included debt obligations, operating leases, purchase obligations, and other long-term liabilities. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the
six months ended
June 30, 2017
.
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,
2016
.
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, 2017
.
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, 2017
, 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,
2016
was filed.