sv1
As filed with the Securities and Exchange Commission on
March 31, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Valero GP Holdings, LLC
(Exact name of registrant as specified in its charter)
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Delaware |
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4610 |
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84-0470977 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
One Valero Way
San Antonio, Texas 78249
(210) 345-2000
(Address, including zip code, and telephone number, including
area code, of
registrants principal executive offices)
Bradley C. Barron
Vice President General Counsel and Secretary
Valero GP Holdings, LLC
One Valero Way
San Antonio, Texas 78249
(210) 345-2000
(Name, address, including zip code, and telephone number,
including area code,
of agent for service)
Copies to:
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Gislar Donnenberg
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
(713) 220-4200 |
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R. Joel Swanson
Joshua Davidson
Baker Botts L.L.P.
One Shell Plaza
910 Louisiana Street
Houston, Texas 77002
(713) 229-1234 |
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Title of Each Class of |
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Aggregate Offering |
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Amount of |
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Securities to be Registered |
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Price (1)(2) |
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Registration Fee |
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Units representing limited liability company interests
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$474,375,000 |
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$50,759 |
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(1) |
Includes units issuable upon exercise of the underwriters
option to purchase additional units. |
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(2) |
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933. |
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion, dated
March 31, 2006
PROSPECTUS
16,500,000 Units
Representing Limited Liability Company Interests
This is an initial public offering of our units. We expect the
initial public offering price of these units to be between
$ and
$ per
unit. We indirectly own the 2% general partner interest, 100% of
the incentive distribution rights and a 21.4% limited partner
interest in Valero L.P., a publicly traded Delaware limited
partnership engaged in the crude oil and refined product
transportation, terminalling and storage business. Before this
offering, there has been no public market for our units. We
intend to apply to list our units on the New York Stock Exchange
under the symbol VEH.
All of the units being sold in this offering are being offered
by subsidiaries of Valero Energy Corporation. We will receive
none of the proceeds from this offering. Following the offering,
subsidiaries of Valero Energy Corporation will own 28,010,258 of
our units, or approximately 63% of our outstanding membership
interests.
Investing in our units involves risks. Please read Risk
Factors beginning on page 20.
These risks include the following:
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Our only cash generating assets are our indirect ownership
interests in Valero L.P., and our cash flow is therefore
completely dependent upon the ability of Valero L.P. to make
cash distributions to its partners, including us. |
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Valero L.P.s unitholders, excluding the owner of Valero
L.P.s general partner, have the right to remove Valero
L.P.s general partner by a simple majority vote, which
would cause us to divest our indirect general partner interest
and incentive distribution rights in Valero L.P. in exchange for
cash or common units of Valero L.P. and cause us to lose
our ability to manage Valero L.P. |
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Assuming an initial public offering price of
$ per
unit, you will experience immediate and substantial dilution of
$14.79 per unit. |
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Although we manage Valero L.P. through our indirect ownership of
its general partner, Valero L.P.s general partner owes
fiduciary duties to Valero L.P. and Valero L.P.s
unitholders, which may conflict with our interests. |
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If we or Valero L.P. were treated as a corporation for federal
or state income tax purposes, then our cash available for
distribution to you would be substantially reduced. |
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Even if you do not receive any cash distributions from us, you
will be required to pay taxes on your share of our taxable
income. |
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Per Unit |
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Total |
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Initial public offering price
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$ |
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Underwriting discount
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$ |
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$ |
Proceeds to selling unitholders (before expenses)
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$ |
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$ |
Subsidiaries of Valero Energy Corporation have granted the
underwriters a 30-day
option to purchase up to an additional 2,475,000 units on
the same terms and conditions as set forth in this prospectus if
the underwriters sell more than 16,500,000 units in this
offering. We will not receive any proceeds from any units to be
sold by the selling unitholders upon any exercise of the
underwriters option to purchase additional units.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Lehman Brothers, on behalf of the underwriters, expects to
deliver the units on or
about ,
2006.
Lehman
Brothers
,
2006
We own the general partner of Valero L.P., as well as the
incentive distribution rights and a 21.4% limited partner
interest in Valero L.P. We do not own any operating assets
directly. The map below identifies Valero L.P.s assets and
their locations.
Valero L.P. System Overview
TABLE OF CONTENTS
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1 |
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67 |
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68 |
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69 |
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72 |
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81 |
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103 |
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Valero L.P.s Relationship with Valero Energy
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131 |
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136 |
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161 |
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ii
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with information
different from that contained in this prospectus. If anyone
provides you with different or inconsistent information, you
should not rely on it. We and the selling unitholders are not,
and the underwriters are not, offering to sell units or seeking
offers to buy units in any jurisdiction where offers and sales
are not permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the
units offered hereby.
Until ,
2006 (25 days after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
iii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully, including the historical and pro forma financial
statements and the notes to those financial statements. The
information presented in this prospectus assumes an initial
public offering price of $24.00 per unit and that the
underwriters do not exercise their option to purchase additional
units. Furthermore, you should carefully read
Summary of Risk Factors and Risk
Factors for information about important risks that you
should consider before making a decision to purchase units in
this offering.
References in this prospectus to we,
us, Valero GP Holdings and
our refer to Valero GP Holdings, LLC and its wholly
owned subsidiaries. References in this prospectus to
Valero L.P. refer to Valero L.P. and its wholly
owned subsidiaries. References to Valero Energy
refer to Valero Energy Corporation and its subsidiaries, unless
the context indicates otherwise. References in this prospectus
to our combined financial statements, combined
financial data, and combined balance sheet
data refer to data or information derived from the
combined and consolidated financial statements of Valero GP
Holdings.
Valero GP Holdings, LLC
Our only cash generating assets are our indirect ownership
interests in Valero L.P., a publicly traded Delaware limited
partnership (New York Stock Exchange symbol: VLI). Valero L.P.,
through its subsidiaries, operates one of the largest
independent terminal and petroleum liquids pipeline systems in
the United States. Our aggregate ownership interests in Valero
L.P. consist of the following:
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the 2% general partner interest in Valero L.P., which we hold
through our 100% ownership interest in Riverwalk Logistics, L.P.; |
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100% of the incentive distribution rights issued by Valero L.P.,
which entitle us to receive increasing percentages of the cash
distributed by Valero L.P., currently at the maximum percentage
of 23%; and |
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617,339 common units and 9,599,322 subordinated units of
Valero L.P. representing a 21.4% limited partner interest in
Valero L.P. We expect the subordinated units to convert on a
one-for-one basis to
common units during the second quarter of 2006. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 63% of our outstanding units. It is Valero
Energys intent to further reduce and ultimately sell all
of its indirect ownership interest in us, pending market
conditions.
Our primary objective is to increase per unit distributions to
our unitholders by actively supporting Valero L.P. in executing
its business strategy, which includes continued growth through
expansion projects and strategic acquisitions. We may facilitate
Valero L.P.s growth through the use of our capital
resources, which could involve capital contributions, loans or
other forms of financial support.
Valero L.P. is required by its partnership agreement to
distribute all of its available cash at the end of each quarter,
less reserves established by its general partner in its sole
discretion to provide for the proper conduct of Valero
L.P.s business or to provide funds for future
distributions. Similarly, we are required by our limited
liability company agreement to distribute all of our available
cash at the end of each quarter, less reserves established by
our board of directors. However, unlike Valero L.P., we do not
have a general partner or incentive distribution rights.
Therefore, all of our distributions are made on our units, which
are the only class of security outstanding.
Valero L.P. has an established historical record of paying
quarterly cash distributions to its partners. Since its initial
public offering in 2001, Valero L.P. has increased its quarterly
cash distribution by approximately 42.5%, from $0.60 per
unit, or $2.40 per unit on an annualized basis, to a
current level of $0.855 per unit, or $3.42 per unit on
an annualized basis. For the fourth quarter of 2005, we received
a cash distribution from Valero L.P. of approximately
$12.7 million (representing approximately
$50.7 million on an annualized basis), consisting of
$0.9 million on our 2% general partner interest,
$3.1 million on the incentive distribution rights and
$8.7 million on the units of Valero L.P. that we own. Based
on this current distribution level, we expect that our initial
quarterly cash distribution will be $0.27 per unit, or
$1.08 per unit on an annualized basis.
1
The graph set forth below shows the adjusted historical cash
distributions declared and paid during the periods shown with
respect to our ownership interests in Valero L.P. On
March 18, 2003, Valero L.P. redeemed 3,809,750 common units
indirectly owned by us. For comparability purposes, the amounts
presented in the table for the quarters in 2001 and 2002 have
been adjusted to reflect the reduced amount of distributions
that would have been paid to us if the redemption had occurred
on April 16, 2001, the effective date of Valero L.P.s
initial public offering.
From April 16, 2001 through the fourth quarter of 2005, the
total quarterly cash distributions declared and paid by Valero
L.P. with respect to all of its partnership interests increased
457%, from approximately $7.9 million (adjusted to reflect
the reduced amount of distributions that would have been paid
had the common unit redemption discussed above occurred on
April 16, 2001) to approximately $44.0 million. Over
the same period, the adjusted quarterly cash distributions
declared and paid by Valero L.P. with respect to our ownership
interests increased 140%, from approximately $5.3 million,
or 67% of Valero L.P.s adjusted total quarterly
distributions, to approximately $12.7 million, or 28.9% of
Valero L.P.s total quarterly distributions. The changes in
the adjusted historical cash distributions on our ownership
interests reflected in the graph set forth below generally
resulted from the following:
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the increases in Valero L.P.s per unit quarterly
distribution from $0.60 declared and paid for the third quarter
of 2001 to $0.855 declared and paid for the fourth quarter of
2005; and |
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the increases in Valero L.P.s distributions with respect
to the 2% general partner interest resulting from the issuance
of a total of 31,420,855 common units by Valero L.P. during such
period to finance acquisitions and capital improvements. |
Adjusted Quarterly Valero L.P. Distributions to Valero GP
Holdings, LLC (a)
2
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(a) |
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Actual distributions paid to Valero GP Holdings for quarters
prior to the March 18, 2003 redemption were as follows (in
millions, except per unit amounts): |
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Total Distribution Paid to | |
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Per Unit Distribution | |
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Valero GP Holdings, LLC | |
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2001:
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Second Quarter
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$ |
0.501 |
(b) |
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7.2 |
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Third Quarter
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0.600 |
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8.6 |
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Fourth Quarter
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0.600 |
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8.7 |
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2002:
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First Quarter
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0.650 |
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9.5 |
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Second Quarter
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0.700 |
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10.5 |
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Third Quarter
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0.700 |
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10.5 |
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Fourth Quarter
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0.700 |
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10.5 |
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(b) |
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The second quarter 2001 distribution was prorated for the period
from April 16, 2001, the effective date of Valero
L.P.s initial public offering, to June 30, 2001. |
Our ownership of Valero L.P.s incentive distribution
rights entitles us to receive the following percentages of cash
distributed by Valero L.P. as the following target cash
distribution levels are reached:
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8.0% of all cash distributed in a quarter after $0.60 per
unit has been distributed with respect to all units of Valero
L.P. for that quarter until $0.66 per unit has been
distributed; and |
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23.0% of all cash distributed in a quarter after $0.66 per
unit has been distributed with respect to all units of Valero
L.P. for that quarter. |
For the quarter ended December 31, 2005, Valero L.P. paid a
distribution of $0.855 per unit, which meant we received
23.0% of the $0.195 incremental cash distribution per unit in
excess of the maximum target distribution level of $0.66.
Because the incentive distribution rights currently participate
at the maximum 23% target cash distribution level, future growth
in distributions we receive from Valero L.P. will not result
from an increase in the percentage of incremental cash
distributed on the incentive distribution rights.
The graph set forth below shows hypothetical cash distributions
payable with respect to our ownership interests in Valero L.P.
across an illustrative range of annualized distributions per
unit made by Valero L.P. The graph shows the impact to us of
Valero L.P. raising or lowering its per unit distribution from
its current quarterly distribution of $0.855 per unit, or
$3.42 per unit on an annualized basis, and is based upon
the following assumptions:
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Valero L.P.s 37,210,427 common units and 9,599,322
subordinated units outstanding as of December 31,
2005; and |
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our ownership of the 2% general partner interest in Valero L.P.,
the incentive distribution rights, 617,339 common units and
9,599,322 subordinated units. |
This information is presented for illustrative purposes only and
is not intended to be a prediction of future performance. Valero
L.P.s cash distributions with respect to our ownership
interests will vary depending on several factors, including
Valero L.P.s outstanding partnership interests on the
record date for distribution, the per unit distribution and our
relative ownership of partnership interests. In addition, the
level of distributions we receive may be affected by the various
risks associated with an investment in us and the underlying
business of Valero L.P. Please read Risk Factors.
3
Hypothetical
Annual Cash Distributions to Valero GP Holdings, LLC
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(a) |
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This represents the most recent distribution (fourth
quarter 2005) presented on an annualized basis. |
Based on Valero L.P.s current quarterly distribution, the
number of our units that will be outstanding and our expected
level of expenses and reserves that our board of directors
believes prudent to maintain, we expect to make an initial
quarterly cash distribution of $0.27 per unit, or
$1.08 per unit on an annualized basis. Due to our indirect
ownership of Valero L.P.s incentive distribution rights,
our cash flows are affected by changes in Valero L.P.s
distributions to a greater extent than those of Valero
L.P.s common unitholders. If Valero L.P. is successful in
implementing its business strategy and increasing distributions
to its partners, including us, we generally would expect to
increase distributions to our unitholders. The timing and amount
of any such increase in our distributions will not necessarily
be comparable to any increase in Valero L.P.s
distributions. In August 2006, we expect to pay you a
distribution equal to the initial quarterly distribution
prorated for the portion of the quarter ending June 30,
2006 that we are a publicly traded limited liability company.
However, we cannot assure you that any distributions will be
declared or paid. Please read Our Cash Distribution Policy
and Restrictions on Distributions Estimated Minimum
Cash Available for Distribution Based upon Estimated Minimum
EBITDA of Valero L.P.
Our Structure and Management
We were formed in June 2000 as a Delaware limited liability
company. The chart below depicts our organization and ownership
upon completion of this offering and the related transactions.
Upon the consummation of this offering:
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our public unitholders will own an approximate 37% limited
liability company interest in us represented by
16,500,000 units; |
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our current owners, subsidiaries of Valero Energy, will own an
approximate 63% limited liability company interest in us
represented by 28,010,258 units; and |
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we will continue to own a 100% membership interest in Valero GP,
LLC and Riverwalk Holdings, LLC, which own the 2% general
partner interest, 100% of the incentive distribution rights and
a 21.4% limited partner interest in Valero L.P. |
Effective with the closing of this offering, we will enter into
an Administration Agreement with Valero GP, LLC. Pursuant to the
Administration Agreement:
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Valero GP, LLC will provide all employees for us; and |
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Valero GP, LLC will provide us with all executive management,
accounting, legal, cash management, corporate finance and other
administrative services. |
The annual charges to be paid under the Administration Agreement
will be $500,000. This amount will be increased annually to
reflect Valero GP, LLCs annual merit increases. Any other
adjustments to the annual fee, such as adjustments to reflect
changes in the levels of service provided to us or Valero GP,
LLCs actual payroll cost, are subject to the approval of
Valero GP, LLCs conflicts committee. We will also
reimburse Valero GP, LLC for all direct public company costs and
any other direct costs, such as outside legal and accounting
fees, that Valero GP, LLC incurs while providing us services
pursuant to the Administration Agreement.
The initial term of the Administration Agreement will commence
with the closing of this offering and terminate on
December 31, 2011, with automatic two year renewals unless
terminated by either party on six months written notice.
We may cancel or reduce the services received under this
agreement on 60 days written notice. The
Administration Agreement will terminate on the change of control
of either us or Valero GP, LLC. For a more detailed description
of this agreement, please read Certain Relationships and
Related Transactions Related Party
Transactions.
Our board of directors will manage our operations and
activities, including, among other things, establishing the
quarterly cash distribution levels for our units and reserves
that it believes prudent to maintain for the proper conduct of
our business.
We manage Valero L.P. through our ownership of Valero GP, LLC,
the general partner of Riverwalk Logistics, L.P., which in turn
is the general partner of Valero L.P. We appoint the directors
of Valero GP, LLC. Our officers are also officers of Valero GP,
LLC. William E. Greehey is our Chairman of the Board as well as
the Chairman of the Boards of Valero GP, LLC and Valero Energy.
We will appoint additional directors, at least three of which
will be independent of Valero GP, LLC and Valero L.P., as
defined by the New York Stock Exchange. The board of Valero GP,
LLC is responsible for overseeing Valero GP, LLCs role as
the general partner of Riverwalk Logistics, L.P., the general
partner of Valero L.P. We, as the sole owner of Valero GP, LLC,
must also approve matters that have or would be reasonably
expected to have a material effect on our interest as the sole
member of Valero GP, LLC. Please read Management.
Our principal executive offices are located at One Valero Way,
San Antonio, Texas 78249, and our telephone number is
(210) 345-2000. Our website is located at
www.valerogpholdings.com. Information contained on our
website is not incorporated by reference into and does not
constitute a part of this prospectus.
5
Ownership of Valero GP Holdings, LLC
6
The Offering
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Units offered by subsidiaries of Valero Energy
Corporation |
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16,500,000 units or 18,975,000 units if the
underwriters exercise their option to purchase additional units
in full. |
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Units outstanding after this offering |
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44,510,258 units. Immediately prior to the closing of this
offering, we will issue 44,510,258 units to subsidiaries of
Valero Energy in exchange for their current ownership interests
in us. These subsidiaries of Valero Energy will then offer
16,500,000 of their units to the public (or 18,975,000 if the
underwriters exercise their option to purchase additional units
in full). |
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Use of proceeds |
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We will not receive any of the proceeds of this offering.
Subsidiaries of Valero Energy will receive all the proceeds of
this offering. |
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Cash distributions |
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We expect to make an initial quarterly cash distribution of
$0.27 per unit to the extent we have sufficient cash from
operations after establishment of cash reserves and payment of
fees and expenses. Please read Our Cash Distribution
Policy and Restrictions on Distributions Our Initial
Distribution Rate. |
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We expect to pay you a prorated distribution for the initial
quarter during which we are a publicly traded limited liability
company. This distribution will be paid for the period beginning
on the closing date of this offering and ending on the last day
of that fiscal quarter. For example, in August 2006, we expect
to pay you a distribution for the period from the closing date
of this offering to and including June 30, 2006. However,
we cannot assure you that we will declare or pay any
distributions. |
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Limited call right |
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If at any time our affiliates own more than 80% of our
outstanding units, our affiliates have the right, but not the
obligation, to purchase all of the remaining units at a price
not less than the then current market price of the units. At the
completion of this offering, our current owners will own
approximately 63% of our units. |
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Limited voting rights |
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If any person or group other than our affiliates acquires
beneficial ownership of 20% or more of any class of our units,
that person or group loses voting rights on all of its units.
This loss of voting rights does not apply to any person or group
that acquires all of its units from our affiliates and any
transferees of that person or group approved by our board of
directors or to any person or group who acquires the units with
the prior approval of our board of directors. |
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Staggered board |
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We will have a staggered board of directors as a result of which
only a portion of the members of our board of directors will be
elected each year. Removal of directors will require a meeting
of unitholders and cannot be done by written consent. |
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Preferred unit purchase rights |
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Upon closing of this offering, we expect to adopt a preferred
unit purchase rights plan, which will be designed to cause
substantial dilution to anyone who may attempt to acquire us on
terms not approved by our board of directors upon any triggering
event, such as the acquisition of 15% of our outstanding units. |
7
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Estimated ratio of taxable income to distributions |
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We estimate that if you own the units you purchase in this
offering through the record date for distributions for the
period ending December 31, 2008, you will be allocated, on
a cumulative basis, an amount of federal taxable income for that
period that will be less
than % of the cash
distributed with respect to that period. Please read
Material Tax Consequences Tax Consequences of
Unit Ownership for the basis of this estimate. |
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Exchange listing |
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We intend to apply to list our units on the New York Stock
Exchange under the symbol VEH. |
8
Valero L.P.
Valero L.P. is a publicly traded Delaware limited partnership
based in San Antonio, Texas, engaged in the crude oil and
refined product transportation, terminalling and storage
business. On July 1, 2005, Valero L.P. completed the
acquisition of Kaneb Services LLC and Kaneb Pipe Line Partners,
L.P. (collectively, Kaneb) and became one of the
largest independent terminal and petroleum liquids pipeline
operators in the United States. Valero L.P. has terminal
facilities in the United States, Canada, Mexico, the Netherlands
Antilles, the Netherlands and the United Kingdom. On
March 30, 2006, Valero L.P. sold its subsidiaries in
Australia and New Zealand, which own eight terminals with a
storage capacity of 1.1 million barrels.
Valero L.P. has four business segments, consisting of refined
product terminals, refined product pipelines, crude oil
pipelines, and crude oil storage tanks. As of December 31,
2005, Valero L.P.s assets consisted of a diversified
portfolio of logistics assets, including:
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76 refined product terminal facilities providing approximately
59.7 million barrels of storage capacity; |
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8,389 miles of refined product pipelines, including
2,000 miles of anhydrous ammonia pipelines, with 21
associated terminals providing storage capacity of
4.9 million barrels; |
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797 miles of crude oil pipelines with 11 associated storage
tanks providing storage capacity of 1.7 million
barrels; and |
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60 crude oil storage tanks providing storage capacity of
12.5 million barrels. |
For a more detailed description of each segments assets
and operations, please read Business of Valero
L.P. Business Segments. For a description of
each segments results of operations and revenues, please
read Managements Discussion and Analysis of
Financial Condition and Results of Operations Valero
L.P.
Valero L.P.s business strategy is to increase per unit
cash distributions to its partners through three primary
strategic initiatives:
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continuous improvement of its operations through initiatives
focused on matters such as improving safety and environmental
stewardship, cost controls and asset reliability and integrity; |
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internal growth initiatives comprised of enhancing the
utilization of its existing assets by expanding its business
with current and new customers as well as investing in accretive
expansion projects; and |
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external growth initiatives from acquisitions that meet its
financial and strategic criteria. |
Valero L.P.s principal executive offices are located at
One Valero Way, San Antonio, Texas 78249, and its phone
number is (210) 345-2000. Valero L.P. maintains a website
at www.valerolp.com that provides information about its
business and operations. Valero L.P. also files annual,
quarterly and current reports and other information with the
Securities and Exchange Commission, or SEC. Valero L.P.s
SEC filings are available to the public at the SECs
website at www.sec.gov. You may also read and copy any
document Valero L.P. files at the SECs public reference
room at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the SECs public
reference room by calling the SEC at
1-800-SEC-0330.
Information contained on these websites, and the reports filed
by Valero L.P. with the SEC are not incorporated by reference
into and do not constitute a part of this prospectus.
9
Comparison of Rights of Holders of Valero L.P.s Common
Units and Our Units
While the trading prices of our units and Valero L.P.s
common units are likely to follow generally similar broad
trends, the trading prices may diverge because, among other
things, we participate in Valero L.P.s incentive
distribution rights and Valero L.P.s common unitholders do
not.
The following table compares certain features of Valero
L.P.s common units and our units.
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Valero L.P.s Common Units |
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Our Units |
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Distributions and Incentive Distribution Rights
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Valero L.P. pays its limited partners and general partner
quarterly distributions equal to the cash it receives from its
operations, less certain reserves for expenses and other uses of
cash. Valero L.P.s general partner currently has a 2%
general partner interest in Valero L.P. and owns the incentive
distribution rights in Valero L.P. |
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We expect to pay our unitholders quarterly distributions equal
to the cash we receive from Valero L.P., less certain reserves
for expenses and other uses of cash. |
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Subordinated Units |
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At its initial public offering, Valero L.P. issued subordinated
units. During the subordination period, Valero L.P.s
common units have priority over the subordinated units to the
minimum quarterly distribution from Valero L.P.s
distributable cash flow. In addition, during the subordination
period, Valero L.P.s common units carry arrearage rights,
which are similar to cumulative rights on preferred stock. We
expect the subordinated units to convert to common units during
the second quarter of 2006. |
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We do not have subordinated units. As a result, our units carry
no rights to arrearages. |
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Taxation of Entity and Entity Owners
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Valero L.P. is a pass-through entity that is not subject to an
entity-level federal income tax. |
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Similarly, we are a pass-through entity that is not subject to
an entity-level federal income tax. |
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Valero L.P. expects that holders of its common units will
benefit for a period of time from tax basis adjustments and
remedial allocations of deductions so that they will be
allocated a relatively small amount of federal taxable income
compared to the cash distributed to them. |
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We also expect that our unitholders will benefit for a period of
time from tax basis adjustments as a result of our indirect
ownership of interests in Valero L.P. However, our ownership of
the incentive distribution rights will cause more taxable income
to be allocated to us from Valero L.P. Therefore, we expect the
ratio of our taxable income to the distributions you will
receive to be higher than the ratio of taxable income to the |
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Valero L.P.s Common Units |
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Our Units |
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distributions received by the common unitholders of Valero L.P.
Moreover, if Valero L.P. is successful in increasing its
distributable cash flow over time, we expect the ratio of our
taxable income to distributions will increase. |
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Valero L.P. common unitholders receive Schedule K-1s from Valero
L.P. reflecting the unitholders share of Valero
L.P.s items of income, gain, loss and deduction at the end
of each fiscal year. |
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Similarly, our unitholders will receive Schedule K-1s from us
reflecting the unitholders share of our items of income,
gain, loss and deduction at the end of each fiscal year. |
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Assets and Operations |
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Valero L.P. is a publicly traded Delaware limited partnership
based in San Antonio, Texas, engaged in the crude oil and
refined product transportation, terminalling and storage
business. As one of the largest independent terminal and
petroleum liquids pipeline operators in the United States,
Valero L.P. has terminal facilities in the United States,
Canada, Mexico, the Netherlands Antilles, the Netherlands and
the United Kingdom. |
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Our only cash generating assets are our indirect ownership
interests in Valero L.P. We currently have no independent
operations. Accordingly, our financial performance and our
ability to pay cash distributions to our unitholders is
completely dependent upon the ability of Valero L.P. to make
cash distributions to its partners, including us. |
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Limitation on Issuance of Additional Units
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Following the completion of the subordination period, Valero
L.P. may issue an unlimited number of additional partnership
interests and other equity securities without obtaining
unitholder approval. |
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Similarly, we may issue an unlimited number of additional
limited liability company interests and other equity securities
without obtaining unitholder approval. |
11
Summary of Risk Factors
An investment in our units involves risks associated with us and
Valero L.P. and the tax characteristics associated with our
units. You should consider carefully all the risk factors
together with all of the other information included in this
prospectus before you invest in our units. The risks related to
an investment in us, conflicts of interest, Valero L.P.s
business and tax consequences to our unitholders are described
under the caption Risk Factors. These risks include,
but are not limited to, those described below:
Risks Inherent in an Investment in Us
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Our only cash generating assets are our ownership interests in
Valero GP, LLC and Riverwalk Holdings, LLC, which own the 2%
general partner interest, 100% of the incentive distribution
rights and a 21.4% limited partner interest in Valero L.P. Our
cash flow is therefore completely dependent upon the ability of
Valero L.P. to make cash distributions to its partners,
including us. |
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In the future, we may not have sufficient cash to pay
distributions at our estimated initial quarterly distribution
level or to increase distributions. |
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Valero L.P.s unitholders, excluding the owner of Valero
L.P.s general partner, have the right to remove Valero
L.P.s general partner by a simple majority vote, which
would cause us to divest our indirect general partner interest
and incentive distribution rights in Valero L.P. in exchange for
cash or common units of Valero L.P. and cause us to lose our
ability to manage Valero L.P. |
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Valero L.P.s general partner, with our consent, may limit
or modify the incentive distributions we are entitled to receive
in order to facilitate the growth strategy of Valero L.P. Our
board of directors can give this consent without a vote of our
unitholders. |
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The amount of cash distributions that we will be able to
distribute to you will be reduced by the costs associated with
our being a public company, other general and administrative
expenses and any reserves that our board of directors believes
prudent to maintain for the proper conduct of our business and
for future distributions. |
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Restrictions in our anticipated credit facility could limit our
ability to make distributions to our unitholders. |
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Our ability to sell our ownership interests in Valero L.P. may
be limited by securities laws restrictions and liquidity
constraints. |
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The market price of our units could be adversely affected by
sales of substantial amounts of our units into the public
markets, including sales by our existing unitholders. |
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Distributions on our incentive distribution rights and
subordinated units in Valero L.P. are more uncertain than
distributions on the common units we hold. |
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Assuming an initial public offering price of $24.00 per
unit, you will experience immediate and substantial dilution of
$14.79 per unit. |
Risks Related to Conflicts of Interest
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Although we manage Valero L.P. through our indirect ownership of
its general partner, Valero L.P.s general partner owes
fiduciary duties to Valero L.P. and Valero L.P.s
unitholders, which may conflict with our interests. |
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The fiduciary duties of our officers and directors may conflict
with those of Valero L.P.s general partners officers
and directors. |
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When Valero Energy reduces its ownership interest such that it
owns less than 20% of us or Valero GP, LLC, Valero Energy and
its affiliates may directly compete with Valero L.P., which
could cause conflicts of interest and may adversely impact
Valero L.P., and as a result, our results of operations and cash
available for distribution. |
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Subsidiaries of Valero Energy will control us and will own a
sufficient number of our units to block any attempt to remove or
replace our board of directors. |
Risks Related to Valero L.P.s Business
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A decline in production at the Valero Energy refineries Valero
L.P. serves or the Tesoro Mandan refinery could materially
reduce the volume of crude oil and refined petroleum products
Valero L.P. transports or stores in its assets. |
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Valero L.P.s future financial and operating flexibility
may be adversely affected by restrictions in its debt agreements
and by its, our and Valero Energys leverage. |
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Valero L.P.s subsidiary, Valero Logistics Operations, L.P.
(Valero Logistics Operations), may be unable to purchase its
senior notes upon a change of control of Valero GP Holdings. |
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Valero L.P. may not be able to generate sufficient cash from
operations to enable it to pay expected quarterly distributions
on its units every quarter. |
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Valero L.P. depends on Valero Energy for a significant portion
of its revenues and throughputs of crude oil and refined
products. Any reduction in the crude oil and refined products
that Valero L.P. transports or stores for Valero Energy, as a
result of scheduled or unscheduled refinery maintenance,
upgrades or shutdowns or otherwise, could result in a decline in
Valero L.P.s revenues, earnings and cash available to pay
distributions. |
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Under the pipelines and terminals usage agreement, Valero Energy
may use other transportation methods or providers for up to 25%
of the crude oil processed and refined products produced at the
Ardmore, McKee and Three Rivers refineries. Furthermore, Valero
Energy is not required to use Valero L.P.s pipelines if
there is a change in market conditions that has a material
adverse effect on Valero Energy for the transportation of crude
oil and refined products, or in the markets for refined products
served by these refineries. These factors could adversely affect
Valero L.P.s ability to make distributions to its
unitholders, including us. |
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Increases in natural gas and power prices could adversely affect
Valero L.P.s ability to make distributions to its
unitholders, including us. |
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Valero L.P.s operations are subject to federal, state and
local laws and regulations relating to environmental protection
and operational safety that could require Valero L.P. to make
substantial expenditures. |
Tax Risks to Our Unitholders
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If we or Valero L.P. were treated as a corporation for federal
or state income tax purposes, then our cash available for
distribution to you would be substantially reduced. |
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A successful IRS contest of the federal income tax positions we
or Valero L.P. take may adversely impact the market for our or
Valero L.P.s units, and the costs of any contest will
reduce cash available for distribution to our unitholders. |
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Even if you do not receive any cash distributions from us, you
will be required to pay taxes on your share of our taxable
income. |
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The sale or exchange of 50% or more of our or Valero L.P.s
capital and profits interests, within a twelve-month period,
will result in the termination of our or Valero L.P.s
partnership for federal income tax purposes. Valero Energy
currently intends to sell its interests in us, pending market
conditions, such that 50% or more of the total interests in our
capital and profits may be sold within a twelve-month period
after the completion of this offering. |
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Summary of Conflicts of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships among us, Valero Energy, Valero L.P.
and its general partner, and their affiliates. Valero Energy has
the ability to elect, remove and replace our directors and
officers. Valero Energy also has the ability to elect, remove
and replace the directors and officers of Valero GP, LLC, the
general partner of Valero L.P. Our directors and officers have
fiduciary duties to manage our business in a manner beneficial
to us and our unitholders. At the same time, Valero GP, LLC and
its directors and officers have fiduciary duties to manage
Valero L.P.s business in a manner beneficial to Valero
L.P. and its partners, including us. William E. Greehey is our
Chairman of the Board as well as the Chairman of the Boards of
Valero GP, LLC and Valero Energy. Additionally, all of our
executive officers also serve as executive officers of Valero
GP, LLC, the general partner of Riverwalk Logistics, L.P., and,
as a result, have fiduciary duties to manage the business of
Valero L.P. in a manner beneficial to Valero L.P. and its
partners. Mr. Greehey and these officers may encounter
situations in which their fiduciary obligations to Valero L.P.,
on the one hand, and us, on the other hand, are in conflict.
Valero Energy, which will retain an approximate 63% ownership
interest in us after giving effect to this offering, may face
conflicts of interest if it is confronted with decisions that
would have an impact on us, on the one hand, and itself, on the
other hand. The partnership agreement of Valero L.P. and our
limited liability company agreement provide several ways of
resolving these conflicts of interest, including the approval of
the conflicts committees of independent directors of Valero GP,
LLC and us. The resolution of these conflicts may not always be
in our best interest or that of our unitholders. For a more
detailed description of the conflicts of interest involving us
and the resolution of these conflicts, please read
Conflicts of Interest and Fiduciary Duties.
Valero Energy currently intends to reduce and ultimately sell
all of its ownership interest in us, pending market conditions.
Under Valero L.P.s Amended and Restated Omnibus Agreement,
if Valero Energy reduces its ownership interest such that it
owns less than 20% of us or Valero GP, LLC, Valero Energy and
its affiliates will no longer be prohibited from engaging in the
business of transporting crude oil or refined petroleum products
(including petrochemicals) or operating crude oil storage or
refined petroleum products terminalling assets in the United
States. Valero Energy could then directly compete with Valero
L.P., which could cause conflicts of interest among these
entities and adversely impact Valero L.P.s results of
operations and cash available for distribution and therefore our
cash available for distribution.
We will enter into a Non-Compete Agreement with Valero L.P. upon
the closing of this offering. This Non-Compete Agreement will
not be effective until we are no longer subject to the Amended
and Restated Omnibus Agreement described above. Under the
Non-Compete Agreement, we will have a right of first refusal
with respect to the potential acquisition of general partner and
other equity interests in publicly traded partnerships under
common ownership with the general partner interest. Valero L.P.
will have a right of first refusal with respect to the potential
acquisition of assets that relate to the transportation, storage
or terminalling of crude oil, feedstocks or refined petroleum
products (including petrochemicals) in the United States and
internationally. With respect to any other business
opportunities, neither we nor Valero L.P. are prohibited from
engaging in any business, even if we and Valero L.P. would have
a conflict of interest with respect to such other business
opportunity.
If Valero Energys or an investment grade entitys
ownership interest in us decreases below 51%, the indentures for
Valero Logistics Operations senior notes require Valero
Logistics Operations to offer to repurchase all outstanding
senior notes at a price equal to 100% of the aggregate principal
amount thereof plus accrued and unpaid interest.
Our limited liability company agreement provides that the
authority and function of our board of directors and officers
shall be identical to the authority and functions of a board of
directors and officers of a corporation organized under the
Delaware General Corporation Law, or DGCL. Furthermore, our
limited liability company agreement provides that, except as
specifically provided therein, the fiduciary duties and
obligations owed to our company and our members shall be the
same as the respective duties and obligations owed by officers
and directors of a corporation organized under the DGCL to their
corporation and stockholders, respectively. Our limited
liability company agreement permits affiliates of our directors
to invest or engage in other businesses or
14
activities that compete with us. Our limited liability company
agreement authorizes our board of directors to establish a
conflicts committee, consisting solely of independent directors,
which will be responsible for reviewing transactions involving
potential conflicts of interest on behalf of our public
unitholders. Our independent directors will not be the same as
the independent directors who serve on the conflicts committee
of Valero GP, LLC. If our conflicts committee approves a
transaction involving a potential conflict, you will not be able
to assert that such approval constituted a breach of fiduciary
duties owed to you by our directors and officers. By purchasing
our units, you are treated as having consented to various
actions contemplated in the limited liability company agreement
and conflicts of interest that might otherwise be considered a
breach of fiduciary or other duties under applicable state law.
For a description of our other relationships with our
affiliates, please read Certain Relationships and Related
Transactions.
15
Summary Historical and Pro Forma Financial Data
Valero GP Holdings, LLC
The following table sets forth, for the periods and at the dates
indicated, summary historical and pro forma financial data for
Valero GP Holdings (in thousands, except per unit amounts). The
historical financial statements of Valero GP Holdings combine
the financial statements of Valero GP Holdings and Valero GP,
LLC and consolidate the financial statements of Riverwalk
Logistics, L.P. Prior to March 18, 2003, the financial
statements of Valero GP Holdings also consolidated the
financial statements of Valero L.P. On March 18, 2003,
Valero GP Holdings began accounting for its investment in Valero
L.P. under the equity method, which is discussed in note 2
to the audited financial statements of Valero GP Holdings
included elsewhere in this prospectus. The summary historical
financial data as of December 31, 2004 and 2005 and for the
years ended December 31, 2003, 2004 and 2005 should be read
in conjunction with the audited financial statements of Valero
GP Holdings, Valero L.P. and Kaneb included elsewhere in this
prospectus. The summary pro forma financial data as of and for
the year ended December 31, 2005 should be read in
conjunction with the unaudited pro forma financial statements of
Valero GP Holdings included elsewhere in this prospectus.
The summary pro forma statement of income data for the year
ended December 31, 2005 reflects the pro forma effect of
two separate transactions. First, Valero GP Holdings
equity in income of Valero L.P. is adjusted to reflect the
effect of the acquisition of Kaneb by Valero L.P., including the
effect of the sale of certain assets acquired from Kaneb, as if
those transactions occurred on January 1, 2005. Second, the
effect of this offering is reflected as if it had occurred on
January 1, 2005, including (a) the elimination of
interest expense on Valero GP Holdings notes payable to
affiliates resulting from a capital contribution by Valero
Energy subsidiaries to Valero GP Holdings of notes issued
by Valero GP Holdings and held by Valero Energy subsidiaries and
(b) the incurrence of an incremental $2.3 million of
general and administrative expenses that Valero GP Holdings is
expected to incur as a publicly traded limited liability
company, including costs under a new Administration Agreement
with Valero GP, LLC, pursuant to which Valero GP, LLC will
provide certain administrative services to Valero GP Holdings
for a fee. The summary pro forma balance sheet data reflects the
effect of the capital contribution discussed above as well as a
capital contribution by Valero Energy subsidiaries to fund
certain employee benefit plan liabilities of Valero GP Holdings
as if those transactions occurred on December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, including equity in earnings of
Valero L.P.
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
52,286 |
|
|
$ |
35,314 |
|
|
$ |
37,646 |
|
|
$ |
25,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
9,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
7,023 |
|
|
|
1,562 |
|
|
|
91 |
|
|
|
28 |
|
|
|
2,350 |
|
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
13,708 |
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
58,569 |
|
|
|
14,021 |
|
|
|
91 |
|
|
|
28 |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
59,889 |
|
|
|
38,265 |
|
|
|
35,223 |
|
|
|
37,618 |
|
|
|
23,601 |
|
|
Other income
|
|
|
3,179 |
|
|
|
3,190 |
|
|
|
705 |
|
|
|
401 |
|
|
|
567 |
|
|
|
456 |
|
|
Interest expense
|
|
|
(3,811 |
) |
|
|
(21,686 |
) |
|
|
(20,283 |
) |
|
|
(17,110 |
) |
|
|
(17,778 |
) |
|
|
|
|
|
Minority interest (a)
|
|
|
(9,393 |
) |
|
|
(14,109 |
) |
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
36,480 |
|
|
|
27,284 |
|
|
|
16,287 |
|
|
|
18,514 |
|
|
|
20,407 |
|
|
|
24,057 |
|
|
Income tax expense
|
|
|
|
|
|
|
396 |
|
|
|
33 |
|
|
|
67 |
|
|
|
114 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
36,480 |
|
|
$ |
26,888 |
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
24,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
(at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
729,188 |
|
|
$ |
760,256 |
|
|
$ |
392,937 |
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
$ |
419,707 |
|
|
Total debt (b)
|
|
|
285,519 |
|
|
|
386,816 |
|
|
|
283,797 |
|
|
|
270,597 |
|
|
|
265,961 |
|
|
|
|
|
|
Members equity (c)
|
|
|
309,278 |
|
|
|
244,771 |
|
|
|
105,960 |
|
|
|
113,975 |
|
|
|
141,780 |
|
|
|
410,034 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
60,369 |
|
|
$ |
23,033 |
|
|
$ |
22,183 |
|
|
$ |
16,731 |
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(17,060 |
) |
|
|
1,521 |
|
|
|
(19,606 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
45,975 |
|
|
|
296,679 |
|
|
|
(23,632 |
) |
|
|
2,876 |
|
|
|
|
|
|
Distributions received from Valero L.P. (d)
|
|
|
15,872 |
|
|
|
39,130 |
|
|
|
36,013 |
|
|
|
37,964 |
|
|
|
44,745 |
|
|
|
|
|
16
|
|
|
(a) |
|
Minority interest represents the proportionate interest of
public unitholders in the net income of Valero L.P. during the
period that Valero GP Holdings consolidated Valero L.P. |
|
(b) |
|
Total debt as of December 31, 2001 and 2002 includes
$26.9 million and $110.4 million, respectively, of
Valero L.P.s outstanding debt, prior to the ceasing of
consolidation of Valero L.P. on March 18, 2003. The
remainder of the debt at the end of 2001 and 2002 and all of the
debt as of December 31, 2003, 2004 and 2005 represents
notes payable by Valero GP Holdings to subsidiaries of Valero
Energy. The pro forma total debt as of December 31, 2005 is
zero as the result of a capital contribution to Valero GP
Holdings by Valero Energy subsidiaries of such notes. |
|
(c) |
|
Members equity in the historical balance sheet decreased
from December 31, 2002 to December 31, 2003 as a
result of the distribution to Valero GP Holdings members
of the proceeds received from the redemption by Valero L.P. of
3,809,750 common units held by Valero GP Holdings.
Members equity in the pro forma balance sheet as of
December 31, 2005 is significantly higher than the
members equity in the historical balance sheet as of the
same date due to the capital contribution of notes from Valero
Energy subsidiaries discussed in footnote (b) above. |
|
(d) |
|
Distributions received from Valero L.P. for the years ended
December 31, 2001, 2002 and 2003 include distributions
received by Valero GP Holdings prior to the ceasing of
consolidation of Valero L.P. on March 18, 2003, which were
eliminated in the combined statements of cash flows. |
17
Summary Historical and Pro Forma Financial Data
Valero L.P.
The following table sets forth, for the periods and at the dates
indicated, summary historical and pro forma financial data for
Valero L.P. as of December 31, 2004 and 2005 (dollars in
thousands, except per unit data). The summary historical
financial data as of December 31, 2004 and 2005 and for the
years ended December 31, 2003, 2004 and 2005 should be read
in conjunction with the audited financial statements of Valero
L.P. included elsewhere in this prospectus. The summary pro
forma financial data for the year ended December 31, 2005
should be read in conjunction with the unaudited pro forma
financial statements of Valero L.P. included elsewhere in this
prospectus.
The summary pro forma statement of income data for the year
ended December 31, 2005 assumes:
|
|
|
|
|
the acquisition of Kaneb by Valero L.P. occurred on
January 1, 2005; |
|
|
|
the sale of certain assets acquired as part of the acquisition
of Kaneb for $455 million occurred on January 1, 2005
and that the proceeds from such sale were used to repay debt; |
|
|
|
the sale of Martin Oil LLC, a wholly owned subsidiary of Kaneb
that was acquired as part of the acquisition of Kaneb, to Valero
Energy for $26.8 million occurred on January 1, 2005
and that the proceeds were used to repay debt; and |
|
|
|
the sale of Valero L.P.s subsidiaries in Australia and New
Zealand, which were acquired in connection with the acquisition
of Kaneb and which Valero L.P. sold on March 30, 2006 for
$65 million plus working capital adjustments, occurred on
January 1, 2005 and that the proceeds were used to repay
debt. |
Summary pro forma balance sheet data as of December 31,
2005 is not presented because the transactions discussed above
are reflected in Valero L.P.s historical balance sheet as
of December 31, 2005, other than the sale of
Valero L.P.s Australian and New Zealand
subsidiaries, the effect of which is immaterial.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
1,005,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,806 |
|
|
|
401,357 |
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
64,609 |
|
|
|
78,298 |
|
|
|
184,609 |
|
|
|
272,250 |
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
6,950 |
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
65,528 |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
16,440 |
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
94,180 |
|
|
Provision for loss contingencies (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
61,228 |
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
875,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
57,230 |
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
130,347 |
|
|
Equity earnings in joint ventures
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,319 |
|
|
|
5,116 |
|
|
Interest and other expense, net
|
|
|
(3,811 |
) |
|
|
(4,880 |
) |
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
(61,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax (expense)
benefit
|
|
|
45,873 |
|
|
|
55,538 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
112,388 |
|
|
|
74,342 |
|
Income tax (expense) benefit (c)
|
|
|
|
|
|
|
(395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
45,873 |
|
|
|
55,143 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
107,675 |
|
|
$ |
83,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
45,873 |
|
|
$ |
55,143 |
|
|
$ |
69,593 |
|
|
$ |
78,418 |
|
|
$ |
111,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
387,070 |
|
|
$ |
415,508 |
|
|
$ |
827,557 |
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
|
|
|
Long-term debt, less current portion
|
|
|
25,660 |
|
|
|
108,911 |
|
|
|
353,257 |
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
|
|
Partners equity
|
|
|
342,166 |
|
|
|
293,895 |
|
|
|
438,163 |
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
|
|
Operating Data (barrels/day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil pipeline throughput
|
|
|
303,811 |
|
|
|
348,023 |
|
|
|
355,008 |
|
|
|
381,358 |
|
|
|
358,965 |
|
|
|
|
|
Refined product pipeline throughput
|
|
|
308,047 |
|
|
|
295,456 |
|
|
|
392,145 |
|
|
|
442,596 |
|
|
|
556,654 |
|
|
|
|
|
Refined product terminal throughput
|
|
|
189,172 |
|
|
|
175,559 |
|
|
|
225,426 |
|
|
|
256,576 |
|
|
|
245,084 |
|
|
|
|
|
Crude oil storage tank throughput
|
|
|
253,402 |
|
|
|
293,925 |
|
|
|
366,986 |
|
|
|
473,714 |
|
|
|
517,409 |
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
77,656 |
|
|
$ |
106,108 |
|
|
$ |
108,503 |
|
|
$ |
186,430 |
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(442,350 |
) |
|
|
(58,511 |
) |
|
|
(89,000 |
) |
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
28,688 |
|
|
|
318,454 |
|
|
|
(49,590 |
) |
|
|
(77,178 |
) |
|
|
|
|
|
|
|
(a) |
|
Cost of sales relates to the sale of bunker fuel. Valero L.P.
purchases bunker fuel for resale and records cost of sales for
barrels of fuel sold. |
|
(b) |
|
For the quarter ended June 30, 2005, Kaneb recorded a
provision for loss contingencies associated with certain legal
matters. Please read Kaneb Services LLC and
Subsidiaries Condensed Notes to Consolidated
Financial Statements Note 6
Contingencies included elsewhere in this prospectus. |
|
(c) |
|
Valero L.P. is not a taxable entity for federal and state income
tax purposes. For 2002, income tax expense relates to the
acquisition by Valero L.P. of the Wichita Falls Business from
Valero Energy. For 2005, historical and pro forma income tax
amounts relate to taxable, wholly owned corporate subsidiaries
of Valero L.P. that were acquired as part of the acquisition of
Kaneb. The corporate subsidiaries are primarily international
subsidiaries. |
|
(d) |
|
On September 30, 2005, Valero L.P. sold certain assets it
acquired as part of the acquisition of Kaneb for
$455 million, and on March 30, 2006 Valero L.P. sold
its subsidiaries in Australia and New Zealand, which were
acquired in connection with the Kaneb acquisition, for
$65 million plus working capital adjustments. The results
of operations of these assets and subsidiaries are included in
income from discontinued operations. |
|
(e) |
|
The historical statement of income data for the year ended
December 31, 2005 includes the results of operations of
Kaneb from the date of acquisition, July 1, 2005, through
December 31, 2005. |
19
RISK FACTORS
You should consider carefully the risk factors included
below, together with all of the other information included in
this prospectus, when evaluating an investment in our units. If
any of the circumstances described in this section were to
occur, Valero GP Holdings business, financial condition or
results of operations could be materially adversely affected. In
that case, the trading price of our units could decline, and you
could lose all or part of your investment.
Limited liability company interests are inherently different
from capital stock of a corporation, although many of the
business risks to which we are subject are similar to those that
would be faced by a corporation engaged in a similar
business.
Risks Inherent in an Investment in Us
|
|
|
Our only cash generating assets are our ownership
interests in Valero GP, LLC and Riverwalk Holdings, LLC, which
own the 2% general partner interest, 100% of the incentive
distribution rights and a 21.4% limited partner interest in
Valero L.P. Our cash flow is therefore completely dependent upon
the ability of Valero L.P. to make cash distributions to its
partners, including us. |
Our operating cash flow is currently completely dependent upon
Valero L.P. making cash distributions to its partners, including
us. The amount of cash that Valero L.P. can distribute to its
partners each quarter principally depends upon the amount of
cash it generates from its operations, which will fluctuate from
quarter to quarter based on, among other things:
|
|
|
|
|
the amount of crude oil and refined product transported in its
pipelines; |
|
|
|
throughput volumes in its terminals and storage facilities; |
|
|
|
tariff rates and fees it charges and the margins it realizes for
its services; |
|
|
|
the level of its operating costs; |
|
|
|
weather conditions; |
|
|
|
domestic and foreign governmental regulations and taxes; |
|
|
|
the effect of worldwide energy conservation measures; and |
|
|
|
prevailing economic conditions. |
In addition, the actual amount of cash that Valero L.P. will
have available for distribution will depend on other factors,
including:
|
|
|
|
|
its debt service requirements and restrictions on distributions
contained in its current or future debt agreements; |
|
|
|
receipts or payments under interest rate swaps; |
|
|
|
the sources of cash used to fund its acquisitions; |
|
|
|
the level of capital expenditures it makes; |
|
|
|
fluctuations in its working capital needs; |
|
|
|
issuances of debt and equity securities; and |
|
|
|
adjustments in cash reserves made by Valero L.P.s general
partner in its discretion. |
Because of these factors, Valero L.P. may not have sufficient
available cash each quarter to continue paying distributions at
their current level or at all. Furthermore, cash distributions
to Valero L.P. unitholders depend primarily upon cash flow,
including cash flow from financial reserves and working capital
borrowings, and not solely on profitability, which is affected
by non-cash items. Therefore, Valero L.P. may make cash
distributions during periods when it records losses and may not
make cash distributions during periods when it records net
20
income. Please read Risks Related to Valero
L.P.s Business for a discussion of further risks
affecting Valero L.P.s ability to generate cash for
distribution.
|
|
|
In the future, we may not have sufficient cash to pay
distributions at our estimated initial quarterly distribution
level or to increase distributions. |
Because our only source of operating cash flow consists of cash
distributions from Valero L.P., the amount of distributions we
are able to make to our unitholders may fluctuate based on the
level of distributions Valero L.P. makes to its unitholders,
including us. We cannot assure you that Valero L.P. will
continue to make quarterly distributions at its current level of
$0.855 per unit, or any other amount, or increase its
quarterly distributions in the future. In addition, while we
would expect to increase or decrease distributions to our
unitholders if Valero L.P. increases or decreases distributions
to us, the timing and amount of such changes in distributions,
if any, will not necessarily be comparable to the timing and
amount of any changes in distributions made by Valero L.P. to
us. Our ability to distribute cash received from Valero L.P. to
our unitholders is limited by a number of factors, including:
|
|
|
|
|
interest expense and principal payments on any indebtedness we
may incur; |
|
|
|
restrictions on distributions contained in any future debt
agreements; |
|
|
|
our general and administrative expenses, including expenses we
will incur as a result of being a public company; |
|
|
|
expenses of our subsidiaries, including tax liabilities of our
corporate subsidiaries, if any; |
|
|
|
reserves necessary for us to make the necessary capital
contributions to maintain our 2% general partner interest in
Valero L.P., as required by the partnership agreement of Valero
L.P. upon the issuance of additional partnership securities by
Valero L.P.; and |
|
|
|
reserves our board of directors believes prudent for us to
maintain for the proper conduct of our business or to provide
for future distributions. |
We cannot guarantee that in the future we will be able to pay
distributions or that any distributions Valero L.P. does pay to
us will allow us to pay distributions at or above our estimated
initial quarterly distribution of $0.27 per unit. The
actual amount of cash that is available for distribution to our
unitholders will depend on numerous factors, many of which are
beyond our control or the control of Valero L.P. Our estimated
minimum cash available to pay distributions for the year ending
December 31, 2006 represents the minimum amount of cash we
need to pay our estimated minimum initial distribution of
$0.27 per unit, or $1.08 per unit on an annualized
basis. Therefore, a reduction in the amount of cash distributed
by Valero L.P. per unit or on the incentive distribution rights,
or an increase in our expenses, may result in our not being able
to pay our estimated initial quarterly distribution of
$0.27 per unit.
|
|
|
Valero L.P.s unitholders, excluding the owner of
Valero L.P.s general partner, have the right to remove
Valero L.P.s general partner by a simple majority vote,
which would cause us to divest our indirect general partner
interest and incentive distribution rights in Valero L.P. in
exchange for cash or common units of Valero L.P. and cause us to
lose our ability to manage Valero L.P. |
We currently manage Valero L.P. through Riverwalk Logistics,
L.P., Valero L.P.s general partner and our indirect,
wholly owned subsidiary. Valero L.P.s partnership
agreement, however, gives unitholders of Valero L.P. the right
to remove the general partner of Valero L.P. upon the
affirmative vote of holders of a majority of outstanding Valero
L.P. common units, excluding the common units owned by us. We
own a 21.4% limited partner interest in Valero L.P., and the
public unitholders own 76.6%. If Riverwalk Logistics, L.P. were
removed as the general partner of Valero L.P., it would receive
cash or common units in exchange for its 2% general partner
interest and the incentive distribution rights and would lose
its ability to manage Valero L.P. While the common units or cash
that Riverwalk Logistics, L.P. would receive are intended under
the terms of Valero L.P.s partnership agreement to fully
compensate it in the event it is removed as general partner, the
value of these
21
common units or the investments made with the cash over time may
not be equivalent to the value of the 2% general partner
interest and incentive distribution rights had we retained them.
|
|
|
Valero L.P.s general partner, with our consent, may
limit or modify the incentive distributions we are entitled to
receive in order to facilitate the growth strategy of Valero
L.P. Our board of directors can give this consent without a vote
of our unitholders. |
We indirectly own Valero L.P.s general partner, which owns
the incentive distribution rights in Valero L.P. that entitle us
to receive increasing percentages, up to a maximum of 23%, of
any cash distributed by Valero L.P. as it reaches a distribution
of $0.66 per Valero L.P. common unit in any quarter. A
substantial portion of the cash flows we receive from Valero
L.P. is provided by these incentive distributions. Our limited
liability company agreement provides that our board of directors
may consent to the elimination, reduction or modification of the
incentive distribution rights without your approval if it
determines that the elimination, reduction or modification will
not adversely effect our unitholders in any material respect.
|
|
|
The amount of cash distributions that we will be able to
distribute to you will be reduced by the costs associated with
our being a public company, other general and administrative
expenses and any reserves that our board of directors believes
prudent to maintain for the proper conduct of our business and
for future distributions. |
Before we can pay distributions to our unitholders, we must
first pay or reserve cash for our expenses, including the costs
of being a public company, which we expect to be approximately
$2.4 million per year, and other operating expenses,
reserves to satisfy debt service requirements, if any, and
reserves for future distributions. Prior to this offering, we
have been a private company and have not filed reports with the
SEC. Following this offering, we will become subject to the
public reporting requirements of the Securities Exchange Act of
1934, as amended.
In addition, we may reserve funds to allow our indirect wholly
owned subsidiary, Riverwalk Logistics, L.P., to maintain its 2%
general partner interest in Valero L.P. by making capital
contributions to Valero L.P. when Valero L.P. issues additional
common units.
|
|
|
Restrictions in our anticipated credit facility could
limit our ability to make distributions to our
unitholders. |
In connection with this offering we anticipate entering into a
bank credit facility with a borrowing capacity of up to
$20 million to enable us to manage our cash flow
obligations. This new credit facility may contain covenants
limiting our ability to incur indebtedness, grant liens, engage
in transactions with affiliates and make distributions to our
unitholders. Any such facility may also contain covenants
requiring us to maintain certain financial ratios. Our ability
to comply with any restrictions and covenants may be affected by
events beyond our control, including prevailing economic,
financial and industry conditions. If we are unable to comply
with these restrictions and covenants, a significant portion of
any future indebtedness under a credit facility may become
immediately due and payable, and our lenders commitment to
make further loans to us under a credit facility may terminate.
We might not have, or be able to obtain, sufficient funds to
make these accelerated payments. In addition, our obligations
under a credit facility may be secured by substantially all of
our assets, and if we are unable to repay any future
indebtedness under this proposed credit facility, the lenders
could seek to foreclose on such assets.
Our payment of principal and interest on any future indebtedness
will reduce our cash available for distribution on our units. We
anticipate that any credit facility will limit our ability to
pay distributions to our unitholders during an event of default
or if an event of default would result from the distribution.
In addition, any future levels of indebtedness may:
|
|
|
|
|
adversely affect our ability to obtain additional financing for
future operations or capital needs; |
|
|
|
limit our ability to pursue acquisitions and other business
opportunities; or |
|
|
|
make our results of operations more susceptible to adverse
economic or operating conditions. |
22
Various limitations in any future financing agreements may
reduce our ability to incur additional indebtedness, to engage
in some transactions or to capitalize on business opportunities.
|
|
|
Our ability to sell our ownership interests in Valero L.P.
may be limited by securities laws restrictions and liquidity
constraints. |
All of the units of Valero L.P. that we own are unregistered,
restricted securities, within the meaning of Rule 144 under
the Securities Act of 1933. Unless we exercise our registration
rights with respect to these units, we are limited to selling
into the market in any three-month period an amount of Valero
L.P. common units that does not exceed the greater of 1% of the
total number of common units outstanding or the average weekly
reported trading volume of the common units for the four
calendar weeks prior to the sale. We face contractual
limitations on our ability to sell our 2% general partner
interest and incentive distribution rights and the market for
such interests is illiquid.
|
|
|
The market price of our units could be adversely affected
by sales of substantial amounts of our units into the public
markets, including sales by our existing unitholders. |
Sales by us or any of our existing unitholders, including
subsidiaries of Valero Energy, of a substantial number of our
units in the public markets following this offering, or the
perception that such sales might occur, could have a material
adverse effect on the price of our units or could impair our
ability to obtain capital through an offering of equity
securities. In addition, we have agreed to provide registration
rights to those holders, subject to certain limitations. Valero
Energy and its subsidiaries will own 28,010,258 units, or
approximately 63% of our outstanding units, upon completion of
this offering. Upon the expiration of the 180 day
lock-up period, Valero
Energy and its subsidiaries intend to further reduce and
ultimately sell all of their units pending market conditions. We
do not know whether any such sales would be made in the public
market or in private placements, nor do we know what impact such
potential or actual sales would have on our unit price in the
future.
|
|
|
Distributions on our incentive distribution rights and
subordinated units in Valero L.P. are more uncertain than
distributions on the common units we hold. |
Our indirect ownership of the incentive distribution rights in
Valero L.P. entitles us to receive our pro rata share of
specified percentages of total cash distributions made by Valero
L.P. with respect to any particular quarter only in the event
that Valero L.P. distributes more than $0.60 per unit for
such quarter. As a result, the holders of Valero L.P.s
common units and subordinated units have a priority over the
holders of Valero L.P.s incentive distribution rights to
the extent of cash distributions by Valero L.P. up to and
including $0.60 per unit for any quarter.
Our incentive distribution rights entitle us to receive
increasing percentages, up to 23%, of all cash distributed by
Valero L.P. Because the incentive distribution rights currently
participate at the maximum 23% target cash distribution level in
all distributions made by Valero L.P. at or above the current
distribution level, future growth in distributions we receive
from Valero L.P. will not result from an increase in the target
cash distribution level associated with the incentive
distribution rights.
Additionally, during the subordination period, Valero
L.P.s common units have a priority over the 9,599,322
subordinated units, that we indirectly own, to the minimum
quarterly distribution of $0.60 per common unit.
Furthermore, a decrease in the amount of distributions by Valero
L.P. to less than $0.66 per common unit per quarter would
reduce our percentage of the incremental cash distributions
above $0.60 per common unit per quarter from 23% to 8%. As
a result, any such reduction in quarterly cash distributions
from Valero L.P. would have the effect of disproportionately
reducing the amount of all distributions that we receive from
Valero L.P. based on our ownership interest in the incentive
distribution rights and subordinated units in Valero L.P. as
compared to cash distributions we receive from Valero L.P. on
our 2% general partner interest in Valero L.P. and our Valero
L.P. common units.
23
|
|
|
Assuming an initial public offering price of
$24.00 per unit, you will experience immediate and
substantial dilution of $14.79 per unit. |
The assumed initial public offering price of $24.00 per
unit exceeds our pro forma net tangible book value of
$9.21 per unit after the offering. Based on these amounts,
you will incur immediate and substantial dilution of
$14.79 per unit. This dilution results primarily because
the market value of our investment in Valero L.P. is
significantly in excess of the historical carrying amount of
that investment. Please read Dilution.
|
|
|
If we fail to develop or maintain an effective system of
internal controls, we may not be able to report our financial
results accurately or prevent fraud. |
Prior to this offering, we have been a private company and have
not filed reports with the SEC. We will become subject to the
public reporting requirements of the Securities Exchange Act of
1934, as amended, upon the completion of this offering. We
produce our consolidated financial statements in accordance with
the requirements of generally accepted accounting principles in
the United States (GAAP), but our internal accounting controls
may not currently meet all standards applicable to companies
with publicly traded securities. Effective internal controls are
necessary for us to provide reliable financial reports to
prevent fraud and to operate successfully as a company with
publicly traded securities. Our efforts to develop and maintain
our internal controls may not be successful, and we may be
unable to maintain adequate controls over our financial
processes and reporting in the future, including compliance with
the obligations under Section 404 of the Sarbanes-Oxley Act
of 2002. For example, Section 404 will require us, among
other things, annually to review and report on, and our
independent registered public accounting firm to attest to, our
internal control over financial reporting. We must comply with
Section 404 for our fiscal year ending December 31,
2007. Any failure to develop or maintain effective controls, or
difficulties encountered in their implementation or other
effective improvement of our internal controls, could harm our
operating results or cause us to fail to meet our reporting
obligations. Given the difficulties inherent in the design and
operation of internal controls over financial reporting, we can
provide no assurance as to our conclusions about the
effectiveness of our internal controls. Ineffective internal
controls subject us to regulatory scrutiny and a loss of
confidence in our reported financial information, which could
have an adverse effect on our business and would likely have a
negative effect on the market price of our units.
|
|
|
If Valero L.P.s general partner is not fully
reimbursed or indemnified for obligations and liabilities it
incurs in managing the business and affairs of Valero L.P., it
may not be able to satisfy its obligations and its cash flows
will be reduced. |
The general partner of Valero L.P. and its affiliates may make
expenditures on behalf of Valero L.P. for which they will seek
reimbursement from Valero L.P. In addition, under Delaware law,
the general partner, in its capacity as the general partner of
Valero L.P., has unlimited liability for the obligations of
Valero L.P., such as its debts and environmental liabilities,
except for those contractual obligations of Valero L.P. that are
expressly made without recourse to the general partner. To the
extent Riverwalk Logistics, L.P. incurs obligations on behalf of
Valero L.P., it is entitled to be reimbursed or indemnified by
Valero L.P. If Valero L.P. does not reimburse or indemnify its
general partner, Riverwalk Logistics, L.P. may be unable to
satisfy these liabilities or obligations, which would reduce its
cash flows. In turn, Riverwalk Logistics, L.P. would have less
cash to distribute to us.
|
|
|
If distributions on our units are not paid with respect to
any fiscal quarter, including those at the anticipated initial
distribution rate, our unitholders will not be entitled to
receive such payments in the future. |
Our distributions to our unitholders will not be cumulative.
Consequently, if distributions on our units are not paid with
respect to any fiscal quarter at the anticipated initial
distribution rate, our unitholders will not be entitled to
receive such payments in the future. Any distributions received
by us from Valero L.P. related to periods prior to the closing
of this offering will be distributed entirely to our current
investors.
24
|
|
|
Our cash distribution policy limits our ability to
grow. |
Because we distribute all of our available cash, our growth may
not be as fast as businesses that reinvest their available cash
to expand ongoing operations. In fact, our growth initially will
be completely dependent upon Valero L.P.s ability to
increase its quarterly distributions because our only
cash-generating assets are indirect ownership interests in
Valero L.P. If we issue additional units or incur debt to fund
acquisitions and growth capital expenditures, the payment of
distributions on those additional units or interest on that debt
could increase the risk that we will be unable to maintain or
increase our per unit distribution level.
Consistent with the terms of its partnership agreement, Valero
L.P. distributes to its partners its available cash each
quarter. In determining the amount of cash available for
distribution, Valero L.P. sets aside cash reserves, which it
uses to fund its growth capital expenditures. Additionally, it
has relied upon external financing sources, including commercial
borrowings and other debt and equity issuances, to fund its
acquisition capital expenditures. Accordingly, to the extent
Valero L.P. does not have sufficient cash reserves or is unable
to finance growth externally, its cash distribution policy will
significantly impair its ability to grow. In addition, to the
extent Valero L.P. issues additional units in connection with
any acquisitions or growth capital expenditures, the payment of
distributions on those additional units may increase the risk
that Valero L.P. will be unable to maintain or increase its per
unit distribution level, which in turn may impact the available
cash that we have to distribute to our unitholders. The
incurrence of additional debt to finance its growth strategy
would result in increased interest expense to Valero L.P., which
in turn may impact the available cash that we have to distribute
to our unitholders.
|
|
|
If in the future we cease to manage Valero L.P., we may be
deemed to be an investment company under the Investment Company
Act of 1940, which would cause us either have to register as an
investment company, obtain exemptive relief from the SEC, or
modify our organizational structure or our contract
rights. |
If we cease to manage Valero L.P. as a consequence of Riverwalk
Logistics, L.P.s removal or withdrawal as Valero
L.P.s general partner or otherwise, and are deemed to be
an investment company under the Investment Company Act of 1940
because of our ownership of Valero L.P. partnership interests,
we would either have to register as an investment company under
the Investment Company Act, obtain exemptive relief from the
SEC, or modify our organizational structure or our contract
rights to fall outside the definition of an investment company.
Registering as an investment company could, among other things,
materially limit our ability to engage in transactions with
affiliates, including the sale and purchase of certain
securities or other property to or from our affiliates, restrict
our ability to borrow funds or engage in other transactions
involving leverage.
|
|
|
An increase in interest rates may cause the market price
of our units to decline resulting in the loss of a portion of
your investment in us. |
As interest rates rise, the ability of investors to obtain
higher risk-adjusted rates of return by purchasing
government-backed debt securities may cause a corresponding
decline in demand for riskier investments generally, including
yield-based equity investments such as limited liability company
membership interests. Reduced demand for our units resulting
from investors seeking other more favorable investment
opportunities may cause the trading price of our units to
decline. As a result, you may lose a portion of your investment
in us.
|
|
|
We may issue an unlimited number of additional securities
without the consent of our unitholders, which will dilute your
ownership interest in us and may increase the risk that we will
not have sufficient available cash to maintain or increase our
per unit distribution level. |
At any time we may issue an unlimited number of additional
securities without the approval of our unitholders on terms and
conditions determined by our board of directors. The issuance by
us of additional units or other equity securities of equal or
senior rank will have the following effects:
|
|
|
|
|
our unitholders proportionate ownership interest in us
will decrease; |
|
|
|
the amount of cash available for distribution on each unit may
decrease; |
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the relative voting strength of each previously outstanding unit
may be diminished; |
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the ratio of taxable income to distributions may
increase; and |
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the market price of the units may decline. |
Please read Description of Our Limited Liability Company
Agreement Issuance of Additional Securities.
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Valero L.P. may issue additional Valero L.P. units, which
may increase the risk that Valero L.P. will not have sufficient
available cash to maintain or increase its per unit cash
distribution level and that we will have to make a capital
contribution to Valero L.P. |
Valero L.P. may issue additional Valero L.P. units, including
units that rank senior to the Valero L.P. common units and the
incentive distribution rights as to quarterly cash
distributions, on the terms and conditions established by its
general partner. Additionally, we are required to make
additional capital contributions to Valero L.P. upon Valero
L.P.s issuance of additional units in order to maintain
our 2% general partner interest in Valero L.P. Furthermore, to
the extent Valero L.P. issues units that are senior to the
Valero L.P. common units and the incentive distribution rights,
their issuance will render more uncertain the payment of
distributions on the common units and the incentive distribution
rights. Neither the common units nor the incentive distribution
rights are entitled to any arrearages from prior quarters. The
payment of distributions on any additional Valero L.P. units may
increase the risk that Valero L.P. will be unable to maintain or
increase its per unit cash distribution level and the
requirement that we make capital contributions to Valero L.P. to
maintain our 2% general partner interest may impact the
available cash that we have to distribute to our unitholders.
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The initial public offering price of our units may not be
indicative of the market price of our units after this offering,
and our unit price may be volatile. In addition, you may not be
able to resell our units at or above the initial public offering
price. |
Prior to this offering there has been no public market for our
units. An active market for our units may not develop or may not
be sustained after this offering. The initial public offering
price of our units will be determined by negotiations between us
and the underwriters based on numerous factors that we discuss
in the Underwriting Offering Price
Determination section of this prospectus. This price may
not be indicative of the market price for our units after this
initial public offering. The market price of our units could be
subject to significant fluctuations after this offering and may
decline below the initial public offering price. You may not be
able to resell your units at or above the initial public
offering price. Our unit price could be affected by a number of
factors, including:
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Valero L.P.s operating and financial performance and
prospects; |
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quarterly variations in the rate of growth of our distributions
per unit; |
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changes in revenue or earnings estimates or publication of
research reports by analysts; |
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speculation in the press or investment community; |
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level of investor interest in purchasing our units due to the
very limited number of publicly traded entities whose assets
consist exclusively of ownership interests in a publicly traded
limited partnership; |
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sales of our units by our unitholders; |
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announcements by Valero L.P. or its competitors of significant
contracts, acquisitions, strategic partnerships, joint ventures,
securities offerings or capital commitments; |
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general market conditions; and |
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domestic and international economic, legal and regulatory
factors unrelated to Valero L.P.s performance. |
26
The stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of
particular companies and partnerships. These broad market
fluctuations may adversely affect the trading price of our units.
Our units and Valero L.P.s common units may not trade in
simple relation or proportion to one another. Instead, while the
trading prices of our units and Valero L.P.s common units
are likely to follow generally similar broad trends, the trading
prices may diverge because, among other things:
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Valero L.P.s cash distributions to its common unitholders
have a priority over distributions on its incentive distribution
rights; |
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we participate in the distributions on the 2% general partner
interest and the incentive distribution rights in Valero L.P.
while Valero L.P.s common unitholders do not; and |
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we may enter into other businesses separate and apart from
Valero L.P. or any of its affiliates. |
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Anti-takeover provisions in our limited liability company
agreement may make an acquisition of us more complicated and the
removal and replacement of our directors and executive officers
more difficult. |
Our limited liability company agreement contains provisions that
may delay or prevent a change in control. These provisions may
also make it difficult for unitholders to remove and replace our
board of directors and executive officers.
Section 203. Our limited liability company agreement
effectively adopts Section 203 of the DGCL.
Section 203 of the DGCL as it applies to us prevents an
interested unitholder, defined as a person who owns 15% or more
of our outstanding units, from engaging in business combinations
with us for three years following the time such person becomes
an interested unitholder. Section 203 broadly defines
business combination to encompass a wide variety of
transactions with or caused by an interested unitholder,
including mergers, asset sales and other transactions in which
the interested unitholder receives a benefit on other than a pro
rata basis with other unitholders. This provision of our limited
liability company agreement could have an anti-takeover effect
with respect to transactions not approved in advance by our
board of directors, including discouraging takeover attempts
that might result in a premium over the market price for our
units.
Limited Voting Rights. Our limited liability company
agreement provides that if any person or group other than our
affiliates acquires beneficial ownership of 20% or more of any
class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any
person or group that acquires all of its units from our
affiliates or any transferees of that person or group approved
by our board of directors or to any person or group who acquires
the units with the prior approval of our board of directors.
Staggered Board. In addition, our limited liability
company agreement provides for a staggered board of directors as
a result of which only a portion of the members of the board of
directors is elected each year. Removal of directors will
require a meeting of unitholders and cannot be done by written
consent.
Preferred Unit Purchase Rights. Further, upon completion
of this offering, we intend to issue preferred unit purchase
rights which will have the effect of diluting any potential
acquirer of us not authorized by the board of directors upon any
triggering event, such as the purchase of 15% of our outstanding
units.
These provisions may delay or prevent a third party from
acquiring us and any such delay or prevention could cause the
market price of our units to decline.
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Valero L.P.s common unitholders may not have limited
liability if a court finds that limited partner actions
constitute control of Valero L.P.s business. |
Under Delaware law, common unitholders could be held liable for
Valero L.P.s obligations to the same extent as a general
partner if a court determined that actions of a common
unitholder constituted participation in the control
of Valero L.P.s business.
Under Delaware law, the general partner generally has unlimited
liability for the obligations of the partnership, such as its
debts and environmental liabilities, except for those
contractual obligations of the
27
partnership that are expressly made without recourse to the
general partner. In addition, Section 17-607 of the
Delaware Revised Uniform Limited Partnership Act provides that,
under some circumstances, a limited partner may be liable to
Valero L.P. for the amount of a distribution for a period of
three years from the date of the distribution.
Risks Related to Conflicts of Interest
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Although we manage Valero L.P. through our indirect
ownership of its general partner, Valero L.P.s general
partner owes fiduciary duties to Valero L.P. and Valero
L.P.s unitholders, which may conflict with our
interests. |
Conflicts of interest exist and may arise in the future as a
result of the relationships between us and our affiliates,
including Valero L.P.s general partner, on the one hand,
and Valero L.P. and its limited partners, on the other hand. The
directors and officers of Valero GP, LLC have fiduciary duties
to manage Valero L.P.s business in a manner beneficial to
us, its owner. At the same time, Valero GP, LLC has a fiduciary
duty to manage Valero L.P. in a manner beneficial to Valero L.P.
and its unitholders. The board of directors of Valero GP, LLC or
its conflicts committee will resolve any such conflict and have
broad latitude to consider the interests of all parties to the
conflict. Our independent directors will not be the same as the
independent directors who serve on the conflicts committee of
Valero GP, LLC. The resolution of these conflicts may not always
be in our best interest or that of our unitholders.
For example, conflicts of interest may arise in the following
situations:
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the allocation of shared overhead expenses to Valero L.P. and us; |
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the entering into, interpretation and enforcement of contractual
obligations between us and our affiliates, including Valero
Energy, on the one hand, and Valero L.P., on the other hand; |
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the determination and timing of the amount of cash to be
distributed to Valero L.P.s partners and the amount of
cash to be reserved for the future conduct of Valero L.P.s
business; |
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any proposal by Valero GP, LLC to eliminate, reduce or modify
the incentive distribution rights; |
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the decision whether Valero L.P. should make acquisitions, and
on what terms; |
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the determination of whether Valero L.P. should use cash on
hand, borrow or issue equity to raise cash to finance
acquisitions or expansion capital projects, repay indebtedness,
meet working capital needs, pay distributions to Valero
L.P.s partners or otherwise; and |
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any decision we make in the future to engage in business
activities independent of, or in competition with, Valero L.P. |
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The fiduciary duties of our officers and directors may
conflict with those of Valero L.P.s general partners
officers and directors. |
Our directors and officers have fiduciary duties to manage our
business in a manner beneficial to us and our unitholders.
Simultaneously, a majority of our directors and all of our
officers are also directors and officers of Valero GP, LLC, the
general partner of Valero L.P.s general partner, and have
fiduciary duties to manage the business of Valero L.P. in a
manner beneficial to Valero L.P. and its unitholders. For
instance, William E. Greehey is our Chairman of the Board as
well as the Chairman of the Boards of Valero GP, LLC and Valero
Energy. Consequently, these directors and officers may encounter
situations in which their fiduciary obligations to Valero L.P.,
on the one hand, and us, on the other hand, are in conflict. The
resolution of these conflicts may not always be in our best
interest or that of our unitholders. For example, we share
executive officers and administrative personnel with Valero
L.P.s general partner to operate both our business and
Valero L.P.s business. Our executive officers, who are
also the executive officers of Valero L.P.s general
partner, will allocate, in their reasonable and sole discretion,
their time spent on our behalf and on behalf of Valero L.P.
These allocations may not be the result of arms-length
negotiations between Valero L.P.s general partner and us,
and therefore the allocations may not exactly match the actual
time and overhead spent. For a more detailed
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description of the potential conflicts of interest between us
and our affiliates and the methods for resolving such conflicts
of interest, please read Conflicts of Interest and
Fiduciary Duties.
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When Valero Energy reduces its ownership interest such
that it owns less than 20% of us or Valero GP, LLC, Valero
Energy and its affiliates may directly compete with Valero L.P.,
which could cause conflicts of interest and may adversely impact
Valero L.P., and as a result, our results of operations and cash
available for distribution. |
Under Valero L.P.s Amended and Restated Omnibus Agreement,
when Valero Energy reduces its ownership interest such that it
owns less than 20% of us or Valero GP, LLC, Valero Energy and
its affiliates will no longer be prohibited from engaging in the
business of transporting crude oil or refined petroleum products
(including petrochemicals) or operating crude oil storage or
refined petroleum products terminalling assets in the United
States. As a result, Valero Energy could directly compete with
Valero L.P., which could cause conflicts of interest among these
entities and adversely impact Valero L.P., and as a result, our
results of operations and cash available for distribution. It is
Valero Energys intent to further reduce and ultimately
sell all of its indirect ownership interest in us, pending
market conditions. Please read Conflicts of Interest and
Fiduciary Duties Potential Future Conflicts.
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Subsidiaries of Valero Energy will control us and will own
a sufficient number of our units to block any attempt to remove
or replace our board of directors. |
Upon completion of this offering, subsidiaries of Valero Energy
will own an aggregate of approximately 63% of the outstanding
units, or approximately 57% if the underwriters option to
purchase additional units is exercised in full. Accordingly,
Valero Energy will be able to determine all matters requiring
the majority approval of the holders of our units. As long as
Valero Energy beneficially owns a majority interest in us, it
will have the ability to elect all members of our board of
directors and to manage our affairs. Valero Energy will be able
to cause or prevent a change of control of our company. This
concentration of ownership may have the effect of preventing or
discouraging transactions involving an actual or potential
change of control of our company, regardless of whether a
premium is offered over then current market prices.
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Our affiliates have a limited call right that may require
you to sell your units at an undesirable time or price. |
If at any time our affiliates own more than 80% of our
outstanding units, we will have the right, but not the
obligation, which we may assign to any of our affiliates, to
acquire all, but not less than all, of the units held by
unaffiliated persons at a price not less than the then current
market price. As a result, you may be required to sell your
units at an undesirable time or price and may not receive any
return on your investment. You may also incur a tax liability
upon a sale of your units. At the completion of this offering,
Valero Energy, our current indirect owner, will own
approximately 63% of our units. Please read Description of
Our Limited Liability Company Agreement Limited Call
Right.
Risks Related to Valero L.P.s Business
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A decline in production at the Valero Energy refineries
Valero L.P. serves or the Tesoro Mandan refinery could
materially reduce the volume of crude oil and refined petroleum
products Valero L.P. transports or stores in its assets. |
A decline in production at the Valero Energy refineries Valero
L.P. serves, or at the Tesoro Mandan refinery, could materially
reduce the volume of crude oil and refined petroleum products
Valero L.P. transports on those pipelines that are connected to
these refineries or the volumes of refined petroleum products
Valero L.P. stores in related terminals. As a result, Valero
L.P.s financial position and results of operations and its
ability to make distributions to its partners could be adversely
affected. The Valero Energy refineries served by Valero
L.P.s
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assets or the Tesoro Mandan refinery could partially or
completely shut down its operations, temporarily or permanently,
due to factors affecting its ability to produce refined
petroleum products such as:
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scheduled upgrades or maintenance; |
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unscheduled maintenance or catastrophic events, such as a fire,
flood, explosion or power outage; |
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labor difficulties that result in a work stoppage or slowdown; |
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environmental proceedings or other litigation that require the
halting of all or a portion of the operations of the
refinery; or |
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legislation or regulation that adversely impacts the economics
of refinery operations. |
For example, Valero L.P.s operations are expected to be
negatively impacted by lower throughput volumes in 2006 due to
scheduled maintenance turnarounds at some of the Valero Energy
refineries Valero L.P. serves.
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Valero L.P.s future financial and operating
flexibility may be adversely affected by restrictions in its
debt agreements and by its, our and Valero Energys
leverage. |
As of December 31, 2005, Valero L.P.s consolidated
debt was approximately $1.2 billion. Among other things,
this amount of debt may be viewed negatively by credit rating
agencies, which could result in increased costs to Valero L.P.
in accessing the capital markets. In August 2005, Moodys
Investor Service confirmed Valero Logistics Operations,
L.P.s and upgraded Kaneb Pipe Line Operating Partnership,
L.P.s senior unsecured ratings at Baa3 with a stable
outlook. In July 2005, Standard & Poors lowered its
ratings on Valero Logistics Operations, L.P.s and Kaneb
Pipe Line Operating Partnership, L.P.s senior unsecured
ratings to BBB minus with a stable outlook. In July 2005, Fitch
lowered its rating of Kaneb Pipe Line Operating Partnership,
L.P.s senior unsecured rating to BBB minus with a stable
outlook. Any future downgrade of the debt held by these wholly
owned subsidiaries of Valero L.P. could significantly increase
Valero L.P.s capital costs or adversely affect Valero
L.P.s ability to raise capital in the future.
Debt service obligations, restrictive covenants in its credit
facilities and the indentures governing its outstanding senior
notes and maturities resulting from this leverage may adversely
affect Valero L.P.s ability to finance future operations,
pursue acquisitions and fund other capital needs and Valero
L.P.s ability to pay cash distributions to unitholders. In
addition, this leverage may make Valero L.P.s results of
operations more susceptible to adverse economic or operating
conditions. For example, during an event of default under any of
its debt agreements, Valero L.P. would be prohibited from making
cash distributions to its unitholders.
Additionally, Valero L.P. may not be able to access the capital
markets in the future at economically attractive terms, which
may adversely affect its future financial and operating
flexibility and its ability to pay cash distributions at current
rates.
Further, if one or more credit rating agencies were to downgrade
the outstanding indebtedness of Valero Energy, Valero L.P. could
experience a similar downgrade of its outstanding indebtedness,
an increase in its borrowing costs, difficulty accessing capital
markets or a reduction in the market price of its common units.
Such a development could adversely affect Valero L.P.s
ability to finance acquisitions, refinance existing indebtedness
and make cash distributions to its partners, including us.
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Valero L.P.s subsidiary, Valero Logistics
Operations, L.P., may be unable to purchase its senior notes
upon a change of control of Valero GP Holdings. |
It is Valero Energys intent to reduce and ultimately sell
all of its ownership interest in us, pending market conditions.
If Valero Energys or an investment grade entitys
ownership interest in us decreases below 51%, Valero Logistics
Operations will be obligated to offer to repurchase its
$350 million outstanding senior notes at a price equal to
100% of the aggregate principal amount thereof plus accrued and
unpaid interest. At the completion of this offering, Valero
Energy will indirectly own an approximate 63% membership
interest in us.
If Valero Logistics Operations is required to make such an
offer, it may not have sufficient funds to pay the purchase
price, and it may be required to secure third-party financing to
do so. Valero Logistics Operations may
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not be able to obtain such financing on commercially reasonable
terms, on terms acceptable to Valero Logistics Operations or at
all. Valero Logistics Operations and its
subsidiaries current and future credit agreements and
other indebtedness may contain restrictions on the ability of
Valero Logistics Operations to repurchase the notes upon such a
change in control. The failure of Valero Logistics Operations to
repurchase the notes tendered to it upon a change in control
would constitute an event of default under the indentures
governing its senior notes, and thus an event of default under
Valero Logistics Operations credit agreements, and would
have a material adverse effect on Valero L.P.s financial
condition.
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Valero L.P. may not be able to generate sufficient cash
from operations to enable it to pay expected quarterly
distributions on its units every quarter. |
The amount of cash Valero L.P. is able to distribute to its
partners is principally dependent on the amount of cash it is
able to generate from operations, which fluctuates from quarter
to quarter based on, among other things:
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the amount of crude oil and refined product transported in its
pipelines; |
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throughput volumes in its terminals and storage facilities; |
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tariff rates and fees it charges and the margins it realizes for
its services; |
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the level of its operating cost; |
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weather conditions; |
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domestic and foreign governmental regulations and taxes; |
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the effect of worldwide energy conservation measures; and |
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prevailing economic conditions. |
In determining the expected cash available for distribution,
Valero L.P. makes assumptions about throughput, tariffs and fees
and operating costs. Whether these assumptions are realized is
not entirely within Valero L.P.s control or the control of
its general partner. If these assumptions are not realized,
Valero L.P. may not generate sufficient cash to make a quarterly
distribution on its units at the current level.
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Valero L.P. depends on Valero Energy for a significant
portion of its revenues and throughputs of crude oil and refined
products. Any reduction in the crude oil and refined products
that Valero L.P. transports or stores for Valero Energy, as a
result of scheduled or unscheduled refinery maintenance,
upgrades or shutdowns or otherwise, could result in a decline in
Valero L.P.s revenues, earnings and cash available to pay
distributions. |
Valero L.P. acquired Kaneb effective July 1, 2005, however,
it continues to rely on Valero Energy for a significant portion
of its revenues. For the year ended December 31, 2005,
Valero Energy accounted for approximately 34% of Valero
L.P.s revenues. While some of Valero L.P.s
relationships with Valero Energy are subject to long-term
contracts, Valero L.P. may be unable to negotiate extensions or
replacements of these contacts on favorable terms, if at all.
Because of the geographic location of certain of Valero
L.P.s pipelines, terminals and storage facilities, Valero
L.P. depends largely upon Valero Energy to provide throughput
for its assets. Any decrease in throughputs would cause Valero
L.P.s revenues to decline and adversely affect Valero
L.P.s ability to make cash distributions to its
unitholders. A decrease in throughputs could result from a
temporary or permanent decline in the amount of crude oil
transported to and stored at or refined products stored at and
transported from the refineries Valero L.P. serves. Factors that
could result in such a decline include:
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a material decrease in the supply of crude oil; |
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a material increase in the price of crude oil; |
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a material decrease in demand for refined products in the
markets served by Valero L.P.s pipelines and terminals; |
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scheduled turnarounds or unscheduled maintenance; |
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operational problems or catastrophic events at a refinery; |
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environmental proceedings or other litigation that compel the
cessation of all or a portion of the operations at a refinery; |
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a decision by Valero Energy to redirect refined products
transported in Valero L.P.s pipelines to markets not
served by Valero L.P.s pipelines or to transport crude oil
by means other than Valero L.P.s pipelines; |
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increasingly stringent environmental regulations, including new
EPA fuels content regulations requiring refinery
upgrades; or |
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a decision by Valero Energy to sell one or more of the
refineries Valero L.P. serves to a purchaser that elects not to
use Valero L.P.s pipelines and terminals. |
The loss of all or even a portion of the volumes of crude oil
and refined petroleum products supplied by Valero Energy would
have a material adverse effect on Valero L.P.s business,
results of operations and financial condition and Valero
L.P.s ability to make cash distributions, unless Valero
L.P. were able to acquire comparable volumes from other sources.
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Under the pipelines and terminals usage agreement, Valero
Energy may use other transportation methods or providers for up
to 25% of the crude oil processed and refined products produced
at the Ardmore, McKee and Three Rivers refineries. Furthermore,
Valero Energy is not required to use Valero L.P.s
pipelines if there is a change in market conditions that has a
material adverse effect on Valero Energy for the transportation
of crude oil and refined products, or in the markets for refined
products served by these refineries. These factors could
adversely affect Valero L.P.s ability to make
distributions to its unitholders, including us. |
If market conditions with respect to the transportation of crude
oil or refined products or with respect to the end markets in
which Valero Energy sells refined products change in a material
manner such that Valero Energy would suffer a material adverse
effect if it were to continue to use Valero L.P.s
pipelines and terminals at the required levels, Valero
Energys obligation to Valero L.P. will be suspended during
the period of the change in market conditions to the extent
required to avoid the material adverse effect. Any suspension of
Valero Energys obligation could adversely affect
throughput in Valero L.P.s pipelines and terminals and
therefore Valero L.P.s ability to make distributions to
its unitholders, including us.
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Increases in natural gas and power prices could adversely
affect Valero L.P.s ability to make distributions to its
partners, including us. |
Power costs constitute a significant portion of Valero
L.P.s operating expenses. Power costs represented
approximately 17.3% of Valero L.P.s operating expenses for
the year ended December 31, 2005. Valero L.P. uses mainly
electric power at its pipeline pump stations and terminals and
such electric power is furnished by various utility companies
that use primarily natural gas to generate electricity.
Accordingly, Valero L.P.s power costs typically fluctuate
with natural gas prices. Increases in natural gas prices may
cause Valero L.P.s power costs to increase further. If
natural gas prices remain high or increase further, Valero
L.P.s cash flows may be adversely affected, which could
adversely affect Valero L.P.s ability to make
distributions to Valero L.P.s partners, including us.
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Valero L.P.s operations are subject to federal,
state and local laws and regulations relating to environmental
protection and operational safety that could require Valero L.P.
to make substantial expenditures. |
Valero L.P.s operations are subject to increasingly strict
environmental and safety laws and regulations. The
transportation and storage of petroleum and other products, such
as specialty liquids, produces a risk that these products may be
suddenly released into the environment, potentially causing
substantial expenditures for a
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response action, significant government penalties, liability to
government agencies for natural resources damages, personal
injury or property damages to private parties and significant
business interruption. Valero L.P. owns or leases a number of
properties that have been used to store or distribute refined
products for many years. Many of these properties, such as the
recently acquired assets from Kaneb, were operated by third
parties whose handling, disposal, or release of hydrocarbons and
other wastes was not under Valero L.P.s control. If Valero
L.P. were to incur a significant liability pursuant to
environmental or safety laws or regulations, such a liability
could have a material adverse effect on its financial position
and its ability to make distributions to its unitholders,
including us, and its ability to meet its debt service
requirements. As of December 31, 2005, Valero L.P. has
recorded liabilities for contingent losses totaling
$59.1 million, including environmental liabilities. For a
more detailed discussion of Valero L.P.s contingent
liabilities, please read Valero L.P. and
Subsidiaries Notes to Financial
Statements Note 12. Commitments and
Contingencies beginning on page F-52.
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Increases in interest rates could adversely affect Valero
L.P.s business and the trading price of Valero L.P.s
units. |
Valero L.P. has significant exposure to increases in interest
rates. As of December 31, 2005, Valero L.P. had
approximately $1.2 billion of consolidated debt, of which
$0.8 billion was at fixed interest rates and
$0.4 billion was at variable interest rates after giving
effect to interest rate swap agreements. Valero L.P.s
results of operations, cash flows and financial position could
be materially adversely affected by significant increases in
interest rates above current levels. Further, the trading price
of Valero L.P.s units will be sensitive to changes in
interest rates and any rise in interest rates could adversely
impact such trading price.
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Valero L.P.s pipeline integrity program may subject
it to significant costs and liabilities. |
Effective as of May 29, 2001, the U.S. Department of
Transportation issued a final rule requiring pipeline operators
with more than 500 miles of pipelines to develop integrity
management programs to comprehensively evaluate their pipelines,
and take measures to protect the integrity of pipeline segments
located in what the rule refers to as high consequence
areas where a leak or rupture could potentially do the
most harm. Subsequently, the Pipeline Safety Improvement Act of
2002 was enacted, which further enhanced pipeline safety
requirements. Valero L.P. has developed and will continue its
pipeline integrity management programs, which are intended to
assess and maintain the integrity of its pipelines. While the
costs associated with the pipeline integrity testing itself are
not large, the results of these tests could cause Valero L.P. to
incur significant and unanticipated operating and capital
expenditures for repairs or upgrades deemed necessary to ensure
the continued safe and reliable operation of its pipelines.
Further, the rule or an increase in public expectations for
pipeline safety may require additional reporting, the
replacement of some of Valero L.P.s pipeline segments,
additional monitoring equipment, and more frequent inspection or
testing of Valero L.P.s pipeline facilities. Any repair,
remediation, preventative or mitigating actions may require
significant capital and operating expenditures. Should Valero
L.P. fail to comply with the U.S. Department of
Transportation rules, and related regulations and orders, it
could be subject to penalties and fines, which could have a
material adverse effect on its ability to make distributions to
its unitholders, including us.
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Valero L.P.s operations are subject to operational
hazards and unforeseen interruptions for which it may not be
adequately insured. |
Valero L.P.s operations are subject to operational hazards
and unforeseen interruptions such as natural disasters, adverse
weather, accidents, fires, explosions, hazardous materials
releases, mechanical failures and other events beyond its
control. These events might result in a loss of equipment or
life, injury or extensive property damage, as well as an
interruption in Valero L.P.s operations. Valero L.P. may
not be able to maintain or obtain insurance of the type and
amount it desires at reasonable rates. As a result of market
conditions, premiums and deductibles for certain of Valero
L.P.s insurance policies have increased substantially, and
could escalate further. Valero L.P. currently benefits from
coverage under insurance procured by Valero Energy under an
annual policy that runs through May 2006. Valero L.P. may be
unable to continue to benefit from such insurance procured by
Valero Energy and in some instances, certain insurance could
become unavailable or available only for reduced amounts of
coverage and at higher rates. For example, Valero L.P.s
insurance carriers require broad exclusions for
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losses due to terrorist acts. If Valero L.P. were to incur a
significant liability for which it was not fully insured, such a
liability could have a material adverse effect on Valero
L.P.s financial position and its ability to make
distributions to its unitholders, including us, and to meet its
debt service requirements.
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Valero L.P.s exposure to a diversified national and
international geographic asset and product mix may have an
adverse impact on its results of operations. |
Valero L.P.s business is geographically diversified both
in the United States and internationally, which exposes Valero
L.P. to supply and demand risks in different markets. A
significant overall decrease in supply or demand for refined
petroleum products or anhydrous ammonia may have an adverse
effect on Valero L.P.s financial condition. Also, the
product mix handled by Valero L.P. is significantly diversified,
and the transportation or the terminalling of specialty liquids
may expose Valero L.P. to significant environmental risks, which
could have a material adverse impact on Valero L.P.s
results of operations. Further, Valero L.P. has significant
international terminalling operations, which exposes it to risks
particular to such operations. A significant decrease in supply
or demand at Valero L.P.s main international terminals in
Point Tupper, Nova Scotia or St. Eustatius, the Netherlands
Antilles, as well as foreign currency risks and other risks
associated with operations in foreign legal and political
environments, could have an adverse impact on Valero L.P.s
financial results.
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Reduced demand for refined products could affect Valero
L.P.s results of operations and ability to make
distributions to its partners, including us. |
Any sustained decrease in demand for refined products in the
markets served by Valero L.P.s pipelines could result in a
significant reduction in throughput in our crude oil and refined
product pipelines and therefore in Valero L.P.s cash flow,
reducing Valero L.P.s ability to make distributions to its
partners, including us. Factors that could lead to a decrease in
market demand include:
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a recession or other adverse economic condition that results in
lower spending by consumers on gasoline, diesel, and travel; |
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higher fuel taxes or other governmental or regulatory actions
that increase, directly or indirectly, the cost of gasoline; |
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an increase in fuel economy, whether as a result of a shift by
consumers to more fuel-efficient vehicles or technological
advances by manufacturers; |
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an increase in the market price of crude oil that leads to
higher refined product prices, which may reduce demand for
gasoline. Market prices for crude oil and refined products are
subject to wide fluctuation in response to changes in global and
regional supply that are beyond Valero L.P.s control, and
recent significant increases in the price of crude oil may
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the increased use of alternative fuel sources, such as
battery-powered engines. Several state and federal initiatives
mandate this increased use. For example, the Energy Policy Act
of 1992 requires 75% of new vehicles purchased by federal
agencies since 1999, 75% of all new vehicles purchased by state
governments since 2000, and 70% of all new vehicles purchased
for private fleets in 2006 and thereafter to use alternative
fuels. |
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Valero L.P. may not be able to integrate effectively and
efficiently with Kaneb or any future businesses or operations it
may acquire. Any future acquisitions may substantially increase
the levels of Valero L.P.s indebtedness and contingent
liabilities. |
Valero L.P. is integrating the operations of Valero L.P. with
those of Kaneb. Such integration of operations is a complex,
time-consuming and costly process. Valero L.P. may not be able
to realize the operating efficiencies, cost savings and other
benefits expected. In addition, the costs Valero L.P. incurs in
implementing these efficiencies, cost savings and other benefits
may be greater than expected.
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Part of Valero L.P.s business strategy includes acquiring
additional pipelines and terminalling and storage facilities
that complement Valero L.P.s existing asset base and
distribution capabilities or provide entry into new markets.
Valero L.P. may not be able to identify suitable acquisitions,
or it may not be able to purchase or finance any acquisitions on
terms that it finds acceptable. Additionally, Valero L.P.
competes against other companies for acquisitions, and we cannot
assure you that Valero L.P. will be successful in the
acquisition of any assets or businesses appropriate for its
growth strategy. Valero L.P.s capitalization and results
of operations may change significantly as a result of future
acquisitions, and you will not have the opportunity to evaluate
the economic, financial and other relevant information that
Valero L.P. will consider in connection with any future
acquisitions. Unexpected costs or challenges may arise whenever
businesses with different operations and management are
combined. For example, the incurrence of substantial unforeseen
environmental and other liabilities, including liabilities
arising from the operation of an acquired business or asset
prior to Valero L.P.s acquisition for which it is not
indemnified or for which indemnity is inadequate, may adversely
affect Valero L.P.s ability to realize the anticipated
benefit from an acquisition. Inefficiencies and difficulties may
arise because of unfamiliarity with new assets and new
geographic areas of any acquired businesses. Successful business
combinations will require Valero L.P.s management and
other personnel to devote significant amounts of time to
integrating the acquired businesses with Valero L.P.s
existing operations. These efforts may temporarily distract
their attention from
day-to-day business,
the development or acquisition of new properties and other
business opportunities. If Valero L.P. does not successfully
integrate any future acquisitions, or if there is any
significant delay in achieving such integration, Valero
L.P.s business and financial condition could be adversely
affected.
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Valero L.P. may sell additional limited partnership units,
diluting existing interests of its unitholders, including
us. |
Valero L.P.s partnership agreement allows it to issue
additional limited partnership units and certain other equity
securities without unitholder approval. After the subordination
period, which is expected to end after the first quarter of
2006, there will be no limit on the total number of limited
partnership units and other equity securities Valero L.P. may
issue. When Valero L.P. issues additional limited partnership
units or other equity securities, the proportionate partnership
interest of its existing unitholders will decrease. The issuance
could negatively affect the amount of cash distributed to
unitholders and the market price of the limited partnership
units. Issuance of additional units will also diminish the
relative voting strength of the previously outstanding units.
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Valero Energy and its affiliates have conflicts of
interest and limited fiduciary responsibilities, which may
permit them to favor their own interests to the detriment of
Valero L.P.s unitholders. |
Valero Energy and its affiliates will own approximately 63% of
Valero GP Holdings after the completion of this offering, and we
own Valero L.P.s general partner. As a result,
conflicts of interest may arise between Valero Energy and its
affiliates, including Valero L.P.s general partner,
on the one hand, and Valero L.P. and its limited partners,
on the other hand. As a result of these conflicts, the general
partner may favor its own interests and the interests of its
affiliates over the interests of Valero L.P.s
unitholders. These conflicts include, among others, the
following situations:
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Valero Energy, as the primary shipper in certain of
Valero L.P.s pipelines, has an economic incentive to
seek lower tariff rates for these pipelines, lower terminalling
fees and lower storage fees; |
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Neither Valero L.P.s partnership agreement nor any
other agreement requires Valero Energy to pursue a business
strategy that favors Valero L.P. or utilizes
Valero L.P.s assets, including any increase in
refinery production or pursuing or growing markets linked to
Valero L.P.s assets. Valero Energys directors
and officers have a fiduciary duty to make these decisions in
the best interests of the stockholders of Valero Energy; |
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Valero Energy and its affiliates may engage in limited
competition with Valero L.P.; |
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Valero Energy may use other transportation methods or providers
for up to 25% of the crude oil processed and refined products
produced at its Ardmore, McKee and Three Rivers refineries and
is not required to |
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use Valero L.P.s pipelines if there is a material
change in the market conditions for the transportation of crude
oil and refined products, or in the markets for refined products
served by these refineries, that has a material adverse effect
on Valero Energy; |
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For some of the refined product pipelines and terminals
connected to Valero Energys Corpus Christi East, Corpus
Christi West and Three Rivers refineries, Valero Energy has
agreed to specified minimum commitment percentages for certain
pipelines and terminals, which generally represent approximately
75% of 2002 historical volumes, but may use other transportation
and storage methods and providers for any volumes exceeding such
minimum commitments; |
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Valero L.P.s general partner is allowed to take into
account the interests of parties other than Valero L.P., such as
Valero Energy, in resolving conflicts of interest, which has the
effect of limiting its fiduciary duty to Valero L.P.s
unitholders; |
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Valero L.P.s general partner may limit its liability
and reduce its fiduciary duties, while also restricting the
remedies available to unitholders. As a result of purchasing
Valero L.P.s common units, unitholders have consented
to some actions and conflicts of interest that might otherwise
constitute a breach of fiduciary or other duties under
applicable state law; |
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Valero L.P.s general partner determines the amount
and timing of asset purchases and sales, capital expenditures,
borrowings, issuance of additional limited partner interests and
reserves, each of which can affect the amount of cash that is
paid to Valero L.P.s unitholders; |
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Valero L.P.s general partner determines in its sole
discretion which costs incurred by Valero Energy and its
affiliates are reimbursable by Valero L.P.; |
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Valero L.P.s general partner may cause Valero L.P. to
pay the general partner or its affiliates for any services
rendered on terms that are fair and reasonable to
Valero L.P. or enter into additional contractual
arrangements with any of these entities on
Valero L.P.s behalf; |
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Valero L.P.s general partner controls the enforcement
of obligations owed to Valero L.P. by Valero Energy and its
affiliates, including under the handling and throughput
agreement, the throughput commitment agreement, the terminalling
agreements and the pipelines and terminals usage agreement with
Valero Energy; |
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Valero L.P.s general partner decides whether to
retain separate counsel, accountants, or others to perform
services for Valero L.P.; and |
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In some instances, Valero L.P.s general partner may
cause Valero L.P. to borrow funds in order to permit the
payment of distributions, even if the purpose or effect of the
borrowing is to make a distribution on the Valero L.P.
subordinated units or to make incentive distributions or to
hasten the expiration of the subordination period. |
Valero L.P.s partnership agreement gives the general
partner broad discretion in establishing financial reserves for
the proper conduct of Valero L.P.s business,
including interest payments. These reserves also will affect the
amount of cash available for distribution.
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The rates that Valero L.P. may charge on its
interstate pipelines are subject to regulation by various
federal and state agencies, such as FERC and the STB. |
Pursuant to the Interstate Commerce Act, or ICA, the Federal
Energy Regulatory Commission, or FERC, regulates the tariff
rates for Valero L.P.s interstate common carrier
pipeline operations. Under the ICA, tariff rates must be
published, just and reasonable and not unduly discriminatory.
Shippers may protest or challenge, and the FERC may investigate,
the lawfulness of any existing, new or changed tariff rates. The
FERC can suspend new or changed tariff rates for up to seven
months. The FERC can also require refunds of amounts collected
under rates ultimately found to be unlawful.
Valero L.P. uses various FERC-authorized rate methodologies
for its interstate pipelines, including
cost-of-service rates,
market-based rates and settlement rates. Typically,
Valero L.P. annually adjusts its rates in
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accordance with FERC indexing methodology, which currently
allows a pipeline to increase its rates by a percentage equal to
the producer price index for finished goods. If the index
results in a negative adjustment, Valero L.P. will typically be
required to reduce any rates that exceed the new maximum
allowable rate. In addition, changes in the index might not be
large enough to fully reflect actual increases in Valero
L.P.s costs. The FERCs authorized rate-making
methodologies may also delay the use or implementation of rates
that reflect increased costs. If the FERCs rate-making
methodologies change, any such change or new methodologies could
result in rates that generate lower revenues and cash flow and
could adversely affect Valero L.P.s ability to make
distributions to its unitholders, including us, and to meet its
debt service requirements. Any of the foregoing would adversely
affect Valero L.P.s revenues and cash flow and could
affect Valero L.P.s ability to make distributions to its
partners, including us, and to meet its debt service
requirements. Additionally, competition constrains Valero
L.P.s rates in various Valero L.P. markets. As a result,
Valero L.P. may from time to time be forced to reduce some of
its rates to remain competitive.
Other federal regulatory bodies, including the Surface
Transportation Board, or STB, impose additional rate regulations
on Valero L.P.s operations and typically require that
Valero L.P.s rates be just and reasonable and
non-discriminatory.
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Valero L.P.s pipeline operations are subject to FERC
rate-making principles that could have an adverse impact on
Valero L.P.s ability to recover the full cost of operating
its pipeline facilities and its ability to make distributions to
its partners. |
In a decision issued in 2004 involving an oil pipeline limited
partnership, BP West Coast Products, LLC v. FERC,
the United States Court of Appeals for the District of Columbia
Circuit rejected FERCs Lakehead policy. Under that
policy, the FERC had allowed an oil pipeline limited partnership
to include in its cost of service an income tax allowance only
to the extent that its unitholders were corporations. In May
2005, the FERC issued a new Policy Statement on Income Tax
Allowances (Policy Statement), stating that a pipeline organized
as a tax pass-through entity may include in its cost of
service-based rates an income tax allowance to reflect actual or
potential tax liability on its public utility income
attributable to all entities or individuals owning public
utility assets, if the pipeline proves that the ultimate owner
of the interest has an actual or potential income tax liability
on such income. The Policy Statement also provides that whether
a pipelines owners have such actual or potential income
tax liability will be reviewed by the FERC on a case-by-case
basis. In August 2005, the FERC also dismissed requests for
rehearing of its new Policy Statement. Since June 2005, FERC has
also issued several orders applying its new policy on income tax
allowance, two of which involved the remanded BP West Coast
case. Although the new policy affords pipelines organized as
pass-through entities an opportunity to recover a tax allowance,
these recent orders vary with regard to the type of evidence or
related burden of proof necessary to establish whether an actual
or potential income tax liability exists for all owners.
Application of the Policy Statement in these and other
individual cases will also be subject to further FERC action
and/or review in the appropriate Court of Appeals. In addition,
multiple petitions for review of the Policy Statement and
FERCs application of the Policy Statement on remand of the
BP West Coast decision have already been filed at the
United States Court of Appeals for the District of Columbia
Circuit. Therefore, the ultimate outcome of these proceedings is
not certain and could result in changes to the FERCs
treatment of income tax allowances in cost of service. If Valero
L.P. was to file for a cost of service-based rate increase, it
would likely be permitted to include an income tax allowance in
such rates only to the extent it could show, pursuant to the
Policy Statement, that the ultimate owners of Valero L.P.s
units have actual or potential income tax liability on Valero
L.P.s income. There is not yet a definitive ruling from
FERC concerning the type of evidence Valero L.P. would have
to produce to prevail on a request to include a tax allowance.
If the FERC were to disallow a substantial portion of Valero
L.P.s income tax allowance, it is likely that the maximum
rates that could be charged could decrease from current levels.
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Terrorist attacks and the threat of terrorist attacks have
resulted in increased costs to Valero L.P.s business.
Continued hostilities in the Middle East or other sustained
military campaigns may adversely impact Valero L.P.s
results of operations. |
The long-term impact of terrorist attacks, such as the attacks
that occurred on September 11, 2001, and the threat of
future terrorist attacks, on the energy transportation industry
in general, and on Valero L.P. in particular, is not known at
this time. Increased security measures taken by Valero L.P. as a
precaution against possible terrorist attacks have resulted in
increased costs to its business. Uncertainty surrounding
continued hostilities in the Middle East or other sustained
military campaigns may affect Valero L.P.s operations in
unpredictable ways, including disruptions of crude oil supplies
and markets for refined products, and the possibility that
infrastructure facilities could be direct targets of, or
indirect casualties of, an act of terror.
Changes in the insurance markets attributable to terrorist
attacks may make certain types of insurance more difficult for
Valero L.P. to obtain. Moreover, the insurance that may be
available to Valero L.P. may be significantly more expensive
than its existing insurance coverage. Instability in the
financial markets as a result of terrorism or war could also
affect Valero L.P.s ability to raise capital.
Tax Risks to Our Unitholders
You should read Material Tax Consequences for a more
complete discussion of the expected material federal income tax
consequences of owning and disposing of our units.
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If we or Valero L.P. were treated as a corporation for
federal or state income tax purposes, then our cash available
for distribution to you would be substantially reduced. |
The anticipated after-tax benefit of an investment in our units
depends largely on our being treated as a partnership for
federal income tax purposes. We have not requested, and do not
plan to request, a ruling from the IRS on this matter. The value
of our investment in Valero L.P. depends largely on Valero L.P.
being treated as a partnership for federal income tax purposes.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%.
Distributions to you would generally be taxed again as corporate
distributions, and no income, gains, losses, deductions or
credits would flow through to you. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. Thus,
treatment of us as a corporation would result in a material
reduction in our anticipated cash flow and after-tax return to
you, likely causing a substantial reduction in the value of our
units.
If Valero L.P. were treated as a corporation for federal income
tax purposes, it would pay federal income tax on its taxable
income at the corporate tax rate. Distributions to us would
generally be taxed again as corporate distributions, and no
income, gains, losses, deductions or credits would flow through
to us. As a result, there would be a material reduction in our
anticipated cash flow, likely causing a substantial reduction in
the value of our units.
Current law may change, causing us or Valero L.P. to be treated
as a corporation for federal income tax purposes or otherwise
subjecting us or Valero L.P. to entity level taxation. In
addition, because of widespread state budget deficits, several
states are evaluating ways to subject partnerships to entity
level taxation through the imposition of state income, franchise
or other forms of taxation. For example, the State of New Jersey
imposes a state level tax which Valero L.P. currently pays at
the maximum amount of $250,000. If any additional states were to
impose a tax upon us or Valero L.P. as an entity, the cash
available for distribution to you would be reduced.
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A successful IRS contest of the federal income tax
positions we or Valero L.P. take may adversely impact the market
for our or Valero L.P.s units, and the costs of any
contest will reduce cash available for distribution to our
unitholders. |
The IRS may adopt positions that differ from the positions we or
Valero L.P. take, even positions taken with the advice of
counsel. It may be necessary to resort to administrative or
court proceedings to sustain some or all of the positions we or
Valero L.P. take. A court may not agree with all of the
positions we or Valero L.P. take. Any contest with the IRS may
materially and adversely impact the market for our or Valero
L.P.s units and the prices at which they trade. In
addition, the costs of any contest between Valero L.P. and the
IRS will result in a reduction in cash available for
distribution to Valero L.P. unitholders and thus will be borne
indirectly by us, as a unitholder and as the owner of the
general partner of Valero L.P., and by the other unitholders of
Valero L.P. Moreover, the costs of any contest between us and
the IRS will result in a reduction in cash available for
distribution to our unitholders and thus will be borne
indirectly by our unitholders.
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Even if you do not receive any cash distributions from us,
you will be required to pay taxes on your share of our taxable
income. |
You will be required to pay federal income taxes and, in some
cases, state and local income taxes on your share of our taxable
income, whether or not you receive cash distributions from us.
You may not receive cash distributions from us equal to your
share of our taxable income or even equal to the actual tax
liability that results from your share of our taxable income.
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The sale or exchange of 50% or more of our or Valero
L.P.s capital and profits interests, within a twelve-month
period, will result in the termination of our or Valero
L.P.s partnership for federal income tax purposes. Valero
Energy currently intends to sell its interests in us, pending
market conditions, such that 50% or more of the total interests
in our capital and profits may be sold within a twelve-month
period after the completion of this offering. |
We will be considered to have terminated our partnership for
federal income tax purposes if, within a twelve-month period,
there is a sale or exchange for federal income tax purposes of
50% or more of the total interests in our capital and profits,
including sales by subsidiaries of Valero Energy, together with
all other units sold during such period. Likewise, Valero L.P.
will be considered to have terminated its partnership for
federal income tax purposes if there is a sale or exchange of
50% or more of the total interests in Valero L.P.s capital
and profits within a twelve-month period. A termination of our
partnership would result in a deemed sale or exchange of our
interest in Valero L.P.s capital and profits. This deemed
sale or exchange of our interests in Valero L.P.s capital
and profits may also cause the termination of Valero L.P.s
partnership if this deemed sale, together with all other sales
of interests in Valero L.P., results in a sale or exchange of
50% or more of Valero L.P.s capital and profits interests
within a twelve-month period. A termination would, among other
things, result in the closing of our or Valero L.P.s
taxable year for all unitholders and would result in a deferral
of depreciation and cost recovery deductions allowable in
computing our or Valero L.P.s taxable income. Thus, if
this occurs you will be allocated an increased amount of federal
taxable income for the year in which we are considered to be
terminated, and for future years, as a percentage of the cash
distributed to you with respect to that period. It is Valero
Energys intent to further reduce and ultimately sell all
of its indirect ownership interest in us, pending market
conditions, such that 50% or more of the total interests in our
capital and profits may be sold within a twelve-month period
after the completion of this offering. Please read
Material Tax Consequences Disposition of
Units for a discussion of the consequences of our
termination for federal income tax purposes.
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Tax gain or loss on the disposition of our units could be
different than expected. |
If you sell your units, you will recognize gain or loss equal to
the difference between the amount realized and your tax basis in
those units. Prior distributions to you in excess of the total
net taxable income you were allocated for a unit, which
decreased your tax basis in that unit, will, in effect, become
taxable income to you if the unit is sold at a price greater
than your tax basis in that unit, even if the price you receive
is less than your
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original cost. A substantial portion of the amount realized,
whether or not representing gain, may be ordinary income to you.
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Tax-exempt entities and foreign persons face unique tax
issues from owning units that may result in adverse tax
consequences to them. |
Investment in units by tax-exempt entities, such as individual
retirement accounts (known as IRAs) and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations exempt from federal income
tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and
will be taxable to them. Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal income tax
returns and pay tax on their share of our taxable income.
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We will treat each purchaser of our units as having the
same tax benefits without regard to the units purchased. The IRS
may challenge this treatment, which could adversely affect the
value of our units. |
Because we cannot match transferors and transferees of units, we
will adopt depreciation and amortization positions that may not
conform with all aspects of existing Treasury regulations. A
successful IRS challenge to those positions could adversely
affect the amount of tax benefits available to you. It also
could affect the timing of these tax benefits or the amount of
gain from your sale of units and could have a negative impact on
the value of our units or result in audit adjustments to your
tax returns. Please read Material Tax
Consequences Uniformity of Units for a further
discussion of the effect of the depreciation and amortization
positions we will adopt.
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You will likely be subject to state and local taxes and
return filing requirements as a result of investing in our
units. |
In addition to federal income taxes, you will likely be subject
to other taxes, such as state and local income taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we or Valero L.P. do business or own property. You will
likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of these
various jurisdictions. Further, you may be subject to penalties
for failure to comply with those requirements. We or Valero L.P.
may own property or conduct business in other states or foreign
countries in the future. It is your responsibility to file all
federal, state and local tax returns. Our counsel has not
rendered an opinion on the state and local tax consequences of
an investment in our units. Please read Material Tax
Consequences State, Local, Foreign and Other Tax
Considerations.
|
|
|
We expect that our ratio of taxable income to cash
distributions will be higher than the ratio applicable to
holders of common units in Valero L.P. |
We expect that our ratio of taxable income to cash distributions
will be higher than the ratio applicable to holders of common
units in Valero L.P. Other holders of common units in Valero
L.P. will receive remedial allocations of deductions from Valero
L.P. Any remedial allocations of deductions to us from Valero
L.P. will be very limited. In addition, our ownership of Valero
L.P. incentive distribution rights will cause more taxable
income to be allocated to us from Valero L.P. If Valero L.P. is
successful in increasing its distributions over time, our income
allocations from our Valero L.P. incentive distribution rights
will increase, and, therefore, our ratio of taxable income to
cash distributions will increase.
40
|
|
|
Items of our income, gain, loss and deduction will be
allocated among our unitholders to account for the difference
between the fair market value and tax basis of our assets at the
time of an offering. |
Specified items of income, gain, loss and deduction will be
allocated to us from Valero L.P. and among our unitholders to
account for the difference between the fair market value and tax
basis of Valero L.P.s assets and our assets at the time
the assets were contributed to Valero L.P. (or its predecessors)
or at the time of this and any other offering. The effect of
these allocations will be to allocate to us from Valero L.P. and
to our unitholders, gain attributable to our share of the
difference between the fair market value and the tax basis of
Valero L.P.s assets at these times (including gain
attributable to our ownership of the incentive distribution
rights). The effect of these allocations to a unitholder
purchasing units in this offering will be essentially the same
as if the tax basis of our and Valero L.P.s assets were
equal to their fair market values at the time of the offering,
with the result that a unitholder purchasing units in this
offering will not bear the federal income tax burden associated
with any existing difference between the fair market value and
tax basis of our or Valero L.P.s assets. The federal
income tax burden associated with the difference between the
fair market value and tax basis of our assets immediately prior
to an offering will be borne by our existing unitholders as of
that time. Please read Material Tax
Consequences Tax Treatment of Operations
Tax Basis, Depreciation and Amortization.
41
USE OF PROCEEDS
We will not receive any proceeds from the sale of the units in
this offering. All of the units being sold in this offering are
being offered by other subsidiaries of Valero Energy.
CAPITALIZATION
The following table sets forth our cash and our capitalization
as of December 31, 2005 (in thousands) on a historical
basis and as adjusted to reflect (i) a capital contribution
by Valero Energy subsidiaries to fund certain employee benefit
plan liabilities of ours and (ii) a capital contribution by
Valero Energy subsidiaries to us of notes issued by us and held
by Valero Energy subsidiaries. These transactions will occur
prior to the sale of the units being offered in this prospectus.
You should read our financial statements and notes that are
included elsewhere in this prospectus for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
Offering | |
|
As Adjusted | |
|
|
Historical | |
|
Adjustments | |
|
for Offering | |
|
|
| |
|
| |
|
| |
Cash
|
|
$ |
121 |
|
|
$ |
3,886 |
|
|
$ |
4,007 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliates
|
|
$ |
265,961 |
|
|
$ |
(265,961 |
) |
|
$ |
|
|
Members equity
|
|
|
141,780 |
|
|
|
268,254 |
|
|
|
410,034 |
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
407,741 |
|
|
$ |
2,293 |
|
|
$ |
410,034 |
|
|
|
|
|
|
|
|
|
|
|
42
DILUTION
Dilution is the amount by which the offering price paid by
purchasers of units sold in this offering will exceed our net
tangible book value per unit after the offering. On a pro forma
basis as of December 31, 2005, our net tangible book value
was $410.0 million, or $9.21 per unit. This remains
unchanged when adjusted for the sale by the selling unitholders
of 16,500,000 units at an assumed initial public offering
price of $24.00 per unit. Purchasers of units in this
offering will experience substantial and immediate dilution in
net tangible book value per unit for financial accounting
purposes, as illustrated in the following table.
|
|
|
|
|
Assumed initial public offering price per unit
|
|
$ |
24.00 |
|
Less: Net tangible book value per unit before and after the
offering (a)
|
|
|
9.21 |
|
|
|
|
|
Immediate dilution in net tangible book value per unit to
purchasers in this offering
|
|
$ |
14.79 |
|
|
|
|
|
|
|
(a) |
Determined by dividing the total number of units outstanding
after this offering (44,510,258 units) into our net
tangible book value. |
43
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON
DISTRIBUTIONS
You should read the following discussion of our cash
distribution policy and restrictions on distributions in
conjunction with the assumptions and considerations included in
this section. For more detailed information regarding the
factors and assumptions upon which our cash distribution policy
is based, please read Estimated Minimum Cash
Available for Distribution Based upon Estimated Minimum EBITDA
of Valero L.P. Assumptions and Considerations
Related to the Estimated Minimum EBITDA of Valero L.P.
below. In addition, you should read Forward-Looking
Statements and Risk Factors for information
regarding statements that do not relate strictly to historical
or current facts and for certain risks inherent in our and
Valero L.P.s business.
For additional information regarding our and Valero
L.P.s historical and pro forma operating results, you
should refer to the historical financial statements of Valero GP
Holdings and Valero L.P. for the years ended December 31,
2005, 2004 and 2003, the historical financial statements of
Kaneb for the six months ended June 30, 2005 and 2004 and
the years ended December 31, 2004 and 2003, and the pro
forma combined financial statements of each of Valero GP
Holdings and Valero L.P. for the year ended December 31,
2005 included elsewhere in this prospectus.
General
|
|
|
Rationale for Our Cash Distribution Policy |
Our cash distribution policy reflects a basic judgment that our
unitholders will be better served if we distribute our available
cash rather than retain it. Our cash-generating assets consist
entirely of our ownership interests in Valero GP, LLC and
Riverwalk Holdings, LLC which own the 2% general partner
interest, 100% of the incentive distribution rights and a 21.4%
limited partner interest in Valero L.P., from which we receive
quarterly distributions. We currently have no operations
separate from those of Valero L.P. and do not currently intend
to conduct operations separate from those of Valero L.P. Because
we are not subject to an entity-level federal income tax, we
have more cash to distribute to you than would be the case if we
were subject to income tax. Our distribution policy is
consistent with the terms of our limited liability company
agreement, which requires that we distribute all of our
available cash quarterly.
|
|
|
Restrictions and Limitations on Cash Distributions and Our
Ability to Change Our Cash Distribution Policy |
There is no guarantee that our unitholders will receive
quarterly distributions from us. Our cash distribution policy
may be changed at any time and is subject to certain
restrictions, including:
|
|
|
|
|
Valero L.P.s distribution policy is subject to
restrictions on distributions under its credit agreements, which
contain material financial tests and covenants it must satisfy.
Should it be unable to comply with the restrictions under its
credit agreements, Valero L.P. would be prohibited from making
cash distributions to us, which in turn would prevent us from
making cash distributions to you notwithstanding our stated cash
distribution policy. |
|
|
|
Our cash distribution policy may be subject to restrictions on
distributions under our anticipated credit facility. Our credit
facility may contain material financial tests and covenants that
we must satisfy. Should we be unable to comply with the
restrictions, if any, under our anticipated credit facility, we
would be prohibited from making cash distributions to you
notwithstanding our stated cash distribution policy. |
|
|
|
Valero L.P.s general partner has broad discretion under
Valero L.P.s partnership agreement to establish reserves
for the prudent conduct of Valero L.P.s business and for
future cash distributions to Valero L.P.s unitholders, and
the establishment of those reserves could result in a reduction
in cash distributions that we would otherwise anticipate
receiving from Valero L.P., which in turn could result in a
reduction in cash distributions to you from levels we currently
anticipate pursuant to our stated distribution policy. |
|
|
|
Our board of directors has discretion under our limited
liability company agreement to establish reserves for the
prudent conduct of our business and for future distributions to
our unitholders, and the |
44
|
|
|
|
|
establishment of those reserves could result in a reduction in
cash distributions to you from levels we currently anticipate
pursuant to our stated cash distribution policy. |
|
|
|
While our limited liability company agreement requires us to
distribute our available cash, our limited liability company
agreement, including our cash distribution policy contained
therein, may be amended by a vote of the holders of a majority
of our units. |
|
|
|
Under Section 18-607 of the Delaware Limited Liability
Company Act, we may not make a distribution to you if the
distribution would cause our liabilities to exceed the fair
value of our assets. |
|
|
|
Under Section 17-607 of the Delaware Revised Uniform
Limited Partnership Act, Valero L.P. may not make a distribution
to us if the distribution would cause its liabilities to exceed
the fair value of its assets. |
|
|
|
We may lack sufficient cash to pay distributions to our
unitholders due to increases in general and administrative
expenses, principal and interest payments required under any
outstanding debt, working capital requirements and anticipated
cash needs of us or Valero L.P. and its subsidiaries. |
|
|
|
Our Cash Distribution Policy Limits Our Ability to
Grow |
Because we distribute all of our available cash, our growth may
not be as fast as businesses that reinvest their available cash.
Since our only cash generating assets are our indirect ownership
interests in Valero L.P., our growth will initially be
completely dependent upon Valero L.P.s ability to increase
quarterly cash distributions per unit. If we issue additional
units or incur debt, the payment of distributions on those
additional units or interest on that debt could increase the
risk that we will be unable to maintain or increase our per unit
distribution level.
|
|
|
Valero L.P.s Ability to Grow is Dependent on its
Ability to Access External Growth Capital |
Valero L.P. distributes to its partners all of its available
cash. As a result, it relies on external financing sources,
including commercial borrowings and debt and equity issuances,
to fund its acquisitions and growth capital expenditures. As a
result, to the extent Valero L.P. does not have sufficient cash
reserves or is unable to finance growth externally, its cash
distribution policy will significantly impair its ability to
grow. In addition, to the extent Valero L.P. issues additional
units and maintains or increases its distribution level per
unit, the payment of distributions on those additional units may
increase the risk that Valero L.P. will be unable to maintain or
increase its per unit distribution level, which in turn may
impact the available cash that we have to distribute to our
unitholders. The incurrence of additional debt to finance its
growth strategy would result in increased interest expense to
Valero L.P., which in turn may impact the distributions to us
and the available cash that we have to distribute to our
unitholders.
Our Initial Distribution Rate
|
|
|
Our Cash Distribution Policy |
Upon the closing of this offering, our board of directors will
adopt a cash distribution policy for our units pursuant to which
we will declare an initial quarterly distribution of
$0.27 per unit, or $1.08 per unit on an annualized
basis, to be paid no later than 50 days after the end of
each fiscal quarter. This equates to an aggregate cash
distribution of approximately $12.0 million per complete
quarter or $48.1 million per year.
Any distributions received by us from Valero L.P. related to
periods prior to the closing of this offering will be
distributed entirely to Valero Energy or its subsidiaries. In
August 2006, we expect to pay a prorated quarterly distribution
to you (based on our initial quarterly distribution of
$0.27 per unit) for the period between the consummation of
this offering and June 30, 2006.
45
The following table sets forth the assumed number of our units
outstanding upon the closing of this offering and the estimated
aggregate distribution amounts to be paid on such units during
the first four quarters following the closing of this offering
at our initial quarterly distribution of $0.27 per unit, or
$1.08 per unit on an annualized basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions | |
|
|
|
|
| |
|
|
Number | |
|
One | |
|
Four | |
|
|
of Units | |
|
Quarter | |
|
Quarters | |
|
|
| |
|
| |
|
| |
Publicly held units
|
|
|
16,500,000 |
|
|
$ |
4,455,000 |
|
|
$ |
17,820,000 |
|
Units held by subsidiaries of Valero Energy
|
|
|
28,010,258 |
|
|
|
7,562,770 |
|
|
|
30,251,079 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44,510,258 |
|
|
$ |
12,017,770 |
|
|
$ |
48,071,079 |
|
|
|
|
|
|
|
|
|
|
|
Our distributions will not be cumulative. Consequently, if
distributions on our units are not paid at the targeted levels,
our unitholders will not be entitled to receive such payments in
the future.
Our distribution policy is consistent with the terms of our
limited liability company agreement, which requires that we
distribute all of our available cash quarterly. Under our
limited liability company agreement, available cash is defined
to generally mean, for each fiscal quarter, the amount of cash
generated from our business in excess of the amount of cash
reserves established by our board of directors to, among other
things:
|
|
|
|
|
provide for the conduct of our business; |
|
|
|
comply with applicable law or any debt instrument or other
agreement applicable to us; |
|
|
|
provide funds for distributions to our unitholders with respect
to any one or more of the next four quarters; or |
|
|
|
permit Riverwalk Logistics, L.P. to make capital contributions
to Valero L.P. to maintain its 2% general partner interest upon
the issuance of partnership securities by Valero L.P. |
|
|
|
Valero L.P.s Cash Distribution Policy |
Like us, Valero L.P. has adopted a cash distribution policy that
requires it to distribute its available cash to unitholders on a
quarterly basis. Under Valero L.P.s partnership agreement,
available cash is defined to mean generally, for each fiscal
quarter, the sum of all cash and cash equivalents at the end of
such quarter, plus any working capital borrowings made
subsequent to the end of such quarter, in excess of the amount
its general partner determines is necessary or appropriate to
provide for the conduct of its business, to comply with
applicable law or any of its debt instruments or other
agreements, or to provide for future distributions to its
unitholders for any one or more of the next four quarters. In
providing for the conduct of its business, Valero L.P.s
definition of available cash in its partnership agreement also
allows it to maintain reserves for future capital expenditures
and anticipated credit needs. Valero L.P. makes its quarterly
distributions from cash generated from its operations, and those
distributions have grown over time as Valero L.P.s
business has grown, primarily as a result of acquisitions and
internal growth projects.
46
The following table shows the actual cash distributions
(i.e., payments) that Valero L.P. has paid to its partners,
including us, on all of its outstanding partnership interests
with respect to the quarter indicated (in thousands, except per
unit amounts). Payments are made within 45 days after the
end of each quarter based on the partnership interests
outstanding as of a record date that is set after the end of
each quarter. Valero L.P. has an established historical record
of paying quarterly cash distributions to its partners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid to | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited | |
|
|
|
|
|
|
|
|
Partners, | |
|
Paid to Valero GP Holdings, LLC | |
|
|
|
|
|
|
Excluding | |
|
| |
|
Total | |
|
|
|
|
Valero GP | |
|
Limited | |
|
General | |
|
Incentive | |
|
|
|
Paid to | |
|
|
Distribution | |
|
Holdings, | |
|
Partner | |
|
Partner | |
|
Distribution | |
|
|
|
All | |
|
|
Per Unit | |
|
LLC | |
|
Units | |
|
Interest | |
|
Rights | |
|
Total | |
|
Partners | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$ |
0.700 |
|
|
$ |
8,063 |
|
|
$ |
7,201 |
|
|
$ |
319 |
|
|
$ |
384 |
|
|
$ |
7,904 |
|
|
$ |
15,967 |
|
2nd Quarter
|
|
|
0.750 |
|
|
|
8,638 |
|
|
|
7,716 |
|
|
|
348 |
|
|
|
718 |
|
|
|
8,782 |
|
|
|
17,420 |
|
3rd Quarter
|
|
|
0.750 |
|
|
|
9,570 |
|
|
|
7,710 |
|
|
|
369 |
|
|
|
759 |
|
|
|
8,838 |
|
|
|
18,408 |
|
4th Quarter
|
|
|
0.750 |
|
|
|
9,587 |
|
|
|
7,693 |
|
|
|
369 |
|
|
|
759 |
|
|
|
8,821 |
|
|
|
18,408 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
0.800 |
|
|
|
10,228 |
|
|
|
8,205 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,716 |
|
|
|
19,944 |
|
2nd Quarter
|
|
|
0.800 |
|
|
|
10,230 |
|
|
|
8,203 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,714 |
|
|
|
19,944 |
|
3rd Quarter
|
|
|
0.800 |
|
|
|
10,230 |
|
|
|
8,203 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,714 |
|
|
|
19,944 |
|
4th Quarter
|
|
|
0.800 |
|
|
|
10,240 |
|
|
|
8,193 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,704 |
|
|
|
19,944 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
0.800 |
|
|
|
10,243 |
|
|
|
8,190 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,701 |
|
|
|
19,944 |
|
2nd Quarter (a)
|
|
|
0.855 |
|
|
|
31,279 |
|
|
|
8,744 |
|
|
|
879 |
|
|
|
3,049 |
|
|
|
12,672 |
|
|
|
43,951 |
|
3rd Quarter
|
|
|
0.855 |
|
|
|
31,282 |
|
|
|
8,740 |
|
|
|
879 |
|
|
|
3,049 |
|
|
|
12,668 |
|
|
|
43,950 |
|
4th Quarter
|
|
|
0.855 |
|
|
|
31,282 |
|
|
|
8,740 |
|
|
|
879 |
|
|
|
3,049 |
|
|
|
12,668 |
|
|
|
43,950 |
|
|
|
(a) |
For the second quarter of 2005, Valero L.P.s financial
statements reflected a total cash distribution of approximately
$21.6 million, which was based on the partnership interests
outstanding as of June 30, 2005. On July 1, 2005,
Valero L.P. issued approximately 23.8 million of its common
units in exchange for all outstanding units of Kaneb Pipe Line
Partners, L.P. in connection with its acquisition of Kaneb.
Pursuant to the terms of the merger agreement and because actual
payments are made within 45 days after the end of each
quarter based on the partnership interests outstanding as of a
record date that is set after the end of each quarter, the
actual cash payment made with respect to the second quarter was
approximately $44.0 million, which includes the
distributions paid to former Kaneb unitholders with respect to
the second quarter of 2005. |
Our Initial Quarterly Distribution
In the sections that follow, we present the basis for our belief
that we will be able to fully fund our initial quarterly
distribution of $0.27 per unit for the year ending
December 31, 2006. In those sections, we present two
tables, including:
|
|
|
|
|
our Pro Forma Cash Available for Distribution in
which we present the amount of available cash that we would have
had for the year ended December 31, 2005, giving effect to
the following transactions as if these transactions had occurred
on January 1, 2005: |
|
|
|
|
|
the acquisition of Kaneb by Valero L.P., and the sale of certain
assets acquired in such acquisition as described under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Valero
L.P. Recent Developments; |
47
|
|
|
|
|
the existence of the Administration Agreement to be entered into
between Valero GP Holdings and Valero GP, LLC, which will
provide for the payment by Valero GP Holdings of certain costs
incurred by Valero GP, LLC personnel on behalf of Valero GP
Holdings; |
|
|
|
the incurrence of certain third party costs by Valero GP
Holdings related to its being a publicly held entity; and |
|
|
|
Valero L.P.s current quarterly cash distribution of
$0.855 per limited partner unit, or $3.42 per limited
partner unit on an annualized basis. |
|
|
|
|
|
our Estimated Minimum Cash Available for Distribution
Based upon Estimated Minimum EBITDA of Valero L.P. in
which we present the calculation of estimated minimum EBITDA of
Valero L.P. necessary for Valero L.P. to pay distributions to
its partners, including us, which will enable us to have
sufficient cash available for distribution to fully fund our
expected distribution for the year ending December 31, 2006. |
Our tables entitled Pro Forma Cash Available for
Distribution and Estimated Minimum Cash Available
for Distribution Based upon Estimated Minimum EBITDA of Valero
L.P. used in this section as described below, have been
prepared by and are the responsibility of our management.
Neither our independent registered public accounting firm, KPMG
LLP, nor our previous independent registered public accounting
firm, Ernst & Young LLP, have examined, compiled or
otherwise applied procedures to this information and,
accordingly, do not express an opinion or any other form of
assurance on the information or its achievability, and they
assume no responsibility for, and disclaim any association with,
the prospective financial information. In addition, such tables
and information were not prepared with a view toward compliance
with published guidelines of the SEC or the guidelines
established by the American Institute of Certified Public
Accountants for preparation and presentation of prospective
financial information, and were not prepared in accordance with
accounting principles generally accepted in the United States of
America nor were procedures applied pursuant to auditing
standards of the Public Company Accounting Oversight Board
(United States).
|
|
|
Pro Forma Cash Available for Distribution |
Our pro forma cash available for distribution for the year ended
December 31, 2005 would have been sufficient to pay the
initial quarterly distribution of $0.27 per unit on all
units to be outstanding following the completion of this
offering. Our ability to pay our initial distribution of
approximately $48.1 million on all our units for the year
ended December 31, 2005 is predicated primarily on Valero
L.P.s ability to pay a pro forma distribution of
$3.42 per unit for 2005. If Valero L.P. had completed the
transactions described in this prospectus at the beginning of
2005, it would have generated sufficient cash available for
distribution to pay the full $3.42 per unit for the year
ended December 31, 2005, net of cash reserves withheld at
the discretion of Valero L.P.s general partner of
$33.5 million.
Our pro forma cash available for distribution includes estimated
general and administrative expenses we will incur as a result of
being a publicly traded limited liability company, such as costs
associated with annual and quarterly reports to unitholders, tax
return and Schedule K-1 preparation and distribution,
investor relations, registrar and transfer agent fees, director
compensation and incremental insurance costs, including director
and officer liability insurance. We expect these general and
administrative expenses initially to total approximately
$2.4 million per year, which includes $0.5 million per
year related to the Administration Agreement.
The pro forma financial statements of Valero GP Holdings and
Valero L.P., upon which pro forma cash available for
distribution is based, do not purport to present the results of
operations had the pro forma transactions described in this
prospectus actually been completed as of the dates indicated.
Furthermore, cash available for distribution is a cash
accounting concept, while the pro forma financial statements of
Valero GP Holdings and Valero L.P. have been prepared on an
accrual basis. We derived the amounts of pro forma cash
available for distribution shown above in the manner described
in the table below. As a result, the amount of pro forma cash
available for distribution should only be viewed as a general
indication of the amount of cash available for distribution that
we might have generated had the transactions described in this
prospectus actually been completed as of the dates indicated.
48
The following table illustrates, on a pro forma basis for the
year ended December 31, 2005, the amount of cash available
for distribution to our unitholders, assuming that the
transactions described in this prospectus had been consummated
at the beginning of 2005 (in thousands, except unit and per unit
amounts).
Valero GP Holdings, LLC
Pro Forma Cash Available for Distribution
For the Year Ended December 31, 2005
(unaudited)
|
|
|
|
|
|
|
|
Valero L.P. Data:
|
|
|
|
|
|
Pro Forma Income from Continuing Operations
|
|
$ |
83,084 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
61,121 |
|
|
|
|
Income tax benefit
|
|
|
(8,742 |
) |
|
|
|
Depreciation and amortization expense
|
|
|
94,180 |
|
|
|
|
Provision for loss contingencies
|
|
|
42,000 |
|
|
|
|
Other non-cash charges
|
|
|
4,000 |
|
|
|
|
Cash payments by Kaneb related to acquisition costs (a)
|
|
|
23,022 |
|
|
|
|
|
|
Pro Forma Adjusted EBITDA (b)
|
|
|
298,665 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
Distributions from joint ventures
|
|
|
6,841 |
|
|
|
|
Borrowings to fund strategic capital expenditures
|
|
|
51,436 |
|
|
|
Less:
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
(5,116 |
) |
|
|
|
Interest expense, net
|
|
|
(61,121 |
) |
|
|
|
Income tax benefit
|
|
|
8,742 |
|
|
|
|
Strategic capital expenditures
|
|
|
(51,436 |
) |
|
|
|
Reliability capital expenditures
|
|
|
(38,680 |
) |
|
|
|
|
|
Pro Forma Cash Available for Distribution Prior to Cash
Reserves
|
|
|
209,331 |
|
|
|
Less:
|
|
|
|
|
|
|
|
Cash reserves (c)
|
|
|
(33,530 |
) |
|
|
|
|
|
Pro Forma Cash Available for Distribution to All Valero L.P.
Partners
|
|
$ |
175,801 |
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Pro Forma Cash Distributed to All Valero L.P. Partners
(d):
|
|
|
|
|
|
|
Distributions to Valero GP Holdings, LLC:
|
|
|
|
|
|
|
|
2% general partner interest
|
|
$ |
3,516 |
|
|
|
|
Incentive distribution rights
|
|
|
12,195 |
|
|
|
|
Common and subordinated units
|
|
|
34,960 |
|
|
|
|
|
|
|
|
|
Total distributions to Valero GP Holdings, LLC
|
|
|
50,671 |
|
|
|
|
Distributions to public unitholders
|
|
|
125,130 |
|
|
|
|
|
|
|
|
|
Total pro forma cash distributed to all Valero L.P.
partners
|
|
$ |
175,801 |
|
|
|
|
|
|
Debt Covenant Ratios Calculated Pursuant to Credit Agreements
(e):
|
|
|
|
|
|
|
Debt-to-EBITDA
|
|
|
3.99 |
x |
|
|
EBITDA-to-Interest
|
|
|
4.80 |
x |
Valero GP Holdings, LLC Data:
|
|
|
|
|
|
Pro Forma Cash Distributions Received from Valero
L.P.
|
|
$ |
50,671 |
|
|
|
Less:
|
|
|
|
|
|
|
|
General and administrative expenses (f)
|
|
|
(2,350 |
) |
|
|
|
Income tax expense
|
|
|
(53 |
) |
|
|
|
Cash reserves (c)
|
|
|
(197 |
) |
|
|
|
|
|
Pro Forma Cash Available for Distribution
|
|
$ |
48,071 |
|
|
|
|
|
|
Expected Cash Distributions by Valero GP Holdings, LLC:
|
|
|
|
|
|
|
Expected distribution per unit
|
|
$ |
1.08 |
|
|
|
|
|
|
|
Distributions paid to public unitholders (based on
16,500,000 units)
|
|
$ |
17,820 |
|
|
|
Distributions paid to Valero Energy (based on
28,010,258 units)
|
|
|
30,251 |
|
|
|
|
|
|
|
|
Total expected cash distributions paid to our unitholders
|
|
$ |
48,071 |
|
|
|
|
|
|
|
|
(a) |
|
Represents cash paid by Kaneb for certain costs incurred in
connection with Valero L.P.s acquisition of Kaneb, which
were charged to expense. |
|
(b) |
|
Valero L.P. does not report EBITDA as a measure of the operating
performance of its assets. However, Valero L.P. recognizes that
EBITDA is a widely accepted financial measure used by investors
to compare partnership performance, even though it is not
defined in GAAP, and has therefore reconciled pro forma income
from continuing operations to pro forma adjusted EBITDA. Pro
forma adjusted EBITDA excludes the charges described in footnote
(a), even though these charges relate to cash charges, because
the inclusion of such amount would result in pro forma adjusted
EBITDA that is not indicative of Valero L.P.s ability to
generate cash from its operations. The payment of cash related
to this charge has been removed from pro forma adjusted EBITDA
to arrive at pro forma cash available for distribution to all
Valero L.P. partners. |
|
(c) |
|
Valero L.P.s partnership agreement permits and Valero GP
Holdings limited liability company agreement permits the
board of directors to establish cash reserves that are necessary
or appropriate to satisfy general and administrative and other
expenses and debt service requirements, to comply with any debt
instrument or other agreements, or to provide for other
requirements. The amounts reflected in this table are those
amounts that are assumed to be reserved such that the cash
available for distribution equals the quarterly distribution of
$0.855 per unit and $0.27 per unit for Valero L.P. and
Valero GP Holdings, respectively. |
|
(d) |
|
Based on units outstanding as of December 31, 2005 and a
Valero L.P. distribution of $0.855 per quarter. |
|
(e) |
|
Valero Logistics Operations and Kaneb Terminals Limited, both
wholly owned subsidiaries of Valero L.P., are parties to various
credit agreements that require Valero L.P. to maintain certain
financial ratios. Specifically, prior to June 30, 2006,
Valero L.P. may not allow its ratio of consolidated indebtedness
(as |
50
|
|
|
|
|
defined in the credit agreements) to consolidated EBITDA (as
defined in the credit agreements) to exceed 5.0 for the four
fiscal quarters most recently ended. Subsequent to June 30,
2006, that ratio may not exceed 4.75. However, in periods
subsequent to an acquisition of at least $100 million, the
credit agreements permit the maximum ratios indicated above to
increase by 0.5. Additionally, the credit agreements require
that Valero L.P.s ratio of consolidated EBITDA (as defined
in the credit agreements) to consolidated interest expense (as
defined in the credit agreements) remain in excess of 3.0 for
the four fiscal quarters most recently ended. |
|
(f) |
|
Represents general and administrative expenses of
$2.4 million that we expect to incur as a public company,
including $0.5 million related to the Administration
Agreement. |
Estimated Minimum Cash Available for Distribution Based upon
Estimated Minimum EBITDA of Valero L.P.
In the table below entitled Estimated Minimum Cash
Available for Distribution Based upon Estimated Minimum EBITDA
of Valero L.P., we estimate that Valero L.P.s EBITDA
must be no less than $293.4 million in order to provide us
with the minimum amount of cash distributions from Valero L.P.
for the year ending December 31, 2006 of $50.7 million
which is necessary to permit us to fund our initial quarterly
cash distribution of $0.27 per unit for each of the four
quarters ending December 31, 2006. We refer to this amount
of minimum cash distributions from Valero L.P. as our
Estimated Minimum Cash Distributions to be Received from
Valero L.P. We have estimated that if cash distributions
from Valero L.P. meet or exceed this amount, we will have
sufficient cash available to pay our initial cash quarterly
distribution for the year ending December 31, 2006, and
additionally, that we and Valero L.P. will not be restricted
under our credit agreements from paying cash distributions to
our unitholders at that level.
Valero L.P.s estimated minimum EBITDA of
$293.4 million for the year ending December 31, 2006
is intended to be an indicator or benchmark of the amount
management considers to be the lowest amount of EBITDA needed to
generate sufficient available cash to make cash distributions to
our unitholders at our initial distribution rate of
$0.27 per unit per quarter (or $1.08 per unit on an
annualized basis) for the year ending December 31, 2006.
Valero L.P.s estimated minimum EBITDA should not be viewed
as managements projection of operating earnings of Valero
L.P. Our management believes that Valero L.P.s actual
EBITDA during the year ending December 31, 2006 will exceed
the estimated minimum EBITDA of $293.4 million.
You should read Assumptions and Considerations
Related to the Estimated Minimum EBITDA of Valero L.P. for
a discussion of the material assumptions underlying our belief
that Valero L.P. will be able to generate sufficient EBITDA to
provide us with our estimated minimum cash distributions to be
received from Valero L.P. While we believe that these
assumptions are reasonable in light of our current expectations
regarding future events, the assumptions underlying the
estimated minimum cash distributions to be received from Valero
L.P. are inherently uncertain and are subject to significant
business, economic, regulatory and competitive risks and
uncertainties that could cause actual results to differ
materially from those we anticipate. If the estimated minimum
EBITDA of Valero L.P. is not achieved, we may not be able to pay
the minimum quarterly distribution on our units. Consequently,
the statement that we believe that cash distributions from
Valero L.P. will be sufficient to allow us to pay the initial
quarterly distribution on our units for the four consecutive
quarters ending December 31, 2006 should not be regarded as
a representation by us or the underwriters or any other person
that we will declare and make such a distribution.
When reading this section, you should keep in mind the risk
factors and other cautionary statements under the heading
Risk Factors in this prospectus. Any of these
factors or the other risks discussed in this prospectus could
cause our financial condition and results of operations to vary
significantly from those set forth in the following table (in
thousands, except unit and per unit amounts).
51
Valero GP Holdings, LLC
Estimated Minimum Cash Available for Distribution
Based upon Estimated Minimum EBITDA of Valero L.P.
For the Year Ending December 31, 2006
(unaudited)
|
|
|
|
|
|
|
|
|
Valero L.P. Data:
|
|
|
|
|
|
Estimated Minimum Income from Continuing Operations
|
|
$ |
124,131 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
63,209 |
|
|
|
|
Income tax expense
|
|
|
8,857 |
|
|
|
|
Depreciation and amortization expense
|
|
|
97,250 |
|
|
|
|
|
|
Estimated Minimum EBITDA (a)
|
|
|
293,447 |
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
Distributions from joint ventures
|
|
|
7,167 |
|
|
|
|
Borrowings to fund strategic capital expenditures
|
|
|
14,689 |
|
|
|
|
Proceeds from the sale of the Australia and New Zealand
subsidiaries
|
|
|
65,376 |
|
|
|
Less:
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
(7,030 |
) |
|
|
|
Interest expense, net
|
|
|
(63,209 |
) |
|
|
|
Income tax expense
|
|
|
(8,857 |
) |
|
|
|
Strategic capital expenditures
|
|
|
(80,065 |
) |
|
|
|
Reliability capital expenditures
|
|
|
(45,717 |
) |
|
|
|
Cash reserves
|
|
|
|
|
|
|
|
|
|
Estimated Minimum Cash Available for Distribution to All
Valero L.P. Partners
|
|
$ |
175,801 |
|
|
|
|
|
|
Estimated Minimum Cash Distributions to All Valero L.P.
Partners (b):
|
|
|
|
|
|
|
Estimated Minimum Cash Distributions to Valero GP Holdings, LLC:
|
|
|
|
|
|
|
|
2% general partner interest
|
|
$ |
3,516 |
|
|
|
|
Incentive distribution rights
|
|
|
12,195 |
|
|
|
|
Common and subordinated units
|
|
|
34,960 |
|
|
|
|
|
|
|
|
|
Total estimated minimum cash distributions to Valero GP
Holdings, LLC
|
|
|
50,671 |
|
|
|
Estimated minimum cash distributions to public unitholders
|
|
|
125,130 |
|
|
|
|
|
|
|
|
|
Total estimated minimum cash distributions by Valero L.P.
|
|
$ |
175,801 |
|
|
|
|
|
|
Debt Covenant Ratios Calculated Pursuant to Credit
Agreements (c):
|
|
|
|
|
|
|
|
Debt-to-EBITDA
|
|
|
4.00 |
x |
|
|
|
EBITDA-to-Interest
|
|
|
4.60 |
x |
|
Valero GP Holdings, LLC Data:
|
|
|
|
|
|
Estimated Minimum Cash Distributions to be Received from
Valero L.P.
|
|
$ |
50,671 |
|
|
|
Less:
|
|
|
|
|
|
|
|
General and administrative expenses (d)
|
|
|
(2,350 |
) |
|
|
|
Income tax expense
|
|
|
(53 |
) |
|
|
|
Cash reserves (e)
|
|
|
(197 |
) |
|
|
|
|
|
Estimated Minimum Cash Available for Distribution
|
|
$ |
48,071 |
|
|
|
|
|
52
|
|
|
|
|
|
|
Expected Minimum Cash Distributions by Valero GP Holdings,
LLC:
|
|
|
|
|
|
Expected distribution per unit
|
|
$ |
1.08 |
|
|
|
|
|
|
Distributions paid to public unitholders (based on
16,500,000 units)
|
|
$ |
17,820 |
|
|
Distributions paid to Valero Energy (based on
28,010,258 units)
|
|
|
30,251 |
|
|
|
|
|
|
|
Total distributions paid to our unitholders
|
|
$ |
48,071 |
|
|
|
|
|
|
|
|
(a) |
|
Valero L.P. does not report EBITDA as a measure of the operating
performance of its assets. However, Valero L.P. recognizes that
EBITDA is a widely accepted financial measure used by investors
to compare partnership performance, even though it is not
defined in GAAP, and has therefore reconciled estimated minimum
income from continuing operations to EBITDA. |
|
(b) |
|
Based on units outstanding as of December 31, 2005 and a
Valero L.P. distribution of $0.855 per quarter. |
|
(c) |
|
Valero Logistics Operations and Kaneb Terminals Limited, both
wholly owned subsidiaries of Valero L.P., are parties to various
credit agreements that require Valero L.P. to maintain certain
financial ratios. Specifically, prior to June 30, 2006,
Valero L.P. may not allow its ratio of consolidated indebtedness
(as defined in the credit agreements) to consolidated EBITDA (as
defined in the credit agreements) to exceed 5.0 for the four
fiscal quarters most recently ended. Subsequent to June 30,
2006, that ratio may not exceed 4.75. However, in periods
subsequent to an acquisition of at least $100 million, the
credit agreements permit the maximum ratios indicated above to
increase by 0.5. Additionally, the credit agreements require
that Valero L.P.s ratio of consolidated EBITDA (as defined
in the credit agreements) to consolidated interest expense (as
defined in the credit agreements) remain in excess of 3.0 for
the four fiscal quarters most recently ended. |
|
(d) |
|
Represents general and administrative expenses of
$2.4 million that we expect to incur as a public company,
including $0.5 million related to the Administration
Agreement. |
|
(e) |
|
Valero GP Holdings limited liability company agreement
permits the board of directors to establish cash reserves that
are necessary or appropriate to satisfy general and
administrative and other expenses and debt service requirements,
to comply with any debt instrument or other agreements or to
provide for other requirements. The amount reflected on this
table is that amount which is assumed to be reserved such that
the cash available for distribution equals the quarterly
distribution of $0.27 per unit, or $1.08 per unit on an
annualized basis. |
|
|
|
Assumptions and Considerations Related to the Estimated
Minimum EBITDA of Valero L.P. |
We believe that our ownership interests in Valero L.P. will
generate sufficient cash flow to enable us to pay our initial
quarterly distribution of $0.27 per unit on all of our units for
the four quarters ending December 31, 2006. Our ability to
make these distributions assumes that Valero L.P. will pay its
recently declared quarterly distribution of $0.855 per common
unit for each of the four quarters ending December 31,
2006, which means that the total amount of cash distributions we
receive from Valero L.P. during that period would be
$50.7 million.
The primary determinant in Valero L.P.s ability to pay a
distribution of $0.855 per common unit for each of the four
quarters ending December 31, 2006, is its ability to
generate EBITDA of at least $293.4 million during that
period, which in turn is dependent upon its ability to generate
income from continuing operations of at least
$124.1 million. Valero L.P.s ability to generate at
least this amount of income from continuing operations is based
on a number of assumptions which are set forth below.
While we believe that these assumptions are generally consistent
with the actual performance of Valero L.P. and are reasonable in
light of our current beliefs concerning future events, the
assumptions are inherently uncertain and are subject to
significant business, economic, regulatory and competitive risks
and uncertainties that could cause actual results to differ
materially from those we anticipate. If these assumptions are
not realized, the actual available cash that Valero L.P.
generates, and thus the cash we would receive from our ownership
interests in Valero L.P., could be substantially less than that
currently expected and could, therefore, be insufficient to
permit us to make our initial quarterly distribution on our
units for the forecasted period. In that event, the market price
of our units may decline materially. Consequently, the statement
that we believe that we
53
will have sufficient cash available to pay the initial
distribution on our units for each quarter through
December 31, 2006, should not be regarded as a
representation by us or the underwriters or any other person
that we will make such a distribution. When reading this
section, you should keep in mind the risk factors and other
cautionary statements under the heading Risk Factors
in this prospectus.
|
|
|
|
|
Estimated Minimum Income from Continuing Operations of Valero
L.P. We believe that Valero L.P. must achieve a minimum of
$124.1 million in income from continuing operations, which
is based on a minimum of $228.7 million in operating income
from its business segments (before general and administrative
expenses). This minimum estimate of $124.1 million in
income from continuing operations is intended to be an indicator
or benchmark of the amount management considers to be the lowest
amount of operating results needed by Valero L.P. to derive its
estimated minimum EBITDA of $293.4 million. The estimate of
minimum income from continuing operations should not be viewed
as Valero L.P.s projection of its earnings. Valero
L.P.s management believes that the actual income from
continuing operations of Valero L.P. during the year ending
December 31, 2006 will exceed $124.1 million. The
minimum operating income by business segment (before general and
administrative expenses and provision for loss contingencies) is
provided in the table below for the year ending
December 31, 2006 and those amounts are compared to pro
forma amounts for the year ended December 31, 2005 (in
thousands). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
Pro Forma | |
|
Minimum | |
|
|
for the | |
|
for the | |
|
|
Year Ended | |
|
Year Ending | |
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Valero L.P.s Operating Income by Business Segment (Before
General and Administrative Expenses and Provision for Loss
Contingencies):
|
|
|
|
|
|
|
|
|
|
Crude oil pipelines
|
|
$ |
30,439 |
|
|
$ |
30,168 |
|
|
Refined products pipelines
|
|
|
80,350 |
|
|
|
77,083 |
|
|
Refined products terminals
|
|
|
96,593 |
|
|
|
93,462 |
|
|
Crude oil storage tanks
|
|
|
30,493 |
|
|
|
27,979 |
|
|
|
|
|
|
|
|
|
|
|
237,875 |
|
|
|
228,692 |
|
Plus:
|
|
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
5,116 |
|
|
|
7,030 |
|
Less:
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(65,528 |
) |
|
|
(39,525 |
) |
|
Provision for loss contingencies
|
|
|
(42,000 |
) |
|
|
|
|
|
Interest expense, net
|
|
|
(61,121 |
) |
|
|
(63,209 |
) |
|
Income tax (expense) benefit
|
|
|
8,742 |
|
|
|
(8,857 |
) |
|
|
|
|
|
|
|
Valero L.P.s Income from Continuing Operations
|
|
$ |
83,084 |
|
|
$ |
124,131 |
|
|
|
|
|
|
|
|
|
|
|
The minimum operating income by business segment is determined
based on estimates of revenues to be generated by each of Valero
L.P.s business segments and estimates of the related
operating expenses. The assumptions for estimated revenues and
operating expenses are outlined below. |
|
|
Assumptions for Estimated Revenues by Business Segment |
|
|
Approximately 60% of Valero L.P.s operating income results
from throughput arrangements with its customers. Under
throughput arrangements, a customer agrees to pay a certain
throughput fee or tariff for volumes moving through Valero
L.P.s terminals, pipelines or storage facilities. The
majority of the remaining 40% of Valero L.P.s operating
income results from storage fee arrangements in which a customer
agrees to pay a certain amount for the right to store their
products in Valero L.P.s storage tanks for a specified
period of time. The average term of these agreements is
approximately one year. Valero |
54
|
|
|
L.P. also generates operating income from the sale of bunker
fuel to marine vessels, but such operating income is not
significant. |
|
|
|
|
|
Crude oil pipelines. Revenue generated in the crude oil
pipelines segment is generated entirely from throughput fees.
The average throughput fee per barrel is estimated to be $0.42
for the year ending December 31, 2006, as compared to $0.39
for the year ended December 31, 2005. The estimated $0.03
average increase is primarily the result of a fee increase that
is effective July 1, 2006. This throughput fee increase is
based on the estimated change in the producer price index which
is allowed under Valero L.P.s throughput agreements.
Estimated revenues for this segment were then determined by
applying this average throughput fee to an estimated minimum
number of barrels of crude oil to be transported per day during
the year ending December 31, 2006. Valero L.P.
management believes that Valero L.P. will transport at
least this volume of crude oil per day because such volume is
less than pro forma amounts transported during the year ended
December 31, 2005, and management does not anticipate any
significant change in volumes transported, except for reductions
relating to temporary shut downs at certain Valero Energy
refineries during 2006 for upgrades, catalyst changes and
maintenance activities. The following table provides Valero
L.P.s assumptions for the average throughput fee per
barrel and estimated minimum throughput volumes for the year
ending December 31, 2006 compared to pro forma throughput
volumes for the year ended December 31, 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma for | |
|
Estimated Minimum for | |
the Year Ended | |
|
the Year Ending | |
December 31, 2005 | |
|
December 31, 2006 | |
| |
|
| |
Throughput | |
|
Average | |
|
Throughput | |
|
Average | |
(Barrels | |
|
Throughput | |
|
(Barrels | |
|
Throughput | |
per Day) | |
|
Fees/Barrel | |
|
per Day) | |
|
Fees/Barrel | |
| |
|
| |
|
| |
|
| |
|
358,965 |
|
|
$ |
0.39 |
|
|
|
330,584 |
|
|
$ |
0.42 |
|
|
|
|
|
|
Refined product pipelines. Revenue generated in the
refined product pipelines segment is generated entirely from
throughput fees. The average throughput fee per barrel is
estimated to be $0.88 for the year ending December 31,
2006, as compared to $0.83 for the year ended December 31,
2005. The estimated $0.05 average increase is primarily the
result of a fee increase that is effective July 1, 2006.
This throughput fee increase is based on the estimated change in
the producer price index. Estimated revenues for this segment
were then determined by applying this average throughput fee to
an estimated minimum number of barrels of refined products to be
transported per day during the year ending December 31,
2006. Valero L.P. management believes that Valero L.P.
will transport at least this volume of refined products per day
because such volume is less than pro forma amounts transported
during the year ended December 31, 2005, and management
does not anticipate any significant change in volumes
transported, except for reductions related to temporary shut
downs at certain Valero Energy refineries which is discussed
above. The following table provides Valero L.P.s
assumptions for the average throughput fee per barrel and
estimated minimum throughput volumes for the year ending
December 31, 2006 compared to pro forma throughput volumes
for the year ended December 31, 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma for | |
|
Estimated Minimum for | |
the Year Ended | |
|
the Year Ending | |
December 31, 2005 | |
|
December 31, 2006 | |
| |
|
| |
Throughput | |
|
Average | |
|
Throughput | |
|
Average | |
(Barrels | |
|
Throughput | |
|
(Barrels | |
|
Throughput | |
per Day) | |
|
Fee/Barrel | |
|
per Day) | |
|
Fee/Barrel | |
| |
|
| |
|
| |
|
| |
|
670,761 |
|
|
$ |
0.83 |
|
|
|
661,426 |
|
|
$ |
0.88 |
|
|
|
|
|
|
Refined product terminals. Revenue generated in the
refined product terminals segment is generated from storage and
throughput fees. Storage fee revenue is estimated to be
$237.6 million for the year ending December 31, 2006
as compared to $228.6 million on a pro forma basis for the
year ended December 31, 2005. The estimated
$9.0 million increase is primarily the result of fee
increases that are effective on the anniversary dates of the
various storage agreements. For throughput fee revenue, the
average fee per barrel is estimated to be $0.50 for the year
ending December 31, 2006, as compared to $0.49 for the year
ended December 31, 2005. The estimated $0.01 average
increase is |
55
|
|
|
|
|
primarily the result of fee increases that were effective
January 1, 2006. These terminalling fee increases are based
primarily on the estimated change in the consumer price index
and producer price index which are allowed under
Valero L.P.s terminals usage agreements. Estimated
throughput revenues for this segment were then determined by
applying this average terminalling fee to an estimated minimum
number of barrels per day of refined products to be throughput
during the year ending December 31, 2006. Valero L.P.
management believes that Valero L.P. will throughput at
least this volume of refined products per day because such
volume is less than the pro forma amounts throughput during the
year ended December 31, 2005, and management does not
anticipate any significant change in volumes throughput, except
for reductions related to temporary shutdowns at certain Valero
Energy refineries which is discussed above. The following table
provides Valero L.P.s assumptions for the average
terminalling fee per barrel and estimated minimum throughput
volumes for the year ending December 31, 2006 compared to
pro forma throughput volumes for the year ended
December 31, 2005. The table also compares estimated
storage fee revenues for the year ending December 31, 2006
to pro forma amounts for the year ended December 31, 2005
(dollars in thousands, except per barrel amounts). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma for | |
|
Estimated Minimum for | |
the Year Ended | |
|
the Year Ending | |
December 31, 2005 | |
|
December 31, 2006 | |
| |
|
| |
Throughput | |
|
Average | |
|
Storage | |
|
Throughput | |
|
Average | |
|
Storage | |
(Barrels | |
|
Throughput | |
|
Fee | |
|
(Barrels | |
|
Throughput | |
|
Fee | |
per Day) | |
|
Fee/Barrel | |
|
Revenues | |
|
per Day) | |
|
Fee/Barrel | |
|
Revenues | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
245,084 |
|
|
$ |
0.49 |
|
|
$ |
228,600 |
|
|
|
180,088 |
|
|
$ |
0.50 |
|
|
$ |
237,611 |
|
|
|
|
|
|
Crude oil storage tanks. Revenue generated in the crude
oil storage tanks segment is generated entirely from throughput
fees. For throughput fee revenue, the average fee per barrel is
estimated to be $0.251 for the year ending December 31,
2006, as compared to $0.249 for the year ended December 31,
2005. The estimated $0.002 average increase is primarily the
result of fee increases that were effective January 1, 2006
and others that will be effective April 1, 2006. These
throughput fee increases are based on the estimated change in
the consumer price index which is allowed under
Valero L.P.s throughput agreements for crude oil
storage tanks. Estimated revenues for this segment were then
determined by applying this average throughput fee to an
estimated minimum number of barrels of crude oil to be received
at various Valero Energy refineries during the year ending
December 31, 2006. Valero L.P. management believes
that Valero L.P. will throughput at least this volume of
crude oil per day because such volume is less than the pro forma
amounts throughput during the year ended December 31, 2005,
and management does not anticipate any significant change in
volumes throughput, except for reductions related to temporary
shutdowns at certain Valero Energy refineries which is discussed
above. The following table provides Valero L.P.s
assumptions for the average throughput fee per barrel and
estimated minimum throughput volumes for the year ending
December 31, 2006 compared to the pro forma throughput
volumes for the year ended December 31, 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma for | |
|
Estimated Minimum for | |
the Year Ended | |
|
the Year Ending | |
December 31, 2005 | |
|
December 31, 2006 | |
| |
|
| |
Throughput | |
|
Average | |
|
Throughput | |
|
Average | |
(Barrels | |
|
Throughput | |
|
(Barrels | |
|
Throughput | |
per Day) | |
|
Fee/Barrel | |
|
per Day) | |
|
Fee/Barrel | |
| |
|
| |
|
| |
|
| |
|
517,409 |
|
|
$ |
0.249 |
|
|
|
503,574 |
|
|
$ |
0.251 |
|
56
|
|
|
Assumptions for Estimated Operating Costs (Except for General
and Administrative Expenses and Provision for Loss
Contingencies) |
|
|
Valero L.P.s most significant operating costs are employee
salary and wage costs, power costs and maintenance expenses. The
following are Valero L.P.s assumptions regarding these
estimated operating costs: |
|
|
|
|
|
Employee salary and wage costs are estimated to be approximately
$107.7 million for the year ending December 31, 2006,
as compared to approximately $102.5 million on a pro forma
basis for the year ended December 31, 2005. Valero
L.P.s estimate for 2006 assumes no significant changes in
the average number of employees as compared to the average
number of employees during the year ended December 31,
2005, and that salaries and wages will increase approximately
4.25%, which is consistent with the actual increase reflected in
the pro forma amounts for the year ended December 31, 2005. |
|
|
|
Power costs are estimated to be approximately $46.3 million
for the year ending December 31, 2006, as compared to
approximately $41.5 million on a pro forma basis for the
year ended December 31, 2005. Valero L.P. primarily uses
electric power at its pipeline pump stations and terminals and
such electric power is furnished by various utility companies
that primarily use natural gas to generate the electricity.
Accordingly, Valero L.P.s power costs typically fluctuate
with natural gas prices, which can vary widely. Electric power
usage during 2006 is expected to be consistent with the usage
during the year ended December 31, 2005. Valero L.P.
assumed that natural gas prices will average $7.15 per MMBTU
during the year ending December 31, 2006. |
|
|
|
Maintenance expenses are estimated to be approximately
$42.9 million for the year ending December 31, 2006,
as compared to approximately $28.7 million on a pro forma
basis for the year ended December 31, 2005. Valero L.P.
assumed that maintenance requirements during 2006 will increase
in scope and frequency compared to those encountered during the
year ended December 31, 2005. Valero L.P. also assumed that
primary maintenance costs incurred, such as contract labor and
materials, will increase 3% in 2006. This increase is consistent
with actual increases Valero L.P. experienced for these costs
during the year ended December 31, 2005. |
|
|
|
|
|
General and Administrative Expenses. General and
administrative expenses are estimated to be approximately
$39.5 million for the year ending December 31, 2006
compared to $65.5 million included in the pro forma amounts
for the year ended December 31, 2005. The decrease of
$26 million is primarily the result of $23.0 million
of non-recurring merger related expenses incurred by Kaneb,
which were included in general and administrative expenses. In
addition, Valero L.P. expects to benefit from cost reductions
resulting from its acquisition of Kaneb on July 1, 2005.
The 2006 estimate of $39.5 million includes estimated cost
reductions of approximately $5 million. Valero L.P.
believes that these cost reductions will be realized as a result
of the elimination of duplicate corporate office expenses and
duplicate professional services. Valero L.P. has also considered
the impact of the new Services Agreement between Valero L.P. and
Valero GP, LLC, which will increase Valero L.P.s general
and administrative expenses by approximately $1.1 million
in 2006. |
|
|
|
Provision for Loss Contingencies. In the second quarter
of 2005, Kaneb recorded a provision for loss contingencies for
various litigation, claims and commitments. No amount has been
included in the estimated minimum income from continuing
operations for 2006 because Valero L.P. does not expect to fund
any recorded amounts in 2006. |
|
|
|
Interest Expense, Net. Valero L.P. estimated that
interest expense will increase due to higher interest rates and
higher debt balances. Valero L.P. assumed that the LIBOR rate
would average 4.88% for the year ending December 31, 2006.
This interest rate assumption is consistent with the one year
yield curve for 30 day LIBOR rates at the time the minimum
income from operations calculation was performed. Debt balances
are estimated to increase by approximately $15 million
during 2006, to fund a portion of Valero L.P.s
$80 million strategic capital expenditures program. |
57
|
|
|
|
|
Income Tax Expense. Valero L.P. estimated income tax
expense based on current statutory tax rates and estimated
taxable income for each of its tax paying subsidiaries. The
majority of Valero L.P.s tax paying subsidiaries are
international subsidiaries. Estimated income tax expense
resulted in a 5.3% effective income tax rate for 2006. Valero
L.P.s pro forma income from continuing operations for the
year ended December 31, 2005 reflects a benefit of
approximately $8.7 million for income taxes as a result of
Kaneb recording a pre-tax loss in the first half of 2005. The
pre-tax loss resulted primarily from merger-related costs and
the provision for loss contingencies. |
|
|
|
Distributions from Joint Ventures and Equity Income from
Joint Ventures. Valero L.P. currently owns equity interests
in a refined products pipeline and multiple refined products
terminals. Based on the 2006 earnings expectations for these
joint ventures, Valero L.P. assumed it will receive cash
distributions of approximately $7 million for the year
ending December 31, 2006. |
|
|
|
Strategic Capital. Strategic capital expenditures are
made to expand the operating capacity of Valero L.P.s
current operations. Valero L.P. estimated strategic capital
expenditures of approximately $80 million for the year
ending December 31, 2006. Valero L.P. assumed that it will
fund $15 million of these expenditures with borrowings
under its existing revolving credit agreement and the remaining
$65 million with proceeds from the sale of Valero
L.P.s Australia and New Zealand subsidiaries. |
|
|
|
Reliability Capital. Reliability capital expenditures are
made on an ongoing basis to maintain current operations. These
expenditures do not increase operating capacity or operating
income. Valero L.P. estimated reliability capital expenditures
of approximately $46 million for the year ending
December 31, 2006. The projects expected to be completed
during 2006 are consistent with Valero L.P.s ongoing
program of asset improvements to maintain the reliability and
integrity of its assets. Valero L.P. assumed that it will fund
these expenditures with cash generated from operating activities. |
Our Sources of Distributable Cash
Our only cash-generating assets are our ownership interests in
Valero GP, LLC and Riverwalk Holdings, LLC, which own the
following:
|
|
|
|
|
the 2% general partner interest in Valero L.P., which we hold
through our 100% ownership interest in Riverwalk Logistics, L.P.; |
|
|
|
100% of the incentive distribution rights issued by Valero L.P.,
described in more detail below; and |
|
|
|
617,339 common units and 9,599,322 subordinated units of Valero
L.P. representing a 21.4% limited partner interest in Valero
L.P. We expect the subordinated units to convert on a
one-for-one basis to common units during the second quarter of
2006. |
|
|
|
Incentive Distribution Rights Hypothetical
Allocations of Distributions to Us and Valero L.P.s Other
Unitholders |
Our assets include 100% of the incentive distribution rights in
Valero L.P. The incentive distribution rights represent our
right to receive an increasing percentage of Valero L.P.s
quarterly distributions after certain target distribution levels
have been achieved. The table set forth below illustrates the
percentage allocations of distributions among the owners of
Valero L.P., including us, at the target distribution levels
contained in Valero L.P.s partnership agreement. This
information assumes that we continue to own a 2% general partner
interest in Valero L.P. and 100% of the incentive distribution
rights of Valero L.P.
The percentage interests shown for us and the other Valero L.P.
unitholders for the minimum quarterly distribution amounts are
also applicable to distribution amounts that are less than the
minimum quarterly distribution. Valero L.P.s current
distribution rate is $0.855 per unit. The amounts presented
below are intended to be illustrative of the way in which we are
entitled to an increasing share of distributions from Valero
L.P. as total distributions from Valero L.P. increase and are
not intended to represent a prediction of future performance.
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions | |
|
Distributions | |
|
|
Distributions | |
|
on our | |
|
on our | |
|
|
to | |
|
General | |
|
Incentive | |
|
|
Unitholders, | |
|
Partner | |
|
Distribution | |
Valero L.P. Quarterly Distribution Per Unit |
|
Including Us | |
|
Interest | |
|
Rights | |
|
|
| |
|
| |
|
| |
Up to $0.60
|
|
|
98% |
|
|
|
2% |
|
|
|
0% |
|
With respect to amounts above $0.60 up to $0.66
|
|
|
90% |
|
|
|
2% |
|
|
|
8% |
|
With respect to amounts above $0.66
|
|
|
75% |
|
|
|
2% |
|
|
|
23% |
|
The table set forth below illustrates the percentage allocations
among us and the other Valero L.P. unitholders as a result of
certain assumed quarterly distribution payments per unit made by
Valero L.P., including the target distribution levels contained
in Valero L.P.s partnership agreement. This information is
based upon:
|
|
|
|
|
Valero L.P.s 37,210,427 common units and 9,599,322
subordinated units outstanding as of December 31,
2005; and |
|
|
|
our ownership of (i) the 2% general partner interest,
(ii) the incentive distribution rights, (iii) 617,339
of Valero L.P.s common units and (iv) 9,599,322 of
Valero L.P.s subordinated units. |
The amounts presented below are intended to be illustrative of
the way in which we are entitled to an increasing share of
distributions from Valero L.P. as total distributions from
Valero L.P. increase, assuming conversion of the subordinated
units, and are not intended to represent a prediction of future
performance (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to | |
|
Distributions to Us from Interests in Valero L.P. | |
|
|
|
|
Owners of Valero | |
|
| |
Valero L.P.s | |
|
|
|
L.P. Other Than Us | |
|
|
Quarterly | |
|
Total | |
|
| |
|
General | |
|
Incentive | |
|
Limited | |
|
|
Distribution | |
|
Annual | |
|
Distribution | |
|
% of | |
|
Partner | |
|
Distribution | |
|
Partner | |
|
Distribution | |
|
% of | |
per Unit | |
|
Distributions | |
|
Amount | |
|
Total | |
|
Interest | |
|
Rights | |
|
Units | |
|
Amount | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.600 |
|
|
$ |
114,636 |
|
|
$ |
87,823 |
|
|
|
77% |
|
|
$ |
2,293 |
|
|
$ |
|
|
|
$ |
24,520 |
|
|
$ |
26,813 |
|
|
|
23% |
|
|
0.660 |
|
|
|
127,119 |
|
|
|
96,606 |
|
|
|
76% |
|
|
|
2,542 |
|
|
|
999 |
|
|
|
26,972 |
|
|
|
30,513 |
|
|
|
24% |
|
|
0.855 |
|
|
|
175,801 |
|
|
|
125,148 |
|
|
|
71% |
|
|
|
3,516 |
|
|
|
12,196 |
|
|
|
34,941 |
|
|
|
50,653 |
|
|
|
29% |
|
|
0.925 |
|
|
|
193,276 |
|
|
|
135,394 |
|
|
|
70% |
|
|
|
3,866 |
|
|
|
16,215 |
|
|
|
37,801 |
|
|
|
57,882 |
|
|
|
30% |
|
|
0.970 |
|
|
|
204,511 |
|
|
|
141,981 |
|
|
|
69% |
|
|
|
4,090 |
|
|
|
18,799 |
|
|
|
39,641 |
|
|
|
62,530 |
|
|
|
31% |
|
Valero L.P. made incentive cash distributions to Riverwalk
Logistics, L.P. of $2.6 million, $4.4 million and
$8.7 million during the years ended December 31, 2003,
2004 and 2005, respectively. For a further description of Valero
L.P.s cash distribution policy, please read
Our Initial Distribution Rate.
59
HOW WE MAKE CASH DISTRIBUTIONS
Set forth below is a summary of the significant provisions of
our limited liability company agreement that relate to cash
distributions.
General
Our limited liability company agreement requires that, within
50 days after the end of each quarter beginning with the
quarter ending June 30, 2006, we distribute all of our
available cash to the holders of record of our units on the
applicable record date.
Definition of Available Cash
Available cash is defined in our limited liability company
agreement and generally means, with respect to any calendar
quarter, all cash on hand at the end of such quarter less the
amount of cash reserves necessary or appropriate, as determined
in good faith by our board of directors, to:
|
|
|
|
|
satisfy general, administrative and other expenses and debt
service requirements; |
|
|
|
permit Riverwalk Logistics, L.P. to make capital contributions
to Valero L.P. to maintain its 2% general partner interest upon
the issuance of additional partnership securities by Valero L.P.; |
|
|
|
comply with applicable law or any debt instrument or other
agreement; |
|
|
|
provide funds for distributions to unitholders with respect to
any one or more of the next four quarters; and |
|
|
|
otherwise provide for the proper conduct of our business. |
Adjustments to Capital Accounts
We will make adjustments to capital accounts upon the issuance
of additional units. In doing so, we will allocate any
unrealized and, for tax purposes, unrecognized gain or loss
resulting from the adjustments to the unitholders in the same
manner as we allocate gain or loss upon liquidation.
Distributions of Cash upon Liquidation
If we dissolve in accordance with the limited liability company
agreement, we will sell or otherwise dispose of our assets in a
process called a liquidation. We will first apply the proceeds
of liquidation to the payment of our creditors in the order of
priority provided in the limited liability company agreement and
by law and, thereafter, we will distribute any remaining
proceeds to the unitholders in accordance with their respective
capital account balances, as adjusted to reflect any gain or
loss upon the sale or other disposition of our assets in
liquidation.
60
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA VALERO GP HOLDINGS, LLC
The following table sets forth, for the periods and at the dates
indicated, selected historical and pro forma financial data for
Valero GP Holdings (in thousands, except per unit amounts). The
historical financial statements of Valero GP Holdings combine
the financial statements of Valero GP Holdings and Valero GP,
LLC and consolidate the financial statements of Riverwalk
Logistics, L.P. Prior to March 18, 2003, the financial
statements of Valero GP Holdings also consolidated the financial
statements of Valero L.P. On March 18, 2003, Valero GP
Holdings began accounting for its investment in Valero L.P.
under the equity method, which is discussed in note 2 to
the audited financial statements of Valero GP Holdings included
elsewhere in this prospectus. The selected historical financial
data as of December 31, 2004 and 2005 and for the years
ended December 31, 2003, 2004 and 2005 should be read in
conjunction with the audited financial statements of Valero GP
Holdings, Valero L.P. and Kaneb included elsewhere in this
prospectus. The selected pro forma financial data as of and for
the year ended December 31, 2005 should be read in
conjunction with the unaudited pro forma financial statements of
Valero GP Holdings included elsewhere in this prospectus.
The selected pro forma statement of income data for the year
ended December 31, 2005 reflects the pro forma effect of
two separate transactions. First, Valero GP Holdings
equity in income of Valero L.P. is adjusted to reflect the
effect of the acquisition of Kaneb by Valero L.P., including the
effect of the sale of certain assets acquired from Kaneb, as if
those transactions occurred on January 1, 2005. Second, the
effect of this offering is reflected as if it had occurred on
January 1, 2005, including (a) the elimination of
interest expense on Valero GP Holdings notes payable to
affiliates resulting from a capital contribution by Valero
Energy subsidiaries to Valero GP Holdings of notes issued by
Valero GP Holdings and held by Valero Energy subsidiaries and
(b) the incurrence of an incremental $2.3 million of
general and administrative expenses that Valero GP Holdings is
expected to incur as a publicly traded limited liability
company, including costs under a new Administration Agreement
with Valero GP, LLC, pursuant to which Valero GP, LLC will
provide certain administrative services to Valero GP Holdings
for a fee. The selected pro forma balance sheet data reflects
the effect of the capital contribution discussed above as well
as a capital contribution by Valero Energy subsidiaries to fund
certain employee benefit plan liabilities of Valero GP Holdings
as if those transactions occurred on December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
24,868 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Equity in earnings of Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
27,418 |
|
|
|
35,314 |
|
|
|
37,646 |
|
|
|
25,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
98,827 |
|
|
|
118,458 |
|
|
|
52,286 |
|
|
|
35,314 |
|
|
|
37,646 |
|
|
|
25,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
9,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
7,023 |
|
|
|
1,562 |
|
|
|
91 |
|
|
|
28 |
|
|
|
2,350 |
|
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
13,708 |
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
58,569 |
|
|
|
14,021 |
|
|
|
91 |
|
|
|
28 |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
59,889 |
|
|
|
38,265 |
|
|
|
35,223 |
|
|
|
37,618 |
|
|
|
23,601 |
|
|
Equity in earnings of Skelly-Belvieu Pipeline Company
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
375 |
|
|
|
456 |
|
|
|
456 |
|
|
Interest income affiliated
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
26 |
|
|
|
111 |
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
(16,806 |
) |
|
|
(18,691 |
) |
|
|
(17,110 |
) |
|
|
(17,778 |
) |
|
|
|
|
|
|
Nonaffiliated, net
|
|
|
(3,811 |
) |
|
|
(4,880 |
) |
|
|
(1,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest (a)
|
|
|
(9,393 |
) |
|
|
(14,109 |
) |
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
36,480 |
|
|
|
27,284 |
|
|
|
16,287 |
|
|
|
18,514 |
|
|
|
20,407 |
|
|
|
24,057 |
|
|
Income tax expense
|
|
|
|
|
|
|
396 |
|
|
|
33 |
|
|
|
67 |
|
|
|
114 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
36,480 |
|
|
$ |
26,888 |
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
24,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
(unaudited) | |
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
729,188 |
|
|
$ |
760,256 |
|
|
$ |
392,937 |
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
$ |
419,707 |
|
|
Total debt (b)
|
|
|
285,519 |
|
|
|
386,816 |
|
|
|
283,797 |
|
|
|
270,597 |
|
|
|
265,961 |
|
|
|
|
|
|
Members equity (c)
|
|
|
309,278 |
|
|
|
244,771 |
|
|
|
105,960 |
|
|
|
113,975 |
|
|
|
141,780 |
|
|
|
410,034 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
60,369 |
|
|
$ |
23,033 |
|
|
$ |
22,183 |
|
|
$ |
16,731 |
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(17,060 |
) |
|
|
1,521 |
|
|
|
(19,606 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
45,975 |
|
|
|
296,679 |
|
|
|
(23,632 |
) |
|
|
2,876 |
|
|
|
|
|
|
Distributions received from Valero L.P. (d)
|
|
|
15,872 |
|
|
|
39,130 |
|
|
|
36,013 |
|
|
|
37,964 |
|
|
|
44,745 |
|
|
|
|
|
The following information is provided to highlight significant
trends and other information regarding the historical operating
results, financial position and other financial data of Valero
GP Holdings. Each section below represents a footnote to the
table above.
Footnotes to Selected Financial Data:
|
|
|
(a) |
|
Minority interest represents the proportionate interest of
public unitholders in the net income of Valero L.P. during the
period that Valero GP Holdings consolidated Valero L.P. |
|
(b) |
|
Total debt as of December 31, 2001 and 2002 includes
$26.9 million and $110.4 million, respectively, of
Valero L.P.s outstanding debt, prior to the ceasing of
consolidation of Valero L.P. on March 18, 2003. The
remainder of the debt at the end of 2001 and 2002 and all of the
debt as of December 31, 2003, 2004 and 2005 represents
notes payable by Valero GP Holdings to subsidiaries of Valero
Energy. The pro forma total debt as of December 31, 2005 is
zero as the result of a capital contribution to Valero GP
Holdings by Valero Energy subsidiaries of such notes. |
|
(c) |
|
Members equity in the historical balance sheet decreased
from December 31, 2002 to December 31, 2003 as a
result of the distribution to Valero GP Holdings members
of the proceeds received from the redemption by Valero L.P. of
3,809,750 common units held by Valero GP Holdings.
Members equity in the pro forma balance sheet as of
December 31, 2005 is significantly higher than the
members equity in the historical balance sheet as of the
same date due to the assumed capital contribution of notes from
Valero Energy subsidiaries discussed in footnote (b) above. |
|
(d) |
|
Distributions received from Valero L.P. for the years ended
December 31, 2001, 2002 and 2003 include distributions
received by Valero GP Holdings prior to the ceasing of
consolidation of Valero L.P. on March 18, 2003, which were
eliminated in the combined statements of cash flows. |
62
SELECTED HISTORICAL AND
PRO FORMA FINANCIAL DATA VALERO L.P.
The following table sets forth, for the periods and at the dates
indicated, selected historical and pro forma financial data for
Valero L.P. (dollars in thousands, except per unit data). The
selected historical financial data as of December 31, 2004
and 2005 and for the years ended December 31, 2003, 2004
and 2005 should be read in conjunction with the audited
financial statements of Valero L.P. included elsewhere in this
prospectus. The selected pro forma financial data for the year
ended December 31, 2005 should be read in conjunction with
the unaudited pro forma financial statements of Valero L.P.
included elsewhere in this prospectus.
The pro forma statement of income data for the year ended
December 31, 2005 assumes:
|
|
|
|
|
the acquisition of Kaneb by Valero L.P. occurred on
January 1, 2005; |
|
|
|
the sale of certain assets acquired as part of the acquisition
of Kaneb for $455 million occurred on January 1, 2005
and that the proceeds from such sale were used to repay debt; |
|
|
|
the sale of Martin Oil LLC, a wholly owned subsidiary of Kaneb
that was acquired as part of the acquisition of Kaneb, to Valero
Energy for $26.8 million occurred on January 1, 2005
and that the proceeds were used to repay debt; and |
|
|
|
the sale of Valero L.P.s subsidiaries in Australia and New
Zealand, which were acquired in connection with the acquisition
of Kaneb and which Valero L.P. sold on March 30, 2006 for
$65 million plus working capital adjustments, occurred on
January 1, 2005 and that the proceeds were used to repay
debt. |
Summary pro forma balance sheet data as of December 31,
2005 is not presented because the transactions discussed above
are reflected in Valero L.P.s historical balance sheet as
of December 31, 2005, other than the sale of
Valero L.P.s Australian and New Zealand subsidiaries,
the effect of which is immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
1,005,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,806 |
|
|
|
401,357 |
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
64,609 |
|
|
|
78,298 |
|
|
|
184,609 |
|
|
|
272,250 |
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
6,950 |
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
65,528 |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
16,440 |
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
94,180 |
|
|
Provision for loss contingencies (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
61,228 |
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
875,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
57,230 |
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
130,347 |
|
|
Equity earnings in joint ventures
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,319 |
|
|
|
5,116 |
|
|
Interest and other expense, net
|
|
|
(3,811 |
) |
|
|
(4,880 |
) |
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
(61,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax (expense)
benefit
|
|
|
45,873 |
|
|
|
55,538 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
112,388 |
|
|
|
74,342 |
|
Income tax (expense) benefit (c)
|
|
|
|
|
|
|
(395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
45,873 |
|
|
|
55,143 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
107,675 |
|
|
$ |
83,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
45,873 |
|
|
$ |
55,143 |
|
|
$ |
69,593 |
|
|
$ |
78,418 |
|
|
$ |
111,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
Balance Sheet Data(at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
387,070 |
|
|
$ |
415,508 |
|
|
$ |
827,557 |
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
|
|
|
Long-term debt, less current portion
|
|
|
25,660 |
|
|
|
108,911 |
|
|
|
353,257 |
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
|
|
Partners equity
|
|
|
342,166 |
|
|
|
293,895 |
|
|
|
438,163 |
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
|
|
Operating Data (barrels/day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil pipeline throughput
|
|
|
303,811 |
|
|
|
348,023 |
|
|
|
355,008 |
|
|
|
381,358 |
|
|
|
358,965 |
|
|
|
|
|
Refined product pipeline throughput
|
|
|
308,047 |
|
|
|
295,456 |
|
|
|
392,145 |
|
|
|
442,596 |
|
|
|
556,654 |
|
|
|
|
|
Refined product terminal throughput
|
|
|
189,172 |
|
|
|
175,559 |
|
|
|
225,426 |
|
|
|
256,576 |
|
|
|
245,084 |
|
|
|
|
|
Crude oil storage tank throughput
|
|
|
253,402 |
|
|
|
293,925 |
|
|
|
366,986 |
|
|
|
473,714 |
|
|
|
517,409 |
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
77,656 |
|
|
$ |
106,108 |
|
|
$ |
108,503 |
|
|
$ |
186,430 |
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(442,350 |
) |
|
|
(58,511 |
) |
|
|
(89,000 |
) |
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
28,688 |
|
|
|
318,454 |
|
|
|
(49,590 |
) |
|
|
(77,178 |
) |
|
|
|
|
|
|
|
(a) |
|
Cost of sales relates to the sale of bunker fuel. Valero L.P.
purchases bunker fuel for resale and records cost of sales for
barrels of fuel sold. |
|
(b) |
|
For the quarter ended June 30, 2005, Kaneb recorded a
provision for loss contingencies associated with certain legal
matters. Please read Kaneb Services LLC and
Subsidiaries Condensed Notes to Consolidated
Financial Statements Note 6.
Contingencies included elsewhere in this prospectus. |
|
(c) |
|
Valero L.P. is not a taxable entity for federal and state income
tax purposes. For 2002, income tax expense relates to the
acquisition by Valero L.P. of the Wichita Falls Business from
Valero Energy. For 2005, historical and pro forma income tax
amounts relate to taxable, wholly owned corporate subsidiaries
of Valero L.P. that were acquired as part of the acquisition of
Kaneb. The corporate subsidiaries are primarily international
subsidiaries. |
|
(d) |
|
On September 30, 2005, Valero L.P. sold certain assets it
acquired as part of the acquisition of Kaneb for
$455 million, and on March 30, 2006 Valero L.P. sold
its subsidiaries in Australia and New Zealand which were
acquired in connection with the Kaneb acquisition for
$65 million plus working capital adjustments. The results
of operations of these assets and subsidiaries are included in
income from discontinued operations. |
|
(e) |
|
The historical statement of income data for the year ended
December 31, 2005 includes the results of operations of
Kaneb from the date of acquisition, July 1, 2005, through
December 31, 2005. |
64
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with the
historical and pro forma combined financial statements and notes
thereto included elsewhere in this prospectus. For more detailed
information regarding the basis of presentation for the
following information, you should read the notes to the
historical and pro forma financial statements included in this
prospectus. In addition, you should read Forward-Looking
Statements and Risk Factors for information
regarding certain risks inherent in our and Valero L.P.s
business.
Valero GP Holdings, LLC
Overview
Financial Statement
Presentation
We reflect our ownership interest in Valero L.P. using the
equity method of accounting, which means that our financial
results reflect a portion of Valero L.P.s net income,
based on our ownership interest in Valero L.P., and our own
administrative costs. We have no separate operating activities
apart from those conducted by Valero L.P. and therefore generate
no revenues from operations. Our cash flows currently consist of
distributions from Valero L.P. on the partnership interests,
including incentive distribution rights, that we own. Prior to
March 18, 2003, we reflected our ownership interests in
Valero L.P. on a consolidated basis, which means that our
financial results were combined with Valero L.P.s
financial results through that date, with the portion of the
results of operations related to the minority limited partner
interests reflected as an expense. Accordingly, the discussion
of our financial position and results of operations in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations reflects the operating
activities and results of operations of Valero L.P. through
March 18, 2003. Subsequent to that date, our financial
position and results of operations reflect our ownership
interests in Valero L.P. and our portion of Valero L.P.s
net income, respectively.
General
We were formed in June 2000 as UDS Logistics, LLC. We
changed our name to Valero GP Holdings, LLC in
January 2006. In anticipation of our initial public
offering, we transferred our ownership of 614,572 common
units and 9,599,322 subordinated units of Valero L.P. to
Riverwalk Holdings, LLC, a wholly owned subsidiary.
We own Riverwalk Logistics, L.P., which is the general partner
of Valero L.P., a publicly traded Delaware limited partnership
(NYSE symbol: VLI). Valero L.P. conducts substantially all of
its business through its operating partnerships and wholly owned
subsidiaries, Valero Logistics Operations, L.P. and Kaneb Pipe
Line Operating Partnership, L.P. Through its subsidiaries,
Valero L.P. is engaged in the crude oil and refined product
transportation, terminalling and storage business.
Our only cash generating assets are our indirect ownership
interests in Valero L.P. Valero L.P., through its subsidiaries,
operates one of the largest independent terminal and petroleum
liquids pipeline systems in the United States. Our aggregate
ownership interests in Valero L.P. consist of the following:
|
|
|
|
|
the 2% general partner interest in Valero L.P., which we hold
through our 100% ownership interest in Riverwalk Logistics, L.P.; |
|
|
|
100% of the incentive distribution rights issued by Valero L.P.,
which entitle us to receive increasing percentages of the cash
distributed by Valero L.P., currently at the maximum percentage
of 23%; and |
|
|
|
617,339 common units and 9,599,322 subordinated units of Valero
L.P. representing a 21.4% limited partner interest in Valero
L.P. We expect the subordinated units to convert on a
one-for-one basis to common units during the second quarter of
2006. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 63% of our outstanding units. It is Valero
Energys intent to further reduce and ultimately sell all
of its indirect ownership interest in us, pending market
conditions.
65
Our primary objective is to increase per unit distributions to
our unitholders by actively supporting Valero L.P. in executing
its business strategy, which includes continued growth through
expansion projects and strategic acquisitions. For instance, we
may facilitate Valero L.P.s growth through the use of our
capital resources, which could involve capital contributions,
loans or other forms of financial support.
Valero L.P. is required by its partnership agreement to
distribute all of its available cash at the end of each quarter,
less reserves established by its general partner in its sole
discretion to provide for the proper conduct of
Valero L.P.s business or to provide funds for future
distributions. Similarly, we are required by our limited
liability company agreement to distribute all of our available
cash at the end of each quarter, less reserves established by
our board of directors. However, unlike Valero L.P., we do
not have a general partner or incentive distribution rights.
Therefore, all of our distributions are made on our units, which
are the only class of security outstanding.
Valero L.P. has an established historical record of paying
quarterly cash distributions to its partners. Since its initial
public offering in 2001, Valero L.P. has increased its quarterly
distribution by approximately 42.5%, from $0.60 per unit, or
$2.40 per unit on an annualized basis, to a current level of
$0.855 per unit, or $3.42 per unit on an annualized basis. For
the fourth quarter of 2005, we received a cash distribution from
Valero L.P. of approximately $12.7 million (representing
$50.7 million on an annualized basis), consisting of
$0.9 million on our 2% general partner interest,
$3.1 million on the incentive distribution rights and
$8.7 million on the units of Valero L.P. that we own. Based
on this current distribution level, we expect that our initial
quarterly cash distribution will be $0.27 per unit, or $1.08 per
unit on an annualized basis.
Cash Distributions
We intend to pay our unitholders quarterly cash distributions
equal to our available cash. Available cash is defined in our
limited liability company agreement and will initially be equal
to the cash distributions we receive from Valero L.P., less
reserves established by our board of directors for debt we may
incur, if any, general and administrative expenses, future
distributions and other miscellaneous uses of cash. Please read
Our Cash Distribution Policy and Restrictions on
Distributions General. Based upon Valero L.P.s
recently declared quarterly distribution and the anticipated
level of cash reserves that our board of directors believes is
prudent for us to maintain, we expect that our initial quarterly
distribution will be $0.27 per unit, or $1.08 per unit on an
annualized basis.
The table set forth below shows the historical cash
distributions declared and paid for the periods shown with
respect to our ownership interests in Valero L.P. and incentive
distribution rights (dollars and units in thousands, except per
unit amounts). From 2001 through 2004, the aggregate annual cash
distributions declared and paid by Valero L.P. with respect to
all of its partnership interests increased as set forth in the
table below. Over the same period, the aggregate annual cash
distributions declared and paid by Valero L.P. with respect to
our ownership interests increased as set forth in the table
below. The changes in historical cash distributions on our
ownership interests reflected in the table set forth below
generally resulted from the following:
|
|
|
|
|
the increases in Valero L.P.s per unit quarterly
distribution from $0.60 declared and paid for the third quarter
of 2001 to $0.855 declared and paid for the fourth quarter of
2005; |
|
|
|
the decrease in Valero L.P.s distributions to Valero
Energy resulting from the redemption by Valero L.P. on
March 18, 2003 of 3,809,750 common units indirectly owned
by Valero Energy; and |
|
|
|
the increases in Valero L.P.s distributions with respect
to the 2% general partner interest resulting from the issuance
of a total of 31,420,855 common units by Valero L.P. during such
period to finance acquisitions and capital improvements. |
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions Made by Valero L.P.(a) | |
|
|
| |
|
|
April 16, 2001 to | |
|
Years Ended December 31, | |
|
|
December 31, | |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Cash distributions per unit
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
Average number of Valero L.P. limited partner units
outstanding (b)
|
|
|
19,217 |
|
|
|
19,261 |
|
|
|
22,423 |
|
|
|
23,041 |
|
|
|
40,868 |
|
Total cash distributions made by Valero L.P. to all
partners (c)
|
|
$ |
33,359 |
|
|
$ |
55,175 |
|
|
$ |
70,203 |
|
|
$ |
79,776 |
|
|
$ |
151,795 |
|
Cash distributions we received from Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions on general partner interest
|
|
$ |
667 |
|
|
$ |
1,103 |
|
|
$ |
1,405 |
|
|
$ |
1,596 |
|
|
$ |
3,036 |
|
|
Distributions on incentive distribution rights (d)
|
|
|
|
|
|
|
1,103 |
|
|
|
2,620 |
|
|
|
4,448 |
|
|
|
10,259 |
|
|
Distributions on our limited partnership interests
|
|
|
23,856 |
|
|
|
38,694 |
|
|
|
30,320 |
|
|
|
32,804 |
|
|
|
34,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions received by us
|
|
$ |
24,523 |
|
|
$ |
40,900 |
|
|
$ |
34,345 |
|
|
$ |
38,848 |
|
|
$ |
47,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to us as a percentage of total cash
distributions (e)
|
|
|
73.5 |
% |
|
|
74.1 |
% |
|
|
48.9 |
% |
|
|
48.7 |
% |
|
|
31.4 |
% |
|
|
(a) |
Distributions declared for a quarter are paid by Valero L.P.
within 45 days following the end of each quarter based on
the partnership interests outstanding as of a record date that
is set after the end of each quarter. Distributions for the
fourth quarter are declared and paid in the year following such
quarter. |
|
|
(b) |
Average number of Valero L.P. limited partner units outstanding
on the distribution record dates for the periods presented. |
|
|
(c) |
For the second quarter of 2005, Valero L.P.s financial
statements reflected a total cash distribution of approximately
$21.6 million, which was based on the partnership interests
outstanding as of June 30, 2005. On July 1, 2005,
Valero L.P. issued approximately 23.8 million of its common
units in exchange for all outstanding units of Kaneb Pipe Line
Partners, L.P. in connection with its acquisition of Kaneb.
Pursuant to the terms of the merger agreement and because actual
payments are made within 45 days after the end of each
quarter based on the partnership interests outstanding as of a
record date that is set after the end of each quarter, the
actual cash payment made with respect to the second quarter was
approximately $44.0 million, which includes the
distributions paid to former Kaneb unitholders with respect to
the second quarter of 2005. |
|
|
(d) |
Effective March 11, 2004, Valero L.P.s partnership
agreement was amended to reduce the incentive distribution
rights to 23% for total distributions in excess of $0.66 per
unit. This amendment had no effect on the amount of
distributions paid relative to the incentive distribution rights
for 2004 and 2005. |
|
|
(e) |
The 2002 percentage increase is based on the
$34.6 million of cash distributions that would have been
paid to us for 2001 had Valero L.P. issued common units to the
public on January 1, 2001. The 2003 percentage
decrease results from the redemption by Valero L.P. in March
2003 of 3,809,750 common units held by Valero GP Holdings, LLC. |
Results of Operations
As discussed above in Overview, our
results of operations after March 18, 2003 consist primarily of
our portion of Valero L.P.s net income, which is based on
our ownership interests in Valero L.P. Prior to March 18,
2003, our results of operations and components thereof were
primarily those of Valero L.P. because we consolidated the
financial statements of Valero L.P. with ours. Please read
Valero L.P. Results of
Operations.
Historically, Valero L.P. has from time to time issued common
units to the public, which have diluted our ownership percentage
in Valero L.P. Such issuances have resulted in increases in our
proportionate share of Valero L.P.s capital because the
issuance price per unit exceeded our carrying amount per unit at
the time of issuance. SEC Staff Accounting Bulletin No. 51,
Accounting for Sales of Stock by a Subsidiary
(SAB 51), provides guidance on accounting for the effect of
issuances of a subsidiarys stock on the parents
investment in that subsidiary. SAB 51 allows registrants to
elect an accounting policy of recording such increases or
decreases in a parents investment (SAB 51 credits or
charges, respectively) either in income or directly in equity.
As of June 30, 2005, prior to Valero L.P.s
acquisition of Kaneb, we had approximately $7 million in
accumulated pre-tax SAB 51 credits related to our
investment in Valero L.P. On July 1, 2005, the issuance of
common units by
67
Valero L.P. in connection with its acquisition of Kaneb
generated an additional pre-tax SAB 51 credit of
approximately $151 million for us. We have not recognized
any SAB 51 credits in our financial statements through
December 31, 2005, and we are not permitted to do so until
the Valero L.P. subordinated units that we own convert to common
units, which is expected to occur in the second quarter of 2006.
We expect to adopt our accounting policy and recognize all of
our cumulative SAB 51 credits at that time.
Liquidity and Capital Resources
Our primary cash requirements are for distributions to partners,
capital contributions to maintain Riverwalk Logistics,
L.P.s 2% general partner interest in Valero L.P., debt
service requirements, if any, and general and administrative
expenses. We expect to fund distributions to partners, debt
service requirements, if any, and general and administrative
expenses primarily with the quarterly cash distributions we
receive from Valero L.P.
New Credit Facility
In connection with this offering, we anticipate entering into a
bank credit facility with a borrowing capacity of up to
$20 million to enable us to manage our cash flow
obligations. For example, we expect to fund capital
contributions through borrowings under our anticipated credit
facility and we may initially meet other liquidity and capital
resource requirements through borrowings under our anticipated
credit facility.
Because we depend on cash distributions from Valero L.P. to meet
our liquidity and capital resource requirements, information
regarding Valero L.P.s liquidity and capital resource
requirements have been provided below to assist you in
understanding how Valero L.P.s cash flows are derived.
Please read Valero
L.P. Liquidity and Capital Resources.
Administration
Agreement
Effective with the closing of this offering, we will enter into
an Administration Agreement with Valero GP, LLC. The
Administration Agreement will provide, among other things, that:
|
|
|
|
|
Valero GP, LLC will provide all employees for us; and |
|
|
|
Valero GP, LLC will provide us with all executive management,
accounting, legal, cash management, corporate finance and other
administrative services. |
The annual charges to be paid under the Administration Agreement
will be $500,000. This amount will be increased annually to
reflect Valero GP, LLCs annual merit increases. Any other
adjustments to the annual fee, such as adjustments to reflect
changes in the levels of service provided to us or Valero GP,
LLCs actual payroll cost, are subject to the approval of
Valero GP, LLCs conflicts committee. We will also
reimburse Valero GP, LLC for all direct public company costs and
any other direct costs, such as outside legal and accounting
fees, that Valero GP, LLC incurs while providing us services
pursuant to the Administration Agreement.
The initial term of the Administration Agreement will commence
with the closing of this offering and terminate on
December 31, 2011, with automatic two year renewals unless
terminated by either party on six months written notice.
We may cancel or reduce the services provided under this
agreement on 60 days written notice. The Administration
Agreement will terminate upon the change of control of either us
or Valero GP, LLC. For a more detailed description of this
agreement, please read Certain Relationships and Related
Party Transactions Related Party Transactions.
Prior to the effective date of this offering, the employees of
our wholly owned subsidiary, Valero GP, LLC, participate in the
employee benefit plans of Valero Energy. These plans include
Valero Energys Pension Plan, Excess Pension Plan,
Supplemental Executive Retirement Plan (SERP), Flex Benefits
Plans which provides certain welfare benefits, and a Retiree
Benefits Plan which provides post-retirement medical benefits to
eligible employees. In addition, Valero GP, LLC maintains
various long-term incentive plans (LTIP) which provide
Valero L.P. unit options, restricted units and performance units
to certain of its officers, directors and employees.
68
Upon the closing of this offering:
|
|
|
|
|
All benefit obligations for benefits payable under the Pension
Plan, Excess Pension Plan and SERP associated with
employees service through the effective date of this
offering will be the responsibility of Valero Energy. All
benefit obligations related to service after the effective date
of this offering will be covered under new and separate benefit
plans maintained by Valero GP, LLC. We expect these new plans to
provide employee retirement benefits comparable to the benefits
previously provided to these employees under the Valero Energy
plans. |
|
|
|
Medical and other welfare benefits will continue to be provided
to Valero GP, LLC employees under the Flex Benefits Plan through
December 31, 2006, at which time a new welfare benefit plan
will be established by Valero GP, LLC. Valero GP, LLC will
reimburse Valero Energy for the medical and other welfare
benefits provided to Valero GP, LLC employees from the effective
date of this offering through December 31, 2006. We expect
the new Valero GP, LLC plan to provide employee welfare benefits
comparable to the benefits previously provided to these
employees under the Valero Energy plan. |
|
|
|
Benefit obligations related to the LTIP and certain long-term
disability (LTD) benefits under the Flex Benefits Plan will
be retained by Valero GP, LLC. Valero Energy will contribute
cash to us on the effective date of this offering that will be
sufficient to fund the fair value of these liabilities at that
date. We expect the LTD plan to continue to provide similar
benefits to Valero GP, LLC employees after the effective date of
this offering. |
|
|
|
Benefit obligations related to the post-retirement medical
benefits will be retained by Valero GP, LLC for those employees
that are not retirement eligible (employees over
55 years old with 5 years of service and eligible to
receive benefits under the Pension Plan). The benefit obligation
for retirement eligible employees under the Retiree Benefits
Plan will be the responsibility of Valero Energy. Valero Energy
will contribute cash and a receivable from Valero L.P. to us on
the effective date of this offering that will be sufficient to
fund the estimated post-retirement benefit obligation retained
by Valero GP, LLC at that date. We expect the post-retirement
medical benefits plan to be adopted by Valero GP, LLC will
provide comparable benefits to its employees after the effective
date of this offering. |
Critical Accounting Policies
We evaluate our investment in Valero L.P. for impairment if and
when there is evidence that we may not be able to recover the
carrying amount of our investment or Valero L.P. is unable to
sustain an earnings capacity that justifies the carrying amount.
A loss in the value of our investment that is other than a
temporary decline is recognized currently in earnings based on
the difference between the estimated current fair value of the
investment and our carrying amount. In order to determine fair
value, our management must make certain estimates and
assumptions regarding Valero L.P.s operations, including,
among other things, an assessment of market conditions,
projected cash flows, interest rates and growth rates that could
significantly impact the fair value of our investment. Due to
the significant subjectivity of the assumptions used to
determine fair value, changes in market conditions and/or
changes in assumptions could result in significant impairment
charges in the future, thus affecting our earnings. Any such
unfavorable changes in market conditions could also
significantly affect cash distributions we receive from Valero
L.P. and thus cash distributions we pay to our unitholders. We
believe that the carrying amount of our investment in Valero
L.P., as of December 31, 2005, is recoverable. However,
providing sensitivity analysis based on using varying
assumptions in performing the impairment evaluation is not
practicable due to the significant number of assumptions
involved in determining fair value.
Valero L.P.
Recent Developments
On July 1, 2005, Valero L.P. completed the acquisition of
Kaneb for an aggregate consideration of $2.9 billion. As a
result, Valero L.P.s annual reported results for 2005 only
reflect the contribution of the assets acquired in the Kaneb
acquisition for the second half of the year. Kaneb operated
pipeline and terminal assets in the United States, Canada,
Europe, the Netherland Antilles, Australia and New Zealand.
69
In conjunction with the Kaneb acquisition, Valero L.P. agreed
with the United States Federal Trade Commission to divest
certain assets. These assets consisted of two California
terminals handling refined products, blendstocks, and crude oil,
three East Coast refined product terminals, and a 550-mile
refined product pipeline with four truck terminals and storage
in the U.S. Rocky Mountains (collectively, the Held Separate
Businesses). On September 30, 2005, Valero L.P. sold the
Held Separate Businesses to Pacific Energy Partners, L.P. for
approximately $455.0 million. In a separate transaction
that occurred simultaneously with the closing of the Kaneb
acquisition, Valero L.P. sold all of its interest in
Kanebs commodity trading business to Valero Energy for
approximately $26.8 million.
Additionally, on March 30, 2006, Valero L.P. sold its
subsidiaries located in Australia and New Zealand, which own
eight terminals with an aggregate storage capacity of
1.1 million barrels, for approximately $65.0 million,
plus working capital adjustments. The results of operations for
the Held Separate Businesses and Valero L.P.s subsidiaries
located in Australia and New Zealand are reflected in income
from discontinued operations in Valero L.P.s consolidated
statement of income.
Overview
Valero L.P. is a publicly traded Delaware limited partnership
formed in 1999 engaged in the crude oil and refined product
transportation, terminalling and storage business. Valero L.P.
has terminal facilities in the United States, Canada, Mexico,
the Netherlands Antilles, the Netherlands and the United Kingdom.
As a result of the Kaneb acquisition, Valero L.P.s
business changed significantly. Geographically, Valero L.P.
expanded from operating primarily in Texas and bordering states,
to operating across the United States and internationally.
Additionally, prior to the Kaneb acquisition Valero L.P. relied
on Valero Energy almost exclusively for its revenues and cash
flows. The Kaneb acquisition greatly increased Valero
L.P.s volume from customers other than Valero Energy and
consequently reduced Valero L.P.s dependence on that one
customer. Also in connection with the Kaneb acquisition, Valero
L.P. began selling bunker fuel from the facilities in Canada and
the Netherlands Antilles that Valero L.P. acquired. Valero L.P.
purchases bunker fuel for resale to its customers at those
locations. Principally as a result of the Kaneb acquisition,
Valero L.P.s revenues more than doubled to
$659.6 million for the year ended December 31, 2005
compared to $220.8 million for the year ended
December 31, 2004. Increased revenues resulted in higher
net income of $111.1 million for 2005, compared to
$78.4 million for 2004. Despite this significant growth,
Valero L.P.s debt-to-capitalization ratio decreased 8.7%
from 46.8% as of December 31, 2004 to 38.1% as of
December 31, 2005.
Valero L.P. conducts its operations through its wholly owned
subsidiaries, primarily Valero Logistics Operations and Kaneb
Pipe Line Operating Partnership, L.P. (KPOP). Valero L.P.s
operations are divided into four reportable business segments:
refined product terminals, refined product pipelines, crude oil
pipelines and crude oil storage tanks.
Refined Product Terminals. Valero L.P. owns 57 terminals
in the United States that provide storage and handling services
on a fee basis for petroleum products, specialty chemicals and
other liquids. Valero L.P. also owns significant international
terminal operations on the island of St. Eustatius, Netherlands
Antilles, Point Tupper, Nova Scotia, in the United Kingdom, the
Netherlands and in Nuevo Laredo, Mexico.
Refined Product Pipelines. Valero L.P. owns common
carrier pipelines in Texas, Oklahoma, Colorado, New Mexico,
Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota
covering approximately 6,389 miles, consisting of the Central
West System which is connected to Valero Energy refineries and
the East Pipeline and the North Pipeline which Valero L.P.
acquired from Kaneb. In addition, Valero L.P. owns a 2,000 mile
anhydrous ammonia pipeline located in Louisiana, Arkansas,
Missouri, Illinois, Indiana, Iowa and Nebraska.
Crude Oil Pipelines. Valero L.P. owns 797 miles of crude
oil pipelines which transport crude oil and other feedstocks,
such as gas oil, from various points in Texas, Oklahoma, Kansas
and Colorado to Valero Energys McKee, Three Rivers and
Ardmore refineries as well as associated crude oil storage
facilities in Texas and Oklahoma that are located along the
crude oil pipelines.
70
Crude Oil Storage Tanks. Valero L.P. owns 60 crude oil
and intermediate feedstock storage tanks and related assets that
store and deliver crude oil to Valero Energys refineries
in Benicia, Corpus Christi and Texas City.
Valero L.P. provides transportation, storage services and
ancillary services to its customers, including Valero Energy,
which indirectly owns Valero L.P.s general partner.
Factors that affect the results of Valero L.P.s operations
include:
|
|
|
|
|
company-specific factors, such as asset integrity issues and
maintenance requirements that impact the throughput rates of its
assets; |
|
|
|
seasonal factors that affect the demand for refined products and
fertilizers transported by and/or stored in its assets; |
|
|
|
industry factors, such as changes in the prices of petroleum
products that affect demand and operations of its customers; and |
|
|
|
other factors such as refinery utilization rates and maintenance
turnaround schedules that impact the operations of refineries
served by its assets. |
71
Results of Operations
Year Ended December 31,
2004 Compared to Year Ended December 31, 2005
Valero L.P. Financial Highlights
(dollars in thousands, except unit and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
220,792 |
|
|
$ |
407,194 |
|
|
Product
|
|
|
|
|
|
|
252,363 |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
220,792 |
|
|
|
659,557 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
229,806 |
|
|
Operating expenses
|
|
|
78,298 |
|
|
|
184,609 |
|
|
General and administrative expenses
|
|
|
11,321 |
|
|
|
26,553 |
|
|
Depreciation and amortization
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
98,024 |
|
|
|
153,694 |
|
|
Equity income from joint ventures
|
|
|
1,344 |
|
|
|
2,319 |
|
|
Interest and other expense, net
|
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
78,418 |
|
|
|
112,388 |
|
|
Income tax expense
|
|
|
|
|
|
|
4,713 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
78,418 |
|
|
|
107,675 |
|
Income from discontinued operations
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
|
Net income
|
|
|
78,418 |
|
|
|
111,073 |
|
|
Less general partners interest and incentive distributions
|
|
|
(5,927 |
) |
|
|
(10,758 |
) |
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$ |
72,491 |
|
|
$ |
100,315 |
|
|
|
|
|
|
|
|
Weighted-average units outstanding
|
|
|
23,041,394 |
|
|
|
35,023,250 |
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
Discontinued operations
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$ |
385,161 |
|
|
$ |
1,170,705 |
|
Partners equity
|
|
|
438,311 |
|
|
|
1,900,779 |
|
Debt-to-capitalization ratio (a)
|
|
|
46.8 |
% |
|
|
38.1 |
% |
|
|
(a) |
Valero L.P.s
debt-to-capitalization
ratio is defined as its long-term debt, including current
portion, divided by the sum of its long-term debt, including
current portion, and partners equity. |
72
Valero L.P. Segment Operating Highlights
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Refined Product Terminals:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day) (a)
|
|
|
256,576 |
|
|
|
245,084 |
|
|
Throughput revenues
|
|
$ |
39,984 |
|
|
$ |
43,617 |
|
|
Storage lease revenues
|
|
|
|
|
|
|
115,352 |
|
|
Bunkering revenues
|
|
|
|
|
|
|
252,363 |
|
|
Cost of sales
|
|
|
|
|
|
|
229,806 |
|
|
Operating expenses
|
|
|
18,365 |
|
|
|
94,607 |
|
|
Depreciation and amortization
|
|
|
6,471 |
|
|
|
25,008 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
15,148 |
|
|
$ |
61,911 |
|
|
|
|
|
|
|
|
Refined Product Pipelines:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day) (a)
|
|
|
442,596 |
|
|
|
556,654 |
|
|
Revenues
|
|
$ |
86,418 |
|
|
$ |
149,853 |
|
|
Operating expenses
|
|
|
37,332 |
|
|
|
64,671 |
|
|
Depreciation and amortization
|
|
|
14,715 |
|
|
|
27,778 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
34,371 |
|
|
$ |
57,404 |
|
|
|
|
|
|
|
|
Crude Oil Pipelines:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day)
|
|
|
381,358 |
|
|
|
358,965 |
|
|
Revenues
|
|
$ |
52,462 |
|
|
$ |
51,429 |
|
|
Operating expenses
|
|
|
15,468 |
|
|
|
16,378 |
|
|
Depreciation and amortization
|
|
|
4,499 |
|
|
|
4,612 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
32,495 |
|
|
$ |
30,439 |
|
|
|
|
|
|
|
|
Crude Oil Storage Tanks:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day)
|
|
|
473,714 |
|
|
|
517,409 |
|
|
Revenues
|
|
$ |
41,928 |
|
|
$ |
46,943 |
|
|
Operating expenses
|
|
|
7,133 |
|
|
|
8,953 |
|
|
Depreciation and amortization
|
|
|
7,464 |
|
|
|
7,497 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
27,331 |
|
|
$ |
30,493 |
|
|
|
|
|
|
|
|
Consolidated Information:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
Cost of sales
|
|
|
|
|
|
|
229,806 |
|
|
Operating expenses
|
|
|
78,298 |
|
|
|
184,609 |
|
|
Depreciation and amortization
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
109,345 |
|
|
|
180,247 |
|
|
|
General and administrative expenses
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$ |
98,024 |
|
|
$ |
153,694 |
|
|
|
|
|
|
|
|
|
|
(a) |
Throughput related to newly acquired assets included in the
table above is calculated based on throughput for the period
from the date of acquisition through December 31 of the
year of acquisition divided by the number of days in the
applicable year. |
73
Net income for the year ended December 31, 2005 increased
$32.7 million compared to the year ended December 31,
2004 due to higher segmental operating income, partially offset
by increased general and administrative expense, increased
interest expense and increased income tax expense. All of these
increases predominantly resulted from the Kaneb acquisition.
Segment operating income for the year ended December 31,
2005 increased $70.9 million compared to the year ended
December 31, 2004, primarily due to a $46.8 million
increase in operating income for the refined product terminals
segment and a $23.0 million increase in operating income
for the refined product pipelines segment. These increases
relate primarily to the effect of the Kaneb acquisition. Except
for storage lease revenues and bunker sales, operating income
for Valero L.P.s segments depends upon the level of
throughputs moving through its assets. In addition to the Kaneb
acquisition, which impacted only the refined product terminals
and refined product pipelines segments, all of Valero
L.P.s segments were affected by lower throughputs in 2005
resulting from scheduled maintenance turnarounds or other
operational issues at Valero Energys McKee, Three Rivers
and Ardmore refineries.
|
|
|
Refined Product Terminals |
Revenues increased by $371.3 million for the year ended
December 31, 2005, compared to the year ended
December 31, 2004, primarily due to the following:
|
|
|
|
|
the Kaneb acquisition, which contributed $115.4 million of
storage lease revenues and $252.4 million of bunkering
revenues; and |
|
|
|
higher throughputs at Valero L.P.s asphalt terminals,
which charge a higher terminalling fee than Valero L.P.s
other refined product terminals, resulting in increased revenues
of $3.1 million. |
Partially offsetting the increases above were lower throughputs
resulting from the McKee refinery turnaround, coupled with
downtime of a unit at the McKee refinery.
Cost of sales was $229.8 million for the year ended
December 31, 2005. Cost of sales reflects the cost of
bunker fuel sold to marine vessels at Valero L.P.s
facilities at St. Eustatius, Netherlands Antilles and Point
Tupper, Nova Scotia, which Valero L.P. acquired as part of the
Kaneb acquisition.
Operating expenses increased $76.2 million for the year
ended December 31, 2005, compared to the year ended
December 31, 2004, primarily due to the inclusion in 2005
of operating expenses related to the assets acquired in the
Kaneb acquisition. Operating expenses further increased compared
to 2004 due to increased regulatory and maintenance expense and
increased internal overhead expense resulting from increased
headcount.
Depreciation and amortization expense increased by
$18.5 million primarily due to an increase in Valero
L.P.s property and equipment related to the Kaneb
acquisition.
|
|
|
Refined Product Pipelines |
Revenues increased by $63.4 million for the year ended
December 31, 2005, compared to the year ended
December 31, 2004, primarily due to increased throughputs
due to the following:
|
|
|
|
|
the Kaneb acquisition, which increased throughputs by
115,096 barrels per day, resulting in additional revenues
of $57.4 million; |
|
|
|
the Dos Laredos pipeline system, which only operated for part of
2004, contributed $3.4 million of additional revenue since
it operated for a full year in 2005 and due to a change in the
contract terms with Petroleos Mexicanos (PEMEX), allowing for an
increase in volumes from 5,000 barrels per day to
10,000 barrels per day; |
|
|
|
the supply dynamics in the Denver market resulted in increased
throughputs transported on the McKee to Denver refined product
pipeline, a high tariff rate pipeline, resulting in higher
revenues of $3.3 million, despite the McKee
turnaround; and |
74
|
|
|
|
|
the expansion of the Corpus Christi to Harlingen to Edinburg
refined product pipeline, which commenced operations in October
2005, increased revenue by $0.9 million. |
Partially offsetting the increases above were lower throughputs
in the refined product pipelines that support Valero
Energys Ardmore and Three Rivers refineries, which
experienced maintenance turnarounds during 2005.
Operating expenses increased by $27.3 million for the year
ended December 31, 2005, compared to the year ended
December 31, 2004, primarily due to the inclusion in 2005
of operating expenses related to the assets acquired in the
Kaneb acquisition. Operating expenses also increased due to
higher regulatory and maintenance expenses related to repairs on
the McKee to Denver and Houston pipelines.
Depreciation and amortization expense increased
$13.1 million for the year ended December 31, 2005,
compared to the year ended December 31, 2004, due to
increases in Valero L.P.s property and equipment related
to the following:
|
|
|
|
|
the Kaneb acquisition, which contributed depreciation and
amortization expense of $12.1 million; |
|
|
|
the expansion of the Corpus Christi to Harlingen to Edinburg
refined product pipeline, which commenced operations in October
2005, resulting in additional depreciation expense of
$0.5 million; and |
|
|
|
the Dos Laredos pipeline system, which only operated for part of
2004, resulted in higher depreciation expense of
$0.2 million for the full year of 2005. |
Revenues decreased $1.0 million for the year ended
December 31, 2005, compared to the year ended
December 31, 2004. Decreased revenues resulted primarily
from lower throughputs, due to the scheduled turnarounds at the
Three Rivers and McKee refineries, coupled with separate
downtime of a unit at the McKee refinery. Revenues increased on
the Ringgold to Wasson crude oil pipeline, despite lower overall
throughputs to the Ardmore refinery, due to increased throughput
in this higher tariff rate pipeline.
Operating expenses increased by $0.9 million for the year
ended December 31, 2005, compared to the year ended
December 31, 2004 primarily due to higher maintenance
expense on the Wasson to Ardmore and the Wichita Falls crude oil
pipelines, partially offset by decreased power costs after the
removal of pump stations on the Wichita Falls pipeline as part
of the power optimization program.
Revenues increased $5.0 million for the year ended
December 31, 2005 compared to the year ended
December 31, 2004, primarily due to a lack of significant
operating downtime at the Texas City refinery or the Benicia
refinery during 2005, resulting in increased throughput in
Valero L.P.s crude oil storage tanks.
Operating expenses increased by $1.8 million for the year
ended December 31, 2005 compared to the year ended
December 31, 2004, due to higher regulatory and maintenance
expense on the Corpus Christi and Texas City crude oil storage
tanks.
General and administrative expenses increased by
$15.2 million for the year ended December 31, 2005
compared to the year ended December 31, 2004, partially due
to increased headcount as a result of the Kaneb acquisition.
Additionally, on July 1, 2005, Valero L.P. amended the
services agreement with Valero Energy to reflect the increased
level of service resulting from the addition of Kaneb, which
increased Valero L.P.s annual fee to Valero Energy.
Interest expense increased by $20.4 million for the year
ended December 31, 2005 compared to the year ended
December 31, 2004, due to higher average debt balances
resulting from debt assumed as part of the Kaneb acquisition and
debt incurred to fund the Kaneb acquisition combined with higher
interest rates in 2005. Additionally, in the fourth quarter of
2005, a portion of the Three Rivers to Pettus to Corpus Christi,
Texas
75
refined product pipeline was permanently idled. As a result,
Valero L.P. recorded an impairment charge of $2.1 million
included in interest and other expense, net.
Income tax expense was $4.7 million for the year ended
December 31, 2005, all of which related to certain
operations acquired in the Kaneb acquisition that are conducted
through separate taxable wholly owned corporate subsidiaries.
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2004 |
Valero L.P. Financial Highlights
(dollars in thousands, except unit and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Statement of Income Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
64,609 |
|
|
|
78,298 |
|
|
General and administrative expenses
|
|
|
7,537 |
|
|
|
11,321 |
|
|
Depreciation and amortization
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
83,037 |
|
|
|
98,024 |
|
|
Equity income from joint ventures
|
|
|
2,416 |
|
|
|
1,344 |
|
|
Interest and other expense, net
|
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
|
|
|
|
|
Net income
|
|
|
69,593 |
|
|
|
78,418 |
|
|
Less general partners interest and incentive distributions
|
|
|
(3,959 |
) |
|
|
(5,927 |
) |
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$ |
65,634 |
|
|
$ |
72,491 |
|
|
|
|
|
|
|
|
Weighted-average units outstanding
|
|
|
21,706,164 |
|
|
|
23,041,394 |
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$ |
354,192 |
|
|
$ |
385,161 |
|
|
Partners equity
|
|
|
438,163 |
|
|
|
438,311 |
|
|
Debt-to-capitalization ratio (a)
|
|
|
44.7 |
% |
|
|
46.8 |
% |
|
|
(a) |
Valero L.P.s debt-to-capitalization ratio is defined as
its long-term debt, including current portion, divided by the
sum of its long-term debt, including current portion, and
partners equity. |
76
Valero L.P. Segment Operating Highlights
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Refined Product Terminals:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day) (a)
|
|
|
225,426 |
|
|
|
256,576 |
|
|
Throughput revenues
|
|
$ |
31,269 |
|
|
$ |
39,984 |
|
|
Operating expenses
|
|
|
15,447 |
|
|
|
18,365 |
|
|
Depreciation and amortization
|
|
|
3,508 |
|
|
|
6,471 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
12,314 |
|
|
$ |
15,148 |
|
|
|
|
|
|
|
|
Refined Product Pipelines:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day) (a)
|
|
|
392,145 |
|
|
|
442,596 |
|
|
Revenues
|
|
$ |
72,276 |
|
|
$ |
86,418 |
|
|
Operating expenses
|
|
|
28,914 |
|
|
|
37,332 |
|
|
Depreciation and amortization
|
|
|
12,380 |
|
|
|
14,715 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
30,982 |
|
|
$ |
34,371 |
|
|
|
|
|
|
|
|
Crude Oil Pipelines:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day)
|
|
|
355,008 |
|
|
|
381,358 |
|
|
Revenues
|
|
$ |
50,741 |
|
|
$ |
52,462 |
|
|
Operating expenses
|
|
|
15,196 |
|
|
|
15,468 |
|
|
Depreciation and amortization
|
|
|
5,379 |
|
|
|
4,499 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
30,166 |
|
|
$ |
32,495 |
|
|
|
|
|
|
|
|
Crude Oil Storage Tanks:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day) (a)
|
|
|
366,986 |
|
|
|
473,714 |
|
|
Revenues
|
|
$ |
27,164 |
|
|
$ |
41,928 |
|
|
Operating expenses
|
|
|
5,052 |
|
|
|
7,133 |
|
|
Depreciation and amortization
|
|
|
5,000 |
|
|
|
7,464 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
17,112 |
|
|
$ |
27,331 |
|
|
|
|
|
|
|
|
Consolidated Information:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
Operating expenses
|
|
|
64,609 |
|
|
|
78,298 |
|
|
Depreciation and amortization
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
90,574 |
|
|
|
109,345 |
|
|
|
General and administrative expenses
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$ |
83,037 |
|
|
$ |
98,024 |
|
|
|
|
|
|
|
|
|
|
(a) |
During the years ended December 31, 2003 and 2004, Valero
L.P. completed several acquisitions as discussed below. The
throughput related to these newly acquired assets included in
the table above is calculated based on throughput for the period
from the date of acquisition through December 31, divided
by the number of days in the applicable year. |
77
Net income for the year ended December 31, 2004 increased
$8.8 million or 13% compared to the year ended
December 31, 2003. This increase was primarily attributable
to the following:
|
|
|
|
|
The acquisitions of the South Texas Pipelines and Terminals and
the crude oil storage tanks in March 2003, the Southlake
pipeline in August 2003 and the Paulsboro terminal in September
2003. These assets were included in the results of operations
for a full year in 2004 compared to a partial year in 2003; |
|
|
|
The acquisition of the Royal Trading asphalt terminals in
February 2004; |
|
|
|
The commencement of operations in June 2004 of the Dos Laredos
pipeline system, which ships propane to the Nuevo Laredo, Mexico
propane terminal; |
|
|
|
Valero Energys addition of a new crude unit at its Texas
City refinery in the fourth quarter of 2003, which allowed that
refinery to process more throughput, which benefited Valero
L.P.s storage tank business; |
|
|
|
Increased tariff rates effective April 2004 and the
implementation of a Corpus Christi North Beach storage facility
lease agreement effective January 2004; and |
|
|
|
Lower throughput volumes in 2003 due to economic-based
production cuts at Valero Energys McKee refinery, a major
turnaround at Valero Energys Ardmore refinery and planned
and unplanned crude unit outages at the Texas City refinery. |
Partially offsetting the above increases to net income were the
following:
|
|
|
|
|
Crude unit outages at Valero Energys McKee refinery in the
second and third quarters of 2004 and a turnaround at Valero
Energys Benicia refinery in the fourth quarter of 2004; |
|
|
|
Increased operating expense due to the following (excluding the
impact of 2003 and 2004 acquisitions): |
|
|
|
|
|
Higher incentive compensation expense; |
|
|
|
Higher power costs as a result of higher natural gas prices; and |
|
|
|
Increased internal overhead costs due to the amendment to the
Services Agreement, under which overhead previously allocated to
Valero Energy is now borne by Valero L.P. |
|
|
|
|
|
Higher general and administrative expense primarily due to the
amendment to the Services Agreement effective April 1,
2004, between Valero L.P. and Valero Energy for services
rendered by Valero Energy corporate employees. In addition,
general and administrative expenses in 2004 were higher due to
increased external public company expenses, incentive
compensation and employee headcount; |
|
|
|
Less equity income from Skelly-Belvieu Pipeline Company due
primarily to a 21% decline in throughput barrels in the
Skellytown to Mont Belvieu refined product pipeline in addition
to higher maintenance expenses associated with pipeline
integrity inspection costs; and |
|
|
|
Higher interest expense, which resulted from several factors,
including (a) a full year of interest expense in 2004
related to the $250.0 million of 6.05% senior notes issued
in March 2003; (b) borrowings of $43.0 million under the
revolving credit facility in the first quarter of 2004 to fund
the acquisition of the Royal Trading asphalt terminals and a
portion of the construction costs related to the Dos Laredos
pipelines and terminal; and (c) less interest income from
interest rate swaps as interest rates increased in 2004. |
On a per unit basis, net income per unit applicable to the
limited partners interest increased 4% or $0.13 per
limited partner unit for the year ended December 31, 2004
compared to the year ended December 31, 2003. This per unit
increase was attributable to the above reasons; however, the
increase in the per unit amount was partially offset by an
increase in the number of common units outstanding as a result
of the equity offerings completed in 2003.
78
|
|
|
Refined Product Terminals |
Revenues for the refined product terminals segment increased
$8.7 million or 28% for the year ended December 31,
2004 compared to the year ended December 31, 2003,
primarily due to a full year of operations of the South Texas
Terminals acquired on March 18, 2003 and the Paulsboro
refined product terminal acquired on September 3, 2003 and
due to the acquisition of the Royal Trading asphalt terminals on
February 20, 2004. Revenues for the above-mentioned
acquired terminals were $15.5 million for the year ended
December 31, 2004 compared to revenues of $6.5 million
from the dates of acquisition through December 31, 2003.
Operating expenses for the refined product terminals segment
increased $2.9 million or 19% for the year ended
December 31, 2004 compared to the year ended
December 31, 2003 due primarily to expenses associated with
the 2003 and 2004 acquisitions. Operating expenses for the
above-mentioned acquired terminals were $6.1 million for
the year ended December 31, 2004 compared to
$2.9 million from the dates of acquisition through
December 31, 2003.
Depreciation and amortization expense for the refined product
terminals segment increased $3.0 million for the year ended
December 31, 2004 compared to the year ended
December 31, 2003 due to the acquisitions completed in 2003
and 2004 as well as the June 1, 2004 startup of the Nuevo
Laredo terminal, which is connected to the Dos Laredos pipeline
system.
|
|
|
Refined Product Pipelines |
Revenues for the refined product pipelines segment increased
$14.1 million or 20% for the year ended December 31,
2004 compared to the year ended December 31, 2003 due to a
13% increase in throughput resulting primarily from Valero
L.P.s acquisition of the South Texas Pipelines on
March 18, 2003 and the Southlake refined product pipeline
on August 1, 2003. Revenues for the South Texas Pipelines
and Southlake refined product pipeline were $31.6 million
for the year ended December 31, 2004 compared to revenue of
$22.5 million from the dates of acquisition through
December 31, 2003. In addition, the Dos Laredos pipeline
system, which began shipping propane to the Nuevo Laredo, Mexico
propane terminal on June 1, 2004, contributed revenues of
$2.6 million in 2004.
Operating expenses for the refined product pipelines segment
increased $8.4 million or 29% for the year ended
December 31, 2004 compared to the year ended
December 31, 2003 primarily due to expenses associated with
a full year of operations of the South Texas Pipelines acquired
on March 18, 2003 and the Southlake refined product
pipeline acquired on August 1, 2003, in addition to higher
power costs and increased employee benefit costs related to
higher incentive compensation.
Depreciation and amortization expense for the refined product
pipelines segment increased $2.3 million or 19% for the
year ended December 31, 2004 compared to the year ended
December 31, 2003 due to the acquisition of the South Texas
Pipelines on March 18, 2003 and the Southlake refined
product pipeline effective August 1, 2003 as well as the
commencement of operations of the Dos Laredos pipeline system on
June 1, 2004.
Although Valero Energys McKee refinery had a crude unit
down during a portion of the second and third quarter of 2004,
throughput for the crude oil pipelines that supply the McKee
refinery were slightly higher for 2004 compared to 2003.
Throughputs were reduced in 2003 because Valero Energy initiated
economic-based refinery production cuts at its McKee refinery in
the first quarter of 2003, which contributed to lower
throughputs for the crude oil pipelines that supply the McKee
refinery.
Revenues for the crude oil pipelines increased $1.7 million
or 3% for the year ended December 31, 2004 compared to the
year ended December 31, 2003 due primarily to increased
revenues related to the Ardmore crude oil pipelines. During the
second quarter of 2003, Valero Energys Ardmore refinery
experienced a major refinery turnaround for most of April,
resulting in lower throughput and revenues in the Ringgold to
Wasson to Ardmore crude oil pipelines for 2003 as compared to
2004.
79
Although operating expenses for the crude oil pipelines segment
were comparable in the aggregate for the year ended
December 31, 2004 and the year ended December 31,
2003, certain components of operating expenses increased while
others decreased. Power costs were higher during 2004 due to
higher electricity rates as a result of higher natural gas
prices and an expansion of the Wichita Falls crude oil pipeline
by adding a pump station in the fourth quarter of 2003. In
addition, higher employee benefit costs in 2004 were related to
higher incentive compensation. These operating expense increases
were offset by the transfer of the Corpus Christi North Beach
storage facility, including its operating expense, from the
crude oil pipeline segment to the crude oil storage tank segment
effective January 1, 2004.
Depreciation and amortization expense for the crude oil
pipelines decreased due to the transfer of the Corpus Christi
North Beach storage facility from the crude oil pipeline segment
to the crude oil storage tank segment effective January 1,
2004.
Revenues for the crude oil storage tanks segment increased
$14.8 million or 54% for the year ended December 31,
2004 compared to the year ended December 31, 2003 due to a
29% increase in throughput attributable to the following:
|
|
|
|
|
Valero L.P.s ownership of the crude oil storage tanks for
only 288 days of the year ended December 31, 2003,
compared to 366 days in the year ended December 31, 2004;
and |
|
|
|
Valero Energys addition of a new crude unit at its Texas
City refinery in the fourth quarter of 2003, which allowed that
refinery to process more throughput in 2004. In addition, there
were several planned and unplanned crude unit outages at the
Texas City refinery in 2003 which lowered the amount of
throughput processed in 2003. |
Partially offsetting the above increases in 2004 was a
plant-wide turnaround at Valero Energys Benicia refinery
in the fourth quarter of 2004, which lowered throughput in 2004.
In addition, effective January 1, 2004, Valero L.P.
transferred the operations of its Corpus Christi North Beach
storage facility to the crude oil storage tanks segment from the
crude oil pipelines segment. Prior to the transfer, Valero L.P.
had included the use of this storage facility as a part of the
crude oil pipeline tariff for the Corpus Christi to Three Rivers
crude oil pipeline. Valero L.P. entered into a one-year shell
barrel capacity lease agreement with Valero Energy, which is
renewable for one-year terms, for the l.6 million barrels
of capacity at the facility and raised the dockage and wharfage
fees. Revenues for the year ended December 31, 2004 for the
Corpus Christi North Beach storage facility totaled
$7.7 million, which included $5.7 million of rental
income and $2 million of dockage and wharfage fees.
Operating expenses and depreciation and amortization expense for
the crude oil storage tanks segment increased by
$2.1 million and $2.5 million, respectively, due to
Valero L.P.s ownership of the crude oil storage tanks for
the full year of 2004 and the transfer of the Corpus Christi
North Beach storage facility for the year ended
December 31, 2004.
The outlook for the refining industry remains positive with
refiners expecting to continue to benefit in 2006 from the same
industry fundamentals present in 2005. As a result, overall
demand for Valero L.P.s services in 2006 should be strong.
However, in the first half of 2006, a number of government
mandated environmental regulations become effective. These
regulations tighten diesel fuel specifications and effectively
eliminate the use of MTBE in gasoline. In response to these
regulations, many refineries are expected to undergo maintenance
turnarounds in the first half of 2006. Certain of Valero
Energys refineries served by Valero L.P.s assets are
scheduled to undergo maintenance turnarounds to address these
environmental regulations. As a result, Valero L.P. expects this
period of high maintenance turnaround activity will negatively
impact its throughputs and revenues for the first half of 2006.
Additionally, Valero L.P. expects higher maintenance expense
will negatively impact the results of its operations for the
first half of 2006.
80
In contrast, Valero L.P. expects the second half of 2006 to have
relatively few maintenance turnarounds, particularly at the
Valero Energy refineries it serves. Therefore, Valero L.P.
expects throughputs and revenues to improve in the second half
of 2006 compared to the first half of 2006. Additionally, Valero
L.P.s pipeline tariffs increase annually on July 1,
which will further benefit revenues in the second half of 2006.
Finally, lower maintenance expenses as projects are completed to
upgrade Kaneb assets and the contribution from Valero
L.P.s strategic project in South Texas, which Valero L.P.
expects to be fully operational by May 2006, should positively
impact its results of operations for the second half of 2006.
Liquidity and Capital Resources
Valero L.P.s primary cash requirements are for
distributions to partners, debt service, reliability and
expansion capital expenditures, acquisitions and normal
operating expenses. Valero L.P. typically generates sufficient
cash from its current operations to fund
day-to-day operating
and general and administrative expenses, reliability capital
expenditures and distribution requirements. Valero L.P. also has
available borrowing capacity under its existing revolving credit
facility and, to the extent necessary, may raise additional
funds through equity or debt offerings under its
$750 million universal shelf registration statement to fund
strategic capital expenditures or other cash requirements not
funded from operations. However, there can be no assurance
regarding the availability of any additional funds or whether
such additional funds can be provided on terms acceptable to
Valero L.P.
|
|
|
Cash Flows for the Years Ended December 31, 2004 and
2005 |
Net cash provided by Valero L.P.s operating activities for
the year ended December 31, 2005 was $186.4 million
compared to $108.5 million for the year ended
December 31, 2004. The increase in cash generated from
operating activities is primarily due to higher net income and
depreciation expense and less working capital.
The net cash generated by Valero L.P.s operating
activities for the year ended December 31, 2005, combined
with available cash on hand, was used to fund distributions to
its unitholders and the general partner in the aggregate amount
of $127.8 million. Proceeds from long-term debt borrowings
totaling $746.5 million, combined with proceeds from the
general partner contribution totaling $29.2 million and
proceeds received from the sale of Martin Oil LLC to a
subsidiary of Valero Energy totaling $26.8 million were
used to fund Valero L.P.s acquisition of KSL, repay
certain outstanding indebtedness of KSL and KPP and to fund
capital expenditures and investment of other noncurrent assets
of $68.1 million and $3.3 million, respectively.
Proceeds received from the sale of the Held Separate Businesses
on September 30, 2005 were used to repay debt outstanding
under Valero L.P.s $400 Million Revolving Credit
Agreement and Valero L.P.s $525 Million Term Credit
Agreement, which was incurred to partially finance the Kaneb
acquisition.
Net cash provided by operating activities for the year ended
December 31, 2004 was $108.5 million. The net cash
provided by operations, combined with available cash on hand,
was used primarily to fund distributions to unitholders and the
general partner in the aggregate amount of $78.2 million.
Additionally, Valero L.P. used cash from those sources in
combination with long-term debt borrowings totaling
$43.0 million to fund $57.5 million of capital
expenditures, which included construction of the Dos Laredos
pipeline project, and the acquisition of asphalt terminals from
Royal Trading on February 20, 2004 totaling
$28.1 million.
Common Unit Offerings. On March 18, 2003, Valero
L.P. sold 5,750,000 common units in a public offering for net
proceeds of $204.6 million, including a $4.3 million
general partner contribution from Riverwalk Logistics, L.P. to
maintain its 2% general partner interest. Valero L.P. used the
net proceeds primarily to fund the acquisition of certain crude
oil storage tank assets from Valero Energy. On April 16,
2003, Valero L.P. sold 581,000 common units for net proceeds of
$20.9 million, including a $0.5 million general
partner contribution, upon the exercise of a portion of the
underwriters over-allotment option. Valero L.P. used the
net proceeds to pay down the then outstanding balance due under
its revolving credit facility.
81
On August 11, 2003, Valero L.P. sold 1,236,250 common units
in a public offering, which included 161,250 common units
related to an over-allotment option, for net proceeds of
$49.3 million, including a $1.0 million general
partner contribution. Valero L.P. used the net proceeds
primarily to fund the acquisitions of the Southlake refined
product pipeline and the Paulsboro refined product terminal.
Shelf Registration Statement. On October 2, 2003,
the United States Securities and Exchange Commission (the SEC)
declared effective a shelf registration statement on
Form S-3 filed by
Valero L.P. and Valero Logistics Operations to register
$750.0 million of securities for potential future issuance.
Valero L.P. may, in one or more offerings, offer and sell common
units representing limited partner interests in the Partnership.
Valero Logistics Operations may, in one or more offerings, offer
and sell debt securities, which will be fully and
unconditionally guaranteed by Valero L.P. The full balance of
Valero L.P.s $750.0 million universal shelf
registration statement was available as of December 31,
2005.
Distributions. Valero L.P.s partnership agreement,
as amended, determines the amount and priority of cash
distributions that Valero L.P.s common unitholders,
subordinated unitholders and general partner may receive. During
the subordination period, if there is sufficient available cash,
the holders of Valero L.P.s common units are entitled to
receive each quarter a minimum distribution of $0.60 per
unit ($2.40 annualized) prior to any distribution of available
cash to holders of Valero L.P.s subordinated units. In
addition, the general partner is entitled to incentive
distributions, as defined below, if the amount Valero L.P.
distributes with respect to any quarter exceeds $0.60 per
unit. Effective March 11, 2004, Valero L.P.s
partnership agreement was amended to lower the general
partners incentive distribution rights with respect to
distributions of available cash from 48% to 23% of the amount of
any quarterly distribution that exceeds $0.90 per unit.
Valero L.P.s general partner will continue to receive a 2%
distribution with respect to its general partner interest.
The following table reflects the allocation of total cash
distributions to Valero L.P.s general and limited partners
applicable to the period in which the distributions are earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars, except per | |
|
|
unit data) | |
General partner interest
|
|
$ |
1,404 |
|
|
$ |
1,595 |
|
|
$ |
2,589 |
|
General partner incentive distribution
|
|
|
2,620 |
|
|
|
4,449 |
|
|
|
8,711 |
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
4,024 |
|
|
|
6,044 |
|
|
|
11,300 |
|
Limited partners distribution
|
|
|
66,179 |
|
|
|
73,733 |
|
|
|
118,178 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
70,203 |
|
|
$ |
79,777 |
|
|
$ |
129,478 |
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
2.950 |
|
|
$ |
3.200 |
|
|
$ |
3.365 |
|
|
|
|
|
|
|
|
|
|
|
On January 27, 2006, Valero L.P. declared a quarterly
distribution of $0.855 per unit, which was paid on
February 14, 2006 to unitholders of record on
February 7, 2006. This distribution, related to the fourth
quarter of 2005, totaled $44.0 million, of which
$3.9 million represented Valero L.P.s general
partners share. The general partners distribution
included a $3.0 million incentive distribution.
The petroleum pipeline and terminalling industry is capital
intensive, requiring significant investments to maintain,
upgrade or enhance existing operations and to comply with
environmental and safety laws and regulations. Valero
L.P.s capital expenditures consist primarily of:
|
|
|
|
|
reliability capital expenditures, such as those required to
maintain equipment reliability and safety and to address
environmental and safety regulations; and |
|
|
|
expansion capital expenditures, such as those to expand and
upgrade pipeline capacity and to construct new pipelines,
terminals and storage tanks. In addition, expansion capital
expenditures may include acquisitions of pipelines, terminals or
storage tank assets. |
82
During the year ended December 31, 2005, Valero L.P.
incurred reliability capital expenditures of $23.7 million
primarily related to system automation and maintenance upgrade
projects at its terminals and pipelines, and expansion capital
expenditures of $44.4 million primarily related to the
construction of 110 miles of new pipeline in the
northeastern Mexico and South Texas regions (Dos Paises Project).
For 2006, Valero L.P. expects to incur approximately
$123.5 million of capital expenditures, including
$44.8 million for reliability capital projects and
$78.7 million for expansion capital projects. Valero L.P.
continuously evaluates its capital budget and makes changes as
economic conditions warrant. If conditions warrant, Valero
L.P.s actual capital expenditures for 2006 may exceed the
budgeted amounts. Valero L.P. believes cash generated from
operations combined with other sources of liquidity previously
described will be sufficient to fund its capital expenditures in
2006.
|
|
|
Long-Term Contractual Obligations |
On March 18, 2003, Valero Logistics Operations, L.P.
completed the sale of $250 million of 6.05% senior
notes, issued in a private placement to institutional investors,
for net proceeds of $247.3 million. Interest on the
6.05% senior notes is payable semi-annually in arrears on
March 15 and September 15 of each year beginning
September 15, 2003. Although the 6.05% senior notes
were not initially registered under the Securities Act of 1933
or any other securities laws, Valero L.P. exchanged the
outstanding $250.0 million 6.05% senior notes that
were not registered for $250.0 million of 6.05% senior
notes that have been registered under the Securities Act of 1933
in July 2003.
On July 15, 2002, Valero L.P. completed the sale of
$100.0 million of 6.875% senior notes for net proceeds
of $98.2 million. The net proceeds were used to repay the
$91.0 million then outstanding under Valero L.P.s
revolving credit facility. Interest on the 6.875% senior
notes is payable semi-annually in arrears on January 15 and July
15 of each year.
The 6.05% and the 6.875% senior notes do not have sinking
fund requirements. These notes rank equally with existing senior
unsecured indebtedness of Valero Logistics Operations, including
indebtedness under the revolving credit agreement and term loan
agreement. Both series of senior notes contain restrictions on
Valero Logistics Operations ability to incur secured
indebtedness unless the same security is also provided for the
benefit of holders of the senior notes. In addition, the senior
notes limit Valero Logistics Operations ability to incur
indebtedness secured by certain liens and to engage in certain
sale-leaseback transactions.
At the option of Valero Logistics Operations, the 6.05% and the
6.875% senior notes may be redeemed in whole or in part at
any time at a redemption price, which includes a make-whole
premium, plus accrued and unpaid interest to the redemption
date. The Valero Logistics Operations senior notes also include
a change-in-control
provision, which requires (1) that Valero Energy or an
investment grade entity own, directly or indirectly, 51% of
Valero L.P.s general partner interests and (2) that
Valero L.P. (or an investment grade entity) own, directly or
indirectly, all of the general partner and limited partner
interests in Valero Logistics Operations. Otherwise, Valero
Logistics Operations must offer to purchase the senior notes at
a price equal to 100% of their outstanding principal balance
plus accrued interest through the date of purchase.
|
|
|
7.75% and 5.875% Senior Notes |
As a result of the Kaneb acquisition, Valero L.P. assumed the
outstanding senior notes issued by KPOP, having an aggregate
face value of $500.0 million, and an aggregate fair value
of $555.0 million. The difference between the fair value
and the face value of the senior notes is being amortized as a
reduction of interest expense over the remaining lives of the
senior notes using the effective interest method.
The senior notes were issued in two series, the first of which
bears interest at 7.75% annually (due semi-annually on February
15 and August 15) and matures February 15, 2012. The
second series bears interest at 5.875% annually (due
semi-annually on June 1 and December 1) and matures
June 1, 2013.
83
The 7.75% and 5.875% senior notes do not contain sinking
fund requirements. These notes contain restrictions on Valero
L.P.s ability to incur indebtedness secured by liens, to
engage in certain sale-leaseback transactions, to engage in
certain transactions with affiliates, as defined, and to utilize
proceeds from the disposition of certain assets. At the option
of KPOP, the 7.75% and 5.875% senior notes may be redeemed
in whole or in part at any time at a redemption price, which
includes a make-whole premium, plus accrued and unpaid interest
to the redemption date.
The senior notes issued by Valero Logistics Operations are fully
and unconditionally guaranteed by Valero L.P. In connection with
the Kaneb acquisition, effective July 1, 2005, Valero L.P.
fully and unconditionally guaranteed the outstanding senior
notes issued by KPOP. Additionally, effective July 1, 2005,
both Valero Logistics Operations and KPOP fully and
unconditionally guaranteed the outstanding senior notes of the
other.
|
|
|
$525 Million Term Loan Agreement |
On July 1, 2005, Valero L.P. borrowed $525.0 million
under its new $525 million term loan agreement dated
July 1, 2005 (the $525 Term Loan Agreement), the majority
of which was used to fund the Kaneb acquisition. The
$525 Million Term Loan Agreement matures on July 1,
2010 and bears interest based on either an alternative base rate
or LIBOR, which was 5.2% as of December 31, 2005. The
weighted-average interest rate related to outstanding borrowings
under the $525 Million Term Loan Agreement for the year
ended December 31, 2005 was 4.5%. With a portion of the
proceeds received from the sale of the Held Separate Businesses,
Valero L.P. repaid $300.0 million of the outstanding
balance. As of December 31, 2005, Valero L.P.s
outstanding balance under the $525 Million Term Loan
Agreement was $225.0 million. No additional funds may be
borrowed under the $525 Million Term Loan Agreement.
|
|
|
$400 Million Revolving Credit Agreement |
On July 1, 2005, Valero L.P. borrowed $180.0 million
under Valero L.P.s $400 million revolving credit
agreement (the $400 Million Revolving Credit Agreement),
dated effective December 20, 2004 as amended on
June 30, 2005, which expires on July 1, 2010 and bears
interest based on either an alternative base rate or LIBOR,
which was 5.2% as of December 31, 2005. Utilizing the
$180.0 million borrowing, other proceeds and cash on hand,
on July 1, 2005, Valero L.P. repaid approximately
$191.5 million of the outstanding indebtedness of Kaneb and
repaid $38.0 million of indebtedness outstanding on Valero
L.P.s prior $175 million revolving credit facility.
During the year ended December 31, 2005, Valero L.P. repaid
the $209.5 million outstanding under the $400 Million
Revolving Credit Agreement, including $160.0 million which
was repaid using a portion of the proceeds from the sale of the
Held Separate Businesses on September 30, 2005. As of
December 31, 2005, Valero L.P. had $395.1 million
available for borrowing under the $400 Million Revolving
Credit Agreement. The weighted-average interest rate related to
outstanding borrowings under the $400 Million Revolving
Credit Agreement for the year ended December 31, 2005 was
4.3%.
|
|
|
$175 Million Revolving Credit Facility |
Valero L.P. terminated its $175 million revolving credit
facility on July 1, 2005 by repaying the $38.0 million
outstanding amount using proceeds from its new $400 Million
Revolving Credit Agreement. At Valero Logistics Operations
option, borrowings under the revolving credit facility bore
interest based on either an alternative base rate or LIBOR.
As a result of the Kaneb acquisition, on July 1, 2005,
Valero L.P. amended and restated a term loan agreement of
Kanebs UK subsidiary dated January 29, 1999 (the
UK Term Loan), and assumed the outstanding obligation of
21,000,000 Pounds Sterling ($36.1 million as of
December 31, 2005). The UK Term Loan bears interest at
6.65% annually and matures June 30, 2010.
84
The $525 Million Term Loan Agreement, the $400 Million
Revolving Credit Agreement and the UK Term Loan all require that
Valero L.P. maintain certain financial ratios and include other
restrictive covenants, including a prohibition on distributions
if any defaults, as defined in the agreements, exists or would
result from the distribution. These agreements include a change
in control provision, which requires that Valero Energy continue
to own, directly or indirectly, a majority of Valero L.P.s
general partner interest and that Valero Energy and/or Valero
L.P. own 100% of the borrower or 100% of the outstanding limited
partner interest in the borrower. Management of Valero L.P.
believes that it is in compliance with all of these ratios and
covenants as of December 31, 2005.
Valero Logistics Operations and KPOP own and operate pipelines,
terminals and storage tanks and are issuers of the publicly
traded senior notes. Valero L.P. has no operations and has fully
and unconditionally guaranteed the senior notes issued by KPOP
and Valero Logistics Operations and any obligations under Valero
Logistics Operations $400 Million Revolving Credit
Agreement and $525 Million Term Loan Agreement and the
Kaneb UK Term Loan.
|
|
|
Port Authority of Corpus Christi Note Payable |
The proceeds from the original $12.0 million note payable
due to the Port of Corpus Christi Authority of Nueces County,
Texas (Port Authority of Corpus Christi) were used for the
construction of a crude oil storage facility in Corpus Christi,
Texas. The note payable is due in annual installments of
$1.2 million through December 31, 2015 and is
collateralized by the crude oil storage facility. Interest on
the unpaid principal balance accrues at a rate of 8% per
annum. The land on which the crude oil storage facility was
constructed is leased from the Port Authority of Corpus Christi.
During 2003, Valero L.P. entered into interest rate swap
agreements to manage its exposure to changes in interest rates.
The interest rate swap agreements have an aggregate notional
amount of $167.5 million, of which $60.0 million is
tied to the maturity of the 6.875% senior notes and
$107.5 million is tied to the maturity of the
6.05% senior notes. Under the terms of the interest rate
swap agreements, Valero L.P. will receive a fixed rate (6.875%
and 6.05% for the $60.0 million and $107.5 million of
interest rate swap agreements, respectively) and will pay a
variable rate based on LIBOR plus a percentage that varies with
each agreement.
The interest rate swap contracts qualified for the shortcut
method of accounting prescribed by SFAS 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended. As a result, changes in the fair
value of the derivatives will completely offset the changes in
the fair value of the underlying hedged items.
As of December 31, 2004 and 2005, the weighted average
effective interest rate for the interest rate swaps was 4.7% and
6.6%, respectively. As of December 31, 2004 and 2005, the
aggregate estimated fair value of the interest rate swaps
included in other long-term liabilities in the consolidated
balance sheet was $1.2 million and $4.0 million,
respectively.
The following table presents Valero L.P.s long-term
contractual obligations and commitments and the related payments
due, in total and by period, as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Long-term debt (stated maturities)
|
|
$ |
1,046 |
|
|
$ |
611 |
|
|
$ |
660 |
|
|
$ |
713 |
|
|
$ |
265,901 |
|
|
$ |
901,774 |
|
|
$ |
1,170,705 |
|
Operating leases
|
|
|
9,544 |
|
|
|
6,424 |
|
|
|
5,274 |
|
|
|
4,434 |
|
|
|
4,217 |
|
|
|
81,028 |
|
|
|
110,921 |
|
Purchase obligations
|
|
|
216,426 |
|
|
|
959 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
77 |
|
|
|
217,537 |
|
A purchase obligation is an enforceable and legally binding
agreement to purchase goods or services that specifies
significant terms, including (i) fixed or minimum
quantities to be purchased, (ii) fixed, minimum or variable
price provisions, and (iii) the approximate timing of the
transaction. Valero L.P.s purchase obligations consist
mainly of a bunker fuel purchase agreement with minimum volume
requirements, which is based on
85
market prices. Valero L.P. entered into this agreement to
support its operations at St. Eustatius whereby Valero L.P.
purchases bunker fuel for resale to its customers.
Valero L.P. does not have any long-term contractual obligations
related to its investment in joint ventures, other than the
requirement to operate the joint ventures on behalf of the
members and to fund its 50% share of capital expenditures as
they arise.
Related Party Transactions
Valero L.P. has related party transactions with Valero Energy
for pipeline tariff, terminalling fee and crude oil storage tank
fee revenues, certain employee costs, insurance costs,
administrative costs, and lease expense. Under the terms of a
services agreement with Valero Energy (see discussion below
under Services Agreement), Valero L.P. reimburses
Valero Energy for payroll costs of employees working on its
behalf. Additionally, Valero Energy charges Valero L.P. an
administrative service fee. Valero L.P.s receivable from
Valero Energy as of December 31, 2004 and 2005 represents
amounts due for pipeline tariff, terminalling fee and crude oil
storage tank fee revenues and Valero L.P.s payable to
Valero Energy represents amounts due for employee costs,
insurance costs, operating expenses, administrative costs and
lease expense.
The following table summarizes information pertaining to Valero
L.P.s transactions with Valero Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005(a) | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Revenues
|
|
$ |
178,605 |
|
|
$ |
217,608 |
|
|
$ |
234,485 |
|
Operating expenses
|
|
|
24,196 |
|
|
|
31,960 |
|
|
|
60,921 |
|
General and administrative expenses
|
|
|
6,110 |
|
|
|
10,539 |
|
|
|
19,356 |
|
|
|
|
(a) |
|
The amounts reflected in the table include revenues and
operating expenses of $1,850 and $1,867, respectively, which are
included in income from discontinued operations in the
consolidated statement of income. |
In addition to owning a combined 23.4% general and limited
partner interest in Valero L.P. as of December 31, 2005,
Valero L.P. has entered into a number of operating agreements
with Valero Energy, which govern the required services provided
to and received from Valero Energy. Most of the operating
agreements include adjustment provisions, which allow Valero
L.P. to increase the handling, storage and throughput fees it
charges to Valero Energy based on a consumer price index. In
addition, the pipeline tariffs charged by Valero L.P. are
reviewed annually and adjusted based on an inflation index and
may also be adjusted to take into consideration additional costs
incurred to provide the transportation services. The following
is a summary of the significant terms of the individual
agreements.
Valero L.P. does not have any employees. Under the Services
Agreement, the costs related to employees of Valero Energy who
perform services directly on Valero L.P.s behalf (direct
services), including salary, wages and employee benefits are
charged by Valero Energy to Valero L.P. Effective July 1,
2005, the Services Agreement (the 2005 Services Agreement) was
amended to account for Valero L.P.s significant growth
following the closing of the Kaneb acquisition. The 2005
Services Agreement provided that the annual service fee would be
$13.8 million for the first year from July 1, 2005 to
June 30, 2006. In addition, Valero L.P. agreed to perform
certain services for Valero Energy, including control room
services, terminal operations oversight, mapping support and
integrity management program planning in exchange for an annual
fee.
Effective January 1, 2006, pursuant to the new services
agreement (the 2006 Services Agreement), Valero GP, LLC
began directly performing many of the services previously
provided by Valero Energy under the 2005 Services Agreement,
primarily consisting of legal, corporate development and health,
safety and environmental functions. As a result, the employees
performing these services became employees of Valero
GP, LLC, and their costs are now directly charged to Valero
L.P. Accordingly, the annual fee charged by Valero Energy to
Valero
86
L.P. for administrative services was reduced to approximately
$1.9 million per year. This annual fee will increase to
approximately $2.9 million and $3.4 million in 2007
and 2008, respectively. The annual fee will remain at
approximately $3.4 million through the term of the
agreement. In addition, each annual fee will be subject to
adjustments to account for Valero Energys annual salary
increase. Subject to approval by Valero L.P.s Conflicts
Committee, the amounts may also be adjusted for changed service
levels.
The term of the 2006 Services Agreement will expire on
December 31, 2010 with automatic two-year renewal options
unless terminated by either party at least six months prior to
the renewal period. Valero L.P. may cancel or reduce the level
of services that Valero Energy provides Valero L.P. on
60 days prior written notice. The 2006 Services Agreement
will terminate upon the change of control of either us or Valero
L.P.
A portion of Valero L.P.s general and administrative costs
is passed on to third parties, which jointly own certain
pipelines and terminals with Valero L.P. The net amount of
Valero L.P.s general and administrative costs allocated to
partners of jointly owned pipelines totaled $0.5 million,
$0.7 million and $0.6 million for the years ended
December 31, 2003, 2004 and 2005, respectively.
|
|
|
Amended and Restated Omnibus Agreement |
The Amended and Restated Omnibus Agreement governs potential
competition between Valero Energy and Valero L.P. Under the
Amended and Restated Omnibus Agreement, Valero Energy has
agreed, and will cause its controlled affiliates to agree, for
so long as Valero Energy owns 20% or more of Valero L.P. or
Valero L.P.s general partner, not to engage in the
business of transporting crude oil and other feedstocks or
refined products, including petrochemicals, or operating crude
oil storage facilities or refined product terminalling assets in
the United States. This restriction does not apply to:
|
|
|
|
|
any business retained by Ultramar Diamond Shamrock Corporation
(UDS) as of April 16, 2001, the closing of Valero
L.P.s initial public offering, or any business owned by
Valero Energy at the date of its acquisition of UDS on
December 31, 2001; |
|
|
|
any business with a fair market value of less than
$10 million; |
|
|
|
any business acquired by Valero Energy in the future that
constitutes less than 50% of the fair market value of a larger
acquisition, provided Valero L.P. has been offered and declined
the opportunity to purchase the business; and |
|
|
|
any newly constructed pipeline, terminalling or storage assets
that Valero L.P. has not offered to purchase at fair market
value within one year of construction. |
Also under the Amended and Restated Omnibus Agreement, Valero
Energy has agreed to indemnify Valero L.P. for environmental
liabilities related to the assets transferred to Valero L.P. in
connection with Valero L.P.s initial public offering,
provided that such liabilities arose prior to and are discovered
within ten years after that date (excluding liabilities
resulting from a change in law after April 16, 2001).
We will enter into a Non-Compete Agreement with Valero L.P. upon
the closing of this offering. This Non-Compete Agreement will
not be effective until we are no longer subject to the Amended
and Restated Omnibus Agreement described above. Under the
Non-Compete Agreement, we will have a right of first refusal
with respect to the potential acquisition of general partner and
other equity interests in publicly traded partnerships under
common ownership with the general partner interest. Valero L.P.
will have a right of first refusal with respect to the potential
acquisition of assets that relate to the transportation, storage
or terminalling of crude oil, feedstocks or refined petroleum
products (including petrochemicals) in the United States and
internationally. With respect to any other business
opportunities, neither we nor Valero L.P. are prohibited from
engaging in any business, even if we and Valero L.P. would have
a conflict of interest with respect to such other business
opportunity.
87
|
|
|
Pipelines and Terminals Usage Agreement McKee,
Three Rivers and Ardmore |
Under the terms of the Pipeline and Terminals Usage Agreement
dated April 16, 2001, Valero L.P. provides transportation
services that support Valero Energys refining and
marketing operations relating to the McKee, Three Rivers and
Ardmore refineries. Pursuant to the agreement, Valero Energy has
agreed through April 2008:
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|
|
|
to transport in Valero L.P.s crude oil pipelines at least
75% of the aggregate volumes of crude oil shipped to the McKee,
Three Rivers and Ardmore refineries; |
|
|
|
to transport in Valero L.P.s refined product pipelines at
least 75% of the aggregate volumes of refined products shipped
from the McKee, Three Rivers and Ardmore refineries; and |
|
|
|
to use Valero L.P.s refined product terminals for
terminalling services for at least 50% of all refined products
shipped from the McKee, Three Rivers and Ardmore refineries. |
If market conditions change with respect to the transportation
of crude oil or refined products, or to the end markets in which
Valero Energy sells refined products, in a material manner such
that Valero Energy would suffer a material adverse effect if it
were to continue to use Valero L.P.s pipelines and
terminals that service the McKee, Three Rivers and Ardmore
refineries at the required levels, Valero Energys
obligation to Valero L.P. will be suspended during the period of
the change in market conditions to the extent required to avoid
the material adverse effect.
In the event Valero Energy does not transport in Valero
L.P.s pipelines or use Valero L.P.s terminals to
handle the minimum volume requirements and if its obligation has
not been suspended under the terms of the agreement, Valero
Energy will be required to make a cash payment determined by
multiplying the shortfall in volume by the applicable weighted
average pipeline tariff or terminal fee. For the year ended
December 31, 2005, Valero Energy exceeded its obligations
under the Pipelines and Terminals Usage Agreement. Additionally,
Valero Energy has agreed not to challenge, or cause others to
challenge, Valero L.P.s interstate or intrastate tariffs
for the transportation of crude oil and refined products until
at least April 2008.
|
|
|
Crude Oil Storage Tank Agreements |
In conjunction with the acquisition of the Crude Oil Storage
Tanks in March 2003, Valero L.P. entered into the following
agreements with Valero Energy:
|
|
|
|
|
Handling and Throughput Agreement, dated March 2003,
pursuant to which Valero Energy agreed to pay Valero L.P. a fee
for 100% of crude oil and certain other feedstocks delivered to
each of the Corpus Christi West refinery, the Texas City
refinery and the Benicia refinery and to use Valero L.P.s
logistic assets for handling all deliveries to these refineries.
The throughput fees are adjustable annually, generally based on
75% of the regional consumer price index applicable to the
location of each refinery. The initial term of the handling and
throughput agreement is ten years, which may be extended by
Valero Energy for up to an additional five years. |
|
|
|
Services and Secondment Agreements, dated March 2003,
pursuant to which Valero Energy agreed to provide personnel to
Valero L.P. who perform operating and routine maintenance
services related to the crude oil storage tank operations. The
annual reimbursement for those services is an aggregate
$3.5 million. The initial term of the services and
secondment agreements is ten years which Valero L.P. has the
option to extend for an additional five years. In addition to
the fees Valero L.P. has agreed to pay Valero Energy under the
services and secondment agreements, Valero L.P. is responsible
for operating expenses and specified capital expenditures
related to the tank assets that are not addressed in the
services and secondment agreements. These operating expenses and
capital expenditures include tank safety inspections,
maintenance and repairs, certain environmental expenses,
insurance premiums and ad valorem taxes. |
|
|
|
Lease and Access Agreements, dated March 2003, pursuant
to which Valero Energy leases to Valero L.P. the land on which
the crude oil storage tanks are located for an aggregate amount
of $0.7 million per year. The initial term of each lease is
25 years, subject to automatic renewal for successive
one-year periods thereafter. Valero L.P. may terminate any of
these leases upon 30 days notice after the initial term |
88
|
|
|
|
|
or at the end of a renewal period. In addition, Valero L.P. may
terminate any of these leases upon 180 days notice prior to
the expiration of the current term if Valero L.P. ceases to
operate the crude oil storage tanks or cease business operations. |
|
|
|
South Texas Pipelines and Terminals Agreements |
In conjunction with the acquisition of the South Texas Pipelines
and Terminals in March 2003, Valero L.P. entered into the
following agreements with Valero Energy:
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|
|
|
|
Terminalling Agreement, dated March 2003, pursuant to
which Valero Energy agreed, during the initial period of five
years, to pay a terminalling fee for each barrel of refined
product stored or handled by or on behalf of Valero Energy at
the terminals, including an additive fee for gasoline additive
blended at the terminals. At the Houston Hobby Airport terminal,
Valero Energy agreed to pay a filtering fee for each barrel of
jet fuel stored or handled at the terminal. |
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Throughput Commitment Agreement, dated March 2003,
pursuant to which Valero Energy agreed, for an initial period of
seven years: |
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to transport in the Houston and Valley pipeline systems an
aggregate of 40% of the Corpus Christi refineries gasoline
and distillate production but only if the combined throughput in
these pipelines is less than 110,000 barrels per day; |
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to transport in the Pettus to San Antonio refined product
pipeline 25% of the Three Rivers refinery gasoline and
distillate production and in the Pettus to Corpus Christi
refined product pipeline 90% of the Three Rivers refinery
raffinate production; |
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to use the Houston asphalt terminal for an aggregate of 7% of
the asphalt production of the Corpus Christi refineries; |
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to use the Edinburg refined product terminal for an aggregate of
7% of the gasoline and distillate production of the Corpus
Christi refineries, but only if the throughput at this terminal
is less than 20,000 barrels per day; and |
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to use the San Antonio East terminal for 75% of the
throughput in the Pettus to San Antonio refined product
pipeline. |
In the event Valero Energy does not transport in Valero
L.P.s pipelines or use Valero L.P.s terminals to
handle the minimum volume requirements and if Valero
Energys obligation has not been suspended under the terms
of the agreement, Valero Energy will be required to make a cash
payment determined by multiplying the shortfall in volume by the
applicable weighted average pipeline tariff or terminal fee.
Valero Energys obligation to transport 90% of the Three
Rivers refinery raffinate production in the Pettus to Corpus
Christi refined product pipeline was suspended in the fourth
quarter of 2005 due to the temporary idling of the pipeline in
the fourth quarter of 2005.
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Hydrogen Tolling Agreement |
Valero L.P. is a party to a hydrogen tolling agreement,
which provides that Valero Energy will pay Valero L.P. minimum
annual revenues of $1.4 million for transporting crude
hydrogen from the BOC Groups chemical facility in Clear
Lake, Texas to Valero Energys Texas City refinery.
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Pittsburg Asphalt Terminal Throughput Agreement |
Valero L.P. is a party to a terminal storage and throughput
agreement related to the Pittsburg asphalt terminal, which
provides that Valero Energy will pay Valero L.P. a monthly lease
fee of $0.2 million, a minimum annual throughput fee of
$0.4 million and will reimburse Valero L.P. for utility
costs.
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Royal Trading Throughput Agreement |
In conjunction with the Royal Trading acquisition, Valero L.P.
entered into a five-year terminal storage and throughput
agreement with Valero Energy. The agreement provides a base
throughput and blending fee schedule with volume incentive
discounts once certain thresholds are met. In addition, Valero
Energy has agreed to utilize the acquired terminals for a
minimum of 18.5% of the combined McKee and Ardmore
refineries asphalt production.
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Corpus Christi North Beach Storage Facility Lease |
Valero L.P. entered into a one-year shell barrel capacity lease
agreement with Valero Energy on January 1, 2004 for the
1.6 million barrels of capacity at Valero L.P.s
Corpus Christi North Beach storage facility. This lease
automatically renews for additional one-year terms unless either
party terminates it with a
90-day written notice.
The use of this storage facility was previously included as part
of the crude oil pipeline tariff for Valero L.P.s Corpus
Christi to Three Rivers crude oil pipeline.
In January of 2006, Valero L.P. entered into an Office Rental
Agreement (the Rental Agreement) with Valero Energy whereby
Valero L.P. agreed to lease approximately 65,000 square
feet of office space at an annual cost of approximately
$1.6 million per year for the first five years. For years
six through ten, the annual fee is subject to adjustment for
changes in the Consumer Price Index. For each subsequent five
year period under the initial term and during the ten-year
renewal option, the annual rent shall be adjusted to reflect the
actual market rent of comparable office spaces. Rental payments
will commence upon the completion of a new office facility
presently being constructed by Valero Energy. The completion of
this facility is expected to be in the second half of 2007. The
Rental Agreement has an initial term of 25 years with a
ten-year renewal option.
Valero L.P. has other minor storage and throughput contracts
with Valero Energy resulting from the Kaneb acquisition.
As of December 31, 2005, Valero GP Holdings owned 614,572
of Valero L.P.s outstanding common units and all 9,599,322
of Valero L.P.s outstanding subordinated units. In January
2006, in anticipation of our initial public offering, we
transferred all of these units to one of our wholly owned
subsidiaries. In addition, as of December 31, 2005, Valero
GP, LLC, also an indirect wholly owned subsidiary of Valero
Energy, owned 8,200 of Valero L.P.s outstanding common
units. As a result, Valero Energy owns a 21.4% limited partner
interest in Valero L.P. and the 2% general partner interest held
by Riverwalk Logistics.
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Environmental, Health and Safety |
Valero L.P. is subject to extensive federal, state and local
environmental and safety laws and regulations, including those
relating to the discharge of materials into the environment,
waste management, pollution prevention measures, pipeline
integrity and operator qualifications, among others. Because
environmental and safety laws and regulations are becoming more
complex and stringent and new environmental and safety laws and
regulations are continuously being enacted or proposed, the
level of future expenditures required for environmental, health
and safety matters is expected to increase.
The balance of and changes in Valero L.P.s accruals for
environmental matters as of and for the years ended
December 31, 2003, 2004 and 2005 are included in Valero
L.P.s Notes to Consolidated Financial Statements. Valero
L.P. believes that it has adequately accrued for its
environmental exposures.
90
Critical Accounting Policies
The preparation of financial statements in accordance with
United States generally accepted accounting principles requires
management to select accounting policies and to make estimates
and assumptions related thereto that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. The accounting
policies below are considered critical due to judgments made by
Valero L.P.s management and the sensitivity of these
estimates to deviations of actual results from managements
assumptions. The critical accounting policies should be read in
conjunction with Valero L.P.s Notes to Consolidated
Financial Statements, which summarizes Valero L.P.s
significant accounting policies.
Valero L.P. calculates depreciation expense using the
straight-line method over the estimated useful lives of its
property and equipment. Because of the expected long useful
lives of the property and equipment, Valero L.P. depreciates its
property and equipment over periods ranging from 15 years
to 40 years. Changes in the estimated useful lives of the
property and equipment could have a material adverse effect on
Valero L.P.s results of operations.
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Impairment of Long-Lived Assets and Goodwill |
Valero L.P. tests long-lived assets for recoverability whenever
events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Goodwill must be
tested for impairment annually or more frequently if events or
changes in circumstances indicate that the related asset might
be impaired. An impairment loss should be recognized only if the
carrying amount of the asset/goodwill is not recoverable and
exceeds its fair value.
In order to test for recoverability, Valero L.P.s
management must make estimates of projected cash flows related
to the asset which include, but are not limited to, assumptions
about the use or disposition of the asset, estimated remaining
life of the asset, and future expenditures necessary to maintain
the assets existing service potential. In order to
determine fair value, Valero L.P.s management must make
certain estimates and assumptions including, among other things,
an assessment of market conditions, projected cash flows,
investment rates, interest/equity rates and growth rates, that
could significantly impact the fair value of the long-lived
asset or goodwill. Due to the subjectivity of the assumptions
used to test for recoverability and to determine fair value,
significant impairment charges could result in the future, thus
affecting Valero L.P.s future reported net income.
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Asset Retirement Obligations |
Valero L.P. adopted FASB Interpretation No. 47.
Accounting for Conditional Asset Retirement
Obligations (FIN 47) for the year ended
December 31, 2005. FIN 47 clarifies the term
conditional asset retirement obligation as used in
FASB statement No. 143, Accounting for Asset
Retirement Obligations. Valero L.P. records a liability
for asset retirement obligations, including conditional asset
retirement obligations, in the period the obligation is incurred
if Valero L.P. can make a reasonable estimate of the fair value
of the obligation. In order to determine the fair value of an
asset retirement obligation, Valero L.P. must make assumptions
as to the date the obligation will be settled, the amount and
timing of cash flows required to settle the obligation and an
appropriate discount rate.
Valero L.P. has asset retirement obligations with respect to
certain of its assets due to various legal obligations to clean
and/or dispose of those assets at the time they are retired.
However, these assets can be used for extended and indeterminate
period of time as long as they are properly maintained and/or
upgraded. It is Valero L.P.s practice and current intent
to maintain its assets and continue making improvements to those
assets based on technological advances. As a result, Valero L.P.
believes that its assets have indeterminate lives for purposes
of estimating asset retirement obligations because dates or
ranges of dates upon which it would retire these assets cannot
reasonably be estimated at this time. When a date or range of
dates can reasonably be estimated for the retirement of any
asset, Valero L.P. estimates the cost of performing the
retirement activities and records a liability for the fair value
of that cost using established present value techniques.
91
Valero L.P. also has legal obligations in the form of leases and
right of way agreements, which require Valero L.P. to remove
certain of its assets upon termination of the agreement.
However, these lease or right of way agreements generally
contain automatic renewal provisions that extend Valero
L.P.s rights indefinitely or it has other legal means
available to extend its rights. As a result, Valero L.P. has not
recorded a liability for asset retirement obligations as the
timing of settlement cannot be reasonably determined.
Environmental remediation costs are expensed and an associated
accrual established when site restoration and environmental
remediation and cleanup obligations are either known or
considered probable and can be reasonably estimated. Accrued
liabilities are based on estimates of probable undiscounted
future costs over a
20-year time period
using currently available technology and applying current
regulations, as well as Valero L.P.s own internal
environmental policies. Valero L.P.s environmental
liabilities have not been reduced by possible recoveries from
third parties. Environmental costs include initial site surveys,
costs for remediation and restoration and ongoing monitoring
costs, as well as fines, damages and other costs, when
estimable. Adjustments to initial estimates are recorded, from
time to time, to reflect changing circumstances and estimates
based upon additional information developed in subsequent
periods. Valero L.P. believes that it has adequately accrued for
its environmental exposures.
Valero L.P. accrues for costs relating to litigation, claims and
other contingent matters, including tax contingencies, when such
liabilities become probable and reasonably estimable. Such
estimates may be based on advice from third parties or on
managements judgment, as appropriate. Actual amounts paid
may differ from amounts estimated, and such differences will be
charged to income in the period when final determination is made.
92
BUSINESS OF VALERO GP HOLDINGS, LLC
General
Our only cash generating assets are our indirect ownership
interests in Valero L.P., a publicly traded Delaware limited
partnership (New York Stock Exchange symbol: VLI). Valero L.P.,
through its subsidiaries, operates one of the largest
independent terminal and petroleum liquids pipeline systems in
the United States. Our aggregate ownership interests in Valero
L.P. consist of the following:
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the 2% general partner interest in Valero L.P., which we hold
through our 100% ownership interest in Riverwalk Logistics, L.P.; |
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100% of the incentive distribution rights issued by Valero L.P.,
which entitle us to receive increasing percentages of the cash
distributed by Valero L.P., currently at the maximum percentage
of 23%; and |
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617,339 common units and 9,599,322 subordinated units of Valero
L.P. representing a 21.4% limited partner interest in Valero
L.P. We expect the subordinated units to convert on a
one-for-one basis to common units during the second quarter of
2006. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 63% of our outstanding units. It is Valero
Energys intent to further reduce and ultimately sell all
of its indirect ownership interest in us, pending market
conditions.
Our primary objective is to increase per unit distributions to
our unitholders by actively supporting Valero L.P. in executing
its business strategy, which includes continued growth through
expansion projects and strategic acquisitions. We may facilitate
Valero L.P.s growth through the use of our capital
resources, which could involve capital contributions, loans or
other forms of financial support.
Valero L.P. is required by its partnership agreement to
distribute all of its available cash at the end of each quarter,
less reserves established by its general partner in its sole
discretion to provide for the proper conduct of Valero
L.P.s business or to provide funds for future
distributions. Similarly, we are required by our limited
liability company agreement to distribute all of our available
cash at the end of each quarter, less reserves established by
our board of directors. However, unlike Valero L.P., we do not
have a general partner or incentive distribution rights.
Therefore, all of our distributions are made on our units, which
are the only class of security outstanding.
Valero L.P. has an established historical record of paying
quarterly cash distributions to its partners. Since its initial
public offering in 2001, Valero L.P. has increased its quarterly
cash distribution by approximately 42.5%, from $0.60 per unit,
or $2.40 per unit on an annualized basis, to a current level of
$0.855 per unit, or $3.42 per unit on an annualized basis. For
the fourth quarter of 2005 we received a cash distribution from
Valero L.P. of approximately $12.7 million (representing
approximately $50.7 million on an annualized basis),
consisting of $0.9 million on our 2% general partner
interest, $3.1 million on the incentive distribution rights
and $8.7 million on the units of Valero L.P. that we own.
Based on this current distribution level, we expect that our
initial quarterly cash distribution will be $0.27 per unit, or
$1.08 per unit on an annualized basis.
The graph set forth below shows the adjusted historical cash
distributions declared and paid during the periods shown with
respect to our ownership interests in Valero L.P. On
March 18, 2003, Valero L.P. redeemed 3,809,750 common units
indirectly owned by us. For comparability purposes, the amounts
presented in the table for the quarters in 2001 and 2002 have
been adjusted to reflect the reduced amount of distributions
that would have been paid to us if the redemption had occurred
on April 16, 2001, the effective date of Valero L.P.s
initial public offering.
From April 16, 2001 through the fourth quarter of 2005, the
total quarterly cash distributions declared and paid by Valero
L.P. with respect to all of its partnership interests increased
457%, from approximately $7.9 million (adjusted to reflect
the reduced amount of distributions that would have been paid
had the common unit redemption discussed above occurred on
April 16, 2001) to approximately $44.0 million. Over
the same period, the adjusted quarterly cash distributions
declared and paid by Valero L.P. with respect to our ownership
interests increased 140%, from $5.3 million, or 67% of
Valero L.P.s adjusted total quarterly distributions,
to
93
$12.7 million, or 28.9% of Valero L.P.s total
quarterly distributions. The changes in the adjusted historical
cash distributions on our ownership interests reflected in the
graph set forth below generally resulted from the following:
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the increases in Valero L.P.s per unit quarterly
distribution from $0.60 declared and paid for the third quarter
of 2001 to $0.855 declared and paid for the fourth quarter of
2005; and |
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the increases in Valero L.P.s distributions with respect
to the 2% general partner interest resulting from the issuance
of a total of 31,420,855 common units by Valero L.P. during
such period to finance acquisitions and capital improvements. |
Adjusted Quarterly Valero L.P. Distributions to Valero GP
Holdings, LLC (a)
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(a) |
Actual distributions paid to Valero GP Holdings for quarters
prior to the March 18, 2003 redemption were as follows (in
millions, except per unit amounts): |
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Per Unit |
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Total Distribution Paid to |
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Distribution |
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Valero GP Holdings, LLC |
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2001:
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Second Quarter
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$ |
0.501 |
(b) |
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$ |
7.2 |
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Third Quarter
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0.600 |
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8.6 |
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Fourth Quarter
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0.600 |
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8.7 |
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2002:
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First Quarter
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0.650 |
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9.5 |
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Second Quarter
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0.700 |
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10.5 |
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Third Quarter
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0.700 |
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10.5 |
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Fourth Quarter
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0.700 |
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10.5 |
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(b) |
The second quarter distribution was prorated for the period from
April 16, 2001, the effective date of Valero L.P.s
initial public offering, to June 30, 2001. |
Our ownership of Valero L.P.s incentive distribution
rights entitles us to receive the following percentages of cash
distributed by Valero L.P. as the following target cash
distribution levels are reached:
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8.0% of all cash distributed in a quarter after $0.60 per unit
has been distributed with respect to all units of Valero L.P.
for that quarter until $0.66 per unit has been distributed; and |
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23.0% of all cash distributed in a quarter after $0.66 per unit
has been distributed with respect to all units of Valero L.P.
for that quarter. |
94
For the quarter ended December 31, 2005, Valero L.P. paid a
distribution of $0.855 per unit, which meant we received 23.0%
of the $0.195 incremental cash distribution per unit in excess
of the maximum target distribution level of $0.66. Because the
incentive distribution rights currently participate at the
maximum 23% target cash distribution level, future growth in
distributions we receive from Valero L.P. will not result from
an increase in the percentage of incremental cash distributed on
the incentive distribution rights.
The graph set forth below shows hypothetical cash distributions
payable with respect to our ownership interests in Valero L.P.
across an illustrative range of annualized distributions per
unit made by Valero L.P. The graph shows the impact to us of
Valero L.P. raising or lowering its per unit distribution from
its current quarterly distribution of $0.855 per unit, or $3.42
per unit on an annualized basis and is based upon the following
assumptions:
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Valero L.P.s 37,210,427 common units and 9,599,322
subordinated units outstanding as of December 31, 2005; and |
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our ownership of the general partner interest in Valero L.P.,
the incentive distribution rights, 617,339 common units and
9,599,322 subordinated units. |
This information is presented for illustrative purposes only and
is not intended to be a prediction of future performance. Valero
L.P.s cash distributions with respect to our partnership
interests will vary depending on several factors, including
Valero L.P.s outstanding partnership interests on the
record date for distribution, the per unit distribution and our
relative ownership of partnership interests. In addition, the
level of distributions we receive may be affected by the various
risks associated with an investment in us and the underlying
business of Valero L.P. Please read Risk Factors.
Hypothetical Annual Cash Distributions to Valero GP Holdings,
LLC
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(a) |
This represents the most recent distribution (fourth quarter
2005) presented on an annualized basis. |
Based on Valero L.P.s current quarterly distribution, the
number of our units that will be outstanding and our expected
level of expenses and reserves that our board of directors
believes prudent to maintain, we expect to make an initial
quarterly cash distribution of $0.27 per unit, or $1.08 per unit
on an annualized basis. Due to our
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indirect ownership of Valero L.P.s incentive distribution
rights, our cash flows are affected by changes in Valero
L.P.s distributions to a greater extent than those of
Valero L.P.s common unitholders. If Valero L.P. is
successful in implementing its business strategy and increasing
distributions to its partners, including us, we generally would
expect to increase distributions to our unitholders. The timing
and amount of any such increase in our distributions will not
necessarily be comparable to any increase in Valero L.P.s
distributions. In August 2006, we expect to pay you a
distribution equal to the initial quarterly distribution
prorated for the portion of the quarter ending June 30,
2006 that we are a publicly traded limited liability company.
However, we cannot assure you that any distributions will be
declared or paid. Please read Our Cash Distribution Policy
and Restrictions on Distributions Estimated Minimum
Cash Available for Distribution Based upon Estimated Minimum
EBITDA of Valero L.P.
Employees
We have no employees. Our wholly owned subsidiary, Valero GP,
LLC, pursuant to the new Administration Agreement, will provide
administrative services to us. As of January 1, 2006,
Valero GP, LLC had 1,291 employees. We believe that our
relationship with these employees is satisfactory.
For a discussion of how employee benefit plans will be
transferred to Valero GP, LLC upon closing of this offering,
please read Managements Discussion and Analysis of
Financial Condition and Results of Operations Valero
GP Holdings, LLC Liquidity and Capital
Resources Employee Benefits.
Environmental and Safety Regulation
Our only cash generating assets are our indirect ownership
interests in Valero L.P. We have no independent operations.
Please read Business of Valero L.P.
Environmental and Safety Regulation.
Title to Properties
Our only cash generating assets are our indirect ownership
interests in Valero L.P. We have no independent operations.
Please read Business of Valero L.P. Title to
Properties.
Legal Proceedings
Although we may, from time to time, be involved in litigation
and claims arising out of our operations in the normal course of
business, we are not currently a party to any material legal
proceedings. In addition, we are not aware of any legal or
governmental proceedings against us. Please read Business
of Valero L.P. Legal Proceedings and Other
Contingencies.
96
BUSINESS OF VALERO L.P.
General
Valero L.P. is a Delaware limited partnership formed in 1999
that completed its initial public offering of common units on
April 16, 2001. Valero L.P.s common units are traded
on the NYSE under the symbol VLI. Valero L.P.s
principal executive offices are located at One Valero Way, San
Antonio, Texas 78249 and its telephone number is
(210) 345-2000.
Valero L.P.s operations are managed by Valero GP, LLC.
Valero GP, LLC is the general partner of Riverwalk Logistics,
L.P., Valero L.P.s general partner. Valero GP, LLC is an
indirect wholly owned subsidiary of Valero Energy.
Valero L.P. conducts its operations through its wholly owned
subsidiaries, primarily Valero Logistics Operations, L.P.
(Valero Logistics) and Kaneb Pipe Line Operating Partnership,
L.P. (KPOP) Valero L.P. has four business segments: refined
product terminals, refined product pipelines, crude oil
pipelines, and crude oil storage tanks. As of December 31,
2005, Valero L.P.s assets included:
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76 refined product terminal facilities providing approximately
59.7 million barrels of storage capacity; |
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8,389 miles of refined product pipelines, including
2,000 miles of anhydrous ammonia pipelines, with
21 associated terminals providing storage capacity of
4.9 million barrels; |
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797 miles of crude oil pipelines with 11 associated storage
tanks providing storage capacity of 1.7 million barrels; and |
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60 crude oil storage tanks providing storage capacity of
12.5 million barrels. |
Valero L.P. generates revenues by:
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charging tariffs for transporting crude oil, refined products
and ammonia through its pipelines; |
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charging fees for the use of its terminals and crude oil storage
tanks and related ancillary services; and |
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selling bunker fuel, which is fuel consumed by marine vessels. |
Valero L.P.s business strategy is to increase per
unit cash distributions to its partners through:
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continuous improvement of its operations, by improving safety
and environmental stewardship, cost controls and asset
reliability and integrity; |
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internal growth through enhancing the utilization of its
existing assets by expanding its business with current and new
customers as well as investing in strategic expansion projects;
and |
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external growth from acquisitions that meet its financial and
strategic criteria. |
Valero L.P.s largest customer is Valero Energy, which
accounted for 99% and 34% of Valero L.P.s revenues for the
years ended December 31, 2004 and 2005, respectively.
Please read Certain Relationships and Related
Transactions Valero L.P.s Relationship with
Valero Energy.
On July 1, 2005, Valero L.P. completed its acquisition (the
Kaneb Acquisition) of Kaneb Services LLC (KSL) and
Kaneb Pipe Line Partners, L.P. (KPP, and, together with
KSL, Kaneb) and became one of the largest independent terminal
and petroleum liquids pipeline operators in the United States.
Valero L.P. has terminal facilities in the United States,
the Netherlands Antilles, Canada, Mexico, the Netherlands, and
the United Kingdom.
Valero L.P. acquired all of KSLs outstanding equity
securities for approximately $509.0 million in cash, which
was primarily funded by borrowings under a $525.0 million
term credit agreement. Additionally, Valero L.P. issued
approximately 23.8 million of its common units valued at
approximately $1.45 billion in exchange for all of the
outstanding common units of KPP. Please read the disclosures
regarding the Kaneb Acquisition and Valero L.P.s long-term
debt in Valero L.P. and Subsidiaries Notes to
Consolidated
97
Financial Statements Note 3. Acquisitions
and Valero L.P. and Subsidiaries Notes to
Consolidated Financial Statements Note 10.
Long-Term Debt.
In conjunction with the Kaneb Acquisition, Valero L.P.
agreed with the United States Federal Trade Commission to divest
certain assets. These assets consisted of two California
terminals handling refined products, blendstocks and crude oil,
three East Coast refined product terminals, and a 550-mile
refined product pipeline with four truck terminals and storage
in the U.S. Rocky Mountains (collectively, the Held Separate
Businesses). On September 30, 2005, Valero L.P. sold
the Held Separate Businesses to Pacific Energy
Partners, L.P. for approximately $455.0 million. In a
separate transaction that occurred simultaneously with the
closing of the Kaneb Acquisition, Valero L.P. sold all of
its interest in KSLs commodity trading business to Valero
Energy for approximately $26.8 million.
On March 30, 2006, Valero L.P. sold its subsidiaries
located in Australia and New Zealand, which own eight
terminals with an aggregate storage capacity of 1.1 million
barrels, for approximately $65.0 million, plus working
capital adjustments.
Valero L.P.s annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed with (or furnished to) the SEC
are available free of charge on Valero L.P.s website at
http://www.valerolp.com as soon as reasonably practicable
after Valero L.P. files or furnishes such material. Valero L.P.
also posts its corporate governance guidelines, code of business
conduct and ethics, code of ethics for senior financial officers
and the charter of the audit committee of Valero GP, LLC in the
same website location. Information contained on this website
however, is not incorporated by reference into, and does not
constitute a part of, this prospectus. Valero L.P.s
governance documents are also available in print to any
unitholder of record that makes a written request to Corporate
Secretary, Valero L.P., P.O. Box 696000, San Antonio, Texas
78269.
The term throughput as used in this document
generally refers to the crude oil or refined product barrels or
tons of ammonia, as applicable, that pass through each pipeline,
terminal or storage tank.
Business Segments
Valero L.P.s four reportable business segments are refined
product terminals, refined product pipelines, crude oil
pipelines, and crude oil storage tanks. Detailed financial
information about its segments is included in the Notes to
Consolidated Financial Statements.
Refined
Product Terminals
Valero L.P.s terminal facilities provide storage and
handling services on a fee basis for petroleum products,
specialty chemicals and other liquids. In addition, its
terminals located on the island of St. Eustatius, Netherlands
Antilles and in Point Tupper, Nova Scotia sell bunker fuel, and
provide ancillary services, such as pilotage, tug assistance,
line handling, launch service, emergency response services and
other ship services. As of December 31, 2005, Valero L.P.
owned and operated:
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57 terminals in the United States, with a total storage capacity
of approximately 32.6 million barrels; |
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A terminal on the island of St. Eustatius, Netherlands Antilles
with a tank capacity of 11.3 million barrels and a
transshipment facility; |
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A terminal located in Point Tupper, Nova Scotia with a tank
capacity of 7.6 million barrels and a transshipment
facility; |
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Seven terminals located in the United Kingdom and one terminal
located in the Netherlands, having a total storage capacity of
approximately 7.1 million barrels; |
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Eight terminals in Australia and New Zealand with a total
storage capacity of approximately 1.1 million barrels,
which Valero L.P. has sold; and |
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A terminal located in Nuevo Laredo, Mexico. |
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Valero L.P.s five largest terminal facilities are located
on the island of St. Eustatius, Netherlands Antilles; in Point
Tupper, Nova Scotia; in Piney Point, Maryland; in Linden, New
Jersey (50% owned joint venture); and in Selby, California.
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Description of Largest Terminal Facilities |
St. Eustatius, Netherlands Antilles. Valero L.P. owns and
operates an 11.3 million barrel petroleum storage and
terminalling facility located on the Netherlands Antilles island
of St. Eustatius, which is located at a point of minimal
deviation from major shipping routes. This facility is capable
of handling a wide range of petroleum products, including crude
oil and refined products, and it can accommodate the
worlds largest tankers for loading and discharging crude
oil and other petroleum products. A two-berth jetty, a two-berth
monopile with platform and buoy systems, a floating hose
station, and an offshore single point mooring buoy with loading
and unloading capabilities serve the terminals
customers vessels. The St. Eustatius facility has a total
of 51 tanks. The fuel oil and petroleum product facilities have
in-tank and in-line blending capabilities, while the crude tanks
have tank-to-tank blending capability as well as in-tank mixers.
In addition to the storage and blending services at St.
Eustatius, this facility has the flexibility to utilize certain
storage capacity for both feedstock and refined products to
support its atmospheric distillation unit. This unit is capable
of processing up to 25,000 barrels per day of feedstock, ranging
from condensates to heavy crude oil. Valero L.P. owns and
operates all of the berthing facilities at the St. Eustatius
terminal. Separate fees apply for the use of the berthing
facilities as well as associated services, including pilotage,
tug assistance, line handling, launch service, spill response
services and other ship services.
Point Tupper, Nova Scotia. Valero L.P. owns and operates
a 7.6 million barrel terminalling and storage facility
located at Point Tupper on the Strait of Canso, near Port
Hawkesbury, Nova Scotia, Canada, which is located approximately
700 miles from New York City, 850 miles from Philadelphia and
2,500 miles from Mongstad, Norway. This facility is the deepest
independent, ice-free marine terminal on the North American
Atlantic coast, with access to the East Coast and Canada as well
as the Midwestern United States via the St. Lawrence Seaway and
the Great Lakes system. With one of the premier jetty facilities
in North America, the Point Tupper facility can accommodate
substantially all of the worlds largest, fully laden very
large crude carriers and ultra large crude carriers for loading
and discharging crude oil, petroleum products, and
petrochemicals. Crude oil and petroleum product movements at the
terminal are fully automated. Separate fees apply for the use of
the jetty facility as well as associated services, including
pilotage, tug assistance, line handling, launch service, spill
response services and other ship services. Valero L.P. also
charters tugs, mooring launches, and other vessels to assist
with the movement of vessels through the Strait of Canso and the
safe berthing of vessels at the terminal facility.
Piney Point, Maryland. Valero L.P.s terminal and
storage facility in Piney Point, Maryland is located on
approximately 400 acres on the Potomac River. The Piney Point
terminal has approximately 5.4 million barrels of storage
capacity in 28 tanks and is the closest deep-water facility to
Washington, D.C. This terminal competes with other large
petroleum terminals in the East Coast water-borne market
extending from New York Harbor to Norfolk, Virginia. The
terminal currently stores petroleum products consisting
primarily of fuel oils and asphalt. The terminal has a dock with
a 36-foot draft for tankers and four berths for barges. It also
has truck-loading facilities, product-blending capabilities and
is connected to a pipeline that supplies residual fuel oil to
two power generating stations.
Linden, New Jersey. Valero L.P. owns 50% of ST Linden
Terminal LLC, which owns a terminal and storage facility in
Linden, New Jersey. The terminal is located on a 44-acre
facility that provides Valero L.P. with deep-water terminalling
capabilities at New York Harbor. This terminal primarily stores
petroleum products, including gasoline, jet fuel and fuel oils.
The facility has a total capacity of approximately
3.9 million barrels in 28 tanks, can receive products via
ship, barge and pipeline and delivers product by ship, barge,
pipeline and truck. The terminal includes two docks and leases a
third with draft limits of 35, 24 and 24 feet, respectively.
Selby, California. Valero L.P.s terminal located in
Selby, California has approximately 3.0 million barrels of
tankage and is located in the San Francisco Bay area. The
facility provides deep-water access for handling petroleum
products and gasoline additives such as ethanol. The terminal
offers pipeline connections to various
99
refineries and pipelines. It receives and delivers product by
vessel, barge, pipeline and truck-loading facilities. The
terminal also has railroad tank car unloading capability.
The following table outlines Valero L.P.s terminal
locations, capacities, tanks and primary products handled:
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Tankage | |
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No. of | |
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Facility |
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Capacity | |
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Tanks | |
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Primary Products Handled |
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Major U.S. Terminals:
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Piney Point, MD
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5,403,000 |
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28 |
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Petroleum |
Linden, NJ (a)
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3,906,000 |
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28 |
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Petroleum |
Selby, CA
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3,042,000 |
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24 |
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Petroleum, ethanol |
Jacksonville, FL
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2,069,000 |
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30 |
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Petroleum |
Texas City, TX
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2,008,000 |
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124 |
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Chemicals, petrochemicals, petroleum |
Other U.S. Terminals:
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Montgomery, AL
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162,000 |
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7 |
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Petroleum, jet fuel |
Moundville, AL
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310,000 |
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6 |
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Petroleum |
Tucson, AZ (b)
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87,000 |
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4 |
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Petroleum |
Los Angeles, CA
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607,000 |
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20 |
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Petroleum |
Pittsburg, CA
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380,000 |
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8 |
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Asphalt |
Stockton, CA
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706,000 |
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32 |
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Petroleum, ethanol, fertilizer |
Colorado Springs, CO
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324,000 |
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8 |
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Petroleum |
Denver, CO
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111,000 |
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10 |
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Petroleum |
Bremen, GA
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182,000 |
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9 |
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Petroleum |
Brunswick, GA
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303,000 |
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5 |
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Fertilizer, pulp liquor |
Columbus, GA
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175,000 |
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24 |
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Petroleum, chemicals, caustic |
Macon, GA
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307,000 |
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10 |
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Petroleum |
Savannah, GA
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903,000 |
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28 |
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Petroleum, caustic |
Blue Island, IL
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752,000 |
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19 |
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Petroleum, ethanol |
Chillicothe, IL (a)
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270,000 |
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6 |
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Petroleum |
Peru, IL (c)
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221,000 |
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8 |
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Fertilizer |
Indianapolis, IN
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410,000 |
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18 |
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Petroleum |
Westwego, LA
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849,000 |
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53 |
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Molasses, caustic, chemicals, lube oil, fertilizer |
Andrews AFB Pipeline, MD
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72,000 |
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3 |
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Petroleum |
Baltimore, MD
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832,000 |
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50 |
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Chemicals, asphalt |
Salisbury, MD
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177,000 |
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14 |
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Petroleum |
Winona, MN
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267,000 |
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8 |
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Fertilizer |
Reno, NV
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107,000 |
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7 |
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Petroleum |
Linden, NJ
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371,000 |
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13 |
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Petroleum |
Paulsboro, NJ
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71,000 |
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9 |
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Petroleum |
Alamogordo, NM
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120,000 |
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5 |
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Petroleum |
Albuquerque, NM
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248,000 |
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11 |
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Petroleum |
Rosario, NM
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160,000 |
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8 |
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Asphalt |
Catoosa, OK
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340,000 |
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24 |
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Asphalt |
Drumright, OK (c)
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315,000 |
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4 |
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Petroleum |
Portland, OR
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1,119,000 |
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31 |
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Petroleum, ethanol |
Abernathy, TX
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171,000 |
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11 |
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Petroleum |
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Tankage | |
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No. of | |
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Facility |
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Capacity | |
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Tanks | |
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Primary Products Handled |
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Almeda, TX (c)
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106,000 |
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6 |
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Petroleum |
Amarillo, TX
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270,000 |
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11 |
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Petroleum |
Corpus Christi, TX
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359,000 |
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12 |
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Petroleum |
Edinburg, TX
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189,000 |
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7 |
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Petroleum |
El Paso, TX (b)
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348,000 |
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14 |
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Petroleum |
Harlingen, TX
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315,000 |
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7 |
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Petroleum |
Houston, TX (Hobby Airport)
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106,000 |
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6 |
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Petroleum |
Houston, TX
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90,000 |
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6 |
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Asphalt |
Laredo, TX
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202,000 |
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6 |
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Petroleum |
Placedo, TX
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97,000 |
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4 |
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Petroleum |
San Antonio (east), TX
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151,000 |
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10 |
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Petroleum |
San Antonio (south), TX
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219,000 |
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8 |
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Petroleum |
Southlake, TX
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286,000 |
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6 |
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Petroleum |
Texas City, TX
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153,000 |
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12 |
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Petroleum |
Dumfries, VA
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554,000 |
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16 |
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Petroleum, asphalt |
Virginia Beach, VA
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40,000 |
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2 |
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Petroleum |
Tacoma, WA
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377,000 |
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15 |
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Petroleum, ethanol |
Vancouver, WA
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227,000 |
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49 |
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Chemicals |
Vancouver, WA
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316,000 |
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6 |
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Petroleum |
Milwaukee, WI
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308,000 |
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7 |
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Petroleum, ethanol |
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Total U.S. Terminals
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32,570,000 |
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917 |
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Foreign Terminals:
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St. Eustatius, Netherlands Antilles
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11,315,000 |
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51 |
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Petroleum, crude oil |
Point Tupper, Canada
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7,555,000 |
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37 |
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Petroleum, crude oil |
Sydney, Australia (d)
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330,000 |
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65 |
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Chemicals, fats and oils |
Melbourne, Australia (d)
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280,000 |
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72 |
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Specialty chemicals |
Geelong, Australia (d)
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145,000 |
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14 |
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Specialty chemicals, petroleum |
Adelaide, Australia (d)
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90,000 |
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24 |
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Chemicals, tallow, petroleum |
Auckland, New Zealand (a)(d)
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74,000 |
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44 |
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Fats, oils and chemicals |
New Plymouth, New Zealand (d)
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54,000 |
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12 |
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Fats, oils and chemicals |
Mt. Maunganui, New Zealand (d)
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85,000 |
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24 |
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Fats, oils and chemicals |
Wellington, New Zealand (d)
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55,000 |
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14 |
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Fats, oils and chemicals |
Grays, England
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1,945,000 |
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53 |
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Petroleum |
Eastham, England
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2,185,000 |
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162 |
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Chemicals, petroleum, animal fats |
Runcorn, England
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146,000 |
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4 |
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Molten sulfur |
Grangemouth, Scotland
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530,000 |
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46 |
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Petroleum, chemicals and molasses |
Glasgow, Scotland
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344,000 |
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16 |
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Petroleum |
Leith, Scotland (e)
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459,000 |
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34 |
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Petroleum, chemicals |
Belfast, Northern Ireland
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407,000 |
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41 |
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Petroleum |
Amsterdam, the Netherlands
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1,129,000 |
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44 |
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Petroleum |
Nuevo Laredo, Mexico
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34,000 |
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5 |
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Petroleum |
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Total Foreign Terminals
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27,162,000 |
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762 |
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(a) |
Valero L.P. owns 50% of this terminal through a joint venture. |
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(b) |
Valero L.P. owns a 66.67% undivided interest in the El Paso
refined product terminal and a 50% undivided interest in the
Tucson refined product terminal. The tankage capacity and number
of tanks represent the proportionate share of capacity
attributable to Valero L.P.s ownership interest. |
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(c) |
Terminal is temporarily idled. |
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(d) |
On March 30, 2006, Valero L.P. sold these terminal
facilities. |
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(e) |
Terminal is permanently idled. |
Revenues for Valero L.P.s refined product terminals
segment include fees for tank storage agreements, whereby a
customer agrees to pay for a certain amount of storage in a tank
over a period of time, and throughput agreements, whereby a
customer pays a fee per barrel for volumes moving through our
terminals. Revenues for Valero L.P.s refined product
terminals segment also include the sale of bunker fuel at Point
Tupper and St. Eustatius, for which Valero L.P. earns
revenues based upon a price per barrel applied to the number of
barrels delivered to Valero L.P.s customer. Additionally,
Valero L.P.s terminal facilities earn revenues for
ancillary services provided to customers, such as blending and
filtering.
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Demand for Refined Petroleum Products |
The operations of Valero L.P.s refined product terminals
depend in large part on the level of demand for products stored
in Valero L.P.s terminals in the markets served by those
assets. The majority of products stored in Valero L.P.s
terminals are refined petroleum products. Demand for Valero
L.P.s terminalling services will generally fluctuate as
demand for refined petroleum products fluctuates. The factor
that most affects demand for refined petroleum products is the
general condition of the economy, with demand increasing in
times when the economy is strong.
Valero L.P. provides terminalling services for crude oil and
refined petroleum products to many of the worlds largest
producers of crude oil, integrated oil companies, chemical
companies, oil traders and refiners. The largest customer of its
refined product terminals segment is Valero Energy, which
accounted for $46.4 million, or 10.8% of the total revenues
of the segment, for the year ended December 31, 2005. No
other customer accounted for more than 10% of the revenues of
the segment for this period. Valero L.P.s crude oil
transshipment customers include an oil producer that leases and
utilizes 5.0 million barrels of storage at St. Eustatius
and a major international oil company which leases and utilizes
3.6 million barrels of storage at Point Tupper, both of
which have long-term contracts with Valero L.P. In addition, two
different international oil companies each lease and utilize
1.0 million barrels of clean products storage at St.
Eustatius and Point Tupper, respectively. Also in Canada, a
consortium consisting of major oil companies sends natural gas
liquids via pipeline to certain processing facilities on land
leased from Valero L.P. After processing, certain products are
stored at the Point Tupper facility under a long-term contract.
In addition, Valero L.P.s blending capabilities have
attracted customers who have leased capacity primarily for
blending purposes and who have contributed to Valero L.P.s
bunker fuel and bulk product sales.
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Competition and Business Considerations |
Many major energy and chemical companies own extensive terminal
storage facilities. Although such terminals often have the same
capabilities as terminals owned by independent operators, they
generally do not provide terminalling services to third parties.
In many instances, major energy and chemical companies that own
storage and terminalling facilities are also significant
customers of independent terminal operators. Such companies
typically have strong demand for terminals owned by independent
operators when independent terminals have more cost effective
locations near key transportation links, such as deep-water
ports. Major energy and chemical companies also need independent
terminal storage when their owned storage facilities are
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inadequate, either because of size constraints, the nature of
the stored material or specialized handling requirements.
Independent terminal owners generally compete on the basis of
the location and versatility of terminals, service and price. A
favorably located terminal will have access to various cost
effective transportation modes both to and from the terminal.
Transportation modes typically include waterways, railroads,
roadways and pipelines. Terminals located near deep-water port
facilities are referred to as deep-water terminals
and terminals without such facilities are referred to as
inland terminals although some inland facilities
located on or near navigable rivers are served by barges.
Terminal versatility is a function of the operators
ability to offer complex handling requirements for diverse
products. The service function typically provided by the
terminal includes, among other things, the safe storage of the
product at specified temperature, moisture and other conditions,
as well as receipt at and delivery from the terminal, all of
which must be in compliance with applicable environmental
regulations. A terminal operators ability to obtain
attractive pricing is often dependent on the quality,
versatility and reputation of the facilities owned by the
operator. Although many products require modest terminal
modification, operators with versatile storage capabilities
typically require less modification prior to usage, ultimately
making the storage cost to the customer more attractive.
The main competition at Valero L.P.s St. Eustatius and
Point Tupper locations for crude oil handling and storage is
from lightering, which is the process by which
liquid cargo is transferred to smaller vessels, usually while at
sea. The price differential between lightering and terminalling
is primarily driven by the charter rates for vessels of various
sizes. Lightering generally takes significantly longer than
discharging at a terminal. Depending on charter rates, the
longer charter period associated with lightering is generally
offset by various costs associated with terminalling, including
storage costs, dock charges and spill response fees. However,
terminalling is generally safer and reduces the risk of
environmental damage associated with lightering, provides more
flexibility in the scheduling of deliveries and allows Valero
L.P.s customers to deliver their products to multiple
locations. Lightering in U.S. territorial waters creates a risk
of liability for owners and shippers of oil under the U.S. Oil
Pollution Act of 1990 and other state and federal legislation.
In Canada, similar liability exists under the Canadian Shipping
Act. Terminalling also provides customers with the ability to
access value-added terminal services.
In the sale of bunker fuel, Valero L.P. competes with ports
offering bunker fuels to which, or from which, each vessel
travels or are along the route of travel of the vessel. Valero
L.P. also competes with bunker fuel delivery locations around
the world. In the Western Hemisphere, alternative bunker
locations include ports on the U.S. East Coast and Gulf Coast
and in Panama, Puerto Rico, the Bahamas, Aruba, Curaçao,
and Halifax, Nova Scotia.
Refined
Product Pipelines
Valero L.P.s refined product pipelines operations consist
primarily of the transportation of refined petroleum products as
a common carrier in Texas, Oklahoma, Colorado, New Mexico,
Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota
covering approximately 6,389 miles. In addition, Valero
L.P. owns a 2,000 mile anhydrous ammonia pipeline located in
Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and
Nebraska. As of December 31, 2005, Valero L.P. operated:
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24 refined product pipelines with an aggregate length of 3,834
miles, that connect Valero Energys McKee, Three Rivers,
Corpus Christi and Ardmore refineries to certain of Valero
L.P.s terminals, or to interconnections with third-party
pipelines for further distribution, and a 25-mile crude hydrogen
pipeline (collectively, the Central West System); |
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a 2,090-mile refined product pipeline originating in southern
Kansas and terminating at Jamestown, North Dakota, with a
western extension to North Platte, Nebraska and an eastern
extension into Iowa (collectively, the East Pipeline); |
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|
a 440-mile refined product pipeline originating at Tesoro
Corporations Mandan, North Dakota refinery (the Tesoro
Mandan refinery) and terminating in Minneapolis, Minnesota (the
North Pipeline); and |
103
|
|
|
|
|
a 2,000-mile anhydrous ammonia pipeline originating at the
Louisiana delta area that travels through the midwestern United
States and terminates in Nebraska and Indiana (the Ammonia
Pipeline). |
Valero L.P. charges tariffs on a per barrel basis for
transporting refined products in its refined product pipelines
and on a per ton basis for transporting anhydrous ammonia in its
ammonia pipeline.
|
|
|
Description of Valero L.P.s Pipelines |
Central West System. The pipelines included in the
Central West System were constructed to support the refineries
to which they are connected. These pipelines are physically
integrated with and principally serve refineries owned by Valero
Energy. Additionally, Valero L.P. has entered into various
agreements with Valero Energy governing the usage of these
pipelines. For a description of these agreements, please read
Certain Relationships and Related Transactions
Valero L.P.s Relationship with Valero Energy.
The refined products transported in these pipelines include
gasoline, distillates (including diesel and jet fuel), natural
gas liquids (such as propane and butane), blendstocks and other
products produced by Valero Energys refineries. These
pipelines connect certain of Valero Energys refineries to
key markets in Texas, New Mexico and Colorado. The following
table lists information about the pipelines included in the
Central West System and the Valero Energy refineries that they
serve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Valero Energy |
|
|
|
|
|
|
|
|
|
Capacity | |
Origin and Destination |
|
Refinery |
|
Length | |
|
Ownership | |
|
Capacity | |
|
Throughput | |
|
Utilization | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Miles) | |
|
|
|
(Barrels/Day) | |
|
(Barrels/Day) | |
|
|
McKee to El Paso, TX
|
|
McKee |
|
|
408 |
|
|
|
67% |
|
|
|
40,000 |
|
|
|
29,766 |
|
|
|
74% |
|
McKee to Colorado Springs, CO (a)
|
|
McKee |
|
|
256 |
|
|
|
100% |
|
|
|
38,000 |
|
|
|
10,335 |
|
|
|
69% |
|
Colorado Springs, CO to Airport
|
|
McKee |
|
|
2 |
|
|
|
100% |
|
|
|
14,000 |
|
|
|
1,211 |
|
|
|
9% |
|
Colorado Springs to Denver, CO
|
|
McKee |
|
|
101 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
16,299 |
|
|
|
51% |
|
McKee to Denver, CO
|
|
McKee |
|
|
321 |
|
|
|
30% |
|
|
|
9,870 |
|
|
|
9,524 |
|
|
|
96% |
|
McKee to Amarillo, TX (6) (a)(b)
|
|
McKee |
|
|
49 |
|
|
|
100% |
|
|
|
51,000 |
|
|
|
31,391 |
|
|
|
74% |
|
McKee to Amarillo, TX (8) (a)(b)
|
|
McKee |
|
|
49 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amarillo to Abernathy, TX (a)
|
|
McKee |
|
|
102 |
|
|
|
67% |
|
|
|
11,733 |
|
|
|
7,973 |
|
|
|
92% |
|
Amarillo, TX to Albuquerque, NM
|
|
McKee |
|
|
293 |
|
|
|
50% |
|
|
|
17,150 |
|
|
|
9,262 |
|
|
|
54% |
|
Abernathy to Lubbock, TX (a)
|
|
McKee |
|
|
19 |
|
|
|
46% |
|
|
|
8,029 |
|
|
|
2,787 |
|
|
|
35% |
|
McKee to Skellytown, TX
|
|
McKee |
|
|
53 |
|
|
|
100% |
|
|
|
52,000 |
|
|
|
8,228 |
|
|
|
16% |
|
Skellytown to Mont Belvieu, TX
|
|
McKee |
|
|
572 |
|
|
|
50% |
|
|
|
26,000 |
|
|
|
9,859 |
|
|
|
38% |
|
McKee to Southlake, TX
|
|
McKee |
|
|
375 |
|
|
|
100% |
|
|
|
27,300 |
|
|
|
18,476 |
|
|
|
68% |
|
Three Rivers to San Antonio, TX
|
|
Three Rivers |
|
|
81 |
|
|
|
100% |
|
|
|
33,600 |
|
|
|
26,260 |
|
|
|
78% |
|
Three Rivers to US/Mexico International Border near Laredo, TX
|
|
Three Rivers |
|
|
108 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
21,986 |
|
|
|
69% |
|
Corpus Christi to Three Rivers, TX
|
|
Corpus Christi |
|
|
68 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
6,555 |
|
|
|
20% |
|
Three Rivers to Corpus Christi, TX
|
|
Three Rivers |
|
|
72 |
|
|
|
100% |
|
|
|
15,000 |
|
|
|
7,555 |
|
|
|
50% |
|
Three Rivers to Pettus to San Antonio, TX
|
|
Three Rivers |
|
|
103 |
|
|
|
100% |
|
|
|
24,000 |
|
|
|
22,445 |
|
|
|
94% |
|
Three Rivers to Pettus to Corpus Christi, TX (c)
|
|
Three Rivers |
|
|
95 |
|
|
|
100% |
|
|
|
15,000 |
|
|
|
7,467 |
|
|
|
50% |
|
Ardmore to Wynnewood, OK (d)
|
|
Ardmore |
|
|
31 |
|
|
|
100% |
|
|
|
90,000 |
|
|
|
54,143 |
|
|
|
60% |
|
El Paso, TX to Kinder Morgan
|
|
McKee |
|
|
12 |
|
|
|
67% |
|
|
|
40,000 |
|
|
|
21,508 |
|
|
|
54% |
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Valero Energy |
|
|
|
|
|
|
|
|
|
Capacity | |
Origin and Destination |
|
Refinery |
|
Length | |
|
Ownership | |
|
Capacity | |
|
Throughput | |
|
Utilization | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Miles) | |
|
|
|
(Barrels/Day) | |
|
(Barrels/Day) | |
|
|
Corpus Christi to Pasadena, TX
|
|
Corpus Christi |
|
|
208 |
|
|
|
100% |
|
|
|
105,000 |
|
|
|
92,638 |
|
|
|
88% |
|
Corpus Christi to Harlingen, TX
|
|
Corpus Christi |
|
|
167 |
|
|
|
100% |
|
|
|
27,100 |
|
|
|
25,890 |
|
|
|
96% |
|
Other refined product pipeline (e)
|
|
|
|
|
289 |
|
|
|
50% |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,834 |
|
|
|
|
|
|
|
740,782 |
|
|
|
441,558 |
|
|
|
63% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
This pipeline transports barrels relating to two tariff routes,
one of which begins at this pipelines origin and ends at
this pipelines destination and one of which is a longer
tariff route with an origin or destination on another pipeline
of Valero L.P.s that connects to this pipeline. Throughput
disclosed above for this pipeline reflects only the barrels
subject to the tariff route beginning at this pipelines
origin and ending at this pipelines destination. To
accurately determine the actual capacity utilization of the
pipeline, as well as aggregate capacity utilization, all barrels
passing through the pipeline have been taken into account. |
|
|
(b) |
The throughput, capacity and capacity utilization information
disclosed above for the McKee to Amarillo, Texas
6-inch pipeline
reflects both McKee to Amarillo, Texas pipelines on a combined
basis. |
|
|
(c) |
The refined product pipeline from Three Rivers to Pettus to
Corpus Christi, Texas is temporarily idled. In the fourth
quarter of 2005, an eight-mile portion of this pipeline was
permanently idled. As a result, Valero L.P. recorded an
impairment charge of $2.1 million included in
interest and other expenses, net in its consolidated
statements of income. |
|
|
(d) |
Included in this segment are two refined product storage tanks
with a total capacity of 180,000 barrels located in
Wynnewood, Oklahoma. Refined products may be stored and batched
prior to shipment into a third-party pipeline. |
|
|
(e) |
This category consists of the temporarily idled 6-inch Amarillo,
Texas to Albuquerque, New Mexico refined product pipeline. |
East Pipeline. The East Pipeline covers 2,090 miles and
moves refined products from south to north in pipelines ranging
in size from 6 inches to 16 inches. The East Pipeline system
also includes 23 product tanks with total storage capacity of
approximately 1.2 million barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The East
Pipeline transports refined petroleum products to its terminals
along the system and to receiving pipeline connections in
Kansas. Shippers on the East Pipeline obtain refined petroleum
products from refineries in southeast Kansas connected to the
East Pipeline or through other pipelines directly connected to
the pipeline system. The East Pipeline transported approximately
25.2 million barrels from the date of the Kaneb acquisition
through December 31, 2005.
North Pipeline. The North Pipeline runs from west to east
approximately 440 miles from its origin at the Tesoro Mandan
refinery to the Minneapolis, Minnesota area. The North Pipeline
crosses Valero L.P.s East Pipeline near Jamestown, North
Dakota where the two pipelines are connected. While the North
Pipeline is currently supplied exclusively by the Tesoro Mandan
refinery, it is capable of delivering or receiving products to
or from the East Pipeline. The North Pipeline transported
approximately 8.9 million barrels from the date of the
Kaneb acquisition through December 31, 2005.
The East and North Pipelines also include 21 truck-loading
terminals through which refined petroleum products are delivered
to storage tanks and then loaded into petroleum transport
trucks. Revenues earned at these terminals relate solely to the
volumes transported on the pipeline. In the case of the North
Pipeline, separate fees are not charged for the use of these
terminals. Instead, the terminalling fees are a portion of the
transportation rate included in the pipeline tariff. In the case
of the East Pipeline, separate fees are charged for the use of
the terminals, but such fees are separately stated within the
filed pipeline tariff. As a result, these terminals are included
in this segment instead of the refined product terminals segment.
105
The following table shows the number of tanks Valero L.P. owned
at each of the 21 refined petroleum product terminals
connected to the East or North Pipelines, the storage capacity
in barrels and the pipeline to which each such terminal was
connected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Pipeline |
Location of Terminals |
|
Number of Tanks | |
|
Tank Capacity | |
|
System |
|
|
| |
|
| |
|
|
Iowa:
|
|
|
|
|
|
|
|
|
|
|
|
LeMars
|
|
|
9 |
|
|
|
103,000 |
|
|
East |
|
Milford
|
|
|
11 |
|
|
|
172,000 |
|
|
East |
|
Rock Rapids
|
|
|
12 |
|
|
|
366,000 |
|
|
East |
Kansas:
|
|
|
|
|
|
|
|
|
|
|
|
Concordia
|
|
|
7 |
|
|
|
79,000 |
|
|
East |
|
Hutchinson
|
|
|
9 |
|
|
|
161,000 |
|
|
East |
|
Salina
|
|
|
10 |
|
|
|
98,000 |
|
|
East |
Minnesota:
|
|
|
|
|
|
|
|
|
|
|
|
Moorhead
|
|
|
17 |
|
|
|
498,000 |
|
|
North |
|
Sauk Centre
|
|
|
11 |
|
|
|
114,000 |
|
|
North |
|
Roseville
|
|
|
13 |
|
|
|
594,000 |
|
|
North |
Nebraska:
|
|
|
|
|
|
|
|
|
|
|
|
Columbus
|
|
|
12 |
|
|
|
191,000 |
|
|
East |
|
Geneva
|
|
|
39 |
|
|
|
678,000 |
|
|
East |
|
Norfolk
|
|
|
16 |
|
|
|
187,000 |
|
|
East |
|
North Platte
|
|
|
22 |
|
|
|
197,000 |
|
|
East |
|
Osceola
|
|
|
8 |
|
|
|
79,000 |
|
|
East |
North Dakota:
|
|
|
|
|
|
|
|
|
|
|
|
Jamestown (North)
|
|
|
6 |
|
|
|
141,000 |
|
|
North |
|
Jamestown (East)
|
|
|
13 |
|
|
|
188,000 |
|
|
East |
South Dakota:
|
|
|
|
|
|
|
|
|
|
|
|
Aberdeen
|
|
|
12 |
|
|
|
181,000 |
|
|
East |
|
Mitchell
|
|
|
8 |
|
|
|
72,000 |
|
|
East |
|
Sioux Falls
|
|
|
9 |
|
|
|
381,000 |
|
|
East |
|
Wolsey
|
|
|
21 |
|
|
|
149,000 |
|
|
East |
|
Yankton
|
|
|
25 |
|
|
|
246,000 |
|
|
East |
|
|
|
|
|
|
|
|
|
Totals
|
|
|
290 |
|
|
|
4,875,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia Pipeline. The 2,000 mile pipeline originates in
the Louisiana delta area where it has access to three marine
terminals on the Mississippi River. It runs north through
Louisiana and Arkansas into Missouri, where at Hermann,
Missouri, one branch splits and goes east into Illinois and
Indiana, while the other branch continues north into Iowa and
then turns west into Nebraska. The Ammonia Pipeline is connected
to 22 other third-party owned terminals, which include two
industrial facility delivery locations. Product is supplied to
the pipeline from plants in Louisiana and foreign-source product
delivered through the marine terminals. Anhydrous ammonia is
primarily used as agricultural fertilizer through direct
application. It is also used as a component of various types of
dry fertilizer, explosives and as a cleaning agent in power
plant scrubbers. The Ammonia Pipeline transported approximately
5.9 million barrels (converted from tons) from the date of
the Kaneb acquisition through December 31, 2005.
106
Valero L.P. also owns three single-use pipelines, located near
Umatilla, Oregon, Rawlings, Wyoming and Pasco, Washington, each
of which supplies diesel fuel to a railroad fueling facility.
Revenues for the Central West System are based upon throughput
volumes traveling through Valero L.P.s system and the
related tariffs.
The revenues for the East Pipeline, North Pipeline, and Ammonia
Pipeline are based upon volumes and the distance the product is
shipped and the related tariffs.
Pipelines are generally the lowest cost method for intermediate
and long-haul overland transportation of refined petroleum
products. In general, a shipper on one of Valero L.P.s
refined petroleum product pipelines delivers products to the
pipeline from refineries or third party pipelines that connect
to the pipelines. Each shipper transporting product on a
pipeline is required to supply Valero L.P. with a notice of
shipment indicating sources of products and destinations. All
shipments are tested or receive refinery certifications to
ensure compliance with Valero L.P.s specifications.
Petroleum shippers are generally invoiced by Valero L.P.
immediately upon the product entering one of its pipelines.
The Ammonia Pipeline receives product from anhydrous ammonia
plants or from the marine terminals for imported product.
Tariffs for transportation are charged to shippers based upon
transportation from the origination point on the pipeline to the
point of delivery.
The pipelines in the Central West System, the East Pipeline, the
North Pipeline and the Ammonia Pipeline are subject to federal
regulation by one or more of the following governmental agencies
or laws: the Federal Energy Regulatory Commission (the FERC),
the Surface Transportation Board (the STB), the Department of
Transportation (DOT), the Environmental Protection Agency (EPA),
and the Homeland Security Act. Additionally, the operations and
integrity of the Pipelines are subject to the respective state
jurisdictions along the route of the systems.
Except for three single-use pipelines and certain ethanol
facilities, all of Valero L.P.s pipeline operations
constitute common carrier operations and are subject to federal
tariff regulation. Valero L.P. is authorized by the FERC to
adopt market-based rates in approximately one-half of its
markets on the East Pipeline system. Common carrier activities
are those for which transportation through its pipelines is
available at published tariffs filed, in the case of interstate
petroleum product shipments, with the FERC or, in the case of
intrastate petroleum product shipments in Colorado, Kansas,
Louisiana, North Dakota, Oklahoma and Texas, with the relevant
state authority, to any shipper of refined petroleum products
who requests such services and satisfies the conditions and
specifications for transportation. The Ammonia Pipeline is
subject to federal regulation by the STB, rather than the FERC,
and state regulation by the Louisiana Public Service Commission.
Valero L.P. uses Supervisory Control and Data Acquisition remote
supervisory control software programs to continuously monitor
and control the pipelines. The system monitors quantities of
products injected in and delivered through the pipelines and
automatically signals the appropriate personnel upon deviations
from normal operations that require attention.
|
|
|
Demand for and Sources of Refined Products |
The operations of Valero L.P.s Central West, East and
North Pipelines depend in large part on the level of demand for
refined products in the markets served by the pipelines and the
ability and willingness of refiners and marketers having access
to the pipelines to supply such demand by deliveries through the
pipelines.
Virtually all of the refined products delivered through the
pipelines in the Central West System are gasoline and diesel
fuel that originate at refineries owned by Valero Energy. Demand
for these products fluctuates as prices for these products
fluctuate. Prices fluctuate for a variety of reasons including
the overall balance in supply and demand, which is affected by
refinery utilization rates, among other factors. Prices for
gasoline and diesel fuel tend to increase in the warm weather
months as more people drive automobiles.
107
The majority of the refined products delivered through the North
Pipeline are delivered to the Minneapolis, Minnesota
metropolitan area and consist primarily of gasoline and diesel
fuel. Demand for those products fluctuates based on general
economic conditions and with changes in the weather as more
people tend to drive during the warmer months.
Much of the refined products delivered through the East Pipeline
and volumes on the North Pipeline that are not delivered to
Minneapolis are ultimately used as fuel for railroads or in
agricultural operations, including fuel for farm equipment,
irrigation systems, trucks used for transporting crops and crop
drying facilities. Demand for refined products for agricultural
use, and the relative mix of products required, is affected by
weather conditions in the markets served by the East and North
Pipelines. The agricultural sector is also affected by
government agricultural policies and crop prices. Although
periods of drought suppress agricultural demand for some refined
products, particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases
during such times. The mix of refined products delivered varies
seasonally, with gasoline demand peaking in early summer, diesel
fuel demand peaking in late summer and propane demand higher in
the fall. In addition, weather conditions in the areas served by
the East Pipeline affect the mix of the refined products
delivered through the East Pipeline, although historically any
overall impact on the total volumes shipped has not been
significant.
Valero L.P.s refined product pipelines are also dependent
upon adequate levels of production of refined products by
refineries connected to the pipelines, directly or through
connecting pipelines. The refineries are, in turn, dependent
upon adequate supplies of suitable grades of crude oil. The
pipelines in the Central West System are connected to refineries
owned by Valero Energy and generally are subject to long-term
throughput agreements with Valero Energy. Valero Energys
refineries connected directly to Valero L.P.s pipelines
obtain crude oil from a variety of foreign and domestic sources.
The refineries connected directly to the East Pipeline obtain
crude oil from producing fields located primarily in Kansas,
Oklahoma and Texas, and, to a much lesser extent, from other
domestic or foreign sources. In addition, refineries in Kansas,
Oklahoma and Texas are also connected to the East Pipeline
through other pipelines. These refineries obtain their supplies
of crude oil from a variety of sources. The pipelines in Valero
L.P.s Central West System are dependent upon the
refineries owned by Valero Energy to which they connect. If
operations at one of these refineries were discontinued or
reduced, it could be material to Valero L.P.s operations,
although it would endeavor to minimize the impact by seeking
alternative customers for those pipelines. The North Pipeline is
heavily dependent on the Tesoro Mandan refinery, which primarily
operates on North Dakota crude oil although it has the ability
to access other crude oils. If operations at the Tesoro Mandan
refinery were interrupted, it could have a material adverse
effect on Valero L.P.s operations. Other than the
refineries owned by Valero Energy to which Valero L.P.s
pipelines connect and the Tesoro Mandan refinery, if operations
at any one refinery were discontinued, Valero L.P. believes
(assuming unchanged demand for refined products in markets
served by the refined product pipelines) that the effects
thereof would be short-term in nature and its business would not
be materially adversely affected over the long-term because such
discontinued production could be replaced by other refineries or
by other sources.
Virtually all of the refined products transported through the
pipelines in the Central West System are produced by refineries
owned by Valero Energy. The majority of the refined products
transported through the East Pipeline is produced at three
refineries located at McPherson and El Dorado, Kansas and Ponca
City, Oklahoma, which are operated by the National Cooperative
Refining Association (NCRA), Frontier Refining and
ConocoPhillips Company, respectively. The NCRA and Frontier Oil
Corporation refineries are connected directly to the East
Pipeline. The McPherson, Kansas refinery operated by NCRA
accounted for approximately 33.8% of the total amount of product
shipped over the East Pipeline in 2005. The East Pipeline also
has direct access by third party pipelines to four other
refineries in Kansas, Oklahoma and Texas and to Gulf Coast
supplies of products through connecting pipelines that receive
products from pipelines originating on the Gulf Coast.
|
|
|
Demand for and Sources of Anhydrous Ammonia |
The Ammonia Pipeline is one of two major anhydrous ammonia
pipelines in the United States and the only one that has the
capability of receiving foreign production directly into the
system and transporting anhydrous ammonia into the nations
corn belt. This ability to receive either domestic or foreign
anhydrous ammonia is a
108
competitive advantage over the next largest ammonia system,
which originates in Oklahoma and Texas, then extends into Iowa.
Valero L.P.s Ammonia Pipeline operations depend on overall
nitrogen fertilizer use, management practice, the level of
demand for direct application of anhydrous ammonia as a
fertilizer for crop production (Direct Application), the
weather, as Direct Application is not effective if the ground is
too wet or too dry, and the price of natural gas, the primary
component of anhydrous ammonia.
Corn producers have several fertilizer alternatives such as
liquid, dry or Direct Application. Liquid and dry fertilizers
are both upgrades of anhydrous ammonia and therefore are
generally more costly but are less sensitive to weather
conditions during application. Direct Application is the
cheapest method of fertilizer application.
The largest customer of Valero L.P.s refined product
pipeline segment was Valero Energy, which accounted for
$89.7 million, or 57.9% of the total segment revenues, for
the year ended December 31, 2005. In addition to Valero
Energy, Valero L.P. had a total of approximately 57 shippers for
the year ended December 31, 2005, including integrated oil
companies, refining companies, farm cooperatives and a railroad.
No other customer accounted for more than 10% of the total
revenues of the segment for the year ended December 31,
2005.
|
|
|
Competition and Business Considerations |
Because pipelines are generally the lowest cost method for
intermediate and long-haul movement of refined petroleum
products, Valero L.P.s more significant competitors are
common carrier and proprietary pipelines owned and operated by
major integrated and large independent oil companies and other
companies in the areas where Valero L.P. delivers products.
Competition between common carrier pipelines is based primarily
on transportation charges, quality of customer service and
proximity to end users. Valero L.P. believes high capital costs,
tariff regulation, environmental considerations and problems in
acquiring rights-of-way make it unlikely that other competing
pipeline systems comparable in size and scope to Valero
L.P.s pipelines will be built in the near future, provided
Valero L.P.s pipelines have available capacity to satisfy
demand and its tariffs remain at reasonable levels.
The costs associated with transporting products from a loading
terminal to end users limit the geographic size of the market
that can be served economically by any terminal. Transportation
to end users from Valero L.P.s loading terminals is
conducted primarily by trucking operations of unrelated third
parties. Trucks may competitively deliver products in some of
the areas served by Valero L.P.s pipelines. However,
trucking costs render that mode of transportation uncompetitive
for longer hauls or larger volumes. Valero L.P. does not believe
that trucks are, or will be, effective competition to its
long-haul volumes over the long-term.
The pipelines within the Central West System are physically
integrated with and principally serve refineries owned by Valero
Energy. Additionally, Valero L.P. has entered into various
agreements with Valero Energy governing the usage of these
pipelines. As a result, Valero L.P. believes that it will not
face significant competition for transportation services
provided to the Valero Energy refineries Valero L.P. serves. For
a description of the various agreements between Valero Energy
and Valero L.P., refer to Certain Relationships and
Related Transactions Valero L.P.s Relationship
with Valero Energy.
The East and North Pipelines major competitor is an
independent, regulated common carrier pipeline system owned by
Magellan Midstream Partners, L.P. (Magellan), formerly the
Williams Companies, Inc., that operates approximately 100 miles
east of and parallel to the East Pipeline and in close proximity
to the North Pipeline. The Magellan system is a substantially
more extensive system than the East and North Pipelines.
Competition with Magellan is based primarily on transportation
charges, quality of customer service and proximity to end users.
In addition, refined product pricing at either the origin or
terminal point on a pipeline may outweigh transportation costs.
Seventeen of the East Pipelines and all four of the North
Pipelines delivery terminals are located within two to 145
miles of, and in direct competition with, Magellans
terminals.
Competitors of the Ammonia Pipeline include another anhydrous
ammonia pipeline that originates in Oklahoma and Texas, and
terminates in Iowa. The competitor pipeline has the same Direct
Application demand
109
and weather issues as the Ammonia Pipeline but is restricted to
domestically produced anhydrous ammonia. Midwest production
barges and railroads represent other forms of direct competition
to the pipeline under certain market conditions.
Crude
Oil Pipelines
Valero L.P.s crude oil pipeline operations consist
primarily of the transportation of crude oil and other
feedstocks, such as gas oil, from various points in Texas,
Oklahoma, Kansas and Colorado to Valero Energys McKee,
Three Rivers and Ardmore refineries. Also included in this
segment are Valero L.P.s four crude oil storage facilities
in Texas and Oklahoma that are located along the crude oil
pipelines and in which crude oil may be stored and batched prior
to shipment in the crude oil pipelines. With the exception of
the crude oil storage tanks at Corpus Christi discussed below in
Crude Oil Storage Tanks, Valero L.P.
does not generate any separate revenue from these four crude oil
storage facilities. The costs associated with the crude oil
storage facilities are considered in establishing the tariffs
charged for transporting crude oil from the crude oil storage
facilities to the refineries.
As of December 31, 2005, Valero L.P. had an ownership
interest in ten crude oil pipelines with an aggregate length of
797 miles. Valero L.P. charges tariffs on a per barrel basis for
transporting crude oil and other feedstocks in its crude oil
pipelines.
The following table sets forth information about each of Valero
L.P.s crude oil pipelines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Valero Energy | |
|
|
|
|
|
Capacity | |
|
|
|
Capacity | |
Origin and Destination |
|
Refinery | |
|
Length | |
|
Ownership | |
|
(Barrels/Day) | |
|
Throughput | |
|
Utilization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Miles) | |
|
|
|
(Barrels/Day) | |
|
(Barrels/Day) | |
|
|
Cheyenne Wells, CO to McKee
|
|
|
McKee |
|
|
|
252 |
|
|
|
100% |
|
|
|
17,500 |
|
|
|
11,474 |
|
|
|
66% |
|
Dixon, TX to McKee
|
|
|
McKee |
|
|
|
44 |
|
|
|
100% |
|
|
|
85,000 |
|
|
|
36,714 |
|
|
|
43% |
|
Hooker, OK to Clawson, TX(a)
|
|
|
McKee |
|
|
|
41 |
|
|
|
50% |
|
|
|
22,000 |
|
|
|
18,723 |
|
|
|
85% |
|
Clawson, TX to McKee(b)
|
|
|
McKee |
|
|
|
31 |
|
|
|
100% |
|
|
|
36,000 |
|
|
|
13,115 |
|
|
|
88% |
|
Wichita Falls, TX to McKee
|
|
|
McKee |
|
|
|
272 |
|
|
|
100% |
|
|
|
110,000 |
|
|
|
70,538 |
|
|
|
64% |
|
Corpus Christi, TX to Three Rivers
|
|
|
Three Rivers |
|
|
|
70 |
|
|
|
100% |
|
|
|
120,000 |
|
|
|
71,609 |
|
|
|
60% |
|
Ringgold, TX to Wasson, OK(b)
|
|
|
Ardmore |
|
|
|
44 |
|
|
|
100% |
|
|
|
90,000 |
|
|
|
48,027 |
|
|
|
53% |
|
Healdton to Ringling, OK
|
|
|
Ardmore |
|
|
|
4 |
|
|
|
100% |
|
|
|
52,000 |
|
|
|
12,436 |
|
|
|
24% |
|
Wasson, OK to Ardmore (8-10)(c)
|
|
|
Ardmore |
|
|
|
24 |
|
|
|
100% |
|
|
|
90,000 |
|
|
|
61,324 |
|
|
|
68% |
|
Wasson, OK to Ardmore (8)(c)
|
|
|
Ardmore |
|
|
|
15 |
|
|
|
100% |
|
|
|
40,000 |
|
|
|
15,006 |
|
|
|
38% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
797 |
|
|
|
|
|
|
|
662,500 |
|
|
|
358,966 |
|
|
|
57% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Valero L.P. receives 50% of the tariff with respect to 100% of
the barrels transported in the Hooker, Oklahoma to Clawson,
Texas pipeline. Accordingly, the capacity, throughput and
capacity utilization are given with respect to 100% of the
pipeline. |
|
|
(b) |
This pipeline transports barrels relating to two tariff routes,
one beginning at the pipelines origin and ending at its
destination, and one with an origin or destination on another
connecting Valero L.P. pipeline. Throughput disclosed above for
this pipeline reflects only the barrels subject to the tariff
route beginning at this pipelines origin and ending at
this pipelines destination. To accurately determine the
actual capacity utilization of the pipeline, as well as
aggregate capacity utilization, all barrels passing through the
pipeline have been taken into account. |
|
|
(c) |
The Wasson, Oklahoma to Ardmore (8 - 10)
pipelines referred to above originate at Wasson as two pipelines
but merge into one pipeline prior to reaching Ardmore. |
110
The following table sets forth information about Valero
L.P.s crude oil storage facilities associated with the
crude oil pipeline segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero Energy | |
|
|
|
Number | |
|
Mode of | |
|
Mode of | |
|
Throughput Year Ended | |
Location |
|
Refinery | |
|
Capacity | |
|
of Tanks | |
|
Receipt | |
|
Delivery | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
|
|
|
(Barrels/Day) | |
Dixon, TX
|
|
|
McKee |
|
|
|
240,000 |
|
|
|
3 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
36,714 |
|
Ringgold, TX
|
|
|
Ardmore |
|
|
|
600,000 |
|
|
|
2 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
48,027 |
|
Wichita Falls, TX
|
|
|
McKee |
|
|
|
660,000 |
|
|
|
4 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
70,538 |
|
Wasson, OK
|
|
|
Ardmore |
|
|
|
225,000 |
|
|
|
2 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
76,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1,725,000 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
231,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005, Valero Energy
accounted for 100% of the total segment revenues, as Valero
Energy is the only customer of Valero L.P.s crude oil
pipeline segment.
|
|
|
Competition and Business Considerations |
Valero L.P.s crude oil pipelines are physically integrated
with and principally serve refineries owned by Valero Energy.
Additionally, Valero L.P. has entered into various agreements
with Valero Energy governing the usage of these pipelines. As a
result, Valero L.P. believes that it will not face significant
competition for transportation services provided to those
refineries owned by Valero Energy. For a description of the
various agreements between Valero Energy and Valero L.P., refer
to Certain Relationships and Related
Transactions Valero L.P.s Relationship with
Valero Energy.
Crude
Oil Storage Tanks
Valero L.P.s crude oil storage tanks operations consist
primarily of storing and delivering crude oil to Valero
Energys refineries in Benicia, Corpus Christi and Texas
City.
At December 31, 2005, Valero L.P. owned 60 crude oil and
intermediate feedstock storage tanks and related assets with
aggregate storage capacity of approximately 12.5 million
barrels. The land underlying these tanks is subject to long-term
operating leases. Valero L.P. charges a fee for each barrel of
crude oil or certain other feedstocks that Valero L.P. delivers
to Valero Energys Benicia, Corpus Christi West and Texas
City refineries.
The following table sets forth information about Valero
L.P.s crude oil storage tanks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput | |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
Valero Energy |
|
|
|
Number | |
|
|
|
Mode of | |
|
December 31, | |
Location |
|
Refinery |
|
Capacity | |
|
of Tanks | |
|
Mode of Receipt | |
|
Delivery | |
|
2005 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
|
|
|
(Barrels/Day) | |
Benicia, CA
|
|
Benicia |
|
|
3,815,000 |
|
|
|
16 |
|
|
|
marine/pipeline |
|
|
|
pipeline |
|
|
|
155,628 |
|
Corpus Christi, TX
|
|
Corpus Christi |
|
|
4,023,000 |
|
|
|
26 |
|
|
|
marine |
|
|
|
pipeline |
|
|
|
149,174 |
|
Texas City, TX
|
|
Texas City |
|
|
3,087,000 |
|
|
|
14 |
|
|
|
marine |
|
|
|
pipeline |
|
|
|
212,607 |
|
Corpus Christi, TX (North Beach)(a)
|
|
Three Rivers |
|
|
1,600,000 |
|
|
|
4 |
|
|
|
marine |
|
|
|
pipeline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,525,000 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
517,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Valero L.P. does not report throughput for the Corpus Christi
North Beach storage facility, as revenues for this facility are
based on a lease agreement with Valero Energy. |
For the year ended December 31, 2005, Valero Energy
accounted for 100% of the total segment revenues, as Valero
Energy is the only customer of Valero L.P.s crude oil
storage tank segment.
111
|
|
|
Competition and Business Considerations |
Valero L.P.s crude oil storage tanks are physically
integrated with and principally serve refineries owned by Valero
Energy. Additionally, Valero L.P. has entered into various
agreements with Valero Energy governing the usage of these
tanks. As a result, Valero L.P. believes that it will not face
significant competition for its services provided to those
refineries owned by Valero Energy. For a description of the
various agreements between Valero Energy and Valero L.P., refer
to Certain Relationships and Related
Transactions Valero L.P.s Relationship with
Valero Energy.
Employees
Valero L.P. has no employees. Valero GP, LLC, the general
partner of the general partner of Valero L.P., manages Valero
L.P.s operations with its employees. In addition, pursuant
to the Services Agreement described under Certain
Relationships and Related Transactions Valero
L.P.s Relationship with Valero Energy, employees of
subsidiaries of Valero Energy provide certain services to Valero
GP, LLC. As of January 1, 2006, Valero GP, LLC had
1,291 employees. Valero GP, LLC believes that its
relationship with its employees is satisfactory.
For a discussion of how employee benefit plans will be
transferred to Valero GP, LLC upon closing of this offering,
please read Managements Discussion and Analysis of
Financial Condition and Results of Operations Valero
GP Holdings, LLC Liquidity and Capital
Resources Employee Benefits.
Rate Regulation
Several of Valero L.P.s petroleum pipelines are interstate
common carrier pipelines, which are subject to regulation by the
FERC under the October 1, 1977 version of the Interstate
Commerce Act (ICA) and the Energy Policy Act of 1992 (the
EP Act). The ICA and its implementing regulations give the FERC
authority to regulate the rates charged for service on the
interstate common carrier pipelines and generally require the
rates and practices of interstate oil pipelines to be just and
reasonable and nondiscriminatory. The ICA also requires tariffs
to be maintained on file with the FERC that set forth the rates
it charges for providing transportation services on its
interstate common carrier liquids pipelines as well as the rules
and regulations governing these services. The EP Act deemed
certain rates in effect prior to its passage to be just and
reasonable and limited the circumstances under which a complaint
can be made against such grandfathered rates. The EP
Act and its implementing regulations also allow interstate
common carrier oil pipelines to annually index their rates up to
a prescribed ceiling level. In addition, the FERC retains
cost-of-service ratemaking, market-based rates and settlement
rates as alternatives to the indexing approach.
Valero L.P.s interstate anhydrous ammonia pipeline is
subject to regulation by the Surface Transportation Board
(STB) under the current version of the ICA. The ICA and its
implementing regulations give the STB authority to regulate the
rates Valero L.P. charges for service on the ammonia pipeline
and generally require that Valero L.P.s rates and
practices be just and reasonable and nondiscriminatory.
Additionally, the rates and practices for Valero L.P.s
intrastate common carrier pipelines are subject to regulation by
state commissions in Colorado, Kansas, Louisiana, North Dakota,
Oklahoma and Texas. Although the applicable state statutes and
regulations vary, they generally require that intrastate
pipelines publish tariffs setting forth all rates, rules and
regulations applying to intrastate service, and generally
require that pipeline rates and practices be reasonable and
nondiscriminatory. Shippers may also challenge Valero
L.P.s intrastate tariff rates and practices on its
pipelines.
|
|
|
Valero L.P.s Pipelines Rates |
Neither the FERC nor the state commissions have investigated
Valero L.P.s rates or practices, and none of those rates
are currently subject to challenge or complaint. Valero L.P.
does not currently believe that it is likely that there will be
a challenge to the tariffs on its petroleum products or crude
oil pipelines by a current shipper that would materially affect
its revenues or cash flows. In addition, Valero Energy is a
significant shipper on many of Valero L.P.s pipelines.
Valero Energy has committed to refrain from challenging several
of Valero
112
L.P.s petroleum products and crude oil tariffs until at
least April 2008. Valero Energy has also agreed to be
responsible for certain ICA liabilities with respect to
activities or conduct occurring during periods prior to
April 16, 2001. However, the FERC, the STB or a state
regulatory commission could investigate Valero L.P.s
tariffs on their own motion or at the urging of a third party.
Also, since Valero L.P.s pipelines are common carrier
pipelines, Valero L.P. may be required to accept new shippers
who wish to transport in its pipelines and who could potentially
decide to challenge Valero L.P.s tariffs.
Environmental and Safety Regulation
Valero L.P.s operations are subject to extensive federal,
state and local environmental laws and regulations, including
those relating to the discharge of materials into the
environment, waste management and pollution prevention measures.
Valero L.P.s operations are also subject to extensive
federal and state health and safety laws and regulations,
including those relating to pipeline safety. The principal
environmental and safety risks associated with Valero
L.P.s operations relate to unauthorized emissions into the
air, unauthorized releases into soil, surface water or
groundwater, and personal injury and property damage. Compliance
with these environmental and safety laws, regulations and
permits increases Valero L.P.s capital expenditures and
its overall cost of business, and violations of these laws,
regulations and/or permits can result in significant civil and
criminal liabilities, injunctions or other penalties.
Valero L.P. has adopted policies, practices and procedures in
the areas of pollution control, pipeline integrity, operator
qualifications, public relations and education, product safety,
occupational health and the handling, storage, use and disposal
of hazardous materials that are designed to prevent material
environmental or other damage, to ensure the safety of its
pipelines, its employees, the public and the environment and to
limit the financial liability that could result from such
events. Future governmental action and regulatory initiatives
could result in changes to expected operating permits and
procedures, additional remedial actions or increased capital
expenditures and operating costs that cannot be assessed with
certainty at this time. In addition, contamination resulting
from spills of crude oil and refined products occurs within the
industry. Risks of additional costs and liabilities are inherent
within the industry, and there can be no assurances that
significant costs and liabilities will not be incurred in the
future.
The Federal Water Pollution Control Act of 1972, as amended,
also known as the Clean Water Act, and analogous or more
stringent state statutes impose restrictions and strict controls
regarding the discharge of pollutants into state waters or
waters of the United States. The discharge of pollutants into
state waters or waters of the United States is prohibited,
except in accordance with the terms of a permit issued by
applicable federal or state authorities. The Oil Pollution Act,
enacted in 1990, amends provisions of the Clean Water Act as
they pertain to prevention and response to oil spills. Spill
prevention control and countermeasure requirements of the Clean
Water Act and some state laws require the use of dikes and
similar structures to help prevent contamination of state waters
or waters of the United States in the event of an overflow or
release.
Valero L.P.s operations are subject to the Federal Clean
Air Act, as amended, and analogous or more stringent state and
local statutes. The Clean Air Act Amendments of 1990, along with
more restrictive interpretations of the Clean Air Act, may
result in the imposition over the next several years of certain
pollution control requirements with respect to air emissions
from the operations of Valero L.P.s pipelines, storage
tanks and terminals. The Environmental Protection Agency
(EPA) has been developing, over a period of many years,
regulations to implement these requirements. Depending on the
nature of those regulations, and upon requirements that may be
imposed by state and local regulatory authorities; Valero L.P.
may be required to incur certain capital expenditures over the
next several years for air pollution control equipment in
connection with maintaining or obtaining operating permits and
approvals and addressing other air emission-related issues.
113
Due to the broad scope of the issues involved and the complex
nature of the regulations, full development and implementation
of many Clean Air Act regulations have been delayed. Until such
time as the new Clean Air Act requirements are implemented,
Valero L.P. is unable to estimate the effect on its financial
condition or results of operations or the amount and timing of
such required expenditures. At this time, however, Valero L.P.
does not believe that it will be materially affected by any such
requirements.
In addition, EPA has recently revised its fuel content
regulations under Section 211 of the Clean Air Act. These
regulations tighten diesel fuel specifications and effectively
eliminate the use of MTBE in gasoline. In response to these
regulations, many refineries are expected to undergo maintenance
turnarounds in the first half of 2006. Certain of Valero
Energys refineries served by Valero L.P.s assets are
scheduled to undergo maintenance turnarounds to address these
environmental regulations. As a result, Valero L.P. expects this
period of high maintenance turnaround activity will negatively
impact its throughputs and revenues for the first half of 2006.
Additionally, Valero L.P. expects higher maintenance expense
will negatively impact the results of its operations for the
first half of 2006.
Valero L.P. generates non-hazardous solid wastes that are
subject to the requirements of the federal Resource Conservation
and Recovery Act (RCRA) and analogous or more stringent
state statutes. RCRA also governs the disposal of hazardous
wastes. Valero L.P. is not currently required to comply with a
substantial portion of RCRA requirements because its operations
generate minimal quantities of hazardous wastes. However, it is
possible that additional wastes, which could include wastes
currently generated during operations, will in the future be
designated as hazardous wastes. Hazardous wastes are
subject to more rigorous and costly disposal requirements than
are non-hazardous wastes.
The Comprehensive Environmental Response, Compensation and
Liability Act, referred to as CERCLA and also known as
Superfund, and analogous or more stringent state laws, imposes
liability, without regard to fault or the legality of the
original act, on some classes of persons that contributed to the
release of a hazardous substance into the
environment. These persons include the owner or operator of the
site and entities that disposed or arranged for the disposal of
the hazardous substances found at the site. CERCLA also
authorizes the EPA and, in some instances, third parties to act
in response to threats to the public health or the environment
and to seek recovery from the responsible classes of persons for
the costs that they incur. In the course of Valero L.P.s
ordinary operations, it may generate waste that falls within
CERCLAs definition of a hazardous substance.
Valero L.P. currently owns or leases, and has in the past owned
or leased, properties where hydrocarbons are being or have been
handled. Although Valero L.P. has utilized operating and
disposal practices that were standard in the industry at the
time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by Valero
L.P. or on or under other locations where these wastes have been
taken for disposal. In addition, many of these properties have
been operated by third parties whose treatment and disposal or
release of hydrocarbons or other wastes was not under Valero
L.P.s control. These properties and wastes disposed
thereon may be subject to CERCLA, RCRA and analogous state laws.
Under these laws, Valero L.P. could be required to remove or
remediate previously disposed wastes (including wastes disposed
of or released by prior owners or operators), to clean up
contaminated property (including contaminated groundwater) or to
perform remedial operations to prevent future contamination. In
addition, Valero L.P. may be exposed to joint and several
liability under CERCLA for all or part of the costs required to
clean up sites at which hazardous substances may have been
disposed of or released into the environment.
Remediation of subsurface contamination is in process at many of
Valero L.P.s pipeline and terminal sites. Based on current
investigative and remedial activities, Valero L.P. believes that
the cost of these activities will not materially affect its
financial condition or results of operations. Such costs,
however, are often unpredictable and, therefore, there can be no
assurances that the future costs will not become material.
114
|
|
|
Pipeline Integrity and Safety |
Valero L.P.s pipelines are subject to extensive federal
and state laws and regulations governing pipeline integrity and
safety. The federal Pipeline Safety Improvement Act of 2002 and
its implementing regulations (collectively, PSIA) generally
require pipeline operators to maintain qualification programs
for key pipeline operating personnel, to review and update their
existing pipeline safety public education programs, to provide
information for the National Pipeline Mapping System, to
maintain spill response plans and conduct spill response
training and to implement integrity management programs for
pipelines that could affect high consequence areas (i.e., areas
with concentrated populations, navigable waterways and other
unusually sensitive areas). While compliance with PSIA and
analogous or more stringent state laws may affect Valero
L.P.s capital expenditures and operating expenses, Valero
L.P. believes that the cost of such compliance will not
materially affect its competitive position and will not have a
material effect on its financial condition or results of
operations.
Title to Properties
Valero L.P.s principal properties are described above in
Business of Valero L.P. Business
Segments and that information is included herein by
reference. Valero L.P. believes that it has satisfactory
title to all of its assets. Although title to these properties
is subject to encumbrances in some cases, such as customary
interests generally retained in connection with acquisition of
real property, liens related to environmental liabilities
associated with historical operations, liens for current taxes
and other burdens and easements, restrictions and other
encumbrances to which the underlying properties were subject at
the time of acquisition by Valero L.P. or its predecessors,
Valero L.P. believes that none of these burdens will materially
detract from the value of these properties or from its interest
in these properties or will materially interfere with their use
in the operation of Valero L.P.s business. In addition,
Valero L.P. believes that it has obtained sufficient
right-of-way grants and permits from public authorities and
private parties for it to operate its business in all material
respects as described in this prospectus. Valero L.P. performs
scheduled maintenance on all of its pipelines, terminals, crude
oil tanks and related equipment and makes repairs and
replacements when necessary or appropriate. Valero L.P. believes
that all of its pipelines, terminals, crude oil tanks and
related equipment have been constructed and are maintained in
all material respects in accordance with applicable federal,
state and local laws and the regulations and standards
prescribed by the American Petroleum Institute, the Department
of Transportation and accepted industry practice. Please read
Business of Valero L.P. Business
Segments.
Legal Proceedings and Other Contingencies
Valero L.P. is named as a defendant in litigation relating
to its normal business operations, including regulatory and
environmental matters. Valero L.P. is insured against
various business risks to the extent Valero L.P. believes
it is prudent; however, there can be no assurance that the
nature and amount of such insurance will be adequate, in every
case, to indemnify Valero L.P. against liabilities arising
from future legal proceedings as a result of its ordinary
business activity.
With respect to the environmental proceedings listed below, if
any one or more of them were decided against Valero L.P.,
Valero L.P. believes that it would not have a material
effect on its consolidated financial position. However, it is
not possible to predict the ultimate outcome of any of these
proceedings or whether such ultimate outcome may have a material
effect on Valero L.P.s consolidated financial
position.
Grace Energy Corporation Matter. In 1997, Grace Energy
Corporation (Grace Energy) sued subsidiaries of Kaneb in Texas
state court. The complaint sought recovery of the cost of
remediation of fuel leaks in the 1970s from a pipeline that had
once connected a former Grace Energy terminal with Otis Air
Force Base (Otis AFB) in Massachusetts. Grace Energy
alleges the Otis AFB pipeline and related environmental
liabilities had been transferred in 1978 to an entity that was
part of Kanebs acquisition of Support Terminal Services,
Inc. and its subsidiaries from Grace Energy in 1993. Kaneb
contends that it did not acquire the Otis AFB pipeline and
never assumed any responsibility for any associated
environmental damage.
115
In 2000, the court entered final judgment that: (i) Grace
Energy could not recover its own remediation costs of
$3.5 million, (ii) Kaneb owned the Otis AFB
pipeline and its related environmental liabilities and
(iii) Grace Energy was awarded $1.8 million in
attorney costs. Both Kaneb and Grace Energy appealed the trial
courts final judgment to the Texas Court of Appeals in
Dallas. In 2001, Grace Energy filed a petition in bankruptcy,
which created an automatic stay of actions against Grace Energy.
Once that stay is lifted, Valero L.P. intends to resume vigorous
prosecution of the appeal.
Otis AFB is a part of a Superfund Site pursuant to CERCLA.
The site contains a number of groundwater contamination plumes,
two of which are allegedly associated with the Otis AFB
pipeline. Relying on the Texas state courts final judgment
assigning ownership of the Otis AFB pipeline to Kaneb, the
U.S. Department of Justice advised Kaneb in 2001 that it
intends to seek reimbursement from Kaneb for the remediation
costs associated with the two spill areas. In 2002, the
Department of Justice asserted that it had incurred over
$49.0 million in costs and expected to incur additional
costs of approximately $19.0 million for remediation of the
two spill areas. The Department of Justice has not filed a
lawsuit against Valero L.P. on this matter.
Potomac Electric Power Company Matter. On
December 14, 2002, Potomac Electric Power Company sued
subsidiaries of Kaneb in the U.S. District Court for the
District of Maryland, seeking recovery of all its costs
associated with an oil spill in 2000 resulting from a rupture in
a fuel oil pipeline in Maryland owned by Potomac Electric and
operated by a subsidiary of Kaneb. Potomac Electric alleged that
it has incurred costs of approximately $80.0 million as a
result of the spill. This matter was settled, and the case was
dismissed on December 19, 2005. The effects of this
settlement, net of insurance recoveries, were immaterial to the
financial position and results of operations of Valero L.P.
Port of Vancouver Matter. Valero L.P. owns a refined
products terminal on property owned by the Port of Vancouver,
and Valero L.P. leases the land under the terminal from the Port
of Vancouver. Under an Agreed Order entered into with the
Washington Department of Ecology when Kaneb purchased the
terminal in 1998, Kaneb agreed to investigate and remediate a
groundwater plume contaminated by the terminals previous
owner and operator. Kaneb has submitted a final remedial action
plan to the Washington Department of Ecology and is waiting for
it to approve that plan. The Port of Vancouver also owns
property near the terminal site that has been contaminated by
other parties, some of which are in bankruptcy. Estimated costs
to remediate the terminal site depend on a number of factors,
including the outcome of litigation involving the other
properties owned by the Port of Vancouver that are near the
terminal site. No lawsuits have been filed against Valero L.P.
in this matter, and Valero L.P.s liability for any portion
of total future remediation costs is not reasonably estimable at
this time.
Environmental and Safety Compliance Matters. While it is
not possible to predict the outcome of the following
environmental and safety compliance proceedings, if any one or
more of them were decided adversely against Valero L.P.,
Valero L.P. believes that there would be no material effect
on its consolidated financial position, liquidity or results of
operations. Nevertheless, Valero L.P. reports these
proceedings to comply with Securities and Exchange Commission
regulations, which require it to disclose proceedings arising
under federal, state or local provisions regulating the
discharge of materials into the environment or protecting the
environment if Valero L.P. reasonably believes that such
proceedings will result in monetary sanctions of $100,000 or
more.
In particular, the California Bay Area Air Quality Management
District has proposed penalties totaling $381,000 for air
violations at the Selby Terminal; the Illinois State
Generals Office has proposed penalties totaling $133,000
related to a pipeline leak at the Chillicothe Terminal; and the
Pipeline and Hazardous Materials Safety Agency has proposed
penalties totaling $255,000 based on alleged violations of
various pipeline safety requirements in the McKee System. Valero
L.P. is currently in settlement negotiations with these
government agencies to resolve these matters. The California Bay
Area Air Quality Management District has also proposed penalties
totaling $494,000 for alleged air violations at the Martinez
Terminal. The Martinez Terminal was sold to Pacific Energy Group
LLC, a subsidiary of Pacific Energy Partners, L.P., on
September 30, 2005. As part of the asset purchase
agreement, Pacific Energy Group LLC, a subsidiary of Pacific
Energy Partners, L.P., assumed responsibility for the notices of
violation at the Martinez Terminal.
Valero L.P. is also a party to additional claims and legal
proceedings arising in the ordinary course of business. Valero
L.P. believes it is unlikely that the final outcome of any of
these claims or proceedings to which it is a party would have a
material adverse effect on Valero L.P.s financial
position, results of operations or liquidity; however, due to
the inherent uncertainty of litigation, there can be no
assurance that the resolution of any particular claim or
proceeding would not have a material adverse effect on Valero
L.P.s results of operations, financial position or
liquidity.
116
MANAGEMENT
Valero GP Holdings, LLC
Our Board of Directors
Our current board of directors consists of one member, William
E. Greehey. Our current board will appoint an independent
director prior to the closing of this offering. The board also
expects to appoint one independent director within 90 days
of the close of this offering and a third independent director
within one year of this offering. The members of the board of
directors will serve staggered terms, as a result only a portion
of the board of directors will be elected each year. Initially,
the board intends to appoint two functioning committees: an
audit committee and a conflicts committee. The additional
independent directors to be appointed following this offering
are expected to serve on one or more of the committees described
below. Upon completion of this offering, subsidiaries of Valero
Energy will own approximately 63% of our outstanding units and
we will not be required to have a majority of independent
directors, nor will we be required to have compensation or
nominating committees.
Audit Committee. We currently contemplate that the
audit committee will consist of three directors. All members of
the audit committee will be independent under the independence
standards established by the NYSE and SEC rules, and the
committee expects to have an audit committee financial
expert, as defined under SEC rules. The audit committee
will recommend to the board the independent public accountants
to audit our financial statements and establish the scope of,
and oversee, the annual audit. The committee also will approve
any other services provided by its auditor. The audit committee
will provide assistance to the board in fulfilling its oversight
responsibility to the unitholders, the investment community and
others relating to the integrity of our financial statements,
our compliance with legal and regulatory requirements, the
independent auditors qualifications and independence and
the performance of our internal audit function. The audit
committee will oversee our system of disclosure controls and
procedures and system of internal controls regarding financial,
accounting, legal compliance and ethics that management and the
board have established. In doing so, it will be the
responsibility of the audit committee to maintain free and open
communication between the committee and our independent
auditors, the internal accounting function and management of our
company.
Conflicts Committee. We currently contemplate that
the conflicts committee will consist of three independent
directors. The conflicts committee will review specific matters
that the board believes may involve conflicts of interest. The
conflicts committee will determine if the resolution of the
conflict of interest is fair and reasonable to our company. Our
limited liability company agreement provides that members of the
committee may not be officers or employees of our company or
directors, officers or employees of any of our affiliates and
must meet the independence standards for service on an audit
committee of a board of directors as established by the NYSE and
SEC rules. Any matters approved by the conflicts committee will
be conclusively deemed to be fair and reasonable to our company
and approved by all of our unitholders.
While our executive officers and our Chairman of the Board serve
in similar roles with Valero GP, LLC, none of our executive
officers serves as a member of the board of directors or
compensation committee of any entity that has one or more of its
executive officers serving as a member of our board of directors.
Meetings. Our board will hold regular and special
meetings at any time as may be necessary. Regular meetings may
be held without notice on dates set by the board from time to
time. Special meetings of the board may be called with
reasonable notice to each member upon request of the chairman of
the board or upon the written request of any three board
members. A quorum for a regular or special meeting will exist
when a majority of the members are participating in the meeting
either in person or by conference telephone. Any action required
or permitted to be taken at a board meeting may be taken without
a meeting, without prior notice and without a vote if all of the
members sign a written consent authorizing the action.
117
Our Board of Directors and Executive Officers
The following table shows information for members of our board
of directors and our executive officers. Members of our board of
directors will serve staggered terms, as a result only a portion
of the board of directors will be elected each year. As a result
of their initial ownership of approximately 63% of our member
interests, subsidiaries of Valero Energy will retain the ability
to elect, remove and replace at any time any or all of our
directors.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position with Our Company |
|
|
| |
|
|
William E. Greehey
|
|
|
69 |
|
|
Chairman of the Board |
Curtis V. Anastasio
|
|
|
49 |
|
|
President and Chief Executive Officer |
Steven A. Blank
|
|
|
51 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
James R. Bluntzer
|
|
|
51 |
|
|
Senior Vice President-Operations |
Thomas R. Shoaf
|
|
|
47 |
|
|
Vice President and Controller |
Mary F. Morgan
|
|
|
53 |
|
|
Vice President-Marketing and Business Development |
For biographical information, please read Valero
L.P. Directors and Executive Officers of Valero GP,
LLC.
Executive Compensation
Pursuant to our new Administration Agreement, we will pay Valero
GP, LLC approximately $500,000 annually for administrative
services, which includes payment for the time our executive
officers (who are employees of Valero GP, LLC) who devote to the
management of our company.
Employment Agreements
Our executive officers are also executive officers of Valero GP,
LLC. These executive officers do not have employment agreements
in their capacity as our officers.
Compensation of Directors
Our independent directors will receive the following
compensation: a $1,000 fee for each in-person board meeting
attended, a $500 fee for each telephonic board meeting attended,
a $1,000 fee for each in-person committee meeting attended, a
$500 fee for each telephonic committee meeting attended, a
$30,000 annual retainer, a $10,000 annual retainer for serving
as chairman of a committee of the board, a $30,000 annual
retainer for serving as chairman of the board, and an annual
grant of restricted common units under the Valero GP Holdings,
LLC Long-Term Incentive Plan having an aggregate value of
$20,000 at the time of grant, which vest over three years. A
non-employee director serving as chairman of the board will not
receive meeting fees for attending committee meetings. In
addition, each independent member of our board will be
reimbursed for out-of-pocket expenses in connection with
attending meetings of the board of directors or committees. Each
director will be fully indemnified by us for actions associated
with being a member of our board to the extent permitted under
Delaware law.
Long-Term Incentive Plan
General. We intend to adopt the Valero GP Holdings
Long-Term Incentive Plan for employees, consultants and
directors of us and our affiliates who perform services for us.
The long-term incentive plan will consist of unit grants,
restricted units, phantom units, performance units, unit options
and unit appreciation rights. The long-term incentive plan will
permit the grant of awards covering an aggregate of
2,000,000 units. The plan will be administered by the
compensation committee of our board of directors.
Our board of directors, or its compensation committee, in its
discretion may terminate, suspend or discontinue the long-term
incentive plan at any time with respect to any award that has
not yet been granted. Our
118
board of directors, or its compensation committee, also has the
right to alter or amend the long-term incentive plan or any part
of the plan from time to time, including increasing the number
of units that may be granted subject to unitholder approval as
required by the exchange upon which the units are listed at that
time. However, no change in any outstanding grant may be made
that would materially impair the rights of the participant
without the consent of the participant.
Unit Grants. The long-term incentive plan will permit the
grant of units. A unit grant is a grant of units that vest
immediately upon issuance.
Restricted Units and Phantom Units. A restricted unit is
a unit that is subject to forfeiture prior to the vesting of the
award. A phantom unit is a notional unit that entitles the
grantee to receive a unit upon the vesting of the phantom unit
or, in the discretion of the compensation committee, cash
equivalent to the value of a unit. The compensation committee
may determine to make grants under the plan of restricted units
and phantom units to employees and directors containing such
terms as the compensation committee shall determine. The
compensation committee will determine the period over which
restricted units and phantom units granted to employees,
consultants and directors will vest. The committee may base its
determination upon the achievement of specified financial
objectives. In addition, the restricted units and phantom units
will vest upon a change of control of our company, as defined in
the plan, unless provided otherwise by the compensation
committee.
If a grantees employment or membership on the board of
directors terminates for any reason, the grantees unvested
restricted units and phantom units will be automatically
forfeited unless, and to the extent, the compensation committee
provides otherwise. If a grantees employment or membership
in the board of directors terminates as a result of retirement,
death or disability, the grantees restricted units and
phantom units shall immediately vest and become non-forfeitable
as of such date. Units to be delivered in connection with the
grant of restricted units or upon the vesting of phantom units
may be units acquired by us on the open market, units already
owned by us, units acquired by us from any other person or any
combination of the foregoing. If we issue new units in
connection with the grant of restricted units or upon vesting of
the phantom units, the total number of units outstanding will
increase. The compensation committee, in its discretion, may
grant tandem distribution rights with respect to restricted
units and tandem distribution equivalent rights with respect to
phantom units.
Unit Options and Unit Appreciation Rights. The long-term
incentive plan, will permit the grant of options covering units
and the grant of unit appreciation rights. A unit appreciation
right is an award that, upon exercise, entitles the participant
to receive the excess of the fair market value of a unit on the
exercise date over the exercise price established for the unit
appreciation right. Such excess may be paid in units, cash, or a
combination thereof, as determined by the compensation committee
in its discretion. The compensation committee will be able to
make grants of unit options and unit appreciation rights under
the plan to employees and directors containing such terms as the
committee shall determine. Unit options and unit appreciation
rights may not have an exercise price that is less than the fair
market value of the units on the date of grant. In general, unit
options and unit appreciation rights granted will become
exercisable over a period determined by the compensation
committee. In addition, the unit options and unit appreciation
rights will become exercisable upon a change in control of our
company, as defined in the plan, unless provided otherwise by
the committee. The compensation committee, in its discretion may
grant tandem distribution equivalent rights with respect to unit
options and unit appreciation rights.
Upon exercise of a unit option (or a unit appreciation right
settled in units), we will acquire units on the open market or
directly from any other person or use units already owned by us,
or any combination of the foregoing. If we issue new units upon
exercise of the unit options (or a unit appreciation right
settled in units), the total number of units outstanding will
increase, and we will receive the proceeds from an optionee upon
exercise of a unit option. The availability of unit options and
unit appreciation rights is intended to furnish additional
compensation to employees and directors and to align their
economic interests with those of unitholders.
119
Valero L.P.
Directors and Executive Officers of Valero GP, LLC
Valero L.P. does not have directors or officers. The directors
and officers of Valero GP, LLC, the general partner of Valero
L.P.s general partner, Riverwalk Logistics, L.P., perform
all management functions for Valero L.P. We select the directors
of Valero GP, LLC. Officers of Valero GP, LLC are appointed by
its directors.
Set forth below is certain information concerning the directors
and executive officers of Valero GP, LLC:
|
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|
|
|
|
|
Name |
|
Age | |
|
Position Held with Valero GP, LLC |
|
|
| |
|
|
William E. Greehey
|
|
|
69 |
|
|
Chairman of the Board |
Curtis V. Anastasio
|
|
|
49 |
|
|
President, Chief Executive Officer and Director |
Dan J. Hill
|
|
|
65 |
|
|
Director |
Gregory C. King
|
|
|
45 |
|
|
Director |
William R. Klesse
|
|
|
59 |
|
|
Director |
Stan McLelland
|
|
|
60 |
|
|
Director |
Rodman D. Patton
|
|
|
62 |
|
|
Director |
Steven A. Blank
|
|
|
51 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
James R. Bluntzer
|
|
|
51 |
|
|
Senior Vice President-Operations |
Mary F. Morgan
|
|
|
53 |
|
|
Vice President-Marketing and Business Development |
Brad R. Ramsey
|
|
|
37 |
|
|
Vice President-Engineering |
Rodney L. Reese
|
|
|
55 |
|
|
Vice President-Regional Operations |
Thomas R. Shoaf
|
|
|
47 |
|
|
Vice President and Controller |
Mr. Greehey became Chairman of the board of
directors of Valero GP, LLC in January 2002. Mr. Greehey
has served as Chairman of the board of directors of Valero
Energy since 1979. Mr. Greehey was Chief Executive Officer
of Valero Energy from 1979 through December 2005. He was also
President of Valero Energy from 1998 until January 2003.
Mr. Anastasio became the President and a director of
Valero GP, LLC in December 1999. He also became its Chief
Executive Officer in June 2000. He served as Vice President,
General Counsel, and Secretary of Ultramar Diamond Shamrock
Corporation (UDS) from 1997 until December 1999.
Mr. Hill became a director of Valero GP, LLC in July
2004. From February 2001 through May 2004, he served as a
consultant to El Paso Corporation. Prior to that, he served as
President and Chief Executive Officer of Coastal Refining and
Marketing Company. In 1978, Mr. Hill was named as Senior
Vice President of The Coastal Corporation and President of
Coastal States Crude Gathering. In 1971, he began managing
Coastals NGL business. Previously, Mr. Hill worked
for Amoco and Mobil.
Mr. King became a director of Valero GP, LLC in
January 2002. He has served as President of Valero Energy since
January 2003. He served as Executive Vice President and General
Counsel of Valero Energy from September 2001, until January
2003. Mr. King served as Valero Energys Executive
Vice President and Chief Operating Officer from January 2001
until September 2001. Mr. King was Senior Vice President
and Chief Operating Officer of Valero Energy from 1999 to
January 2001.
Mr. Klesse became a director of Valero GP, LLC in
December 1999. He has been Chief Executive Officer of Valero
Energy since January 2006. Prior to that he served as the
Executive Vice President and Chief Operating Officer of Valero
Energy from January 2003 until January 2006. He previously
served as Executive Vice President-Refining and Commercial
Operations of Valero Energy from January 2003 until January
2006. He had served as Executive Vice President, Operations of
UDS from January 1999 through December 2001.
Mr. McLelland became a director of Valero GP, LLC in
October 2005. Mr. McLelland was U.S. Ambassador to Jamaica
from January 1997 until March 2001. Prior to being named U.S.
Ambassador to Jamaica,
120
Mr. McLelland was a senior executive with Valero Energy. He
joined Valero Energy in 1981 as Senior Vice President and
General Counsel. He served as Executive Vice President and
General Counsel from 1990 until 1997.
Mr. Patton became a director of Valero GP, LLC in
June 2001. He retired from Merrill Lynch & Co. in 1999 where
he had served as Managing Director in the Energy Group since
1993. Prior to that, he served in investment banking and
corporate finance positions with Credit Suisse First Boston
(1981-1993) and Blyth Eastman Paine Webber (1971-1981). He is a
director of Apache Corporation.
Mr. Blank became Senior Vice President and Chief
Financial Officer of Valero GP, LLC in January 2002. From
December 1999 until January 2002, he was Chief Accounting and
Financial Officer and a director of Valero GP, LLC. He also
served as UDSs Vice President and Treasurer from December
1996 until January 2002, when he became Vice President-Finance
of Valero Energy.
Mr. Bluntzer became Senior Vice President-Operations
of Valero GP, LLC in October 2005. He served as Vice
President-Operations of Valero GP, LLC from February 2004 until
October 2005. He served as Vice President-Terminal Operations of
Valero GP, LLC from May 2003 to February 2004. He served as
Special Projects Director of Valero GP, LLC from January 2002 to
May 2003 and as Vice President of Midstream Operations of Valero
Energy from June 2001 to January 2002. He served as Refinery
Logistics & Supply Chain Director of Valero Energy from July
2000 to June 2001.
Ms. Morgan became Vice President-Marketing and
Business Development of Valero GP, LLC in July 2005.
Ms. Morgan served as Vice President, Marketing and Business
Development of Kaneb Pipe Line Company LLC from 2004 until July
2005. She served as Vice President, Marketing of Kinder Morgan
Energy Partners, L.P. from 1998 until 2004.
Mr. Ramsey became Vice President-Engineering of
Valero GP, LLC in April 2005. From July 2004 until April 2005,
Mr. Ramsey was Project Management Director for Valero GP,
LLC. From February 2003 to July 2004, he was Engineering and
Maintenance Director of Valero Energys McKee refinery.
From January 2001 to February 2003, Mr. Ramsey was
Maintenance Director of Valero Energys Houston refinery.
He was Turnaround Manager of Valero Energys Texas City
refinery from July 1998 to January 2001.
Mr. Reese became Vice President- Regional Operations
of Valero GP, LLC in October 2005. From April 2003 until October
2005, he served as Vice President, Engineering and Technical
Services of Valero GP, LLC. Prior to that, he served as Vice
President-Operations from December 1999 until April 2003.
Mr. Shoaf became Vice President and Controller of
Valero GP, LLC in July 2005. Mr. Shoaf served as Vice
President-Structured Finance of Valero Corporate Services
Company, a subsidiary of Valero Energy, from 2001 until his
appointment with Valero GP, LLC. From 2000 to 2001,
Mr. Shoaf was Vice President-Finance of Valero Corporate
Services Company.
Audit Committee
The audit committee reviews and reports to the board on various
auditing and accounting matters, including the quality,
objectivity and performance of Valero L.P.s internal and
external accountants and auditors, the adequacy of its financial
controls and the reliability of financial information reported
to the public. The audit committee is composed of
Mr. Patton (Chairman), Mr. Hill and Mr. McLelland.
The board of directors has determined that each of the audit
committee members meets the independence standards for audit
committees set forth in the NYSE listing standards and the
applicable regulations of the SEC. The board of directors has
adopted a written charter for the audit committee. The board of
directors has determined that a member of the audit committee,
namely Mr. Patton, is an audit committee financial expert
(as defined by the SEC) and that he is independent
as that term is used in Item 7(d)(3)(iv) of
Schedule 14A of the Exchange Act.
121
Valero GP, LLC has a compensation committee composed of the
directors who the board has determined to be independent. For
more information, see Compensation Committee Interlocks
and Insider Participation. The members of the compensation
committee are Mr. Hill (Chairman), Mr. McLelland and
Mr. Patton.
Valero L.P.s partnership agreement provides for a
conflicts committee composed of the directors who the board has
determined to be independent. The conflicts committee reviews
and makes recommendations relating to potential conflicts of
interest between Valero L.P., on one hand, and Valero Energy, on
the other hand. The members of the conflicts committee are
Mr. Hill (Chairman), Mr. McLelland and Mr. Patton.
Executive Compensation
The following table sets forth a summary of compensation paid
for the last three years, if applicable, to Valero GP,
LLCs CEO and to its four other most highly compensated
executive officers whose total annual salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 2005. In
prior fiscal years, certain Valero GP, LLC executive
officers were employed by Valero Energy. Valero L.P. paid
for the cost of the services rendered by these officers under
the terms of a services agreement between Valero L.P. and
Valero Energy.
|
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|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation | |
|
Long-Term Compensation Awards | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
Number of | |
|
|
|
|
|
|
|
|
|
|
Securities | |
|
|
|
|
|
|
|
|
Restricted | |
|
Underlying | |
|
|
|
All | |
|
|
|
|
|
|
Unit | |
|
Options | |
|
LTIP | |
|
Other | |
Name and Principal Position (a) |
|
Year | |
|
Salary | |
|
Bonus (b) | |
|
Awards (c) | |
|
Granted | |
|
Payouts (d) | |
|
Compensation (e) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Curtis V. Anastasio,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief Executive
|
|
|
2005 |
|
|
$ |
338,500 |
|
|
$ |
315,000 |
|
|
$ |
258,795 |
|
|
|
13,450 |
|
|
$ |
236,101 |
|
|
$ |
300,151 |
|
|
Officer |
|
|
2004 |
|
|
|
321,000 |
|
|
|
359,700 |
|
|
|
217,564 |
|
|
|
9,625 |
|
|
|
176,266 |
|
|
|
192,180 |
|
|
|
|
2003 |
|
|
|
307,506 |
|
|
|
250,000 |
|
|
|
245,672 |
|
|
|
11,800 |
|
|
|
49,235 |
|
|
|
112,350 |
|
Steven A. Blank,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief
|
|
|
2005 |
|
|
$ |
287,000 |
|
|
$ |
220,500 |
|
|
$ |
139,174 |
|
|
|
7,225 |
|
|
$ |
236,101 |
|
|
$ |
143,525 |
|
|
Financial Officer |
|
|
2004 |
|
|
|
276,500 |
|
|
|
260,000 |
|
|
|
155,403 |
|
|
|
6,875 |
|
|
|
234,982 |
|
|
|
107,010 |
|
James R. Bluntzer,
|
|
|
2005 |
|
|
$ |
193,833 |
|
|
$ |
165,000 |
|
|
$ |
104,093 |
|
|
|
5,400 |
|
|
|
|
|
|
$ |
11,582 |
|
Senior Vice President-Operations
|
|
|
2004 |
|
|
|
177,961 |
|
|
|
126,700 |
|
|
|
55,945 |
|
|
|
2,475 |
|
|
|
|
|
|
|
6,305 |
|
|
|
|
2003 |
|
|
|
171,558 |
|
|
|
107,000 |
|
|
|
24,943 |
|
|
|
2,675 |
|
|
|
|
|
|
|
|
|
Brad R. Ramsey,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President-Engineering
|
|
|
2005 |
|
|
$ |
169,000 |
|
|
$ |
103,800 |
|
|
$ |
51,184 |
|
|
|
2,650 |
|
|
$ |
|
|
|
$ |
8,873 |
|
Rodney L. Reese,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President-Regional
|
|
|
2005 |
|
|
$ |
182,123 |
|
|
$ |
105,000 |
|
|
$ |
44,858 |
|
|
|
2,450 |
|
|
$ |
|
|
|
$ |
10,927 |
|
|
Operations |
|
|
2004 |
|
|
|
172,071 |
|
|
|
110,000 |
|
|
|
54,250 |
|
|
|
2,400 |
|
|
|
|
|
|
|
10,324 |
|
|
|
|
2003 |
|
|
|
163,835 |
|
|
|
95,000 |
|
|
|
24,036 |
|
|
|
2,575 |
|
|
|
|
|
|
|
11,506 |
|
|
|
(a) |
The named executive officers hold or held the indicated offices
in Valero GP, LLC, the general partner of Riverwalk Logistics,
L.P., Valero L.P.s general partner. Valero L.P. does not
have any officers or directors. |
|
|
(b) |
In 2005, 2004 and 2003, executive bonuses were paid 100% in
cash, but recipients could elect to use 25% of their cash bonus
award to purchase Valero L.P. common units at market price. |
|
|
(c) |
Cash distributions are paid on restricted common units at the
same rate as on Valero L.P.s unrestricted common units.
Restricted common units granted in 2005, 2004 and October 2003
vest 1/5 annually over a five-year period, and restricted common
units granted in January 2003 vest 1/3 annually over a
three-year period. The aggregate number of unvested restricted
common units held at December 31, 2005 and the market value
of such common units on that date (calculated according to SEC
regulations without regard to restrictions on such common units)
were: Mr. Anastasio, 9,790 common units, $506,730;
Mr. Blank, 5,609 common units, $290,322; Mr. Bluntzer,
2,932 common units, $151,760; Mr. Ramsey, 2,098 common
units, $108,592; and Mr. Reese, 1,866 common units, $96,584. |
122
|
|
(d) |
LTIP payouts are the number of performance share awards vested
for the applicable years performance multiplied by the
market price per share of Valero Energy common stock on the
vesting date. These performance shares were granted under Valero
Energys Executive Stock Incentive Plan. Total shareholder
return, or TSR, during a specified performance
period was established as the performance measure for
determining what portion of an award may vest. TSR is measured
by dividing the sum of (a) the net change in the price of a
share of Valero Energys common stock between the beginning
of the performance period and the end of the performance period,
and (b) the total dividends paid on the common stock during
the performance period, by (c) the price of a share of
Valero Energys common stock at the beginning of the
performance period. Each performance share award is subject to
vesting in three equal increments, based upon Valero
Energys TSR. At the end of each performance period, Valero
Energys TSR is compared to the TSR for a target group of
comparable companies. Valero Energy and the companies in the
target group are then ranked by quartile. Participants then earn
0%, 50%, 100% or 150% of that portion of the initial grant
amount that is vesting for such period, depending on whether
Valero Energys TSR is in the last, 3rd, 2nd or 1st
quartile of the target group; 200% will be earned if Valero
Energy ranks highest in the group. Amounts not earned in the
given performance period can be carried forward for one
additional performance period and up to 100% of the
carried-forward amount can still be earned, depending upon the
quartile achieved for such subsequent period. |
|
|
(e) |
Amounts include contributions made to Valero Energys
Thrift Plan and Excess Thrift Plan, and unused portions of
amounts provided by Valero Energy under Valero Energys
Flexible Benefits Plan. Messrs. Anastasio, Blank, Bluntzer,
Ramsey and Reese were allocated $20,252, $17,185, $11,582,
$8,873 and $10,927, respectively, as a result of contributions
to the Thrift Plan (and, in the case of Messrs. Anastasio,
Blank and Bluntzer, the Excess Thrift Plan) for 2005. Also
included for Mr. Anastasio in 2005 was $7,247 received as
reimbursement of certain membership dues. Amounts for 2005 also
include vesting of restricted stock issued to Mr. Anastasio
and Mr. Blank under Valero Energys long-term
incentive plan, for which Mr. Anastasio was vested for $272,652
and Mr. Blank was vested for $126,340. |
Option Grants and Related Information
The following table sets forth further information regarding the
grants of Valero L.P. unit options to the named executive
officers reflected in the Summary Compensation Table.
|
|
|
Option Grants in the Last Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Percent of | |
|
|
|
|
|
|
|
|
|
|
Securities | |
|
Total Options | |
|
|
|
Market | |
|
|
|
|
|
|
Underlying | |
|
Granted to | |
|
|
|
Price at | |
|
|
|
Grant Date | |
|
|
Options | |
|
Employees in | |
|
Exercise Price | |
|
Grant Date | |
|
Expiration | |
|
Present Value | |
Name |
|
Granted (#) | |
|
Fiscal Year | |
|
($/Security)(a) | |
|
($/Security) | |
|
Date | |
|
($)(b) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Curtis V. Anastasio
|
|
|
13,450 |
|
|
|
6.81 |
|
|
$ |
57.5100 |
|
|
$ |
57.5100 |
|
|
|
10/27/2012 |
|
|
$ |
77,607 |
|
Steven A. Blank
|
|
|
7,225 |
|
|
|
3.66 |
|
|
|
57.5100 |
|
|
|
57.5100 |
|
|
|
10/27/2012 |
|
|
|
41,688 |
|
James R. Bluntzer
|
|
|
5,400 |
|
|
|
2.74 |
|
|
|
57.5100 |
|
|
|
57.5100 |
|
|
|
10/27/2012 |
|
|
|
31,158 |
|
Brad R. Ramsey
|
|
|
2,650 |
|
|
|
1.34 |
|
|
|
57.5100 |
|
|
|
57.5100 |
|
|
|
10/27/2012 |
|
|
|
15,291 |
|
Rodney L. Reese
|
|
|
2,450 |
|
|
|
1.24 |
|
|
|
57.5100 |
|
|
|
57.5100 |
|
|
|
10/27/2012 |
|
|
|
14,137 |
|
|
|
(a) |
All options reported vest in equal increments over a five-year
period from the date of grant, unless otherwise noted. Under the
terms of Valero GP, LLCs 2000 Long Term Incentive Plan, a
participant may satisfy the tax withholding obligations related
to exercise by tendering cash payment, by authorizing Valero GP,
LLC to withhold common units otherwise issuable to the
participant or by delivering to Valero GP, LLC already owned and
unencumbered common units, subject to certain conditions. |
|
|
(b) |
The Black-Scholes option pricing model was used to determine
grant date present value. This model is designed to value
publicly traded options. Options issued under Valero GP,
LLCs option plan are not freely traded, and the exercise
of such options is subject to substantial restrictions.
Moreover, the Black-Scholes model does not give effect to either
risk of forfeiture or lack of transferability. The estimated
values under |
123
|
|
|
the Black-Scholes model are based on assumptions as to variables
such as interest rates, unit price volatility and future cash
distribution yield. The estimated grant date present values
presented in this table were calculated using an expected
average option life of five years, risk-free rate of return of
4.43%, average volatility rate of 18.66% based on daily
volatility rates from the initial public offering by Valero L.P.
through December 31, 2005, and cash distribution yield of
5.95%, which is the expected annualized quarterly cash
distribution rate in effect at the date of grant expressed as a
percentage of the market value of the common units at the date
of grant. The actual value of unit options could be zero;
realization of any positive value depends upon the actual future
performance of the common units, the continued employment of the
option holder throughout the vesting period and the timing of
the exercise of the option. Accordingly, the values set forth in
this table may not be achieved. |
|
|
|
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values |
The following table sets forth information regarding Valero L.P.
common units and shares of Valero Energy common stock underlying
options exercisable at December 31, 2005, and options
exercised during 2005, for the executive officers named in the
Summary Compensation Table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
|
|
|
|
|
|
Underlying Unexercised | |
|
Value of Unexercised | |
|
|
Securities | |
|
|
|
Options at | |
|
In-the-Money Options at | |
|
|
Acquired | |
|
|
|
December 31, 2005 (#) | |
|
December 31, 2005($) | |
|
|
on Exercise | |
|
Value | |
|
| |
|
| |
Name |
|
(#) | |
|
Realized ($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Curtis V. Anastasio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero L.P. common units
|
|
|
|
|
|
$ |
|
|
|
|
30,645 |
|
|
|
28,320 |
|
|
$ |
374,415 |
|
|
$ |
45,383 |
(a) |
|
Valero Energys common stock
|
|
|
34,000 |
|
|
|
1,136,822 |
|
|
|
146,600 |
|
|
|
|
|
|
|
6,357,385 |
|
|
|
|
(b) |
|
Steven A. Blank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero L.P. common units
|
|
|
|
|
|
$ |
|
|
|
|
11,521 |
|
|
|
17,945 |
|
|
$ |
118,964 |
|
|
$ |
33,460 |
(a) |
|
Valero Energys common stock
|
|
|
25,322 |
|
|
|
690,161 |
|
|
|
|
|
|
|
20,320 |
|
|
|
|
|
|
|
806,501 |
(b) |
|
James R. Bluntzer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero L.P. common units
|
|
|
|
|
|
$ |
|
|
|
|
6,065 |
|
|
|
8,985 |
|
|
$ |
67,789 |
|
|
$ |
10,288 |
(a) |
|
Valero Energys common stock
|
|
|
|
|
|
|
|
|
|
|
74,420 |
|
|
|
|
|
|
|
3,334,025 |
|
|
|
|
(b) |
|
Brad R. Ramsey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero L.P. common units
|
|
|
|
|
|
$ |
|
|
|
|
240 |
|
|
|
3,610 |
|
|
$ |
|
|
|
$ |
|
(a) |
|
Valero Energys common stock
|
|
|
|
|
|
|
|
|
|
|
24,680 |
|
|
|
2,220 |
|
|
|
1,070,332 |
|
|
|
92,385 |
(b) |
|
Rodney L. Reese
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero L.P. common units
|
|
|
3,267 |
|
|
$ |
75,696 |
|
|
|
3,143 |
|
|
|
5,915 |
|
|
$ |
28,713 |
|
|
$ |
9,903 |
(a) |
|
Valero Energys common stock
|
|
|
|
|
|
|
|
|
|
|
17,120 |
|
|
|
|
|
|
|
784,989 |
|
|
|
|
(b) |
|
|
(a) |
Represents the dollar value obtained by multiplying the number
of unexercised in-the-money options by the difference between
the stated exercise price per unit of the options and the
closing market price per unit of Valero L.P.s common units
on December 31, 2005. |
|
|
(b) |
Represents the dollar value obtained by multiplying the number
of unexercised in-the-money options by the difference between
the stated exercise price per share of the options and the
closing market price per share of Valero Energys common
stock on December 31, 2005. |
124
Retirement Benefits
The following table sets forth the estimated annual gross
benefits payable under Valero Energys Pension Plan, Excess
Pension Plan and Supplemental Executive Retirement Plan, or
SERP, upon retirement at age 65, based upon the assumed
compensation levels and years of service indicated and assuming
an election to have payments continue for the life of the
participant only.
|
|
|
Estimated Annual Pension Benefits at Age 65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years of Service | |
Covered | |
|
|
|
| |
Compensation | |
|
|
|
15 | |
|
20 | |
|
25 | |
|
30 | |
|
35 | |
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ |
200,000 |
|
|
|
|
$ |
54,000 |
|
|
$ |
71,000 |
|
|
$ |
89,000 |
|
|
$ |
107,000 |
|
|
$ |
125,000 |
|
|
300,000 |
|
|
|
|
|
83,000 |
|
|
|
110,000 |
|
|
|
138,000 |
|
|
|
166,000 |
|
|
|
193,000 |
|
|
400,000 |
|
|
|
|
|
112,000 |
|
|
|
149,000 |
|
|
|
187,000 |
|
|
|
224,000 |
|
|
|
261,000 |
|
|
500,000 |
|
|
|
|
|
142,000 |
|
|
|
188,000 |
|
|
|
236,000 |
|
|
|
283,000 |
|
|
|
330,000 |
|
|
600,000 |
|
|
|
|
|
171,000 |
|
|
|
227,000 |
|
|
|
284,000 |
|
|
|
341,000 |
|
|
|
398,000 |
|
|
700,000 |
|
|
|
|
|
200,000 |
|
|
|
266,000 |
|
|
|
333,000 |
|
|
|
400,000 |
|
|
|
466,000 |
|
|
800,000 |
|
|
|
|
|
229,000 |
|
|
|
305,000 |
|
|
|
382,000 |
|
|
|
458,000 |
|
|
|
534,000 |
|
|
900,000 |
|
|
|
|
|
259,000 |
|
|
|
344,000 |
|
|
|
431,000 |
|
|
|
517,000 |
|
|
|
603,000 |
|
|
1,000,000 |
|
|
|
|
|
288,000 |
|
|
|
383,000 |
|
|
|
479,000 |
|
|
|
575,000 |
|
|
|
671,000 |
|
|
1,100,000 |
|
|
|
|
|
317,000 |
|
|
|
422,000 |
|
|
|
528,000 |
|
|
|
634,000 |
|
|
|
739,000 |
|
|
1,200,000 |
|
|
|
|
|
346,000 |
|
|
|
461,000 |
|
|
|
577,000 |
|
|
|
692,000 |
|
|
|
807,000 |
|
|
1,300,000 |
|
|
|
|
|
375,000 |
|
|
|
500,000 |
|
|
|
626,000 |
|
|
|
751,000 |
|
|
|
876,000 |
|
|
1,400,000 |
|
|
|
|
|
405,000 |
|
|
|
539,000 |
|
|
|
674,000 |
|
|
|
810,000 |
|
|
|
944,000 |
|
|
1,500,000 |
|
|
|
|
|
434,000 |
|
|
|
578,000 |
|
|
|
723,000 |
|
|
|
868,000 |
|
|
|
1,012,000 |
|
|
1,600,000 |
|
|
|
|
|
463,000 |
|
|
|
617,000 |
|
|
|
772,000 |
|
|
|
926,000 |
|
|
|
1,080,000 |
|
|
1,700,000 |
|
|
|
|
|
492,000 |
|
|
|
656,000 |
|
|
|
821,000 |
|
|
|
985,000 |
|
|
|
1,149,000 |
|
|
1,800,000 |
|
|
|
|
|
522,000 |
|
|
|
695,000 |
|
|
|
869,000 |
|
|
|
1,043,000 |
|
|
|
1,217,000 |
|
|
1,900,000 |
|
|
|
|
|
551,000 |
|
|
|
734,000 |
|
|
|
918,000 |
|
|
|
1,102,000 |
|
|
|
1,285,000 |
|
|
2,000,000 |
|
|
|
|
|
580,000 |
|
|
|
773,000 |
|
|
|
967,000 |
|
|
|
1,160,000 |
|
|
|
1,353,000 |
|
Valero Energy maintains a noncontributory defined benefit
Pension Plan in which virtually all employees of Valero Energy,
including those providing services for Valero L.P., are eligible
to participate and under which contributions by individual
participants are neither required nor permitted. Valero Energy
also maintains a noncontributory, non-qualified Excess Pension
Plan and a non-qualified SERP, which provide supplemental
pension benefits to certain highly compensated employees. The
Pension Plan (supplemented, as necessary, by the Excess Pension
Plan) provides a monthly pension at normal retirement equal to
1.6% of the participants average monthly compensation
(based upon the participants earnings during the three
consecutive calendar years during the last 10 years of the
participants credited service affording the highest such
average) times the participants years of credited service.
The SERP provides an additional benefit equal to 0.35% times the
product of the participants years of credited service
(maximum 35 years) multiplied by the excess of the
participants average monthly compensation over the lesser
of 1.25 times the monthly average (without indexing) of the
social security wage bases for the 35-year period ending with
the year the participant attains social security retirement age,
or the monthly average of the social security wage base in
effect for the year that the participant retires. For purposes
of the SERP, the participants most highly compensated
consecutive 36 months of service are considered.
Compensation for purposes of the Pension Plan, Excess Pension
Plan and SERP includes salary and bonus as reported in the
Summary Compensation Table. Pension benefits are not subject to
any deduction for social security or other offset amounts.
Credited years of service (for purposes of the Pension Plan) for
the period ended December 31, 2005 for the executive
officers named in the Summary Compensation Table are as follows:
Mr. Anastasio- 18 years,
Mr. Blank-26 years; Mr. Bluntzer- 30 years;
Mr. Ramsey- 7 years; and Mr. Reese-
19 years. Mr. Anastasio and Mr. Blank have been
eligible to participate in the SERP since 2002.
For a discussion of how employee benefit plans will be
transferred to Valero GP, LLC upon closing of this offering,
please read Managements Discussion and Analysis of
Financial Condition and Results of Operations Valero
GP Holdings, LLC Liquidity and Capital
Resources Employee Benefits.
125
Compensation of Directors
Directors who are not employees of Valero GP, LLC or its
affiliates receive the following compensation: a $1,000 fee for
each in-person board meeting attended, a $500 fee for each
telephonic board meeting attended, a $1,000 fee for each
in-person committee meeting attended, a $500 fee for each
telephonic committee meeting attended, a $30,000 annual
retainer, a $10,000 annual retainer for serving as chairman of a
committee of the board, a $30,000 annual retainer for serving as
chairman of the board, and an annual grant of restricted common
units under the Valero GP, LLC 2000 Long-Term Incentive Plan
having an aggregate value of $20,000 at the time of grant, which
vest over three years. A non-employee director serving as
chairman of the board will not receive meeting fees for
attending committee meetings.
Compensation Committee Interlocks and Insider
Participation
Mr. Hill (Chairman), Mr. McLelland and Mr. Patton
compose the compensation committee of the board of directors of
Valero GP, LLC. No executive officer of Valero GP, LLC has
served as a member of the board of directors or on the
compensation committee of any company whose executive officers
include a member of Valero GP, LLCs compensation committee.
The compensation committee administers the incentive plans of
Valero GP, LLC and makes awards under them, in consultation with
management, that create appropriate incentives for employees and
management of Valero GP, LLC.
126
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Valero GP Holdings, LLC
The following table sets forth certain information regarding the
beneficial ownership of our units prior to and as of the closing
of this offering by:
|
|
|
|
|
each person who will beneficially own more than 5% of our units; |
|
|
|
each of our named executive officers; |
|
|
|
all of our directors and director nominees; and |
|
|
|
all of our directors, director nominees and executive officers
as a group. |
All information with respect to beneficial ownership has been
furnished by the respective directors or officers, as the case
may be.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units | |
|
Units | |
|
|
Beneficially Owned | |
|
Beneficially Owned | |
|
|
Prior to Offering | |
|
After Offering | |
|
|
| |
|
| |
Name of Beneficial Owner |
|
Units | |
|
Percent | |
|
Units | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
Diamond Shamrock Refining and Marketing Company (a)
|
|
|
22,941,024 |
|
|
|
51.5 |
% |
|
|
22,941,024 |
|
|
|
51.5 |
% |
Sigmor Corporation (a)
|
|
|
13,129,474 |
|
|
|
29.5 |
|
|
|
5,069,234 |
|
|
|
11.4 |
(b) |
The Shamrock Pipe Line Corporation (a)
|
|
|
6,028,369 |
|
|
|
13.5 |
|
|
|
|
|
|
|
0.00 |
|
Diamond Shamrock Refining Company, L.P. (a)
|
|
|
2,410,056 |
|
|
|
5.4 |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining New Orleans, L.L.C. (a)
|
|
|
445 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining Company California (a)
|
|
|
445 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining Texas, L.P. (a)
|
|
|
445 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
William E. Greehey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtis V. Anastasio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven A. Blank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James R. Bluntzer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary F. Morgan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brad R. Ramsey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rodney L. Reese
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas R. Shoaf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All current directors and executive officers as a group
(8 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents less than 1%. |
|
(a) |
|
Valero Energy directly or indirectly owns 100% of the interests
in these entities. Therefore, Valero Energy indirectly
beneficially owns 100% of the units before the offering and
62.9% of the units after the offering. Valero Energy intends to
further reduce and ultimately sell all of its indirect ownership
interest in us, pending market conditions. |
|
(b) |
|
If the underwriters exercise their option to purchase additional
units in full, Sigmor Corporations beneficial interest
will be reduced to 5.8%. |
Valero L.P.
The following table sets forth ownership of Valero L.P. common
units and Valero Energy common stock by directors and executive
officers of Valero GP, LLC as of December 31, 2005. Unless
otherwise indicated in the
127
notes to the table, each of the named persons and members of the
group has sole voting and investment power with respect to the
common units and common stock shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units | |
|
|
|
|
|
Shares of Valero | |
|
|
|
|
Units | |
|
Under | |
|
|
|
Shares of Valero | |
|
Energy Stock | |
|
|
|
|
Beneficially | |
|
Exercisable | |
|
Percentage of | |
|
Energy Stock | |
|
under | |
|
Percentage of | |
|
|
Owned | |
|
Options | |
|
Outstanding | |
|
Beneficially | |
|
Exercisable | |
|
Outstanding | |
Name of Beneficial Owner (a) |
|
(b)(c) | |
|
(d) | |
|
Units (b) | |
|
Owned (e)(f) | |
|
Options (g) | |
|
Shares (f) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
William E. Greehey
|
|
|
66,422 |
|
|
|
|
|
|
|
* |
|
|
|
5,891,266 |
|
|
|
8,402,376 |
|
|
|
2.32 |
% |
Curtis V. Anastasio
|
|
|
28,706 |
|
|
|
30,645 |
|
|
|
* |
|
|
|
57,254 |
|
|
|
146,600 |
|
|
|
* |
|
Dan J. Hill
|
|
|
1,932 |
|
|
|
|
|
|
|
* |
|
|
|
3,000 |
|
|
|
|
|
|
|
* |
|
Gregory C. King
|
|
|
6,506 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
344,633 |
|
|
|
654,800 |
|
|
|
* |
|
William R. Klesse
|
|
|
24,722 |
|
|
|
13,333 |
|
|
|
* |
|
|
|
512,348 |
|
|
|
765,080 |
|
|
|
* |
|
Stan McLelland
|
|
|
344 |
|
|
|
|
|
|
|
* |
|
|
|
9,034 |
|
|
|
|
|
|
|
* |
|
Rodman D. Patton
|
|
|
9,082 |
|
|
|
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
* |
|
Steven A. Blank
|
|
|
18,638 |
|
|
|
11,521 |
|
|
|
* |
|
|
|
5,090 |
|
|
|
20,320 |
|
|
|
* |
|
James R. Bluntzer
|
|
|
3,885 |
|
|
|
6,065 |
|
|
|
* |
|
|
|
40,386 |
|
|
|
74,420 |
|
|
|
* |
|
Brad R. Ramsey
|
|
|
2,137 |
|
|
|
240 |
|
|
|
* |
|
|
|
652 |
|
|
|
24,680 |
|
|
|
* |
|
Rodney L. Reese
|
|
|
7,937 |
|
|
|
3,143 |
|
|
|
* |
|
|
|
20,097 |
|
|
|
17,120 |
|
|
|
* |
|
All directors and executive officers as a group
(11 persons)
|
|
|
170,311 |
|
|
|
84,947 |
|
|
|
0.68 |
% |
|
|
6,893,760 |
|
|
|
10,105,396 |
|
|
|
2.75 |
% |
|
|
|
|
* |
Indicates that the percentage of beneficial ownership does not
exceed 1% of the class. |
|
|
|
(a) |
|
The business address for all beneficial owners listed above is
One Valero Way, San Antonio, Texas 78249. |
|
(b) |
|
As of December 31, 2005, 37,210,427 common units were
issued and outstanding. No executive officer or director owns
any class of equity securities of Valero L.P. other than common
units. The calculation for Percentage of Outstanding common
units includes common units listed under the captions
Units Beneficially Owned and Units under
Exercisable Options. |
|
(c) |
|
Includes restricted common units issued under Valero L.P.s
long-term incentive plans. Restricted common units granted under
Valero GP, LLCs long-term incentive plans may not be
disposed of until vested. Does not include common units that
could be acquired under options, which information is set forth
in the next column. |
|
(d) |
|
Consisting of common units that may be acquired within
60 days of December 31, 2005 through the exercise of
common unit options. |
|
(e) |
|
As of December 31, 2005, 617,422,290 shares of Valero
Energys common stock were issued and outstanding. No
executive officer or director owns any class of equity
securities of Valero Energy other than common stock. The
calculation for Percentage of Outstanding Shares includes shares
listed under the captions Shares of Valero Energy Stock
Beneficially Owned and Shares of Valero Energy Stock
under Exercisable Options. |
|
(f) |
|
Includes shares allocated pursuant to the Valero Energy
Corporation Thrift Plan through December 31, 2005, as well
as shares of restricted stock granted under Valero Energys
Executive Stock Incentive Plan and Valero Energys
Restricted Stock Plan for Non-Employee Directors. Except as
otherwise noted, each person named in the table, and each other
executive officer, has sole power to vote or direct the vote and
to dispose or direct the disposition of all such shares
beneficially owned by him. Restricted stock granted under Valero
Energys Executive Stock Incentive Plan and Valero
Energys Restricted Stock Plan for Non-Employee Directors
may not be disposed of until vested. Does not include shares
that could be acquired under options, which information is set
forth in the next column. |
|
(g) |
|
Consisting of shares of common stock that may be acquired within
60 days of December 31, 2005 through the exercise of
stock options. Such shares may not be voted unless the stock
options are exercised. Stock options that may become exercisable
within such 60-day
period only in the event of a change of control of |
128
|
|
|
|
|
Valero Energy are excluded. Except as set forth herein, none of
the current executive officers or directors of Valero L.P. hold
any rights to acquire Valero Energy common stock, except through
exercise of stock options. |
Except as otherwise indicated, the following table sets forth
certain information as of February 28, 2006 with respect to
each entity known to Valero L.P. to be the beneficial owner of
more than 5% of its outstanding common units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
|
Percentage of | |
|
|
Common | |
|
Common | |
|
Subordinated | |
|
Subordinated | |
Name and Address of Beneficial Owner |
|
Units | |
|
Units(b) | |
|
Units | |
|
Units | |
|
|
| |
|
| |
|
| |
|
| |
Valero Energy Corporation (a)
|
|
|
617,339 |
|
|
|
1.7 |
% |
|
|
9,599,322 |
|
|
|
100 |
% |
|
One Valero Way
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Antonio, Texas 78249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Valero Energy owns the common and subordinated units through its
wholly owned subsidiaries, Valero GP, LLC and Riverwalk
Holdings, LLC. Valero Energy shares voting and investment power
with certain of its wholly owned subsidiaries with respect to
the common and subordinated units. |
|
(b) |
|
Assumes 37,210,427 common units outstanding. |
129
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Relationship with Valero L.P. and its General Partner,
Riverwalk Logistics, L.P.
We manage Valero L.P. through our ownership of Valero GP, LLC,
and Riverwalk Holdings, LLC, which own Riverwalk Logistics,
L.P., the general partner of Valero L.P. Valero L.P., through
its subsidiaries, is engaged in the crude oil and refined
product transportation, terminalling and storage business. Our
only cash-generating assets are our ownership interests in
Valero GP, LLC and Riverwalk Holdings, LLC, which own the
following:
|
|
|
|
|
the 2% general partner interest in Valero L.P., which we hold
through our 100% ownership interest in Riverwalk Logistics, L.P.; |
|
|
|
100% of the incentive distribution rights issued by Valero L.P.,
which entitle us to receive increasing percentages of the cash
distributed by Valero L.P., currently at the maximum percentage
of 23%; and |
|
|
|
617,339 common units and 9,599,322 subordinated units of Valero
L.P., representing a 21.4% limited partner interest in Valero
L.P. We expect the subordinated units to convert on a
one-for-one basis to common units during the second quarter of
2006. |
Our officers are also officers of Valero GP, LLC. Our Chairman,
William E. Greehey, is also the Chairman of Valero GP, LLC. We
also expect to appoint three independent directors, as defined
by the NYSE. We appoint the directors of Valero GP, LLC. The
board of Valero GP, LLC is responsible for overseeing Valero GP,
LLCs role as the owner of the general partner of Valero
L.P. and we, as the sole owner of Valero GP, LLC, must also
approve matters that have or would reasonably be expected to
have a material effect on our interest as the sole indirect
owner of Valero GP, LLC. We also have exclusive authority over
the business and affairs of Valero GP, LLC other than its role
as the owner of the general partner of Valero L.P.
Indemnification of Directors and Officers
Under our limited liability company agreement and subject to
specified limitations, we will indemnify to the fullest extent
permitted by Delaware law, from and against all losses, claims,
damages or similar events any director or officer, or while
serving as a director or officer, any person who is or was
serving as a tax matters member or as a director, officer, tax
matters member, employee, partner, manager, fiduciary or trustee
of our partnership or any of our affiliates. Additionally, we
will indemnify to the fullest extent permitted by law, from and
against all losses, claims, damages or similar events any person
who is or was our employee (other than an officer) or agent.
Any indemnification under our limited liability company
agreement will only be out of our assets. We are authorized to
purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of
whether we would have the power to indemnify the person against
liabilities under our limited liability company agreement.
Related Party Transactions
Our wholly owned subsidiary, Valero GP, LLC performs operating
and maintenance services with respect to Valero L.P. assets and
receives reimbursement for such services from Valero L.P.
It is Valero Energys intent to further reduce its
ownership in us, pending market conditions. Possible additional
sales of our units owned by subsidiaries of Valero Energy
resulting in an indirect ownership in us by Valero Energy of
less than 51% may trigger a change of control under
the indentures governing the $100 million
6.875% Senior Notes due 2012 and the $250 million
6.05% Senior Notes due 2013 issued by Valero Logistics
Operations, L.P.
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Effective with the closing of this offering, we will enter into
an Administration Agreement with Valero GP, LLC. The
Administration Agreement will provide, among other things, that:
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all of our employees will be employees of our wholly owned
subsidiary Valero GP, LLC; and |
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Valero GP, LLC will provide all executive management,
accounting, legal, cash management, corporate finance and other
administrative services to us. |
The annual charges to be paid under the Administration Agreement
will be $500,000. This amount will be increased annually to
reflect Valero GP, LLCs annual merit increases. Any other
adjustments to the annual fee, such as adjustments to reflect
changes in the levels of service provided to us or Valero GP,
LLCs actual payroll cost, are subject to the approval of
Valero GP, LLCs conflicts committee. We will also
reimburse Valero GP, LLC for all direct public company costs and
any other direct costs, such as outside legal and accounting
fees, that Valero GP, LLC incurs while providing us services
pursuant to the Administration Agreement.
The initial term of the Administration Agreement will commence
with the closing of this offering and terminate on
December 31, 2011, with automatic two year renewals unless
terminated by either party on six months written notice.
We may cancel or reduce the services provided under this
agreement on 60 days written notice. This Agreement
will terminate upon a change of control of either us or Valero
GP, LLC.
We will enter into a Non-Compete Agreement with Valero L.P. upon
the closing of this offering. This Non-Compete Agreement will
not be effective until we are no longer subject to the Amended
and Restated Omnibus Agreement described below. Under the
Non-Compete Agreement, we will have a right of first refusal
with respect to the potential acquisition of general partner and
other equity interests in publicly traded partnerships under
common ownership with the general partner interest. Valero L.P.
will have a right of first refusal with respect to the potential
acquisition of assets that relate to the transportation, storage
or terminalling of crude oil, feedstocks or refined petroleum
products (including petrochemicals) in the United States and
internationally. With respect to any other business
opportunities, neither we nor Valero L.P. are prohibited from
engaging in any business, even if we and Valero L.P. would have
a conflict of interest with respect to such other business
opportunity.
Riverwalk Holdings, LLC owns 614,572 common units and 9,599,322
subordinated units of Valero L.P. representing an aggregate
21.4% limited partner interest in Valero L.P. Riverwalk
Logistics, L.P. owns a 2% general partner interest in Valero
L.P. and also owns incentive distribution rights giving
Riverwalk Logistics, L.P. higher percentages of Valero
L.P.s cash distributions as various target distribution
levels are met. Valero GP, LLC, the general partner of Riverwalk
Logistics, L.P., owns 2,767 common units of Valero L.P.
representing a 0.02% limited partner interest in Valero L.P.
The subordinated units will convert to common units of Valero
L.P. on a one-for-one basis during the second quarter of 2006,
if Valero L.P. meets certain tests set forth in its partnership
agreement. If the subordination period ends, the rights of the
holders of subordinated units will no longer be subordinated to
the rights of the holders of common units and the subordinated
units will be converted into common units.
As the sole general partner of Valero L.P., Riverwalk Logistics,
L.P. is responsible for the management of Valero L.P. Valero GP,
LLC, the sole general partner of Riverwalk Logistics, L.P., is
responsible for managing the affairs of Riverwalk Logistics,
L.P., and through it, the affairs of Valero L.P. and its
operating subsidiaries. We own all the membership interests in
Valero GP, LLC.
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Valero L.P.s Relationship with Valero Energy |
Valero L.P.s operations include assets that are
strategically located within Valero Energys refining and
marketing supply chain in Texas, Oklahoma, California, Colorado,
New Jersey, New Mexico, Arizona and other
131
mid-continent states in the United States. Valero L.P. itself
does not own or operate any refining or marketing operations.
Valero L.P. is dependent on Valero Energy to provide a
significant amount of the throughput for Valero L.P.s
pipelines, terminals and storage tanks and the ability of Valero
Energys refineries to maintain their production of refined
products. During the year ended December 31, 2004, Valero
Energy accounted for 99% of Valero L.P.s revenues.
Subsequent to Valero L.P.s acquisition of Kaneb, the
percentage of Valero L.P.s revenues attributable to Valero
Energy has declined. However, revenues attributable to Valero
Energy remain significant with such revenues representing
approximately 34% of Valero L.P.s total revenues for 2005.
Services Agreement
Valero L.P. does not have any employees. The personnel who
manage and operate Valero L.P. are employees of Valero GP, LLC,
a wholly owned subsidiary of Valero GP Holdings, LLC. The costs
related to these employees, including salary, wages and
benefits, are charged by Valero GP, LLC to Valero L.P. In
addition, Valero L.P. receives certain administration services,
consisting primarily of information technology and income tax
and property tax services from Valero Energy. The above
described services are pursuant to a Services Agreement between
Valero Energy, Valero GP, LLC and Valero L.P.
Effective January 1, 2006, a new Services Agreement was
entered into by Valero Energy, Valero GP, LLC and Valero L.P.
This new Services Agreement supersedes the prior agreement which
provided for similar services between Valero Energy and Valero
L.P. The new Services Agreement reflects a new organization
structure whereby Valero Energy is now providing substantially
fewer services than previously provided. Valero GP, LLC has
increased its administrative personnel, primarily in the areas
of legal, engineering, treasury and accounting to be able to
provide these services to Valero L.P. versus receiving them from
Valero Energy. These changes were made to reduce Valero GP,
LLCs dependence on Valero Energy for such services.
The new Services Agreement provides for an annual fee to be paid
by Valero GP, LLC to Valero Energy of approximately
$1.9 million per year. This annual fee will increase to
approximately $2.9 million and $3.4 million for fiscal
years 2007 and 2008, respectively. The annual fee will remain at
approximately $3.4 million through the term of the
agreement. In addition, each annual fee will be subject to
adjustments to account for Valero Energys annual salary
increase. The amounts may also be adjusted for changed service
levels subject to approval by Valero L.P.s Conflicts
Committee.
The new Services Agreement will terminate on December 31,
2010 with automatic two year renewal options unless terminated
by either party on six months written notice.
Valero L.P. may cancel or reduce the level of services that
Valero Energy provides it on 60 days prior written notice.
The Services Agreement will terminate upon the change of control
of either us or Valero L.P.
The overall effect of the new organization structure and the new
Services Agreement will be to increase Valero L.P.s
general and administrative expenses by approximately
$1.1 million in 2006.
Valero L.P. currently occupies office space within Valero
Energys existing headquarters complex. Valero Energy is
constructing a new office building into which Valero L.P. will
relocate its employees upon completion.
Valero L.P. entered into an agreement with Valero Energy whereby
it agreed to lease approximately 65,000 square feet of
office space at an annual cost of approximately
$1.6 million per year for the first five years. For years
six through ten, the annual fee is subject to adjustment for
changes in the Consumer Price Index. For each subsequent five
year period under the initial term and during the ten-year
renewal option, the annual rent shall be adjusted to reflect the
actual market rent of comparable office spaces. Rental payments
will commence upon the completion of a new office facility
presently being constructed by Valero Energy. The completion of
this facility is expected to be in the second half of 2007.
The Office Rental Agreement has an initial term of 25 years
with a 10 year renewal option.
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Amended and Restated Omnibus Agreement |
The Amended and Restated Omnibus Agreement governs potential
competition between Valero Energy and Valero L.P. Under the
Amended and Restated Omnibus Agreement, Valero Energy has
agreed, and will cause its controlled affiliates to agree, for
so long as Valero Energy owns 20% or more of Valero L.P. or
Valero L.P.s general partner, not to engage in the
business of transporting crude oil and other feedstocks or
refined products, including petrochemicals, or operating crude
oil storage facilities or refined product terminalling assets in
the United States. This restriction does not apply to:
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any business retained by UDS as of April 16, 2001, the
closing of Valero L.P.s initial public offering, or any
business owned by Valero Energy at the date of its acquisition
of UDS on December 31, 2001; |
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any business with a fair market value of less than
$10 million; |
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any business acquired by Valero Energy in the future that
constitutes less than 50% of the fair market value of a larger
acquisition, provided Valero L.P. has been offered and declined
the opportunity to purchase the business; and |
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any newly constructed pipeline, terminalling or storage assets
that Valero L.P. has not offered to purchase at fair market
value within one year of construction. |
Also under the Amended and Restated Omnibus Agreement, Valero
Energy has agreed to indemnify Valero L.P. for environmental
liabilities related to the assets transferred to Valero L.P. in
connection with Valero L.P.s initial public offering,
provided that such liabilities arose prior to and are discovered
within 10 years after that date (excluding liabilities
resulting from a change in law after April 16, 2001). It is
Valero Energys intent to further reduce and ultimately
sell all of its indirect ownership interest in us, pending
market conditions.
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Pipelines and Terminals Usage Agreement McKee,
Three Rivers and Ardmore |
Under the terms of the Pipelines and Terminals Usage Agreement
dated April 2001, Valero L.P. provides transportation services
that support Valero Energys refining and marketing
operations relating to the McKee, Three Rivers and Ardmore
refineries. Pursuant to the agreement, Valero Energy has agreed
through April 2008 to:
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transport in Valero L.P.s crude oil pipelines at least 75%
of the aggregate volumes of crude oil shipped to the McKee,
Three Rivers and Ardmore refineries; |
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transport in Valero L.P.s refined product pipelines at
least 75% of the aggregate volumes of refined products shipped
from the McKee, Three Rivers and Ardmore refineries; and |
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use Valero L.P.s refined product terminals for
terminalling services for at least 50% of the refined products
shipped from the McKee, Three Rivers and Ardmore refineries. |
If market conditions change with respect to the transportation
of crude oil or refined products, or to the end markets in which
Valero Energy sells refined products, in a material manner such
that Valero Energy would suffer a material adverse effect if it
were to continue to use Valero L.P.s pipelines and
terminals that service the McKee, Three Rivers and Ardmore
refineries at the required levels. Valero Energys
obligation to Valero L.P. will be suspended during the period of
the change in market conditions to the extent required to avoid
the material adverse effect.
In the event Valero Energy does not transport in Valero
L.P.s pipelines or use Valero L.P.s terminals to
handle the minimum volume requirements and if its obligation has
not been suspended under the terms of the agreement, Valero
Energy will be required to make a cash payment determined by
multiplying the shortfall in volume by the applicable weighted
average pipeline tariff or terminal fee. During the years ended
December 31, 2004 and 2005, Valero Energy exceeded its
obligations under the Pipelines and Terminals Usage Agreement.
Additionally, Valero Energy has agreed not to challenge, or
cause others to challenge, Valero L.P.s interstate or
intrastate tariffs for the transportation of crude oil and
refined products until at least April 2008.
133
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Crude Oil Storage Tanks Agreements |
In connection with the crude oil storage tank contribution in
March 2003, Valero L.P. and Valero Energy entered into the
following agreements related to the operations of the crude oil
storage tanks.
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Handling and Throughput Agreement, dated March
2003 Valero Energy has agreed to pay Valero L.P. a
fee, for an initial period of ten years, for all crude oil and
certain other feedstocks delivered to each of the Corpus Christi
West refinery, the Texas City refinery and the Benicia refinery
and to use Valero L.P. for handling all deliveries to these
refineries. The throughput fees are adjustable annually,
generally based on 75% of the regional consumer price index
applicable to the location of each refinery. The agreement may
be extended by Valero Energy for up to an additional five years. |
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Services and Secondment Agreements, dated March
2003 Valero Energy has agreed to provide to Valero
L.P. personnel who perform operating and routine maintenance
services related to the crude oil storage tank operations. The
annual reimbursement for services is an aggregate
$3.5 million for the initial year and is subject to
adjustment based on the actual expenses incurred and increases
in the regional consumer price index. The initial term of the
Services and Secondment Agreements is ten years with a Valero
L.P. option to extend for an additional five years. In addition
to the fees Valero L.P. has agreed to pay, Valero L.P. is
responsible for operating expenses and specified capital
expenditures related to the tank assets that are not addressed
in the agreement. These operating expenses and capital
expenditures include tank safety inspections, maintenance and
repairs, certain environmental expenses, insurance premiums and
ad valorem taxes. |
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Lease and Access Agreements, dated March 2003
Valero L.P. leases from Valero Energy the real property on which
the crude oil storage tanks are located for an aggregate of
$0.7 million per year. The initial term of each lease is
25 years, subject to automatic renewal for successive
one-year periods thereafter. Valero L.P. may terminate any of
these leases upon 180 days notice prior to the expiration
of the current term if Valero L.P. ceases to operate the crude
oil storage tanks or ceases business operations. |
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South Texas Pipelines and Terminals Agreements |
In connection with the South Texas Pipelines and Terminals
contribution in March of 2003, Valero L.P. and Valero Energy
entered into the following agreements related to the operations
of the pipelines and terminals:
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Terminalling Agreement, dated March 2003, pursuant to
which Valero Energy agreed, during the initial period of five
years, to pay a terminalling fee for each barrel of refined
product stored or handled by or on behalf of Valero Energy at
the terminals, including an additive fee for gasoline additive
blended at the terminals. At the Houston Hobby Airport terminal,
Valero Energy agreed to pay a filtering fee for each barrel of
jet fuel stored or handled at the terminal. |
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Throughput Commitment Agreement, dated March 2003,
pursuant to which Valero Energy agreed, for an initial period of
seven years to: |
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transport in the Houston and Valley pipeline systems an
aggregate of 40% of the Corpus Christi refineries gasoline
and distillate production but only if the combined throughput in
these pipelines is less than 110,000 barrels per day; |
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transport in the Pettus to San Antonio refined product
pipeline 25% of the Three Rivers refinery gasoline and
distillate production and in the Pettus to Corpus Christi
refined product pipeline 90% of the Three Rivers refinery
raffinate production; |
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use the Houston asphalt terminal for an aggregate of 7% of the
asphalt production of the Corpus Christi refineries; |
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use the Edinburg refined product terminal for an aggregate of 7%
of the gasoline and distillate production of the Corpus Christi
refineries, but only if the throughput at this terminal is less
than 20,000 barrels per day; and |
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use the San Antonio east terminal for 75% of the throughput
in the Pettus to San Antonio refined product pipeline. |
In the event Valero Energy does not transport in Valero
L.P.s pipelines or use Valero L.P.s terminals to
handle the minimum volume requirements and if its obligation has
not been suspended under the terms of the agreement, Valero
Energy will be required to make a cash payment determined by
multiplying the shortfall in volume by the applicable weighted
average pipeline tariff or terminal fee. In 2003, Valero Energy
indicated to Valero L.P. that the segment of the Corpus Christi
to Edinburg refined product pipeline that runs approximately
60 miles south from Corpus Christi to Seeligson Station
required repair and replacement. Valero Energy agreed to
indemnify Valero L.P. for any costs Valero L.P. incurs to repair
and replace this segment in excess of $1.5 million,
excluding costs to upgrade the size of the pipe, which is Valero
L.P.s responsibility. This repair and replacement project
became operational in the fourth quarter of 2004.
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Other Operating Agreements |
Other operating agreements between Valero L.P. and Valero Energy
include:
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A hydrogen tolling agreement, which provides that Valero Energy
will pay Valero L.P. minimum annual revenues of
$1.4 million for transporting crude hydrogen from the BOC
Groups chemical facility in Clear Lake, Texas to Valero
Energys Texas City refinery. |
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A terminal storage and throughput agreement related to the
Pittsburg asphalt terminal, which provides that Valero Energy
will pay Valero L.P. a monthly lease fee of $0.2 million, a
minimum annual throughput fee of $0.4 million and will
reimburse Valero L.P. for utility costs. |
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In conjunction with the Royal Trading acquisition in February
2004, Valero L.P. entered into a five-year terminal storage and
throughput agreement with Valero Energy. The agreement provides
a base throughput and blending fee schedule with volume
incentive discounts once certain thresholds are met. In
addition, Valero Energy has agreed to utilize the acquired
terminals for a minimum of 18.5% of the McKee and Ardmore
refineries aggregate asphalt production. |
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Valero L.P. and Valero Energy entered into a one-year shell
barrel capacity lease agreement on January 1, 2004 for the
1.6 million barrels of capacity at the Corpus Christi North
Beach storage facility, renewable annually. The use of this
storage facility was previously included as part of the crude
oil pipeline tariff for the Corpus Christi to Three Rivers crude
oil pipeline. |
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Summary of Transactions with Valero Energy |
Valero L.P. has related party transactions with Valero Energy
for pipeline tariff, terminalling fee and crude oil storage tank
fee revenues, certain employee costs, insurance costs,
administrative costs, and rent expense. On the consolidated
balance sheet of Valero L.P. and its subsidiaries included
elsewhere in this prospectus, the balance of the account
receivable from Valero Energy as of December 31, 2002 and
through March 18, 2003 represented the net amount due for
these related party transactions and the net cash collected
under Valero Energys centralized cash management program
on Valero L.P.s behalf. Beginning March 19, 2003, the
balance of the account receivable from Valero Energy represents
amounts due for pipeline tariff, terminalling fee and crude oil
storage tank fee revenues, and the balance of the account
payable to Valero Energy represents amounts due for employee
costs, insurance costs, operating expenses, administrative costs
and rent expense.
The following table summarizes Valero L.P.s related party
transactions with Valero Energy for the periods indicated
(dollars in thousands):
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Years Ended December 31, | |
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2003 | |
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2004 | |
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2005 | |
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Revenues
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$ |
178,605 |
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$ |
217,608 |
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$ |
234,485 |
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Operating expenses
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24,196 |
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31,960 |
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60,921 |
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General and administrative expenses
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6,110 |
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10,539 |
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19,356 |
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135
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES
General
Conflicts of interest may arise in the future as a result of the
relationships among us, Valero L.P. and our respective
affiliates. Our directors and officers have fiduciary duties to
manage our business in a manner beneficial to us and our
unitholders. All of our executive officers and directors also
serve as executive officers or directors of Valero GP, LLC. For
example, William E. Greehey is the Chairman of the Board of each
of us, Valero GP, LLC and Valero Energy. As a result, these
executive officers and directors have fiduciary duties to manage
the business of Riverwalk Logistics, L.P. and Valero L.P. in a
manner beneficial to Valero L.P. and its partners. Consequently,
these directors and officers may encounter situations in which
their fiduciary obligations to Valero L.P., on the one hand, and
us, on the other hand, are in conflict.
Similarly, Valero Energy, through its retained control of us
after giving effect to this offering and consequent ability to
elect, remove or replace our directors or officers, may face
conflicts of interest if it is confronted with decisions that
would tend to impact us, on the one hand, and itself, on the
other. In resolving any such conflict, Valero Energy may favor
its own interests and the interests of its affiliates over our
interests and those of our other unitholders.
The resolution of these conflicts may not always be in our best
interest or that of our unitholders.
Potential Future Conflicts
Whenever a conflict arises between us, on the one hand, and any
affiliated entities including Valero L.P. and Valero Energy, on
the other hand, our board of directors may resolve that
conflict. Our limited liability company agreement authorizes our
board of directors to establish a conflicts committee,
consisting solely of independent directors, which will be
responsible for reviewing transactions involving potential
conflicts of interest. Our independent directors are not the
same independent directors who serve on the conflicts committee
of either Valero L.P. or Valero GP, LLC. Our board of directors
may, but is not required to, seek the approval of such
resolution from the conflicts committee of our board of
directors. Our limited liability company agreement contains
provisions that modify and limit our directors fiduciary
duties to our unitholders. Our limited liability company
agreement also restricts the remedies available to our
unitholders for actions taken that, without those limitations,
might constitute breaches of fiduciary duty.
Conflicts of interest could arise in the situations described
below, among others:
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We may compete with Valero L.P. and Valero Energy for the
time and effort of our Chairman and officers who also serve
Valero L.P. and Valero Energy. |
There could be material competition for the time and effort of
the directors, officers and employees who provide services to us
and Valero GP, LLC on the one hand, and Valero Energy and its
affiliates, on the other hand. Our officers are not required to
work full time on our affairs or the affairs of Valero GP, LLC
and may devote significant time to the affairs of Valero Energy
or its affiliates.
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Valero Energy may purchase assets or receive services from
Valero L.P., giving rise to conflicts of interest. |
Valero Energys interest as a purchaser of assets or
recipient of services in transactions involving Valero L.P.
could conflict with Valero L.P.s interest as a seller of
these assets or provider of these services. Valero L.P. would
want to receive the highest possible price, and Valero Energy
would want to pay the lowest possible price for these assets or
services.
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Owners of the units will have no right to enforce
obligations of Valero L.P., Valero Energy or their affiliates
under any agreements with us. |
Any agreements between us on the one hand, and Valero L.P. or
Valero Energy and its affiliates, on the other hand, will not
grant to the holders of our units any right to enforce the
obligations of such other parties in our favor.
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Contracts between us, on the one hand, and Valero L.P.,
Valero Energy and their respective affiliates, on the other
hand, may not be the result of an arms-length
negotiation. |
Neither the limited liability company agreement nor any of the
other contracts or arrangements between us, Valero Energy and
its subsidiaries or Valero L.P. are or will be the result of
arms-length negotiations.
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Valero Energy and its affiliates may compete with Valero
L.P. |
Upon completion of this offering, Valero Energy is expected to
retain approximately 63% of our ownership interests. Under
Valero L.P.s Amended and Restated Omnibus Agreement, if
Valero Energy reduces its ownership interest such that it owns
less than 20% of us or Valero GP, LLC, Valero Energy and its
affiliates will no longer be prohibited from engaging in the
business of transporting crude oil or refined petroleum products
(including petrochemicals) or operating crude oil storage or
refined petroleum products terminalling assets in the United
States. As a result, Valero Energy could directly compete with
Valero L.P., which could cause conflicts of interest among these
entities and adversely impact Valero L.P.s results of
operations and cash available for distribution and therefore,
our cash available for distribution. It is Valero Energys
intent to further reduce and ultimately sell all of its indirect
ownership interest in us, pending market conditions.
We will enter into a Non-Compete Agreement with Valero L.P. upon
the closing of this offering. This Non-Compete Agreement will
not be effective until we are no longer subject to the Amended
and Restated Omnibus Agreement described above. Under the
Non-Compete Agreement, we will have a right of first refusal
with respect to the potential acquisition of general partner and
other equity interests in publicly traded partnerships under
common ownership with the general partner interest. Valero L.P.
will have a right of first refusal with respect to the potential
acquisition of assets that relate to the transportation, storage
or terminalling of crude oil, feedstocks or refined petroleum
products (including petrochemicals) in the United States and
internationally. With respect to any other business
opportunities, neither we nor Valero L.P. are prohibited from
engaging in any business, even if we and Valero L.P. would have
a conflict of interest with respect to such other business
opportunity.
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Valero Energy may cause its subsidiaries to exercise their
purchase rights at any time or price that may be undesirable to
you. |
The subsidiaries of Valero Energy who are our current
unitholders may exercise their purchase rights to acquire your
units at any time in their sole discretion after the conditions
for such exercise have been satisfied. In exercising the rights,
Valero Energy and its subsidiaries do not have to consider
whether the exercise is in your best interest. As a result, the
subsidiaries of Valero Energy may purchase your units at a time
or price that you find undesirable.
Our limited liability company agreement provides that our
business and affairs shall be managed under the direction of our
board of directors, which shall have the power to appoint our
officers. Our limited liability company agreement further
provides that the authority and function of our board of
directors and officers shall be identical to the authority and
functions of a board of directors and officers of a corporation
organized under the Delaware General Corporation Law, or DGCL.
Finally, our limited liability company agreement provides that
except as specifically provided therein, the fiduciary duties
and obligations owed to our limited liability company and to our
members shall be the same as the respective duties and
obligations owed by officers and directors of a corporation
organized under the DGCL to their corporation and stockholders,
respectively. Our limited liability company agreement
establishes a conflicts committee of our board of directors,
consisting solely of independent directors, which will be
authorized to review transactions involving potential conflicts
of interest. If the conflicts committee approves such a
transaction, or if a transaction is on terms generally available
from third parties or an action is taken that is fair and
reasonable to the company, you will not be able to assert that
such approval constituted a breach of fiduciary duties owed to
you by our directors and officers.
137
DESCRIPTION OF OUR UNITS
Our units represent limited liability company membership
interests that entitle the holders to participate in our cash
distributions and to exercise the rights and privileges
available to members under our limited liability company
agreement. For a description of the relative rights and
preferences of holders of units and to cash distributions,
please read Our Cash Distribution Policy and Restrictions
on Distributions. For a description of the rights and
privileges of unitholders under our limited liability company
agreement, including voting rights, please read
Description of Our Limited Liability Company
Agreement.
Transfer Agent and Registrar
Computershare will serve as registrar and transfer agent for the
units. We pay all fees charged by the transfer agent for
transfers of units, except the following that must be paid by
unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges; |
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special charges for services requested by a holder of a
unit; and |
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other similar fees or charges. |
There will be no charge to unitholders for disbursements of our
cash distributions. We will indemnify the transfer agent, and
its agents, and each of their stockholders, directors, officers
and employees against all claims and losses that may arise out
of acts performed or omitted for its activities in that
capacity, except for any liability due to any gross negligence
or intentional misconduct of the indemnified person or entity.
The transfer agent may at any time resign, by notice to us, or
be removed by us. The resignation or removal of the transfer
agent will become effective upon our appointment of a successor
transfer agent and registrar and its acceptance of the
appointment. If no successor has been appointed and has accepted
the appointment within 30 days after notice of the
resignation or removal, we are authorized to act as the transfer
agent and registrar until a successor is appointed.
Transfer of Units
By transfer of our units in accordance with our limited
liability company agreement, each transferee of our units will
be admitted as a unitholder with respect to the units
transferred when such transfer and admission is reflected in our
books and records. Additionally, each transferee of our units:
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becomes the record holder of the units; |
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represents that the transferee has the capacity, power and
authority to enter into and become bound by our limited
liability company agreement; |
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automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our limited liability company
agreement; |
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grants powers of attorney to our officers and any liquidator of
our company as specified in the limited liability company
agreement; and |
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makes the consents and waivers contained in our limited
liability company agreement. |
An assignee will become a substituted member of our limited
liability company for the transferred units automatically upon
the recording of the transfer on our books and records.
Management will cause any transfers to be recorded on our books
and records no less frequently than quarterly.
We may, at our discretion, treat the nominee holder of a unit as
the absolute owner. In that case, the beneficial holders
rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the
beneficial owner and the nominee holder.
Units are securities and are transferable according to the laws
governing transfers of securities. In addition to other rights
acquired upon transfer, the transferor gives the transferee the
right to become a substituted member of our limited liability
company for the transferred units.
Until a unit has been transferred on our books, we and the
transfer agent, notwithstanding any notice to the contrary, may
treat the record holder of the unit as the absolute owner for
all purposes, except as otherwise required by law or stock
exchange regulations.
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DESCRIPTION OF OUR LIMITED LIABILITY COMPANY AGREEMENT
The following is a summary of the material provisions of our
limited liability company agreement. The form of our limited
liability company agreement is included as Appendix A in
this prospectus. We will provide prospective investors with a
copy of the form of this agreement upon request at no charge.
We summarize the following provisions of our limited liability
company agreement elsewhere in this prospectus:
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with regard to distributions of available cash, please read
Our Cash Distribution Policy and Restrictions on
Distributions and How We Make Cash
Distributions; |
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with regard to rights of holders of units, please read
Description of Our Units; |
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with regard to the election of members of our board of
directors, please read Management Our Board of
Directors; and |
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with regard to allocations of taxable income and other matters,
please read Material Tax Consequences. |
Organization and Duration
Our company was formed in June 2000 as UDS Logistics. It changed
its name to Valero GP Holdings in January 2006 and will remain
in existence until dissolved in accordance with our limited
liability company agreement.
Purpose
Under our limited liability company agreement, we are permitted
to engage in any business activity that lawfully may be
conducted by a limited liability company organized under
Delaware law and, in connection therewith, to exercise all of
the rights and powers conferred upon us pursuant to the
agreements relating to such business activity; provided,
however, that our management shall not cause us to engage,
directly or indirectly, in any business activity that our board
of directors determines would cause us or Valero L.P. to be
treated as an association taxable as a corporation or otherwise
taxable as an entity for federal income tax purposes.
Fiduciary Duties
Our limited liability company agreement provides that our
business and affairs shall be managed under the direction of our
board of directors, which shall have the power to appoint our
officers. Our limited liability company agreement further
provides that the authority and function of our board of
directors and officers shall be identical to the authority and
functions of a board of directors and officers of a corporation
organized under the DGCL. Finally, our limited liability company
agreement provides that, except as specifically provided
therein, the fiduciary duties and obligations owed to our
limited liability company and to our members shall be the same
as the respective duties and obligations owed by officers and
directors of a corporation organized under the DGCL to their
corporation and stockholders, respectively. Our limited
liability company agreement permits affiliates of our directors
to invest or engage in other businesses or activities that
compete with us. In addition, our limited liability company
agreement establishes a conflicts committee of our board of
directors, consisting solely of independent directors, which
will be responsible for reviewing transactions involving
potential conflicts of interest. If the conflicts committee
approves such a transaction, you will not be able to assert that
such approval constituted a breach of fiduciary duties owed to
you by our directors and officers.
Agreement to be Bound by Limited Liability Company Agreement;
Power of Attorney
By purchasing a unit in us, you will be admitted as a unitholder
of our company and will be deemed to have agreed to be bound by
the terms of our limited liability company agreement. Pursuant
to this agreement, each unitholder and each person who acquires
a unit from a unitholder grants to our board of directors (and,
if appointed, a liquidator) a power of attorney to, among other
things, execute and file documents required for our
qualification, continuance or dissolution. The power of attorney
also grants our board of directors the authority
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to make certain amendments to, and to make consents and waivers
under and in accordance with, our limited liability company
agreement.
Capital Contributions
Unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
Limited Liability
Unlawful Distributions. The Delaware Limited Liability
Company Act, which we refer to in this prospectus as the
Delaware LLC Act, provides that a unitholder who receives a
distribution and knew at the time of the distribution that the
distribution was in violation of the Delaware LLC Act shall be
liable to the company for the amount of the distribution for
three years. Under the Delaware LLC Act, a limited liability
company may not make a distribution to a unitholder if, after
the distribution, all liabilities of the company, other than
liabilities to unitholders on account of their membership
interests and liabilities for which the recourse of creditors is
limited to specific property of the company, would exceed the
fair value of the assets of the company. For the purpose of
determining the fair value of the assets of a company, the
Delaware LLC Act provides that the fair value of property
subject to liability for which recourse of creditors is limited
shall be included in the assets of the company only to the
extent that the fair value of that property exceeds the
nonrecourse liability. Under the Delaware LLC Act, an assignee
who becomes a substituted unitholder of a company is liable for
the obligations of his assignor to make contributions to the
company, except the assignee is not obligated for liabilities
unknown to him at the time he became a unitholder and that could
not be ascertained from the limited liability company agreement.
Failure to Comply with the Limited Liability Provisions of
Jurisdictions in Which We Do Business. Our subsidiaries and
Valero L.P. will initially conduct business in 25 states.
We, our subsidiaries or Valero L.P. may decide to conduct
business in other states, and maintenance of limited liability
for us, as a member, or partner, as the case may be, of our
subsidiaries and through our indirect ownership of Valero
L.P.s general partner, may require compliance with legal
requirements in the jurisdictions in which the subsidiaries or
Valero L.P. conduct business, including qualifying our
subsidiaries to do business there. Limitations on the liability
of unitholders for the obligations of a limited liability
company have not been clearly established in many jurisdictions.
We will operate in a manner that our board of directors
considers reasonable and necessary or appropriate to preserve
the limited liability of our unitholders.
Voting Rights
The following matters require the unitholder vote specified
below:
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Election of members of the board of directors |
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Following our initial public offering we will have two
directors. Our limited liability company agreement provides that
we will have a board of no more
than members.
Holders of our units, voting together as a single class, will
elect our directors. Please read Election of
Members of Our Board of Directors. |
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Staggered board |
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We will have a staggered board of directors as a result of which
only a portion of the members of the board of directors will be
elected each year. Removal of directors will require a meeting
of unitholders and cannot be done by written consent. |
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Issuance of additional units |
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No approval right. |
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Amendment of the limited liability company agreement |
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Certain amendments may be made by our board of directors without
the approval of the unitholders. Other amendments generally
require |
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the approval of a unit majority. Please read
Amendment of Our Limited Liability Company
Agreement. |
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Merger of our company or the sale of all or substantially all of
our assets |
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Unit majority. Please read Merger, Sale or
Other Disposition of Assets. |
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Dissolution of our company |
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Unit majority. Please read Termination and
Dissolution. |
Matters requiring the approval of a unit majority
require the approval of a majority of the units.
Issuance of Additional Securities
Our limited liability company agreement authorizes us to issue
an unlimited number of additional securities and rights to buy
securities for the consideration of and on the terms and
conditions determined by our board of directors without the
approval of the unitholders.
It is possible that we will fund acquisitions through the
issuance of additional units or other equity securities. Holders
of any additional units we issue will be entitled to share
equally with the then-existing holders of units in our
distributions of available cash. In addition, the issuance of
additional units or other equity securities may dilute the value
of the interests of the then-existing holders of units in our
net assets.
In accordance with Delaware law and the provisions of our
limited liability company agreement, we may also issue
additional securities that, as determined by our board of
directors, may have special voting rights to which the units are
not entitled.
The holders of units will not have preemptive rights to acquire
additional units or other securities.
Election of Members of Our Board of Directors
The current member and the independent members of the board of
directors will serve staggered terms, as a result of which only
a portion of the board of directors will be elected each year.
Removal of Members of Our Board of Directors
Any director may be removed, with or without cause, by the
holders of a majority of the units then entitled to vote at an
election of directors. Removal of directors will require a
meeting of unitholders and cannot be done by written consent.
Amendment of Our Limited Liability Company Agreement
General. Amendments to our limited liability company
agreement may be proposed only by or with the consent of our
board of directors. To adopt a proposed amendment, other than
the amendments discussed below, our board of directors is
required to seek written approval of the holders of the number
of units required to approve the amendment or call a meeting of
our unitholders to consider and vote upon the proposed
amendment. Except as described below, an amendment must be
approved by a unit majority.
Prohibited Amendments. No amendment may be made that
would:
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enlarge the obligations of any unitholder without its consent,
unless approved by at least a majority of the type or class of
member interests so affected; |
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provide that we are not dissolved upon an election to dissolve
our company by our board of directors that is approved by a unit
majority; |
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change the term of existence of our company; or |
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give any person the right to dissolve our company other than our
board of directors right to dissolve our company with the
approval of a unit majority. |
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The provision of our limited liability company agreement
preventing the amendments having the effects described in any of
the clauses above can be amended upon the approval of the
holders of at least % of the
outstanding units, voting together as a single class.
No Unitholder Approval. Our board of directors may
generally make amendments to our limited liability company
agreement without the approval of any unitholder or assignee to
reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office; |
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the admission, substitution, withdrawal or removal of members in
accordance with our limited liability company agreement; |
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the merger of our company or any of its subsidiaries into, or
the conveyance of all of our assets to, a newly formed entity if
the sole purpose of that merger or conveyance is to effect a
mere change in our legal form into another limited liability
entity; |
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a change that our board of directors determines to be necessary
or appropriate for us to qualify or continue our qualification
as a company in which our members have limited liability under
the laws of any state or to ensure that neither we, our
operating subsidiaries nor any of their subsidiaries will be
treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes; |
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an amendment that is necessary, in the opinion of our counsel,
to prevent us, members of our board, or our officers, agents or
trustees from in any manner being subjected to the provisions of
the Investment Company Act of 1940, the Investment Advisors Act
of 1940, or plan asset regulations adopted under the
Employee Retirement Income Security Act of 1974, or ERISA,
whether or not substantially similar to plan asset regulations
currently applied or proposed; |
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an amendment that our board of directors determines to be
necessary or appropriate for the authorization of additional
securities or rights to acquire securities; |
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any amendment expressly permitted in our limited liability
company agreement to be made by our board of directors acting
alone; |
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our limited
liability company agreement; |
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any amendment that our board of directors determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our limited liability company agreement; |
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a change in our fiscal year or taxable year and related changes; |
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a merger, conversion or conveyance effected in accordance with
the limited liability company agreement; and |
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any other amendments substantially similar to any of the matters
described in the clauses above. |
In addition, our board of directors may make amendments to our
limited liability company agreement without the approval of any
unitholder or assignee if our board of directors determines that
those amendments:
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do not adversely affect the unitholders (including any
particular class of unitholders as compared to other classes of
unitholders) in any material respect; |
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are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute; |
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are necessary or appropriate to facilitate the trading of units
or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the units are or will be
listed for trading, |
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compliance with any of which our board of directors deems to be
in the best interests of us and our unitholders; |
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are necessary or appropriate for any action taken by our board
of directors relating to splits or combinations of units under
the provisions of our limited liability company
agreement; or |
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of our limited liability company
agreement or are otherwise contemplated by our limited liability
company agreement. |
Opinion of Counsel and Unitholder Approval. Our board of
directors will not be required to obtain an opinion of counsel
that an amendment will not result in a loss of limited liability
to our unitholders or result in our being treated as an entity
for federal income tax purposes if one of the amendments
described above under Amendment of Our Limited
Liability Company Agreement should occur. No other
amendments to our limited liability company agreement will
become effective without the approval of holders of at least 90%
of the units unless we obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability
under applicable law of any unitholder of our company.
Any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding units
in relation to other classes of units will require the approval
of at least a majority of the type or class of units so
affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the
affirmative vote of unitholders whose aggregate outstanding
units constitute not less than the voting requirement sought to
be reduced.
Merger, Sale or Other Disposition of Assets
Our board of directors is generally prohibited, without the
prior approval of the holders of a unit majority, from causing
us to, among other things, sell, exchange or otherwise dispose
of all or substantially all of our assets in a single
transaction or a series of related transactions, including by
way of merger, consolidation or other combination, or approving
on our behalf the sale, exchange or other disposition of all or
substantially all of the assets of our subsidiaries, provided
that our board of directors may mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of our
assets without that approval. Our board of directors may also
sell all or substantially all of our assets under a foreclosure
or other realization upon the encumbrances above without that
approval.
If the conditions specified in the limited liability company
agreement are satisfied, our board of directors may merge our
company or any of its subsidiaries into, or convey all of our
assets to, a newly formed entity if the sole purpose of that
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity. The unitholders are
not entitled to dissenters rights of appraisal under the
limited liability company agreement or applicable Delaware law
in the event of a merger or consolidation, a sale of all or
substantially all of our assets or any other transaction or
event.
Termination and Dissolution
We will continue as a company until terminated under our limited
liability company agreement. We will dissolve upon: (1) the
election of our board of directors to dissolve us, if approved
by the holders of a unit majority; (2) the sale, exchange
or other disposition of all or substantially all of the assets
and properties of our company and our subsidiaries; or
(3) the entry of a decree of judicial dissolution of our
company.
Liquidation and Distribution of Proceeds
Upon our dissolution, the liquidator authorized to wind up our
affairs will, acting with all of the powers of our board of
directors that the liquidator deems necessary or desirable in
its judgment, liquidate our assets and apply the proceeds of the
liquidation as provided in Cash Distribution Policy of
Valero L.P. Distributions of Cash upon
Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to unitholders in kind if it determines that a
sale would be impractical or would cause undue loss to our
unitholders.
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Anti-Takeover Provisions
Our limited liability company agreement contains specific
provisions that are intended to discourage a person or group
from attempting to take control of our company without the
approval of our board of directors. Specifically, our limited
liability company agreement provides that we will elect to have
Section 203 of the DGCL apply to transactions in which an
interested unitholder (as described below) seeks to enter into a
merger or business combination with us. Under this provision,
such a holder will not be permitted to enter into a merger or
business combination with us unless:
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prior to such time, our board of directors approved either the
business combination or the transaction that resulted in the
unitholders becoming an interested unitholder; |
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upon consummation of the transaction that resulted in the
unitholders becoming an interested unitholder, the
interested unitholder owned at least 85% of our outstanding
units at the time the transaction commenced, excluding for
purposes of determining the number of units outstanding those
units owned: |
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by persons who are directors and also officers; and |
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by employee unit plans in which employee participants do not
have the right to determine confidentially whether units held
subject to the plan will be tendered in a tender or exchange
offer; or |
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at or subsequent to such time the business combination is
approved by our board of directors and authorized at an annual
or special meeting of our unitholders (and not by written
consent), by the affirmative vote of at least a majority of our
outstanding voting units that are not owned by the interested
unitholder. |
Section 203 defines business combination to
include:
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any merger or consolidation involving the company and the
interested unitholder; |
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the company involving the interested unitholder; |
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the company of any units of the
company to the interested unitholder; |
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any transaction involving the company that has the effect of
increasing the proportionate share of the units of any class or
series of the company beneficially owned by the interested
unitholder; or |
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the receipt by the interested unitholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the company. |
In general, by reference to Section 203, an
interested unitholder is any entity or person who or
which beneficially owns (or within three years did own) 15% or
more of the outstanding voting units of the company and any
entity or person affiliated with or controlling or controlled by
such entity or person.
The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved
in advance by our board of directors, including discouraging
attempts that might result in a premium over the market price
for units held by unitholders.
Limited Call Right
If at any time our affiliates own more than 80% of the
then-issued and outstanding membership interests of any class,
our affiliates will have the right, which such affiliate may
assign in whole or in part to one or more affiliates or to us,
to acquire all, but not less than all, of the remaining
membership interests of the class as of a record date to be
selected by our management, on at least 10 but not more than
60 days notice. The unitholders are not entitled to
dissenters rights of appraisal under the limited liability
company agreement or applicable
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Delaware law if this limited call right is exercised. The
purchase price in the event of this purchase is the greater of:
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the highest cash price paid by our affiliates for any membership
interests of the class purchased within the 90 days
preceding the date on which our affiliates first mail notice of
their election to purchase those membership interests; or |
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the closing market price as of the date three days before the
date the notice is mailed. |
As a result of this limited call right, a holder of membership
interests in our company may have his membership interests
purchased at an undesirable time or price. Please read
Risk Factors Risks Inherent in an Investment
in Us. The tax consequences to a unitholder of the
exercise of this call right are the same as a sale by that
unitholder of his units in the market. Please read
Material Tax Consequences Disposition of
Units.
Meetings; Voting
All notices of meetings of unitholders shall be sent or
otherwise given in accordance with our limited liability company
agreement not less than 10 nor more than 60 days before the
date of the meeting. The notice shall specify the place, date
and hour of the meeting and (i) in the case of a special
meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be
transacted) or (ii) in the case of the annual meeting,
those matters which the board of directors, at the time of
giving the notice, intends to present for action by the
unitholders (but any proper matter may be presented at the
meeting for such action). The notice of any meeting at which
directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board of
directors intends to present for election. Any previously
scheduled meeting of the unitholders may be postponed, and any
special meeting of the unitholders may be cancelled, by
resolution of the board of directors upon public notice given
prior to the date previously scheduled for such meeting of
unitholders.
Units that are owned by an assignee who is a record holder, but
who has not yet been admitted as a unitholder, shall be voted at
the written direction of the record holder by a proxy designated
by our board of directors. Absent direction of this kind, the
units will not be voted, except that units held by us on behalf
of non-citizen assignees shall be voted in the same ratios as
the votes of unitholders on other units are cast.
Any action required or permitted to be taken by our unitholders
must be effected at a duly called annual or special meeting of
unitholders and may not be effected by any consent in writing by
such unitholders.
Meetings of the unitholders may be called only by a majority of
our board of directors. Unitholders may vote either in person or
by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting
has been called represented in person or by proxy shall
constitute a quorum unless any action by the unitholders
requires approval by holders of a greater percentage of the
units, in which case the quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his
percentage interest in us, although additional units having
special voting rights could be issued. Please read
Issuance of Additional Securities. Units
held in nominee or street name accounts will be voted by the
broker or other nominee in accordance with the instruction of
the beneficial owner unless the arrangement between the
beneficial owner and its nominee provides otherwise.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of units
under our limited liability company agreement will be delivered
to the record holder by us or by the transfer agent.
Non-Citizen Assignees; Redemption
If we or any of our subsidiaries are or become subject to
federal, state or local laws or regulations that, in the
reasonable determination of our board of directors, create a
substantial risk of cancellation or forfeiture of any property
that we have an interest in because of the nationality,
citizenship or other related status of any
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unitholder or assignee, we may redeem, upon 30 days
advance notice, the units held by the unitholder or assignee at
their current market price. To avoid any cancellation or
forfeiture, our board of directors may require each unitholder
or assignee to furnish information about his nationality,
citizenship or related status. If a unitholder or assignee fails
to furnish information about his nationality, citizenship or
other related status within 30 days after a request for the
information or our board of directors determines after receipt
of the information that the unitholder or assignee is not an
eligible citizen, the unitholder or assignee may be treated as a
non-citizen assignee. In addition to other limitations on the
rights of an assignee who is not a substituted unitholder, a
non-citizen assignee does not have the right to direct the
voting of his units and may not receive distributions in kind
upon our liquidation.
Indemnification
Under our limited liability company agreement and subject to
specified limitations, we will indemnify to the fullest extent
permitted by law, any director or officer, or while serving as a
director or officer, any person who is or was serving as a tax
matters member or as a director, officer, tax matters member,
employee, partner, manager, fiduciary or trustee of any or our
affiliates from and against all losses, claims, damages or
similar events. Additionally, we shall indemnify to the fullest
extent permitted by law, any person who is or was an employee
(other than an officer) or agent of our company from and against
all losses, claims, damages or similar events.
Any indemnification under our limited liability company
agreement will only be out of our assets. We are authorized to
purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of
whether we would have the power to indemnify the person against
liabilities under our limited liability company agreement.
Books and Reports
We are required to keep appropriate books of our business at our
principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. For tax and
financial reporting purposes, our fiscal year is the calendar
year.
We will furnish or make available to record holders of units,
within 120 days after the close of each fiscal year, an
annual report containing audited financial statements and a
report on those financial statements by our independent
registered public accounting firm. Except for our fourth
quarter, we will also furnish or make available summary
financial information within 90 days after the close of
each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of unitholders can
be avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
Right to Inspect Our Books and Records
Our limited liability company agreement provides that a
unitholder can, for a purpose reasonably related to his interest
as a unitholder, upon reasonable demand and at his own expense,
have furnished to him:
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a current list of the name and last known address of each
unitholder; |
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a copy of our tax returns; |
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each unitholder and the date
on which each became a unitholder; |
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copies of our limited liability company agreement, the
certificate of formation of the company, any related amendments
and powers of attorney under which they have been executed; |
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information regarding the status of our business and financial
condition; and |
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any other information regarding our affairs as is just and
reasonable. |
Our board of directors may, and intends to, keep confidential
from our unitholders information that it believes to be in the
nature of trade secrets or other information, the disclosure of
which our board of directors believes in good faith is not in
our best interests, information that could damage our company or
our business, or information that we are required by law or by
agreements with a third party to keep confidential.
Registration Rights
Under our limited liability company agreement, we have agreed to
register for resale under the Securities Act of 1933, as amended
and applicable state securities laws any units proposed to be
sold by the subsidiaries of Valero Energy or any of their
affiliates if an exemption from the registration requirements is
not otherwise available. We are obligated to pay all costs and
expenses incidental to any such registration and offering on
behalf of such subsidiaries or affiliates of Valero Energy,
excluding underwriting discounts and commissions.
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MATERIAL PROVISIONS OF VALERO L.P.s PARTNERSHIP
AGREEMENT
The following is a summary of the material provisions of the
Valero L.P. partnership agreement. Valero L.P.s
partnership agreement is included as an exhibit to the
registration statement of which this prospectus constitutes a
part.
Organization and Duration
Valero L.P. was organized in December 1999 and will continue
until dissolved under the terms of its partnership agreement.
Purpose
Valero L.P.s stated purposes under its partnership
agreement are to serve as a partner of its operating partnership
and to engage in any business activities that may be engaged in
by its operating partnership or that are approved by the general
partner, provided that the general partner must reasonably
determine that such activity generates or enhances the
operations of an activity that generates qualifying
income, as this term is defined in Section 7704 of
the Internal Revenue Code.
Valero L.P.s general partner is authorized in general to
perform all acts deemed necessary to carry out Valero
L.P.s purposes and to conduct Valero L.P.s business.
Power of Attorney
Each limited partner, and each person who acquires a unit from a
unitholder and executes and delivers a transfer application,
grants to the general partner and, if appointed, a liquidator, a
power of attorney to, among other things, execute and file
documents required for the qualification, continuance or
dissolution of Valero L.P. The power of attorney also grants the
general partner and the liquidator the authority to amend the
partnership agreement, and to make consents and waivers under
the partnership agreement.
Capital Contributions
Valero L.P.s unitholders are not obligated to make
additional capital contributions, except as described below
under Limited Liability.
Limited Liability
Assuming that a limited partner does not participate in the
control of Valero L.P.s business within the meaning of the
Delaware Revised Uniform Limited Partnership Act, which we refer
to in this prospectus as the Delaware law, and that he otherwise
acts in conformity with the provisions of Valero L.P.s
partnership agreement, his liability under the Delaware law will
be limited, subject to possible exceptions, to the amount of
capital he is obligated to contribute to Valero L.P. for his
common units plus his share of any undistributed profits and
assets. If it were determined, however, that the right or
exercise of the right by the Valero L.P. limited partners as a
group
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to remove or replace the general partner; |
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to approve some amendments to the partnership agreement; or |
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to take other action under the partnership agreement; |
constituted participation in the control of Valero
L.P.s business for the purposes of the Delaware law, then
the limited partners could be held personally liable for Valero
L.P.s obligations under the laws of Delaware, to the same
extent as the general partner. This liability would extend to
persons who transact business with Valero L.P. who reasonably
believe that the limited partner is a general partner. Neither
Valero L.P.s partnership agreement nor the Delaware law
specifically provides for legal recourse against the general
partner if a limited partner were to lose limited liability
through any fault of the general partner. While this does not
mean that a limited partner could not seek legal recourse, we
know of no precedent for this type of a claim in Delaware case
law.
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Under the Delaware law, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware law provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware law
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware law shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware law, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from the partnership
agreement.
Valero L.P.s operating subsidiaries conduct business or
own assets in the United States, Canada, Mexico, the Netherland
Antilles, the Netherlands and the United Kingdom. Maintenance of
Valero L.P.s limited liability as a limited partner or
member, respectively, of its operating subsidiaries, may require
compliance with legal requirements in the jurisdictions in which
the operating subsidiary conducts business. Limitations on the
liability of limited partners or members for the obligations of
a limited partner or member have not been clearly established in
many jurisdictions. If it were determined that Valero L.P. was,
by virtue of Valero L.P.s ownership interest in the
operating subsidiaries or otherwise, conducting business in any
state without compliance with the applicable limited partnership
or limited liability company statute, or that the right or
exercise of the right by the limited partners as a group to
remove or replace Valero L.P.s general partner, to approve
some amendments to the partnership agreement, or to take other
action under the partnership agreement constituted
participation in the control of Valero L.P.s
business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally
liable for Valero L.P.s obligations under the law of that
jurisdiction to the same extent as the general partner under the
circumstances. Valero L.P. will operate in a manner that the
general partner considers reasonable and necessary or
appropriate to preserve the limited liability of the limited
partners.
Issuance of Additional Securities
Valero L.P.s partnership agreement authorizes Valero L.P.
to issue an unlimited number of additional limited partner
interests and other equity securities for the consideration and
on the terms and conditions established by the general partner
in its sole discretion without the approval of any limited
partners. During the subordination period, however, Valero L.P.
may not issue equity securities ranking senior to the common
units or in the aggregate of more than 4,462,161 additional
common units or common units on a parity with the common units,
in each case, without the approval of the holders of a majority
of the outstanding common units (excluding those common units
held by the general partner and its affiliates so long as the
general partner and its affiliates own 10% or more of the
outstanding common units) and subordinated units, voting as
separate classes, except that Valero L.P. may issue an unlimited
number of common units as follows:
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under employee benefit plans; |
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upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of the general
partner; |
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in the event of a combination or subdivision of common units; or |
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to finance an acquisition or a capital improvement that would
have resulted, on a pro forma basis, in an increase in adjusted
operating surplus on a per unit basis for the preceding
four-quarter period. |
It is possible that Valero L.P. will fund acquisitions through
the issuance of additional common units or other equity
securities. Holders of any additional common units Valero L.P.
issues will be entitled to share equally with the then-existing
holders of common units in Valero L.P.s distributions of
available cash. In
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addition, the issuance of additional partnership interests may
dilute the value of the interests of the then-existing holders
of common units in Valero L.P.s net assets.
After the subordination period, there will be no restriction
under the partnership agreement on the ability of the general
partner to issue common units or common units junior or senior
to the common units.
In accordance with Delaware law and the provisions of the
partnership agreement, Valero L.P. may also issue additional
partnership securities that, in the sole discretion of the
general partner, may have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, the general
partner will be required to make additional capital
contributions to the extent necessary to maintain its combined
2% general partner interest in Valero L.P. and Valero Logistics
Operations, L.P. Moreover, the general partner will have the
right, which it may from time to time assign in whole or in part
to any of its affiliates, to purchase common units, subordinated
units or other equity securities whenever, and on the same terms
that Valero L.P. issues those securities to persons other than
the general partner and its affiliates, to the extent necessary
to maintain its percentage interest, including its interest
represented by common units and subordinated units, that existed
immediately prior to each issuance. The holders of common units
will not have preemptive rights to acquire additional common
units or other partnership interests.
Amendment of the Partnership Agreement
Amendments to the partnership agreement may be proposed only by
or with the consent of the general partner, which consent may be
given or withheld in its sole discretion. In order to adopt a
proposed amendment, other than the amendments discussed below,
the general partner is required to seek written approval of the
holders of the number of common units required to approve the
amendment or call a meeting of the limited partners to consider
and vote upon the proposed amendment. Except as described below,
an amendment must be approved by:
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during the subordination period, by a majority of the common
units (excluding those common units held by the general partner
and its affiliates so long as the general partner and its
affiliates own 10% or more of the outstanding common units), and
a majority of the subordinated units, voting as separate
classes; and |
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after the subordination period, by a majority of the common
units. |
We refer to the voting provision described above as a unit
majority.
No amendment may be made that would:
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enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected; |
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enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by Valero L.P. to the general
partner or any of its affiliates without the consent of the
general partner, which may be given or withheld in its sole
discretion; |
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change the term of Valero L.P.; |
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provide that Valero L.P. is not dissolved upon an election to
dissolve Valero L.P. by the general partner that is approved by
the holders of a majority of the outstanding common units and
subordinated units, voting as separate classes; or |
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give any person the right to dissolve Valero L.P. other than the
general partners right to dissolve Valero L.P. with the
approval of the holders of a majority of the outstanding common
units and subordinated units, voting as separate classes. |
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The provision of the partnership agreement preventing the
amendments having the effects described in the five bullets
above can be amended upon the approval of the holders of at
least 90% of the outstanding common units voting together as a
single class.
The general partner may generally make amendments to the
partnership agreement without the approval of any limited
partner or assignee to reflect:
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a change in the name of Valero L.P., the location of the
principal place of business of Valero L.P., the registered agent
or the registered office of Valero L.P.; |
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the admission, substitution, withdrawal or removal of partners
in accordance with the partnership agreement; |
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a change that, in the sole discretion of the general partner, is
necessary or advisable to qualify or continue the qualification
of Valero L.P. as a limited partnership or a partnership in
which the limited partners have limited liability under the laws
of any state or to ensure that neither Valero L.P. nor Valero
Logistics Operations, L.P. will be treated as an association
taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes; |
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an amendment that is necessary, in the opinion of counsel to
Valero L.P., to prevent Valero L.P., the general partner, Valero
GP, LLC, or any of the directors, officers, agents or trustees
of Valero GP, LLC from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment
Advisors Act of 1940, or plan asset regulations
adopted under ERISA, whether or not substantially similar to
plan asset regulations currently applied or proposed; |
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subject to the limitations on the issuance of additional common
units or other limited or general partner interests described
above, an amendment that in the discretion of the general
partner is necessary or advisable for the authorization of
additional limited or general partner interests; |
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any amendment expressly permitted in the partnership agreement
to be made by the general partner acting alone; |
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of the
partnership agreement; |
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any amendment that, in the discretion of the general partner, is
necessary or advisable for the formation by Valero L.P. of, or
its investment in, any corporation, partnership or other entity,
as otherwise permitted by the partnership agreement; |
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a change in the fiscal year or taxable year of Valero L.P. and
related changes; and |
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any other amendments substantially similar to any of the matters
described above. |
In addition, the general partner may make amendments to the
partnership agreement without the approval of any limited
partner or assignee if those amendments, in the discretion of
the general partner:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect; |
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are necessary or advisable to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute; |
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are necessary or advisable to facilitate the trading of limited
partner interests or to comply with any rule, regulation,
guideline or requirement of any securities exchange on which the
limited partner interests are or will be listed for trading,
compliance with any of which the general partner deems to be in
the best interests of Valero L.P. and the limited partners; |
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are necessary or advisable for any action taken by the general
partner relating to splits or combinations of common units under
the provisions of the partnership agreement; or |
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of the partnership agreement or
are otherwise contemplated by the partnership agreement. |
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Opinion of Counsel and Unitholder Approval |
The general partner will not be required to obtain an opinion of
counsel that an amendment will not result in a loss of limited
liability to the limited partners or result in Valero L.P. being
treated as an entity for federal income tax purposes if one of
the amendments described above under Amendment
of the Partnership Agreement should occur. No other
amendments to the partnership agreement will become effective
without the approval of holders of at least 90% of the common
units unless Valero L.P. obtains an opinion of counsel to the
effect that the amendment will not affect the limited liability
under applicable law of any limited partner in Valero L.P. or
cause Valero L.P. or its operating subsidiaries to be taxable as
a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such).
Any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding common
units in relation to other classes of common units will require
the approval of at least a majority of the type or class of
common units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be
approved by the affirmative vote of limited partners
constituting not less than the voting requirement sought to be
reduced.
A merger or consolidation of Valero L.P. requires the prior
approval of Valero L.P.s general partner. The general
partner must also approve the merger agreement, which must
include certain information as set forth in Valero L.P.s
partnership agreement. Once approved by the general partner, the
merger agreement must be submitted to a vote of Valero
L.P.s limited partners, and the merger agreement will be
approved upon receipt of the affirmative vote or consent of the
holders of a unit majority (unless the affirmative vote of the
holders of a greater percentage is required under the merger
agreement or Delaware law).
Unit Majority. During the subordination period, a unit
majority consists of at least a majority of the outstanding
common units (excluding those common units held by the general
partner or its affiliates if they own at least 10% of the common
units), voting as a class, and at least a majority of the
outstanding subordinated units, voting as a class. Upon the
expiration of the subordination period, a unit majority will
consist of at least a majority of the outstanding common units.
Except in connection with a dissolution and liquidation of the
partnership or a duly approved merger, Valero L.P.s
general partner may not (a) sell, exchange or otherwise
dispose of all or substantially all of Valero L.P.s assets
in a single transaction or a series of related transactions, or
(b) approve on behalf of the partnership the sale, exchange
or other disposition of all or substantially all of the assets
of the operating partnership without the approval of the holders
of a unit majority. However, the general partner may mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of the assets of the partnership or operating
partnership without the approval of the unitholders. In
addition, the general partner may sell any or all of the assets
of the partnership or operating partnership in a forced sale
pursuant to the foreclosure of, or other realization upon, any
such encumbrance without the approval of the unitholders.
Termination and Dissolution
Valero L.P. will continue in existence as a limited partnership
until terminated under its partnership agreement. Valero L.P.
will dissolve upon:
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the election of the general partner to dissolve Valero L.P., if
approved by the holders of common units representing a unit
majority; |
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the sale, exchange or other disposition of all or substantially
all of the assets and properties of Valero L.P.; |
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the entry of a decree of judicial dissolution of Valero L.P.; or |
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the withdrawal or removal of the general partner or any other
event that results in its ceasing to be the general partner
other than by reason of a transfer of its general partner
interest in accordance with the partnership agreement or
withdrawal or removal following approval and admission of a
successor. |
Upon a dissolution under the last clause above, the holders of
common units representing a unit majority may also elect, within
specific time limitations, to reconstitute Valero L.P. and
continue its business on the same terms and conditions described
in the partnership agreement by forming a new limited
partnership on terms identical to those in the partnership
agreement and having as general partner an entity approved by
the holders of common units representing a unit majority,
subject to receipt by Valero L.P. of an opinion of counsel to
the effect that:
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the action would not result in the loss of limited liability of
any limited partner; and |
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neither Valero L.P., the reconstituted limited partnership, nor
any operating subsidiary would be treated as an association
taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of that right
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Liquidation and Distribution of Proceeds
Upon its dissolution, unless Valero L.P. is reconstituted and
continued as a new limited partnership, the liquidator
authorized to wind up Valero L.P.s affairs will, acting
with all of the powers of the general partner that the
liquidator deems necessary or desirable in its judgment,
liquidate Valero L.P.s assets and apply the proceeds of
the liquidation as provided in Cash Distribution Policy of
Valero L.P. Distributions of Cash upon
Liquidation. The liquidator may defer liquidation or
distribution of Valero L.P.s assets for a reasonable
period of time or distribute assets to partners in kind if it
determines that a sale would be impractical or would cause undue
loss to the partners.
Withdrawal or Removal of the General Partner
Except as described below, Valero L.P.s general partner
has agreed not to withdraw voluntarily as general partner of
Valero L.P. or as the general partner of any operating
subsidiary prior to March 31, 2011 without obtaining the
approval of the holders of at least a majority of the
outstanding common units, excluding common units held by the
general partner and its affiliates, and furnishing an opinion of
counsel regarding limited liability and tax matters. On or after
March 31, 2011, Valero L.P.s general partner may
withdraw as general partner without first obtaining approval of
any unitholder by giving 90 days written notice, and
that withdrawal will not constitute a violation of the
partnership agreement. Notwithstanding the information above,
Valero L.P.s general partner may withdraw without
unitholder approval upon 90 days notice to the
limited partners if at least 50% of the outstanding common units
are held or controlled by one person and its affiliates other
than the general partner and its affiliates. In addition, the
partnership agreement permits the general partner in some
instances to sell or otherwise transfer all of its general
partner interest in Valero L.P. without the approval of the
unitholders. Please read Transfer of General
Partner Interests.
Upon the withdrawal of the general partner under any
circumstances, other than as a result of a transfer of all or a
part of its general partner interest in Valero L.P., the holders
of common units representing a unit majority may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, Valero
L.P. will be dissolved, wound up and liquidated, unless within
180 days after that withdrawal, the holders of a majority
of the outstanding common units and subordinated units, voting
as separate classes, agree in writing to continue the business
of Valero L.P. and to appoint a successor general partner.
Please read Termination and Dissolution.
If the general partner withdraws under circumstances where such
withdrawal does not violate the partnership agreement, and a
successor general partner is elected under the terms of
partnership agreement, the departing
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general partner will have the option to require the successor
general partner to purchase its general partner interests and
incentive distribution rights for cash. If the general partner
withdraws under circumstances where such withdrawal does violate
the partnership agreement, and a successor general partner is
elected, the successor general partner will have the option to
purchase the general partner interests and incentive
distribution rights of the departing general partner. If such
general partner interests and incentive distribution rights are
not purchased by the successor general partner, they will be
converted into common units.
The general partner may not be removed unless that removal is
approved by the vote of the holders of not less than a majority
of the outstanding common units, and Valero L.P. receives an
opinion of counsel regarding limited liability and tax matters.
Any removal of the general partner is also subject to the
approval of a successor general partner by the vote of the
holders of a majority of the outstanding common units and
subordinated units, voting as separate classes.
If the general partner is removed under circumstances where
cause does not exist, and a successor general partner is elected
under the partnership agreement, the departing general partner
will have the option to require the successor general partner to
purchase its general partner interests and incentive
distribution rights for cash. If the general partner is removed
under circumstances where cause does exist, and a successor
general partner is elected, the successor general partner will
have the option to purchase the general partner interests and
incentive distribution rights of the departing general partner.
If the general partner interests and incentive distribution
rights are not purchased by the successor general partner, they
will be converted into common units.
Cause is narrowly defined to mean that a court of
competent jurisdiction has entered a final, non-appealable
judgment finding the general partner liable for actual fraud,
gross negligence, or willful or wanton misconduct in its
capacity as the general partner.
In addition, if the general partner is removed under
circumstances where cause does not exist, and units held by the
general partner and its affiliates are not voted in favor of
such removal, the subordination period will end and all
subordinated units will convert into common units and all
cumulative arrearages on the common units will be extinguished.
Withdrawal or removal of the general partner of Valero L.P. also
constitutes withdrawal or removal of the general partner of
Valero Logistics Operations, L.P.
In addition, Valero L.P. will be required to reimburse the
departing general partner for all amounts due the departing
general partner, including, without limitation, all
employee-related liabilities, including severance liabilities,
incurred for the termination of any employees employed by the
departing general partner for the benefit of Valero L.P.
Transfer of General Partner Interests
Prior to March 31, 2011, Valero L.P.s general partner
may not transfer all or any part of its general partner interest
unless such transfer (a) has been approved by the prior
written consent or vote of the holders of at least a majority of
the outstanding common units (excluding any common units held by
the general partner or its affiliates) or (b) is of all,
but not less than all, of its general partner interest to
(i) an affiliate of the general partner or
(ii) another person in connection with the merger or
consolidation of the general partner with or into such person or
the transfer by the general partner of all or substantially all
of its assets to such person.
On or after March 31, 2011, Valero L.P.s general
partner may transfer all or any part of its general partner
interest in Valero L.P. without unitholder approval.
No transfer by Valero L.P.s general partner of all or any
part of its general partner interest is permitted unless
(a) the transferee agrees to assume the rights and duties
of the general partner and be bound by the partnership agreement
and (b) the partnership receives an opinion of counsel
regarding limited liability and tax matters.
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Change of Management Provisions
Valero L.P.s partnership agreement contains specific
provisions that are intended to discourage a person or group
from attempting to remove the general partner or otherwise
change management, including the following:
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If the general partner is removed without cause, and the units
held by the general partner and its affiliates are not voted in
favor of that removal, the subordination period will end, all
remaining subordinated units will automatically convert into
common units and will share distributions with the existing
common units pro rata, existing arrearages on the common units
will be extinguished and the common units will no longer be
entitled to arrearages if Valero L.P. fails to pay the minimum
quarterly distribution in any quarter. |
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Any units held by a person that owns 20% or more of any class of
units then outstanding, other than the general partner and its
affiliates, cannot be voted on any matter. |
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The partnership agreement contains provisions limiting the
ability of unitholders to call meetings or to acquire
information about the partnerships operations, as well as
other provisions limiting the unitholders ability to
influence the manner or direction of management. |
Limited Call Right
If at any time Valero L.P.s general partner and its
affiliates own 80% or more of the issued and outstanding limited
partner interests of any class, the general partner will have
the right (which right it may assign and transfer to the
partnership or any affiliate of the general partner) to purchase
all, but not less than all, of the outstanding limited partner
interests of that class that are held by non-affiliated persons.
The record date for determining ownership of the limited partner
interests to be purchased by the general partner will be
selected by the general partner, and the general partner must
mail notice of its election to purchase the interests to the
holders of such interests at least 10 but not more than
60 days prior to the purchase date. The purchase price in
the event of a purchase under these provisions would be the
greater of (a) the current market price (as defined in the
partnership agreement) of the limited partner interests of that
class as of the date three days prior to the date the general
partner mails notice of its election to purchase the interests
and (b) the highest price paid by the general partner or
any of its affiliates for any limited partner interest of that
class purchased within the 90 days preceding the date the
general partner mails notice of its election to purchase the
interests.
Meetings; Voting
Special meetings of Valero L.P.s limited partners may be
called by the general partner or by limited partners owning 20%
or more of the outstanding limited partner interests of the
class or classes for which a meeting is proposed. The general
partner must send notice of any meeting to the limited partners,
and a meeting may not be held less than 10 days nor more
than 60 days after the mailing of the notice. For the
purpose of determining the limited partners entitled to notice
of, and to vote at, a meeting of the limited partners (or to
give written approvals without a meeting as described below),
the general partner will set a record date, which may not be
less than 10 nor more than 60 days before the date of the
meeting (or the date by which the limited partners are requested
to submit written approvals). Only record holders of limited
partner interests on such record date are entitled to notice of,
and to vote at, a meeting of the limited partners (or to vote on
any action to be taken without a meeting).
If authorized by the general partner, any action that may be
taken at a meeting of limited partners may be taken without a
meeting by obtaining approval in writing of the necessary
percentage of the limited partners that would be required to
authorize or take the action at a meeting of the limited
partners.
Each record holder of a limited partner interest has a vote
according to his percentage interest in the partnership. Limited
partner interests held for a persons account by another
person (such as a broker, dealer, or bank), in whose name such
limited partner interests are registered, will be voted by such
other person in favor of, and at the direction of, the
beneficial owner unless the arrangement between such persons
provides otherwise. Representation in person or by proxy of a
majority of the outstanding limited partner interests of the
class or classes for which a meeting has been called will
constitute a quorum at such meeting (unless a particular action
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by the limited partners requires approval by a greater
percentage of limited partner interests, in which case the
quorum shall be such greater percentage). At any meeting at
which a quorum is present, the act of the limited partners
holding a majority of the outstanding limited partner interests
entitled to vote at the meeting will be deemed to be the act of
all the limited partners, unless a greater or different
percentage is required under the partnership agreement, in which
case the act of the limited partners holding such greater or
different percentage of the outstanding limited partner
interests will be required.
Valero L.P. unitholders have no right to elect Valero
L.P.s general partner on an annual or other continuing
basis. Valero L.P.s partnership agreement explicitly
authorizes the general partner to issue limited partner
interests having special or superior voting rights without the
consent of the limited partners.
Transfer of Units and Status as a Limited Partner or
Assignee
No transfer of Valero L.P. limited partner interests will be
recognized by the partnership unless certificate(s) representing
those limited partnership interests are surrendered and such
certificates are accompanied by a duly executed transfer
application. Each transferee of Valero L.P. limited partner
interests must execute a transfer application whereby the
transferee, among other things, requests admission as a
substituted limited partner, makes certain representations,
executes and agrees to comply with and be bound by the
partnership agreement, and gives the consents and approvals and
makes the waivers contained in the partnership agreement.
Transferees may hold common units in nominee accounts.
Once a transferee has executed and delivered a transfer
application in accordance with the partnership agreement, the
transferee becomes an assignee. An assignee becomes a limited
partner upon the consent of the general partner and the
recordation of the name of the assignee on Valero L.P.s
books and records. Such consent may be withheld in the sole
discretion of the general partner. An assignee, pending its
admission as a substituted limited partner, is entitled to an
interest in Valero L.P. equivalent to that of a limited partner
with respect to the right to share in allocations and
distributions, including liquidating distributions. Valero
L.P.s general partner will vote and exercise, at the
written direction of the assignee, other powers attributable to
limited partner interests owned by an assignee who has not
become a substituted limited partner.
Transferees who do not execute and deliver transfer applications
will be treated neither as assignees nor as record holders of
limited partner interests and will not receive distributions,
federal income tax allocations or reports furnished to record
holders of limited partner interests. The only right such
transferees will have is the right to admission as a substituted
limited partner upon execution of a transfer application,
subject to the approval of the general partner. A nominee or
broker who has executed a transfer application with respect to
limited partner interests held in street name or nominee
accounts will receive distributions and reports pertaining to
such limited partner interests.
Non-Citizen Assignees; Redemption
If Valero L.P. is or becomes subject to federal, state or local
laws or regulations that, in the reasonable determination of the
general partner, create a substantial risk of cancellation or
forfeiture of any property that Valero L.P. has an interest in
because of the nationality, citizenship or other related status
of any limited partner or assignee, Valero L.P. may redeem the
common units held by the limited partner or assignee at their
current market price. In order to avoid any cancellation or
forfeiture, the general partner may require each limited partner
or assignee to furnish information about his nationality,
citizenship or related status. If a limited partner or assignee
fails to furnish information about this nationality, citizenship
or other related status within 30 days after a request for
the information or the general partner determines after receipt
of the information that the limited partner or assignee is not
an eligible citizen, the limited partner or assignee may be
treated as a non-citizen assignee. In addition to other
limitations on the rights of an assignee who is not a
substituted limited partner, a non-citizen assignee does not
have the right to direct the voting of his common units and may
not receive distributions in kind upon Valero L.P.s
liquidation.
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Indemnification
Under the partnership agreement, in most circumstances, Valero
L.P. will indemnify the following persons, to the fullest extent
permitted by law, from and against all losses, claims, damages
or similar events:
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the general partner; |
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any departing general partner; |
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any person who is or was an affiliate of the general partner or
any departing general partner; |
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any person who is or was a partner, officer, director, employee,
agent, or trustee of the general partner, Valero GP, LLC, or
departing general partner or any affiliate of the general
partner, Valero GP, LLC, or departing general partner; or |
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any person who is or was serving at the request of the general
partner or departing general partner or any affiliate of the
general partner or departing general partner as an officer,
director, employee, member, partner, agent, or trustee of
another person. |
Any indemnification under these provisions will only be out of
Valero L.P.s assets. Unless it otherwise agrees in its
sole discretion, the general partner shall not be personally
liable for any of Valero L.P.s indemnification
obligations, nor have any obligation to contribute or loan funds
or assets to Valero L.P. to enable Valero L.P. to effectuate
indemnification. Valero L.P. is authorized to purchase insurance
against liabilities asserted against and expenses incurred by
persons for its activities, regardless of whether Valero L.P.
would have the power to indemnify the person against liabilities
under the partnership agreement.
Books and Reports
The general partner is required to keep appropriate books of
Valero L.P.s business at Valero L.P.s principal
offices. The books will be maintained for both tax and financial
reporting purposes on an accrual basis. For tax and financial
reporting purposes, Valero L.P.s fiscal year is the
calendar year.
Valero L.P. will furnish or make available to record holders of
common units, within 120 days after the close of each
fiscal year, an annual report containing audited financial
statements and a report on those financial statements by its
registered public accounting firm. Except for its fourth
quarter, Valero L.P. will also furnish or make available summary
financial information within 90 days after the close of
each quarter.
Valero L.P. will furnish each record holder of a unit with
information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Valero L.P.s ability to furnish this summary
information to unitholders will depend on the cooperation of
unitholders in supplying it with specific information. Every
unitholder will receive information to assist him in determining
his federal and state tax liability and filing his federal and
state income tax returns, regardless of whether he supplies
Valero L.P. with information.
Right to Inspect Valero L.P.s Books and Records
The partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable demand and at his own expense, have
furnished to him:
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a current list of the name and last known address of each
partner; |
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a copy of Valero L.P.s tax returns; |
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner; |
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copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of
attorney under which they have been executed; |
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information regarding the status of Valero L.P.s business
and financial condition; and |
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any other information regarding Valero L.P.s affairs as is
just and reasonable. |
The general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which the general partner believes in good faith
is not in Valero L.P.s best interests or which Valero L.P.
is required by law or by agreements with third parties to keep
confidential.
Registration Rights
Under the partnership agreement, Valero L.P. has agreed to
register for resale under the Securities Act of 1933, as
amended, and applicable state securities laws any common units,
subordinated units or other partnership securities proposed to
be sold by the general partner or any of its affiliates or their
assignees if an exemption from the registration requirements is
not otherwise available. These registration rights continue for
two years following any withdrawal or removal of Riverwalk
Logistics, L.P. as the general partner of Valero L.P. Valero
L.P. is obligated to pay all expenses incidental to the
registration, excluding underwriting discounts and commissions.
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CASH DISTRIBUTION POLICY OF VALERO L.P.
Distributions of Available Cash
Within 45 days after the end of each quarter, Valero L.P.
will distribute all of its available cash to its partners of
record on the applicable record date.
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Definition of Available Cash |
Available cash is defined in Valero L.P.s partnership
agreement and generally means, with respect to any fiscal
quarter, the sum of all cash and cash equivalents on hand at the
end of such quarter, plus any working capital borrowings made
subsequent to the end of such quarter, less the amount of any
cash reserves that Valero L.P.s general partner deems
necessary or appropriate to:
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provide for the proper conduct of Valero L.P.s business,
including reserves for future capital expenditures and
anticipated credit needs; |
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comply with applicable law or any debt instrument or other
agreement or obligation; or |
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provide funds for distributions with respect to any one or more
of the next four fiscal quarters. |
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Intent to Distribute the Minimum Quarterly
Distribution |
Valero L.P.s policy is, to the extent it has sufficient
available cash from operating surplus, as defined below, to
distribute to each common unit and subordinated unit at least
the minimum quarterly distribution of $0.60 per quarter or
$2.40 per year. However, there is no guarantee that Valero
L.P. will pay the minimum quarterly distribution on the common
units in any quarter and Valero L.P. may be prohibited from
making any distributions to unitholders if it would cause an
event of default under the terms of Valero L.P.s
indebtedness.
Operating Surplus and Capital Surplus
Cash distributions are characterized as distributions from
either operating surplus or capital surplus. Valero L.P.
distributes available cash from operating surplus differently
than available cash from capital surplus.
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Definition of Operating Surplus |
Operating surplus is defined in Valero L.P.s partnership
agreement and generally means, with respect to any period ending
prior to the dissolution of Valero L.P.:
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$10 million plus all cash and cash equivalents on hand as
of the close of business on April 16, 2001, the closing
date of its initial public offering of its common units; |
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plus all cash receipts since April 16, 2001, other than
from interim capital transactions such as borrowings that are
not working capital borrowings, sales of equity and debt
securities and sales or other dispositions of assets for cash,
other than inventory, accounts receivable and other assets sold
in the ordinary course of business or as part of normal
retirements or replacements of assets; |
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plus all cash receipts resulting from working capital borrowings
after the end of such period but on or before the date of
determination of the operating surplus for such period; |
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less all operating expenditures since April 16,
2001; and |
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less the amount of cash reserves that Valero L.P.s general
partner deems necessary or advisable to provide funds for future
operating expenditures. |
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Definition of Capital Surplus |
Capital surplus of Valero L.P. will generally be generated only
by:
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borrowings other than working capital borrowings; |
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sales of debt and equity securities; and |
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sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirements
or replacements of assets. |
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Characterization of Cash Distributions |
To avoid the difficulty of trying to determine whether the
available cash that Valero L.P. distributes is from operating
surplus or from capital surplus, all available cash that Valero
L.P. distributes on any date from any source is treated as a
distribution of cash from operating surplus until the sum of all
available cash theretofore distributed equals the operating
surplus calculated as of the end of the fiscal quarter with
respect to which such distribution is being made. Any remaining
amounts of available cash distributed on such date will be
treated as cash from capital surplus and will be distributed
accordingly.
If at any time (i) a hypothetical holder of a common unit
acquired on April 16, 2001 has received distributions of
available cash from capital surplus in an aggregate amount equal
to the $24.50 initial public offering price of the common units,
and (ii) each common unit then outstanding has received an
amount equal to any cumulative arrearage existing with respect
to the common units, then the distinction between operating
surplus and capital surplus will cease, and all subsequent
distributions of available cash will be treated as distributions
of cash from operating surplus and will be distributed
accordingly. To date there have been no distributions from
capital surplus, and Valero L.P. does not anticipate that there
will be significant distributions from capital surplus in the
future.
Subordination Period
Valero L.P. is currently in its subordination
period, which generally will not end prior to
March 31, 2006. During the subordination period, the common
units have the right to receive distributions of available cash
from operating surplus in an amount equal to the minimum
quarterly distribution of $0.60 per quarter, plus any
arrearages in the payment of the minimum quarterly distribution
on the common units from prior quarters, before any
distributions of available cash from operating surplus may be
made on the subordinated units. Affiliates of Valero Energy
currently hold all of the 9,599,322 outstanding subordinated
units.
Upon expiration of the subordination period, each outstanding
subordinated unit will convert into one common unit and will
then participate pro rata with the other common units in
distributions of available cash. In addition, upon removal of
the general partner other than for cause (see second bullet
below), each subordinated unit will immediately convert into one
common unit.
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Definition of Subordination Period |
The subordination period is defined in Valero L.P.s
partnership agreement and will end on the first to occur of the
following:
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the first day of any fiscal quarter beginning after
March 31, 2006 with respect to which (a)(i) distributions
of available cash from operating surplus on each of the
outstanding common and subordinated units for each of the three
previous, consecutive, non-overlapping four-quarter periods
equaled or exceeded the sum of the minimum quarterly
distribution on all outstanding common and subordinated units
during such periods and (ii) the adjusted operating surplus
generated during each of the three previous, consecutive,
non-overlapping four-quarter periods equaled or exceeded the sum
of the minimum quarterly distribution on all outstanding common
and subordinated units on a fully diluted basis plus the |
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related distribution to the general partner, and (b) there
are no cumulative arrearages on the common units; and |
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the date on which the general partner is removed as general
partner of the partnership other than for cause and units held
by the general partner and its affiliates are not voted in favor
of such removal. Upon such removal, existing arrearages on the
common units will be extinguished and the common units will no
longer be entitled to arrearages if Valero L.P. fails to pay the
minimum quarterly distribution in any quarter. |
We expect the subordination period to end and the subordinated
units to convert to common units on a one-for-one basis, during
the second quarter of 2006.
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Definition of Adjusted Operating Surplus |
Adjusted operating surplus for any period generally means
operating surplus generated during that period:
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less any net increase in working capital borrowings during that
period; |
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less any net reduction in cash reserves for operating
expenditures during that period not relating to an operating
expenditure made during that period; |
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plus any net decrease in working capital borrowings during that
period; and |
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plus any net increase in cash reserves for operating
expenditures during that period required by any debt agreement
for the repayment of principal, interest or premium. |
Generally speaking, adjusted operating surplus is intended to
reflect the cash generated from operations during a particular
period and therefore excludes net increases in Valero
L.P.s working capital borrowings and net drawdowns of
reserves of cash generated in prior periods.
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Effect of Expiration of the Subordination Period |
Upon expiration of the subordination period, each outstanding
subordinated unit will convert into one common unit and will
then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders
remove Valero L.P.s general partner other than for cause
and common units held by the general partner and its affiliates
are not voted in favor of that removal, the subordination period
will end, any then-existing arrearages on the common units will
terminate, and each subordinated unit will immediately convert
into one common unit.
Distributions of Available Cash from Operating Surplus
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During Subordination Period |
Currently, Valero L.P. makes distributions of available cash
from operating surplus for any quarter during the subordination
period as follows:
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First, 98% to the common unitholders, pro rata, and 2% to the
general partner, until Valero L.P. has distributed for each
outstanding common unit an amount equal to the minimum quarterly
distribution of $0.60 for that quarter; |
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Second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until Valero L.P. has distributed for each
outstanding common unit an amount equal to any arrearages in
payment of the minimum quarterly distribution on the common
units for any prior quarters during the subordination period; |
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Third, 98% to the subordinated unitholders, pro rata, and 2% to
the general partner, until Valero L.P. has distributed for each
outstanding subordinated unit an amount equal to the minimum
quarterly distribution of $0.60 for that quarter; |
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Fourth, 90% to all unitholders, pro rata, 8% to the holders of
the incentive distribution rights, and 2% to the general
partner, until Valero L.P. has distributed with respect to each
unit then outstanding an amount equal to the excess of the first
target distribution ($0.66 per unit) over the minimum
quarterly distribution; and |
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Thereafter, 75% to all unitholders, pro rata, 23% to the holders
of the incentive distribution rights, and 2% to the general
partner. |
If the minimum quarterly distribution and the first target
distribution have been reduced to zero under the terms of the
partnership agreement, then any distribution of available cash
from operating surplus will be made solely in accordance with
the final bullet point above.
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After Subordination Period |
For any quarter after the subordination period, Valero L.P. will
make distributions of available cash from operating surplus as
follows:
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First, 98% to the unitholders, pro rata, and 2% to the general
partner, until Valero L.P. has distributed for each outstanding
unit an amount equal to the minimum quarterly distribution of
$0.60 for that quarter; |
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Second, 90% to all unitholders, pro rata, 8% to the holders of
the incentive distribution rights, and 2% to the general
partner, until Valero L.P. has distributed with respect to each
unit then outstanding an amount equal to the excess of the first
target distribution ($0.66 per unit) over the minimum
quarterly distribution; and |
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Thereafter, 75% to all unitholders, pro rata, 23% to the holders
of the incentive distribution rights, and 2% to the general
partner. |
If the minimum quarterly distribution and the first target
distribution have been reduced to zero under the terms of the
partnership agreement, then any distribution of available cash
from operating surplus will be made solely in accordance with
the final bullet point above.
The minimum quarterly distribution and the first target
distribution are subject to adjustment as described below in
Adjustment of the Minimum Quarterly
Distribution and Target Distribution Levels.
Distributions of Available Cash from Capital Surplus
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How Distributions from Capital Surplus are Made |
Valero L.P. makes distributions of available cash from capital
surplus in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to the general
partner, until a hypothetical holder of a common unit acquired
on April 16, 2001 has received an aggregate amount equal to
the $24.50 initial public offering price of the common units; |
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Second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until there has been distributed with respect
to each common unit then outstanding an amount equal to any
cumulative arrearage existing with respect to the common
units; and |
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Thereafter, all distributions of available cash from capital
surplus will be distributed as if they were from operating
surplus. |
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Effect of a Distribution from Capital Surplus |
Valero L.P.s partnership agreement treats a distribution
of cash from capital surplus on a common unit as the repayment
of the initial public offering price of such common unit, which
is a return of capital. The initial public offering price less
any distributions of cash from capital surplus per common unit
is referred to as unrecovered initial unit price or
unrecovered capital. Each time a distribution of
cash from capital surplus is made on a common unit, the minimum
quarterly distribution and the first target distribution for all
units will be reduced in the same proportion as the
corresponding reduction in the unrecovered capital. Because
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distributions of cash from capital surplus will reduce the
minimum quarterly distribution, after any of these distributions
are made, it may be easier for Valero L.P.s general
partner to receive incentive distributions. However, any
distribution by Valero L.P. of capital surplus before the
unrecovered capital is reduced to zero cannot be applied to the
payment of the minimum quarterly distribution or any arrearages.
If at any time, Valero L.P. makes a distribution of cash from
capital surplus in an amount equal to the then current
unrecovered capital, the minimum quarterly distribution and the
first target distribution will be reduced to zero. As a result,
all future distributions will be made from operating surplus,
with 75% being paid to all unitholders, pro rata, 23% to the
general partner as the holder of incentive distribution rights,
pro rata, and 2% to the general partner.
Incentive Distribution Rights
Incentive distribution rights are non-voting limited partner
interests that were issued to Valero L.P.s general partner
in connection with the transfer of its general partnership
interest in the operating partnership to Valero L.P. Incentive
distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from
operating surplus after the minimum quarterly distribution has
been achieved. The general partner as the holder of incentive
distribution rights is paid in the manner described in
Distributions of Available Cash from Operating
Surplus above.
Prior to March 31, 2011, the general partner may not
transfer (other than to affiliates, in a merger or the sale of
all assets) the incentive distribution rights without the
approval of the majority of the common units (excluding the
general partners common units).
Adjustment of the Minimum Quarterly Distribution and Target
Distribution Levels
Valero L.P.s minimum quarterly distribution is
$0.60 per unit, subject to adjustment. Valero L.P.s
first target distribution is $0.66 per unit, subject to
adjustment. Valero L.P. has no other target distribution levels.
In addition to reductions of the minimum quarterly distribution
and first target distribution level made upon a distribution of
available cash from capital surplus, as described above, if
Valero L.P. distributes units to its unitholders, combines its
units into fewer units or subdivides its units into a greater
number of units, Valero L.P. will proportionately adjust:
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the minimum quarterly distribution; |
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the first target distribution level; |
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any common unit arrearage; |
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any cumulative common unit arrearage; and |
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the unrecovered capital. |
For example, in the event of a two-for-one split of the common
units (assuming no prior adjustments), the minimum quarterly
distribution, the first target distribution level, any common
unit arrearage, any cumulative common unit arrearage and the
unrecovered capital of the common units would each be reduced to
50% of its initial level.
In addition, if legislation is enacted or if existing law is
modified or interpreted in a manner that causes Valero L.P.
and/or the operating partnership to become taxable as a
corporation or otherwise subject to taxation as an entity for
federal, state or local income tax purposes, then Valero L.P.
will reduce the then-applicable minimum quarterly distribution
and the first target distribution level by multiplying the same
by one minus the sum of (a) the highest marginal federal
corporate (or other) income tax rate that could apply plus
(b) any increase in the effective overall state and local
income tax rates. For example, if Valero L.P. became subject to
a maximum effective federal, state and local income tax rate of
35%, then the minimum quarterly distribution and the first
target distribution level would each be reduced to 65% of their
previous levels.
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Distributions of Cash upon Liquidation
If Valero L.P. dissolves in accordance with its partnership
agreement, it will sell or otherwise dispose of its assets in a
process called a liquidation, and the partners capital
account balances will be adjusted to reflect any resulting gain
or loss. Valero L.P. will first apply the proceeds of
liquidation to the payment of its creditors (including partners)
in the order of priority provided in the partnership agreement
and by law and, thereafter, it will distribute any remaining
proceeds to its partners in accordance with, and to the extent
of, the positive balances in their respective capital accounts,
as adjusted. The manner of adjustment of capital accounts is set
forth in Valero L.P.s partnership agreement.
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Manner of Adjustments for Gain |
Upon its liquidation, Valero L.P. will allocate any net gain (or
unrealized gain attributable to assets distributed in kind to
the partners) in the following manner:
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first, to each partner having a negative balance in its capital
account, in the proportion that such negative balance bears to
the total negative balances of all partners, until each partner
has been allocated net gain equal to its negative balance; |
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second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until the capital account for each common unit
then outstanding is equal to the sum of: |
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the unrecovered capital with respect to such common unit; |
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the amount of any unpaid minimum quarterly distribution for the
quarter during which the liquidation occurs; and |
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the amount of any cumulative arrearage existing with respect to
the common units; |
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third, if prior to the expiration of the subordination period,
98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until the capital account for each subordinated
unit then outstanding is equal to the sum of: |
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the unrecovered capital with respect to such subordinated
unit; and |
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the amount of any unpaid minimum quarterly distribution for the
quarter during which the liquidation occurs; |
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fourth, 90% to all unitholders, pro rata, 8% to the holders of
the incentive distribution rights, pro rata, and 2% to the
general partner, until the capital account for each common unit
then outstanding is equal to the sum of: |
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the unrecovered capital with respect to each common unit; |
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the amount of any unpaid minimum quarterly distribution for the
quarter during which the liquidation occurs; |
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the amount of any cumulative arrearage existing with respect to
the common units; and |
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the excess of (a) the first target distribution less the
minimum quarterly distribution for each quarter of the
partnerships existence, over (b) the cumulative per
unit amount of any distributions of available cash from
operating surplus that were distributed 90% to all unitholders,
pro rata, 8% to the holders of incentive distribution rights,
pro rata, and 2% to the general partner; and |
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thereafter, 75% to all unitholders, pro rata, 23% to the holders
of incentive distribution rights, pro rata, and 2% to the
general partner. |
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Manner of Adjustments for Losses |
Upon its liquidation, Valero L.P. will allocate any loss in the
following manner:
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first, if prior to the conversion of the last subordinated unit,
98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until the capital account for each subordinated
unit has been reduced to zero; |
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second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until the capital account for each common unit
has been reduced to zero; and |
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thereafter, 100% to the general partner. |
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Adjustments to Capital Accounts |
In addition, interim adjustments to capital accounts will be
made at the time Valero L.P. issues additional partnership
interests or makes distributions of property. Such adjustments
will be based on the fair market value of the partnership
interests or the property distributed and any gain or loss
resulting therefrom will be allocated to the partners in the
same manner as gain or loss is allocated upon liquidation. In
the event that positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the
capital accounts resulting from the issuance of additional
partnership interests in Valero L.P., distributions of property
by Valero L.P., or upon Valero L.P.s liquidation, will be
allocated in a manner which results, to the extent possible, in
the capital account balances of the general partner equaling the
amount that would have been the general partners capital
account balances if no prior positive adjustments to the capital
accounts had been made.
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the units offered by this prospectus,
subsidiaries of Valero Energy will hold an aggregate of
28 million of our units, representing approximately 63% of
our outstanding units. The sale of these units could have an
adverse impact on the price of the units or on any trading
market that may develop.
The units sold in this offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any units held by an
affiliate of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
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1% of the total number of the securities outstanding; or |
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the average weekly reported trading volume of the units for the
four calendar weeks prior to the sale. |
Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements, and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned his units for at least two years,
would be entitled to sell units under Rule 144 without
regard to the current public information requirements, volume
limitations, manner of sale provisions, and notice requirements
of Rule 144.
Our limited liability company agreement provides that we may
issue an unlimited number of limited liability company interests
of any type without a vote of the unitholders. Our limited
liability company agreement does not restrict our ability to
issue equity securities ranking junior to the units at any time.
Any issuance of additional units or other equity securities
would result in a corresponding decrease in the proportionate
ownership interest in us represented by, and could adversely
affect the cash distributions to and market price of, units then
outstanding. Please read Description of our Limited
Liability Company Agreement Issuance of Additional
Securities.
Under the limited liability company agreement, subsidiaries of
Valero Energy have the right to cause us to register under the
Securities Act and applicable state securities laws the offer
and sale of any units that they hold. Subject to the terms and
conditions of the limited liability company agreement, these
registration rights allow such subsidiaries of Valero Energy or
their assignees holding any units to require registration of any
of these units and to include any of these units in a
registration by us of other units, including units offered by us
or by any unitholder. These subsidiaries of Valero Energy will
continue to have these registration rights
for .
In connection with any registration of this kind, we will
indemnify each unitholder participating in the registration and
its officers, directors, and controlling persons from and
against any liabilities under the Securities Act or any
applicable state securities laws arising from the registration
statement or prospectus. We will bear all costs and expenses
incidental to any registration, excluding any underwriting
discounts and commissions. Except as described below, such
subsidiaries of Valero Energy may sell their units in private
transactions at any time, subject to compliance with applicable
laws.
We and our principal unitholders have agreed not to sell any
units for a period of 180 days from the date of this
prospectus. Please read Underwriting for a
description of these
lock-up provisions.
166
MATERIAL TAX CONSEQUENCES
This section is a discussion of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, is the
opinion of Andrews Kurth LLP, tax counsel to us, insofar as it
relates to matters of United States federal income tax law and
legal conclusions with respect to those matters. This section is
based upon current provisions of the Internal Revenue Code,
existing and proposed regulations and current administrative
rulings and court decisions, all of which are subject to change.
Later changes in these authorities may cause the tax
consequences to vary substantially from the consequences
described below. Unless the context otherwise requires,
references in this section to us or we
are references to Valero GP Holdings.
The following discussion does not comment on all federal income
tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application
to corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. Accordingly, we urge each prospective unitholder to
consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of units.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Andrews Kurth LLP. Unlike a ruling, an
opinion of counsel represents only that counsels best
legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be
sustained by a court if contested by the IRS. Any contest of
this sort with the IRS may materially and adversely impact the
market for our units and the prices at which our units trade. In
addition, the costs of any contest with the IRS, principally
legal, accounting and related fees, will result in a reduction
in cash available for distribution to our unitholders and thus
will be borne indirectly by our unitholders. Furthermore, the
tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative
changes or court decisions. Any modifications may or may not be
retroactively applied.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Andrews Kurth LLP and are
based on the accuracy of the representations made by us.
For the reasons described below, Andrews Kurth LLP has not
rendered an opinion with respect to the following specific
federal income tax issues:
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(1) |
the treatment of a unitholder whose units are loaned to a short
seller to cover a short sale of units (please read
Tax Consequences of Unit Ownership
Treatment of Short Sales); |
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(2) |
whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please
read Disposition of Units
Allocations Between Transferors and Transferees); and |
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whether our method for depreciating Section 743 adjustments
is sustainable in certain cases (please read
Tax Consequences of Unit Ownership
Section 754 Election). |
Partnership Status
Except as discussed in the following paragraph, a limited
liability company that has more than one member and that has not
elected to be treated as a corporation is treated as a
partnership for federal income tax purposes and, therefore, is
not a taxable entity and incurs no federal income tax liability.
Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction
of the partnership in computing his federal income tax
liability, even if no cash distributions are made to him.
Distributions by a partnership to a partner are generally not
taxable unless the amount of cash distributed to him is in
excess of the partners adjusted basis in his partnership
interest.
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Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the exploration, development, mining or production,
processing, refining, transportation and marketing of any
mineral or natural resource, including our allocable share of
such income from Valero L.P. Other types of qualifying income
include interest other than from a financial business,
dividends, gains from the sale of real property and gains from
the sale or other disposition of assets held for the production
of income that otherwise constitutes qualifying income. We
estimate that less than % of our
current income is not qualifying income; however, this estimate
could change from time to time. Based upon and subject to this
estimate, the factual representations made by us and the general
partner and a review of the applicable legal authorities,
Andrews Kurth LLP is of the opinion that at least 90% of our
current gross income constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status for federal income
tax purposes or whether our operations generate qualifying
income under Section 7704 of the Internal Revenue
Code. Moreover, no ruling has been or will be sought from the
IRS and the IRS has made no determination as to Valero
L.P.s status for federal income tax purposes or whether
its operations generate qualifying income under
Section 7704 of the Internal Revenue Code. Instead, we will
rely on the opinion of Andrews Kurth LLP that, based upon the
Internal Revenue Code, its regulations, published revenue
rulings and court decisions and the representations described
below, we will be treated as a partnership for federal income
tax purposes.
In rendering its opinion, Andrews Kurth LLP has relied on
factual representations made by us and the general partner of
Valero L.P. The representations made by us and the general
partner of Valero L.P. upon which Andrews Kurth LLP has relied
are:
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Neither we, nor Valero L.P., have elected nor will elect to be
treated as a corporation; and |
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For each taxable year, more than 90% of our gross income will be
income that Andrews Kurth LLP has opined or will opine is
qualifying income within the meaning of
Section 7704(d) of the Internal Revenue Code. |
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery, we will be
treated as if we had transferred all of our assets, subject to
liabilities, to a newly formed corporation, on the first day of
the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of
their interests in us. This contribution and liquidation should
be tax-free to unitholders and us so long as we, at that time,
do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for
federal income tax purposes.
If we were taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to the unitholders, and our net income would be
taxed to us at corporate rates. Moreover, if Valero L.P. were
taxable as a corporation in any given year, our share of Valero
L.P.s items of income, gain, loss and deduction would not
be passed through to us, and Valero L.P. would pay tax on its
income at corporate rates. In addition, any distribution made to
a unitholder would be treated as either taxable dividend income,
to the extent of our current or accumulated earnings and
profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholders tax basis in his units, or taxable capital
gain, after the unitholders tax basis in his units is
reduced to zero. Accordingly, taxation of either us or Valero
L.P. as a corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The discussion below is based on Andrews Kurth LLPs
opinion that we and Valero L.P. will be classified as a
partnership for federal income tax purposes.
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Limited Partner Status
Unitholders who have become members of Valero GP Holdings will
be treated as partners of Valero GP Holdings for federal income
tax purposes. Also, assignees who have executed and delivered
transfer applications, and are awaiting admission as members,
and unitholders whose units are held in street name or by a
nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
their units will be treated as partners of Valero GP Holdings
for federal income tax purposes.
Because there is no direct authority addressing assignees of
units who are entitled to execute and deliver transfer
applications and thereby become entitled to direct the exercise
of attendant rights, but who fail to execute and deliver
transfer applications, Andrews Kurth LLPs opinion does not
extend to these persons. Furthermore, a purchaser or other
transferee of units who does not execute and deliver a transfer
application may not receive some federal income tax information
or reports furnished to record holders of units unless the units
are held in a nominee or street name account and the nominee or
broker has executed and delivered a transfer application for
those units.
A beneficial owner of units whose units have been transferred to
a short seller to complete a short sale would appear to lose his
status as a partner with respect to those units for federal
income tax purposes. Please read Tax
Consequences of Unit Ownership Treatment of Short
Sales.
Income, gains, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore be fully taxable as ordinary income. These
holders are urged to consult their own tax advisors with respect
to their status as partners in us for federal income tax
purposes.
Tax Consequences of Unit Ownership
Flow-through of Taxable Income. We will not pay any
federal income tax. Instead, each unitholder will be required to
report on his income tax return his share of our income, gains,
losses and deductions without regard to whether corresponding
cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a
cash distribution. Each unitholder will be required to include
in income his allocable share of our income, gains, losses and
deductions for our taxable year ending with or within his
taxable year. Our taxable year ends on December 31.
Treatment of Distributions. Distributions by us to a
unitholder generally will not be taxable to the unitholder for
federal income tax purposes to the extent of his tax basis in
his units immediately before the distribution. Our cash
distributions in excess of a unitholders tax basis
generally will be considered to be gain from the sale or
exchange of the units, taxable in accordance with the rules
described under Disposition of Units
below. To the extent our distributions cause a unitholders
at risk amount to be less than zero at the end of
any taxable year, he must recapture any losses deducted in
previous years. Please read Limitations on
Deductibility of Losses.
Any reduction in a unitholders share of our liabilities
for which no unitholder bears the economic risk of loss, known
as nonrecourse liabilities, will be treated as a
distribution of cash to that unitholder. A decrease in a
unitholders percentage interest in us because of our
issuance of additional units will decrease his share of our
nonrecourse liabilities, and thus will result in a corresponding
deemed distribution of cash. A non-pro rata distribution of
money or property may result in ordinary income to a unitholder,
regardless of his tax basis in his units, if the distribution
reduces the unitholders share of our unrealized
receivables, including depreciation recapture, and/or
substantially appreciated inventory items, both as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, he will be
treated as having been distributed his proportionate share of
the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will
generally result in the unitholders realization of
ordinary income. That income will equal the excess of
(1) the non-pro rata portion of that distribution over
(2) the unitholders tax basis for the share of
Section 751 Assets deemed relinquished in the exchange.
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Ratio of Taxable Income to Distributions. We estimate
that a purchaser of units in this offering who owns those units
from the date of closing of this offering through the record
date for distributions for the period ending December 31,
2008, will be allocated, on a cumulative basis, an amount of
federal taxable income for that period that will
be %
or less of the cash distributed with respect to that period. We
anticipate that after the taxable year ending December 31,
2008, the ratio of allocable taxable income to cash
distributions to the unitholders will increase. We expect that
our ratio of taxable income to cash distributions will be higher
than the ratio applicable to holders of common units in Valero
L.P. because our ownership of incentive distribution rights will
cause more taxable income to be allocated to us from Valero L.P.
Moreover, if Valero L.P. is successful in increasing
distributable cash flow over time, our income allocations from
incentive distribution rights will increase, and, therefore, our
ratio of taxable income to cash distributions will further
increase. These estimates are based upon the assumption that the
distribution rate from Valero L.P. will approximate the amount
required to make the minimum quarterly distribution on all units
and other assumptions with respect to capital expenditures, cash
flow and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are
based on current tax law and tax reporting positions that we
will adopt and with which the IRS could disagree. Accordingly,
we cannot assure you that these estimates will prove to be
correct. The actual ratio of taxable income to distributions
could be higher or lower and any differences could be material
and could materially affect the value of the units. For example,
the ratio of allocable taxable income to cash distributions to a
purchaser of common units in this offering will be greater than
the estimate with respect to the period described above if:
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Valero L.P.s gross income from operations exceeds the
amount required to make the minimum quarterly distribution on
all Valero L.P.s units, yet Valero L.P. only distributes
the minimum quarterly distribution on all its units, or |
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Valero L.P. makes a future offering of common units and uses the
proceeds of the offering in a manner that does not produce
substantial additional deductions during the period described
above, such as to repay indebtedness outstanding at the time of
this offering or to acquire property that is not eligible for
depreciation or amortization for federal income tax purposes or
that is depreciable or amortizable at a rate significantly
slower than the rate applicable to Valero L.P.s assets at
the time of this offering. |
Basis of Units. A unitholders initial tax basis for
his units will be the amount he paid for the units plus his
share of our nonrecourse liabilities. That basis will be
increased by his share of our income and by any increases in his
share of our nonrecourse liabilities. That basis will be
decreased, but not below zero, by distributions from us, by the
unitholders share of our losses, by any decreases in his
share of our nonrecourse liabilities and by his share of our
expenditures that are not deductible in computing taxable income
and are not required to be capitalized. A unitholders
share of our nonrecourse liabilities will generally be based on
his share of our profits. Please read
Disposition of Units Recognition
of Gain or Loss.
Limitations on Deductibility of Losses. The deduction by
a unitholder of his share of our losses will be limited to the
tax basis in his units and, in the case of an individual
unitholder or a corporate unitholder, if more than 50% of the
value of the corporate unitholders stock is owned directly
or indirectly by five or fewer individuals or some tax-exempt
organizations, to the amount for which the unitholder is
considered to be at risk with respect to our
activities, if that amount is less than his tax basis. A
unitholder must recapture losses deducted in previous years to
the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed
to a unitholder or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that his
tax basis or at risk amount, whichever is the limiting factor,
is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at risk limitation
but may not be offset by losses suspended by the basis
limitation. Any excess loss above that gain previously suspended
by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder
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or can look only to the units for repayment. A unitholders
at risk amount will increase or decrease as the tax basis of the
unitholders units increases or decreases, other than tax
basis increases or decreases attributable to increases or
decreases in his share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals,
estates, trusts and some closely-held corporations and personal
service corporations can deduct losses from passive activities,
which are generally corporate or partnership activities in which
the taxpayer does not materially participate, only to the extent
of the taxpayers income from those passive activities. As
a general rule, the passive loss limitations are applied
separately with respect to each publicly traded partnership.
However, the application of the passive loss limitations to
tiered publicly traded partnerships is uncertain. We will take
the position that any passive losses we generate that are
reasonably allocable to our investment in Valero L.P. will only
be available to offset our passive income generated in the
future that is reasonably allocable to our investment in Valero
L.P. and will not be available to offset income from other
passive activities or investments, including other investments
in private businesses or investments we may make in other
publicly traded partnerships. Moreover, because the passive loss
limitations are applied separately with respect to each publicly
traded partnership, any passive losses we generate will not be
available to offset your income from other passive activities or
investments, including your investments in other publicly traded
partnerships, such as Valero L.P., or salary or active business
income. Further, your share of our net income may be offset by
any suspended passive losses from your investment in us, but may
not be offset by your current or carryover losses from other
passive activities, including those attributable to other
publicly traded partnerships. Passive losses that are not
deductible because they exceed your share of income we generate
may be deducted in full when you dispose of your entire
investment in us in a fully taxable transaction with an
unrelated party.
The IRS could take the position that for purposes of applying
the passive loss limitation rules to tiered publicly traded
partnerships, such as Valero L.P. and us, the related entities
are treated as one publicly traded partnership. In that case,
any passive losses we generate would be available to offset
income from your investments in Valero L.P. However, passive
losses that are not deductible because they exceed a
unitholders share of income we generate would not be
deductible in full until a unitholder disposes of his entire
investment in both us and Valero L.P. in a fully taxable
transaction with an unrelated party.
The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk
rules and the basis limitation.
Limitations on Interest Deductions. The deductibility of
a non-corporate taxpayers investment interest
expense is generally limited to the amount of that
taxpayers net investment income. Investment
interest expense includes:
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interest on indebtedness properly allocable to property held for
investment; |
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our interest expense attributed to portfolio income; and |
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income. |
The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment. The IRS has
indicated that net passive income earned by a publicly traded
partnership will be treated as investment income to its
unitholders. In addition, the unitholders share of our
portfolio income will be treated as investment income.
Entity Level Collections. If we are required or
elect under applicable law to pay any federal, state, local or
foreign income tax on behalf of any unitholder or any former
unitholder, we are authorized to pay those taxes from our funds.
That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the
payment is made on behalf of a person whose identity cannot be
determined, we are
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authorized to treat the payment as a distribution to all current
unitholders. We are authorized to amend the partnership
agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of units and to adjust later
distributions, so that after giving effect to these
distributions, the priority and characterization of
distributions otherwise applicable under the partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner
would be required to file a claim in order to obtain a credit or
refund.
Allocation of Income, Gain, Loss and Deduction. In
general, if we have a net profit, our items of income, gain,
loss and deduction will be allocated among the unitholders in
accordance with their percentage interests in us. If we have a
net loss for the entire year, that loss will be allocated to our
unitholders in accordance with their percentage interests in us
to the extent of their positive capital accounts.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
and fair market value of our assets at the time of this
offering, referred to in this discussion as Contributed
Property. The effect of these allocations to a unitholder
purchasing units in this offering will be essentially the same
as if the tax basis of our assets were equal to their fair
market value at the time of this offering. In addition, items of
recapture income will be allocated to the extent possible to the
partner who was allocated the deduction giving rise to the
treatment of that gain as recapture income in order to minimize
the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the
creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will
be allocated in an amount and manner to eliminate the negative
balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property,
referred to in this discussion as the book-tax
disparity, will generally be given effect for federal
income tax purposes in determining a partners share of an
item of income, gain, loss or deduction only if the allocation
has substantial economic effect. In any other case, a
partners share of an item will be determined on the basis
of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
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his relative contributions to us; |
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the interests of all the unitholders in profits and losses; |
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the interest of all the unitholders in cash flow; and |
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the rights of all the unitholders to distributions of capital
upon liquidation. |
Andrews Kurth LLP is of the opinion that, with the exception of
the issues described in Tax Consequences of
Unit Ownership Section 754 Election and
Disposition of Units Allocations
Between Transferors and Transferees, allocations under our
limited liability company agreement will be given effect for
federal income tax purposes in determining a unitholders
share of an item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are
loaned to a short seller to cover a short sale of
units may be considered as having disposed of those units. If
so, he would no longer be a partner for those units during the
period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder; |
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any cash distributions received by the unitholder as to those
units would be fully taxable; and |
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all of these distributions would appear to be ordinary income. |
Andrews Kurth LLP has not rendered an opinion regarding the
treatment of a unitholder where units are loaned to a short
seller to cover a short sale of units. Therefore, unitholders
desiring to assure their status as
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partners and avoid the risk of gain recognition from a loan to a
short seller are urged to modify any applicable brokerage
account agreements to prohibit their brokers from borrowing
their units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of
partnership interests. Please read Disposition
of Units Recognition of Gain or Loss.
Alternative Minimum Tax. Each unitholder will be required
to take into account his distributive share of any items of our
income, gain, loss or deduction for purposes of the alternative
minimum tax. The current minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. Prospective
unitholders are urged to consult with their tax advisors as to
the impact of an investment in units on their liability for the
alternative minimum tax.
Tax Rates. In general, the highest effective United
States federal income tax rate for individuals is currently 35%
and the maximum United States federal income tax rate for net
capital gains of an individual is currently 15% if the asset
disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We will make the election
permitted by Section 754 of the Internal Revenue Code. That
election is irrevocable without the consent of the IRS. The
election will generally permit us to adjust a unit
purchasers tax basis in our assets (inside
basis) under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply
to a person who purchases units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other unitholders. For purposes of this discussion, a
unitholders inside basis in our assets will be considered
to have two components: (1) his share of our tax basis in
our assets (common basis) and (2) his
Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal
Revenue Code require, if the remedial allocation method is
adopted (which we will adopt), a portion of the
Section 743(b) adjustment attributable to recovery property
to be depreciated over the remaining cost recovery period for
the Section 704(c) built-in gain. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject
to depreciation under Section 167 of the Internal Revenue
Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. We are authorized to take a position to preserve the
uniformity of units even if that position is not consistent with
these Treasury Regulations. Please read
Uniformity of Units.
Although Andrews Kurth LLP is unable to opine as to the validity
of this approach because there is no clear authority on this
issue, we intend to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent
of any unamortized book-tax disparity, using a rate of
depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis
of the property, or treat that portion as non-amortizable to the
extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations
under Section 743 of the Internal Revenue Code but is
arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6), which is not
expected to directly apply to a material portion of our assets.
To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized book-tax disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Uniformity of Units.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either
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favorably or unfavorably by the election. A basis adjustment is
required regardless of whether a Section 754 election is
made in the case of a transfer of an interest in us if we have a
substantial built-in loss immediately after the transfer or if
we distribute property and have a substantial basis reduction.
Generally, a built-in loss or a basis reduction is substantial
if it exceeds $250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets or the tangible assets owned by Valero L.P. to goodwill
instead. Goodwill, as an intangible asset, is generally
amortizable over a longer period of time or under a less
accelerated method than our tangible assets. We cannot assure
you that the determinations we make will not be successfully
challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should,
in our opinion, the expense of compliance exceed the benefit of
the election, we may seek permission from the IRS to revoke our
Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than
he would have been allocated had the election not been revoked.
Tax Treatment of Operations
Accounting Method and Taxable Year. We will use the year
ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his taxable year. In addition, a unitholder who
has a taxable year ending on a date other than December 31
and who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction.
Please read Disposition of Units
Allocations Between Transferors and Transferees.
Tax Basis, Depreciation and Amortization. The tax basis
of our assets and Valero L.P.s assets will be used for
purposes of computing depreciation and cost recovery deductions
and, ultimately, gain or loss on the disposition of these
assets. The tax basis of assets owned at the time of this
offering will be greater to the extent such assets have been
recently acquired. The federal income tax burden associated with
the difference between the fair market value of our assets and
Valero L.P.s assets and their tax basis immediately prior
to (i) this offering will be borne by existing unitholders,
and (ii) any other offering will be borne by unitholders as
of that time. Please read Tax Consequences of
Unit Ownership Allocation of Income, Gain, Loss and
Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service. Property we subsequently acquire or construct
may be depreciated using accelerated methods permitted by the
Internal Revenue Code.
If we or Valero L.P. dispose of depreciable property by sale,
foreclosure or otherwise, all or a portion of any gain,
determined by reference to the amount of depreciation previously
deducted and the nature of the property, may be subject to the
recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a unitholder who has taken cost recovery or
depreciation deductions with respect to property we own or
Valero L.P. owns will likely be required to recapture some or
all of those deductions as ordinary income upon a sale of his
interest in us. Please read Tax Consequences
of Unit Ownership Allocation of Income, Gain, Loss
and Deduction and Disposition of
Units Recognition of Gain or Loss.
The costs incurred in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our Properties. The federal
income tax consequences of the ownership and disposition of
units will depend in part on our estimates of the relative fair
market values, and the tax bases, of our assets and Valero
L.P.s assets. Although we may from time to time consult
with professional appraisers
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regarding valuation matters, we will make many of the relative
fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair
market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and
unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to
those adjustments.
Disposition of Units
Recognition of Gain or Loss. Gain or loss will be
recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property received by him plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholders share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a unit that decreased a unitholders tax basis
in that unit will, in effect, become taxable income if the unit
is sold at a price greater than the unitholders tax basis
in that unit, even if the price received is less than his
original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held more than 12 months
will generally be taxed at a maximum rate of 15%. However, a
portion of this gain or loss will be separately computed and
taxed as ordinary income or loss under Section 751 of the
Internal Revenue Code to the extent attributable to assets
giving rise to depreciation recapture or other unrealized
receivables or to inventory items we own or
Valero L.P. owns. The term unrealized receivables
includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of a unit and may
be recognized even if there is a net taxable loss realized on
the sale of a unit. Thus, a unitholder may recognize both
ordinary income and a capital loss upon a sale of units. Net
capital losses may offset capital gains and no more than $3,000
of ordinary income, in the case of individuals, and may only be
used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method. Treasury Regulations under
Section 1223 of the Internal Revenue Code allow a selling
unitholder who can identify units transferred with an
ascertainable holding period to elect to use the actual holding
period of the units transferred. Thus, according to the ruling,
a unitholder will be unable to select high or low basis units to
sell as would be the case with corporate stock, but, according
to the regulations, may designate specific units sold for
purposes of determining the holding period of units transferred.
A unitholder electing to use the actual holding period of units
transferred must consistently use that identification method for
all subsequent sales or exchanges of units. A unitholder
considering the purchase of additional units or a sale of units
purchased in separate transactions is urged to consult his tax
advisor as to the possible consequences of this ruling and
application of the regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale; |
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an offsetting notional principal contract; or |
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a futures or forward contract with respect to the partnership
interest or substantially identical property. |
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and Transferees. In
general, our taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be
subsequently apportioned among the unitholders in proportion to
the number of units owned by each of them as of the opening of
the applicable exchange on the first business day of the month,
which we refer to in this prospectus as the Allocation
Date. However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be
allocated income, gain, loss and deduction realized after the
date of transfer.
Although simplifying conventions are contemplated by the Code
and most publicly traded partnerships use similar simplifying
conventions, the use of this method may not be permitted under
existing Treasury Regulations. Accordingly, Andrews Kurth LLP is
unable to opine on the validity of this method of allocating
income and deductions between unitholders. If this method is not
allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of
allocation between unitholders, as well as unitholders whose
interests vary during a taxable year, to conform to a method
permitted under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells any of
his units, other than through a broker, generally is required to
notify us in writing of that sale within 30 days after the
sale (or, if earlier, January 15 of the year following the
sale). A purchaser of units who purchases units is required to
notify us in writing of that purchase within 30 days after
the purchase, unless a broker or nominee will satisfy such
requirement. We are required to notify the IRS of any such
transfers of units and to furnish specified information to the
transferor and transferee. Failure to notify us of a transfer of
units may lead to the imposition of penalties.
Constructive Termination. We will be considered to have
been terminated for tax purposes if there is a sale or exchange
of 50% or more of the total interests in our capital and profits
within a 12-month
period. Valero Energy currently intends to sell its interests in
us, pending market conditions, such that 50% of more of the
total interests in our capital and profits may be sold within a
twelve-month period after the completion of this offering. A
constructive termination results in the closing of our taxable
year for all unitholders. In the case of a unitholder reporting
on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may result in
more than 12 months of our taxable income or loss being
includable in his taxable income for the year of termination. We
would be required to make new tax elections after a termination,
including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of
our depreciation and cost recovery deductions. A termination
could also result in penalties if we were unable to determine
that the termination had occurred, and might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination.
Moreover, a termination of our partnership would result in a
deemed sale or exchange of our interest in Valero L.P.s
capital and profits. This deemed sale or exchange of our
interests in Valero L.P.s capital and profits may also
cause the termination of Valero L.P.s partnership if this
deemed sale, together with all other sales of interests in
Valero L.P., results in a sale or exchange of 50% or more of
Valero L.P.s capital and profits interests within a
12-month period. A
termination of Valero L.P. would result in the closing of Valero
L.P.s taxable year for all unitholders, including us, and
would result in a deferral of depreciation and cost recovery
deductions allowable in computing Valero L.P.s taxable
income.
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Uniformity of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6). Any
non-uniformity could have a negative impact on the value of the
units. Please read Tax Consequences of Unit
Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
book-tax disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that
portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable,
consistent with the regulations under Section 743 of the
Internal Revenue Code. This method is consistent with the
Treasury Regulations applicable to property depreciable under
the accelerated or modified accelerated cost recovery systems,
which we expect to apply to substantially all, if not all, of
our depreciable property. We also intend to use this method with
respect to property that we own, if any, depreciable under
Section 167 of the Internal Revenue Code. We do not expect
Section 167 to apply to a material portion, if any, of our
assets. Please read Tax Consequences of Unit
Ownership Section 754 Election. To the
extent that the Section 743(b) adjustment is attributable
to appreciation in value in excess of the unamortized book-tax
disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation
and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and
amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our property. If this position is adopted, it may result in
lower annual depreciation and amortization deductions than would
otherwise be allowable to some unitholders and risk the loss of
depreciation and amortization deductions not taken in the year
that these deductions are otherwise allowable. This position
will not be adopted if we determine that the loss of
depreciation and amortization deductions will have a material
adverse effect on the unitholders. If we choose not to utilize
this aggregate method, we may use any other reasonable
depreciation and amortization method to preserve the uniformity
of the intrinsic tax characteristics of any units that would not
have a material adverse effect on the unitholders. The IRS may
challenge any method of depreciating the Section 743(b)
adjustment described in this paragraph. If this challenge were
sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the
benefit of additional deductions. Please read
Disposition of Units Recognition
of Gain or Loss.
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax
consequences to them.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a Form W-8BEN or applicable
substitute form in order to
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obtain credit for these withholding taxes. A change in
applicable law may require us to change these procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
Under a ruling of the IRS, a foreign unitholder who sells or
otherwise disposes of a unit will be subject to federal income
tax on gain realized on the sale or disposition of that unit to
the extent that this gain is effectively connected with a United
States trade or business of the foreign unitholder. Apart from
the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has
owned less than 5% in value of the units during the five-year
period ending on the date of the disposition and if the units
are regularly traded on an established securities market at the
time of the sale or disposition.
Administrative Matters
Information Returns and Audit Procedures. We intend to
furnish to each unitholder, within 90 days after the close
of each calendar year, specific tax information, including a
Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In
preparing this information, which will not be reviewed by
counsel, we will take various accounting and reporting
positions, some of which have been mentioned earlier, to
determine his share of income, gain, loss and deduction. We
cannot assure you that those positions will yield a result that
conforms to the requirements of the Internal Revenue Code,
Treasury Regulations or administrative interpretations of the
IRS. Neither we nor Andrews Kurth LLP can assure prospective
unitholders that the IRS will not successfully contend in court
that those positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. The limited liability company agreement names Diamond
Shamrock Refining and Marketing Company as our Tax Matters
Partner.
The Tax Matters Partner will make some elections on our behalf
and on behalf of unitholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of
tax deficiencies against unitholders for items in our returns.
The Tax Matters Partner may bind a unitholder with less than a
1% profits interest in us to a settlement with the IRS unless
that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all the
unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
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Nominee Reporting. Persons who hold an interest in us as
a nominee for another person are required to furnish to us:
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the name, address and taxpayer identification number of the
beneficial owner and the nominee; |
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whether the beneficial owner is: |
(1) a person that is not a United States person;
(2) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
(3) a tax-exempt entity;
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the amount and description of units held, acquired or
transferred for the beneficial owner; and |
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specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales. |
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per
failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that
information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to
us.
Accuracy-related Penalties. An additional tax equal to
20% of the amount of any portion of an underpayment of tax that
is attributable to one or more specified causes, including
negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No
penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
A substantial understatement of income tax in any taxable year
exists if the amount of the understatement exceeds the greater
of 10% of the tax required to be shown on the return for the
taxable year or $5,000. The amount of any understatement subject
to penalty generally is reduced if any portion is attributable
to a position adopted on the return:
(1) for which there is, or was, substantial
authority, or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of unitholders for a given year might result
in that kind of an understatement of income relating
to such a transaction for which no substantial
authority exists, we will disclose the pertinent facts on
our return. In addition, we will make a reasonable effort to
furnish sufficient information for unitholders to make adequate
disclosure on their returns and to take other actions as may be
appropriate to permit unitholders to avoid liability for
penalties. More stringent rules would apply to an understatement
of tax resulting from an ownership of units if we were
classified as a tax shelter. We believe we will not
be classified as a tax shelter.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 200% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 400%
or more than the correct valuation, the penalty imposed
increases to 40%.
Reportable Transactions. If we were to engage in a
reportable transaction, we (and possibly you and
others) would be required to make a detailed disclosure of the
transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses in excess of
$2 million. Our participation in a reportable transaction
could increase the likelihood that our federal
179
income tax information return (and possibly your tax return)
would be audited by the IRS. Please read
Information Returns and Audit Procedures
above.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-related
Penalties, |
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability, and |
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in the case of a listed transaction, an extended statute of
limitations. |
We do not expect to engage in any reportable transactions.
State, Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you likely will be subject
to other taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we or Valero L.P. may do business or own
property or in which you are a resident. Although an analysis of
those various taxes is not presented here, each prospective
unitholder should consider their potential impact on his
investment in us. Although you may not be required to file a
return and pay taxes in some jurisdictions because your income
from that jurisdiction falls below the filing and payment
requirement, you will be required to file income tax returns and
to pay income taxes in many other jurisdictions in which we or
Valero L.P. may do business or own property and may be subject
to penalties for failure to comply with those requirements. In
some jurisdictions, tax losses may not produce a tax benefit in
the year incurred and may not be available to offset income in
subsequent taxable years. Some jurisdictions may require us, or
we may elect, to withhold a percentage of income from amounts to
be distributed to a unitholder who is not a resident of the
jurisdiction. Withholding, the amount of which may be greater or
less than a particular unitholders income tax liability to
the jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please read Tax Consequences of Unit
Ownership Entity Level Collections. Based
on current law and our estimate of our future operations, we
anticipate that any amounts required to be withheld will not be
material.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign tax returns, as well as
U.S. federal tax returns, that may be required of him.
Andrews Kurth LLP has not rendered an opinion on the state,
local or foreign tax consequences of an investment in us.
180
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS
An investment in our units by an employee benefit plan is
subject to additional considerations because the investments of
these plans are subject to the fiduciary responsibility and
prohibited transaction provisions of ERISA, and restrictions
imposed by Section 4975 of the Internal Revenue Code. For
these purposes, the term employee benefit plan
includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs
established or maintained by an employer or employee
organization. Among other things, consideration should be given
to:
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whether the investment is prudent under
Section 404(a)(l)(B) of ERISA; |
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whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of
ERISA; and |
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whether the investment will result in recognition of unrelated
business taxable income (please read Material Tax
Consequences Tax-Exempt Organizations and Other
Investors) by the plan and, if so, the potential after-tax
investment return. |
In addition, the person with investment discretion with respect
to the assets of an employee benefit plan, often called a
fiduciary, should determine whether an investment in our units
is authorized by the appropriate governing instrument and is a
proper investment for the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and IRAs that are
not considered part of an employee benefit plan, from engaging
in specified transactions involving plan assets with
parties that are parties in interest under ERISA or
disqualified persons under the Internal Revenue Code
with respect to the plan. Therefore, a fiduciary of an employee
benefit plan or an IRA accountholder that is considering an
investment in our units should consider whether the
entitys purchase or ownership of such units would or could
result in the occurrence of such a prohibited transaction.
In addition to considering whether the purchase of units is or
could result in a prohibited transaction, a fiduciary of an
employee benefit plan should consider whether the plan will, by
investing in our units, be deemed to own an undivided interest
in our assets, with the result that our operations would be
subject to the regulatory restrictions of ERISA, including
fiduciary standard and its prohibited transaction rules, as well
as the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with
respect to whether the assets of an entity in which employee
benefit plans acquire equity interests would be deemed
plan assets under some circumstances. Under these
regulations, an entitys assets would not be considered to
be plan assets if, among other things:
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the equity interests acquired by employee benefit plans are
publicly offered securities; i.e., the equity interests are
widely held by 100 or more investors independent of the issuer
and each other, freely transferable and registered under some
provisions of the federal securities laws; |
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the entity is an operating company; i.e., it is
primarily engaged in the production or sale of a product or
service other than the investment of capital either directly or
through a majority owned subsidiary or subsidiaries; or |
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there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each
class of equity interest is held by the employee benefit plans
referred to above, IRAs and other employee benefit plans not
subject to ERISA, including governmental plans. |
Our assets should not be considered plan assets
under these regulations because it is expected that the
investment will satisfy the requirements in the first bullet
point above.
Plan fiduciaries contemplating a purchase of units should
consult with their own counsel regarding the consequences under
ERISA and the Internal Revenue Code in light of the serious
penalties imposed on persons who engage in prohibited
transactions or other violations.
181
SELLING UNITHOLDERS
Immediately prior to the closing of this offering, we will issue
to the selling unitholders an aggregate of units representing an
aggregate 48.5% membership interest in us. The following table
sets forth information concerning the ownership of units by the
selling unitholders immediately after this offering assuming:
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the underwriters option to purchase additional units is
not exercised; and |
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the underwriters exercise their option to purchase additional
units in full, with the number of units to be sold by each
selling unitholder. |
If the underwriters exercise their option to purchase additional
units, Sigmor Corporation will sell additional units as set
forth below.
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Units Offered By Selling | |
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Unitholders | |
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Units Owned Immediately After This Offering | |
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Assuming | |
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Assuming | |
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Units Owned | |
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Assuming | |
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Underwriters | |
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Assuming | |
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Underwriters | |
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Prior to Offering | |
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Underwriters | |
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Option is | |
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Underwriters | |
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Option is | |
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Option is Not | |
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Exercised | |
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Option is Not | |
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Exercised | |
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Name of Selling Unitholder |
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Units | |
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Percent | |
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Exercised | |
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in Full | |
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Exercised | |
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Percent | |
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in Full | |
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Percent | |
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Sigmor Corporation
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13,129,474 |
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29.5% |
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8,060,240 |
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10,535,240 |
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5,069,234 |
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11.4% |
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2,594,234 |
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5.8% |
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The Shamrock Pipe Line Corporation
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6,028,369 |
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13.5 |
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6,028,369 |
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6,028,369 |
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0.0 |
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0.0 |
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Diamond Shamrock Refining Company, L.P.
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2,410,056 |
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5.4 |
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2,410,056 |
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2,410,056 |
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0.0 |
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0.0 |
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Valero Refining New Orleans, L.L.C
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445 |
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* |
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445 |
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445 |
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0.0 |
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0.0 |
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Valero Refining Company California
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445 |
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* |
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445 |
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445 |
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0.0 |
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0.0 |
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Valero Refining Texas, L.P.
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445 |
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* |
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445 |
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445 |
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0.0 |
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0.0 |
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* |
Represents less than 1%. |
182
UNDERWRITING
Lehman Brothers Inc. is acting as representative of the
underwriters. Under the terms of an Underwriting Agreement,
which will be filed as an exhibit to the registration statement,
each of the underwriters named below has severally agreed to
purchase from the selling unitholders the respective number of
units shown opposite its name below:
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Number of | |
Underwriters |
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Units | |
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Lehman Brothers Inc.
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Total
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16,500,000 |
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The underwriting agreement provides that the underwriters
obligation to purchase the units depends on the satisfaction of
the conditions contained in the underwriting agreement including:
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the obligation to purchase all of the units offered hereby if
any of the units are purchased; |
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the representations and warranties made by us and the selling
unitholders to the underwriters are true; |
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there has been no material change in our financial condition or
in the financial markets; and |
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we deliver customary closing documents to the underwriters. |
Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions the selling unitholders will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters option to purchase
additional units. The underwriting fee is the difference between
the initial public offering price and the amount the
underwriters pay to the selling unitholders for the units.
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No Exercise | |
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Full Exercise | |
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Per unit
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$ |
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$ |
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Total
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$ |
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$ |
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The representative of the underwriters has advised us that the
underwriters propose to offer the units directly to the public
at the public offering price on the cover of this prospectus and
to selected dealers, which may include the underwriters, at such
offering price less a selling concession not in excess of
$ per
unit. After the offering, the representative may change the
offering price and other selling terms.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately
$2.0 million. Valero Energy will pay the expenses of the
offering.
Option to Purchase Additional Units
The selling unitholders have granted the underwriters an option
exercisable for 30 days after the date of this prospectus
to purchase, from time to time, in whole or in part, up to an
aggregate of 2,475,000 additional units at the public offering
price less underwriting discounts and commissions. This option
may be exercised if the underwriters sell more than
16,500,000 units in connection with this offering. To the
extent that this option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase its pro
rata portion of these additional units based on the
underwriters percentage underwriting commitment in the
offering as indicated in the table at the beginning of this
Underwriting section.
Directed Unit Program
At our request, Lehman Brothers Inc. has established a Directed
Unit Program under which they have reserved up
to units
offered hereby at the public offering price for officers,
directors, employees and certain other persons associated with
us. The number of units available for sale to the general public
will be reduced to the extent such persons purchase units
reserved under the Directed Unit Program. The units reserved for
sale
183
under the Directed Unit Program will be subject to a 90 day
lock-up agreement (or
180 days if sold to our executive officers and directors).
Any reserved units not so purchased will be offered by the
underwriters to the general public on the same basis as the
other units offered hereby.
Lock-Up Agreements
We, certain of our affiliates, our executive officers and
directors, and the selling unitholders have agreed that, without
the prior written consent of Lehman Brothers Inc., we and they
will not directly or indirectly, offer, pledge, announce the
intention to sell, sell, contract to sell, sell an option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of any units or any securities which may be
converted into or exchanged for any units, enter into any swap
or other agreement that transfers, in whole or in part, any of
the economic consequences of ownership of the units, make any
demand for or exercise any right or file or cause to be filed a
registration statement with respect to the registration of any
units or securities convertible or exchangeable into units or
any of our other securities or publicly disclose the intention
to do any of the foregoing for a period of 180 days from
the date of this prospectus.
The 180-day restricted
period described in the preceding paragraph will be extended if:
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during the last 17 days of the
180-day restricted
period we issue an earnings release or announce material news or
a material event; or |
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prior to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period, |
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the announcement of
the material news or material event.
Lehman Brothers Inc., in its sole discretion, may release the
units subject to
lock-up agreements in
whole or in part at any time with or without notice. When
determining whether or not to release units from
lock-up agreements,
Lehman Brothers Inc. will consider, among other factors, the
unitholders reasons for requesting the release, the number
of units and other securities for which the release is being
requested and market conditions at the time.
Offering Price Determination
Prior to this offering, there has been no public market for our
units. The initial public offering price will be negotiated
between the representative, us and the selling unitholders. In
determining the initial public offering price of our units, the
representative will consider:
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the history and prospects for the industry in which we compete, |
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our financial information, |
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the ability of our management and our business potential and
earnings prospects, |
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the prevailing securities markets at the time of this
offering, and |
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the recent market prices of, and the demand for, publicly traded
common units of generally comparable entities. |
Indemnification
We and the selling unitholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities incurred in connection
with the Directed Unit Program referred to above, and to
contribute to payments that the underwriters may be required to
make for these liabilities.
184
Stabilization, Short Positions and Penalty Bids
The underwriters may engage in stabilizing transactions, short
sales and purchases to cover positions created by short sales,
and penalty bids or purchases for the purpose of pegging, fixing
or maintaining the price of the units, in accordance with
Regulation M under the Exchange Act:
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum. |
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A short position involves a sale by the underwriters of units in
excess of the number of units the underwriters are obligated to
purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of units involved in the sales made by the
underwriters in excess of the number of units they are obligated
to purchase is not greater than the number of units that they
may purchase by exercising their option to purchase additional
units. In a naked short position, the number of units involved
is greater than the number of units in their option to purchase
additional units. The underwriters may close out any short
position by either exercising their option to purchase
additional units and/or purchasing units in the open market. In
determining the source of units to close out the short position,
the underwriters will consider, among other things, the price of
units available for purchase in the open market as compared to
the price at which they may purchase units through their option
to purchase additional units. A naked short position is more
likely to be created if the underwriters are concerned that
there could be downward pressure on the price of the units in
the open market after pricing that could adversely affect
investors who purchase in the offering. |
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Syndicate covering transactions involve purchases of the units
in the open market after the distribution has been completed in
order to cover syndicate short positions. |
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the units originally
sold by the syndicate member are purchased in a stabilizing or
syndicate covering transaction to cover syndicate short
positions. |
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our units or preventing or retarding a
decline in the market price of the units. As a result, the price
of the units may be higher than the price that might otherwise
exist in the open market. These transactions may be effected on
The New York Stock Exchange or otherwise and, if commenced, may
be discontinued at any time.
Neither we nor any of the underwriters or the selling
unitholders make any representation or prediction as to the
direction or magnitude of any effect that the transactions
described above may have on the price of the units. In addition,
neither we nor any of the underwriters make representation that
the representative will engage in these stabilizing transactions
or that any transaction, once commenced, will not be
discontinued without notice.
Electronic Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members
participating in this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter or selling group
member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a
specific number of units for sale to online brokerage account
holders. Any such allocation for online distributions will be
made by the representative on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us or any underwriter or selling group member in its capacity
as underwriter or selling group member and should not be relied
upon by investors.
185
New York Stock Exchange
We will apply for listing of the units on the New York Stock
Exchange under the symbol VEH.
In connection with the listing of our units on the New York
Stock Exchange, the underwriters have advised us that they will
undertake to sell round lots of 100 units or more to a
minimum of 2,000 beneficial owners.
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of units offered by them.
Stamp Taxes
If you purchase units offered in this prospectus, you may be
required to pay stamp taxes and other charges under the laws and
practices of the country of purchase, in addition to the
offering price listed on the cover page of this prospectus.
Relationships
The underwriters and their affiliates may in the future perform
investment banking and advisory services for us and our
affiliates from time to time for which they may receive
customary fees and expenses. The underwriters may also, from
time to time, engage in transactions with or perform services
for us and our affiliates in the ordinary course of their
business. In addition, certain of the underwriters and their
affiliates have performed, and may in the future perform,
investment banking, commercial banking and advisory services for
Valero Energy and/or Valero L.P. for which they have received or
will receive customary fees and expenses.
NASD Conduct Rules
Because the National Association of Securities Dealers, Inc.
(NASD) views the units offered hereby as interests in a
direct participation program, the offering is being made in
compliance with Rule 2810 of the NASDs Conduct Rules.
Investor suitability with respect to the units should be judged
similarly to the suitability with respect to other securities
that are listed for trading on a national securities exchange.
VALIDITY OF THE UNITS
The validity of the units will be passed upon for us by Andrews
Kurth LLP, Houston, Texas. Certain legal matters in connection
with the units will be passed upon for the underwriters by Baker
Botts L.L.P., Houston, Texas.
EXPERTS
The combined financial statements of Valero GP Holdings, LLC as
of and for the years ended December 31, 2005 and 2004, the
consolidated financial statements of Valero L.P. as of and for
the years ended December 31, 2005 and 2004, and the
consolidated financial statements of Kaneb Services LLC as of
and for the years ended December 31, 2004 and 2003 have
been included herein in reliance upon the reports of KPMG LLP,
an independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of said firm as experts
in accounting and auditing. The audit report covering the
December 31, 2003 consolidated financial statements of
Kaneb Services LLC refers to a change in the method of
accounting for asset retirement obligations.
The combined financial statements of Valero GP Holdings, LLC for
the year ended December 31, 2003, appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
186
The consolidated financial statements of Valero L.P. for the
year ended December 31, 2003, appearing in this Prospectus
and Registration Statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
FORWARD-LOOKING STATEMENTS
This prospectus contains various forward-looking statements and
information that are based on our beliefs as well as assumptions
made by and information currently available to us. These
forward-looking statements are identified as any statement that
does not relate strictly to historical or current facts. In
particular, a significant amount of information included under
Our Cash Distribution Policy and Restrictions on
Distributions is comprised of forward-looking statements.
When used in this prospectus or in the documents we have
incorporated herein or therein by reference, words such as
anticipate, project, expect,
plan, goal, forecast,
intend, could, believe,
may, and similar expressions and statements
regarding our plans and objectives for future operations, are
intended to identify forward-looking statements. Although we
believe that such expectations reflected in such forward-looking
statements are reasonable, we can give no assurances that such
expectations will prove to be correct. Such statements are
subject to a variety of risks, uncertainties and assumptions. If
one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may
vary materially from those anticipated, estimated, projected or
expected. Among the key risk factors that may have a direct
bearing on our results of operations and financial condition are:
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Our ability to pay distributions to our unitholders; |
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Our expected receipt of distributions from Valero L.P.; |
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Any reduction in the quantities of crude oil and refined
products transported in Valero L.P.s pipelines or handled
at Valero L.P.s terminals and storage tanks; |
|
|
|
Any significant decrease in the demand for refined products in
the markets served by Valero L.P.s pipelines and terminals; |
|
|
|
Any material decline in production by any of Valero
Energys McKee, Three Rivers, Corpus Christi East, Corpus
Christi West, Texas City, Paulsboro, Benicia and Ardmore
refineries or Tesoros Mandan, North Dakota refinery; |
|
|
|
Any downward pressure on market prices caused by new competing
refined product pipelines that could cause Valero Energy to
decrease the volumes transported in Valero L.P.s pipelines; |
|
|
|
Any challenges to Valero L.P.s tariffs or changes in state
or federal ratemaking methodology; |
|
|
|
Any changes in laws and regulations to which we or Valero L.P.
are subject, including federal, state and local tax laws,
safety, environmental and employment laws; |
|
|
|
Overall economic conditions; |
|
|
|
Any material decrease in the supply of or material increase in
the price of crude oil available for transport through Valero
L.P.s pipelines and storage in Valero L.P.s storage
tanks; |
|
|
|
Inability to expand Valero L.P.s business and acquire new
assets as well as to attract third-party shippers; |
|
|
|
Conflicts of interest with Valero L.P., Valero GP, LLC or Valero
Energy; |
|
|
|
The loss of Valero Energy as a customer or a significant
reduction in its current level of throughput and storage with
Valero L.P.; |
|
|
|
Any inability to borrow additional funds; |
|
|
|
Any substantial costs related to environmental risks, including
increased costs of compliance; |
|
|
|
Any change in the credit rating assigned to our or Valero Energy
or its subsidiaries indebtedness; |
187
|
|
|
|
|
Any reductions in space allocated to Valero L.P. in
interconnecting third-party pipelines; |
|
|
|
Any material increase in the price of natural gas; |
|
|
|
Inability to successfully complete the announced mergers with
Kaneb or integrate Kanebs operations; |
|
|
|
Terrorist attacks, threat of war or terrorist attacks or
political or other disruptions that limit crude oil
production; and |
|
|
|
Accidents or unscheduled shutdowns affecting Valero L.P.s
pipelines, terminals, machinery, or equipment, or those of
Valero Energy. |
You should not put undue reliance on any forward-looking
statements. When considering forward-looking statements, please
review the risk factors described under Risk Factors
in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 regarding
the units. This prospectus does not contain all of the
information found in the registration statement. For further
information regarding us and the units offered by this
prospectus, you should review the full registration statement,
including its exhibits and schedules, filed under the Securities
Act. The registration statement of which this prospectus
constitutes a part, including its exhibits and schedules, may be
inspected and copied at the public reference room maintained by
the SEC at 100 F Street, N.E., Washington, D.C.
20549. Copies of the materials may also be obtained from the SEC
at prescribed rates by writing to the public reference room
maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC
maintains a website on the Internet at
http://www.sec.gov. Our registration statement, of which
this prospectus constitutes a part, can be downloaded at no cost
from the SECs website.
We intend to furnish our unitholders annual reports containing
our audited financial statements and furnish or make available
quarterly reports containing our unaudited interim financial
information for the first three fiscal quarters of each of our
fiscal years.
188
INDEX TO FINANCIAL STATEMENTS
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Page | |
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| |
VALERO GP HOLDINGS, LLC
|
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|
|
|
|
|
|
|
|
|
|
Introduction
|
|
|
F-2 |
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
F-5 |
|
|
Combined Financial Statements for 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
F-9 |
|
|
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|
F-10 |
|
|
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|
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|
F-11 |
|
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F-12 |
|
|
|
|
|
|
F-13 |
|
VALERO L.P.
|
|
|
|
|
|
Unaudited Pro Forma Combined Financial Statement:
|
|
|
|
|
|
|
|
|
|
F-24 |
|
|
|
|
|
|
F-25 |
|
|
|
|
|
|
F-26 |
|
|
Consolidated Financial Statements for 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
F-28 |
|
|
|
|
|
|
F-30 |
|
|
|
|
|
|
F-31 |
|
|
|
|
|
|
F-32 |
|
|
|
|
|
|
F-33 |
|
|
|
|
|
|
F-34 |
|
KANEB SERVICES LLC
|
|
|
|
|
|
Consolidated Financial Statements for the Six Months Ended
June 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
F-70 |
|
|
|
|
|
|
F-71 |
|
|
|
|
|
|
F-72 |
|
|
|
|
|
|
F-73 |
|
|
Consolidated Financial Statements for 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
F-81 |
|
|
|
|
|
|
F-82 |
|
|
|
|
|
|
F-83 |
|
|
|
|
|
|
F-84 |
|
|
|
|
|
|
F-85 |
|
|
|
|
|
|
F-86 |
|
F-1
VALERO GP HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction
The unaudited pro forma combined statement of income for the
year ended December 31, 2005 reflects the pro forma effect
of two separate transactions. First, Valero GP Holdings
equity in income of Valero L.P. is adjusted to reflect the
effect of the acquisition of Kaneb, including the effect of the
sale of certain of the acquired assets in accordance with an
agreement with the Federal Trade Commission to divest such
assets, as if those transactions occurred on January 1,
2005. Second, the pro forma combined statement of income
reflects the effect of this offering as if it had occurred on
January 1, 2005, including (a) the elimination of
interest expense on Valero GP Holdings notes payable to
affiliates resulting from a capital contribution by Valero
Energy subsidiaries to Valero GP Holdings of notes issued by
Valero GP Holdings and held by Valero Energy subsidiaries and
(b) the incurrence of an incremental $2.3 million of
general and administrative expenses that Valero GP Holdings is
expected to incur as a publicly traded limited liability
company, including costs under a new Administration Agreement
with Valero GP, LLC, pursuant to which Valero GP, LLC will
provide certain administrative services to Valero GP Holdings
for a fee. The unaudited pro forma combined balance sheet
reflects the effect of the capital contribution discussed above
as well as a capital contribution by Valero Energy subsidiaries
to fund certain employee benefit plan liabilities of Valero GP
Holdings as if those transactions occurred on December 31,
2005.
The unaudited pro forma combined financial information should be
read in conjunction with the audited financial statements of
Valero GP Holdings and Valero L.P. and the audited and unaudited
financial statements of Kaneb Services LLC included in this
prospectus. The unaudited pro forma combined financial
information is not necessarily indicative of the financial
results that would have occurred if the acquisition of Kaneb and
this offering had been consummated on the dates indicated, nor
are they necessarily indicative of the financial results in the
future. The pro forma adjustments, as described in the Notes to
Unaudited Pro Forma Combined Financial Statements, are based
upon available information and certain assumptions that the
management of Valero GP Holdings believes are reasonable.
F-2
VALERO GP HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero GP | |
|
|
|
|
|
|
Holdings | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Adjustments | |
|
as Adjusted | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
121 |
|
|
$ |
3,886 |
(b) |
|
$ |
4,007 |
|
|
Receivable from Valero L.P.
|
|
|
1,151 |
|
|
|
|
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,272 |
|
|
|
3,886 |
|
|
|
5,158 |
|
|
|
|
|
|
|
|
|
|
|
Long-term receivable from Valero L.P.
|
|
|
|
|
|
|
5,507 |
(b) |
|
|
5,507 |
|
Investment in Valero L.P.
|
|
|
408,744 |
|
|
|
|
|
|
|
408,744 |
|
Deferred tax asset
|
|
|
298 |
|
|
|
|
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
410,314 |
|
|
$ |
9,393 |
|
|
$ |
419,707 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
2 |
|
|
Income taxes payable
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
Accrued liabilities
|
|
|
2,560 |
|
|
|
|
|
|
|
2,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,573 |
|
|
|
|
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliates
|
|
|
265,961 |
|
|
|
(7,100 |
)(a) |
|
|
|
|
|
|
|
|
|
|
|
(258,861 |
)(c) |
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
7,100 |
(a) |
|
|
7,100 |
|
Members equity
|
|
|
141,780 |
|
|
|
9,393 |
(b) |
|
|
410,034 |
|
|
|
|
|
|
|
|
258,861 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
410,314 |
|
|
$ |
9,393 |
|
|
$ |
419,707 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-3
VALERO GP HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero GP | |
|
Kaneb | |
|
Pro Forma | |
|
|
|
|
|
|
Holdings | |
|
Pro Forma | |
|
Combined | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Adjustments | |
|
for Kaneb | |
|
Adjustments | |
|
as Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Equity in earnings of Valero L.P.
|
|
$ |
37,646 |
|
|
$ |
(11,695 |
)(d) |
|
$ |
25,951 |
|
|
$ |
|
|
|
$ |
25,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
2,322 |
(e) |
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
2,322 |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
37,618 |
|
|
|
(11,695 |
) |
|
|
25,923 |
|
|
|
(2,322 |
) |
|
|
23,601 |
|
Other income, net
|
|
|
456 |
|
|
|
|
|
|
|
456 |
|
|
|
|
|
|
|
456 |
|
Interest income affiliated
|
|
|
111 |
|
|
|
|
|
|
|
111 |
|
|
|
(111 |
)(f) |
|
|
|
|
Interest expense affiliated
|
|
|
(17,778 |
) |
|
|
|
|
|
|
(17,778 |
) |
|
|
17,778 |
(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
20,407 |
|
|
|
(11,695 |
) |
|
|
8,712 |
|
|
|
15,345 |
|
|
|
24,057 |
|
Income tax expense
|
|
|
114 |
|
|
|
|
|
|
|
114 |
|
|
|
(61 |
)(g) |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,293 |
|
|
$ |
(11,695 |
) |
|
$ |
8,598 |
|
|
$ |
15,406 |
|
|
$ |
24,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit basic and assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding (in thousands)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-4
VALERO GP HOLDINGS, LLC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
|
|
|
|
(a) |
To reclass $7.1 million of other postretirement employee
benefit (OPEB) liabilities for Valero
GP Holdings employees from notes payable to
affiliates to other long-term liabilities. See Note (b) for
planned funding of these and other employee benefit plan
liabilities. |
|
|
|
|
(b) |
To reflect a planned $9.4 million capital contribution from
Valero Energy to Valero GP Holdings to fund certain employee
benefit plan liabilities of Valero GP Holdings in accordance
with agreements between Valero Energy and Valero
GP Holdings that will become effective upon the effective
date of this offering. The capital contribution will be funded
with $3.9 million of cash and a $5.5 million
receivable from Valero L.P. held by Valero Energy. |
|
|
|
|
(c) |
To reflect a planned $258.9 million capital contribution
from Valero Energy subsidiaries to Valero GP Holdings of notes
issued by Valero GP Holdings and held by Valero Energy
subsidiaries. |
|
|
|
|
(d) |
To reflect the adjustment to Valero GP Holdings general
partner and limited unitholder interests in Valero L.P.s
income from continuing operations, resulting from (i) the
pro forma effects of the acquisition of Kaneb on net income,
(ii) the issuance of additional common units in connection
with the acquisition of Kaneb, and (iii) an assumed
quarterly per unit distribution by Valero L.P. of
$0.855 per unit, which is the amount of Valero L.P.s
distribution for the quarter ended December 31, 2005. |
|
|
|
The following table reflects the calculation of Valero GP
Holdings pro forma adjustment to equity in earnings of
Valero L.P. for the year ended December 31, 2005 (in
thousands): |
|
|
|
|
|
Valero L.P.s pro forma combined income from continuing
operations
|
|
$ |
83,084 |
|
Less: General partners incentive distribution
|
|
|
(12,196 |
) |
|
|
|
|
Amount to be allocated to 2% general partner interest and
limited partners
|
|
$ |
70,888 |
|
|
|
|
|
Valero GP Holdings 23.4% interest in Valero L.P.
|
|
$ |
16,639 |
|
General partners incentive distribution
|
|
|
12,196 |
|
Less: Amortization of step-up in basis related to Valero
Energys acquisition of UDS (1)
|
|
|
(2,884 |
) |
|
|
|
|
Valero GP Holdings pro forma equity in earnings of Valero
L.P.
|
|
|
25,951 |
|
Less: Valero GP Holdings historical equity in earnings of
Valero L.P.
|
|
|
(37,646 |
) |
|
|
|
|
Pro forma adjustment to equity in earnings of Valero L.P.
|
|
$ |
(11,695 |
) |
|
|
|
|
|
|
|
|
(1) |
Represents the amortization of the excess of the fair value over
historical carrying amounts of Valero L.P.s assets and
liabilities at the date of Valero Energys acquisition of
Ultramar Diamond Shamrock Corporation (UDS), related to Valero
Energys interest in Valero L.P. at that date. |
|
|
|
|
(e) |
To reflect an adjustment to general and administrative expenses
for the year ended December 31, 2005 as follows (in
thousands): |
|
|
|
|
|
Administration agreement with Valero GP, LLC (1)
|
|
$ |
500 |
|
Public company costs (2)
|
|
|
1,850 |
|
Less: Historical general and administrative expenses
|
|
|
(28 |
) |
|
|
|
|
Adjustment to general and administrative expenses
|
|
$ |
2,322 |
|
|
|
|
|
|
|
|
|
(1) |
Represents the fee to be charged by Valero GP, LLC to Valero GP
Holdings under the Administration Agreement for executive
management, accounting, legal, cash management, corporate
finance and other administrative services. |
F-5
VALERO GP HOLDINGS, LLC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
(2) |
Represents third party general and administrative expenses that
Valero GP Holdings expects to incur as a result of being a
publicly traded limited liability company, such as costs
associated with annual and quarterly reports to unitholders, tax
return and Schedule K-1 preparation and distribution,
investor relations, registrar and transfer agent fees, director
compensation and insurance costs, including director and officer
liability insurance. |
|
|
|
|
(f) |
To reflect the elimination of affiliated interest income and
expense resulting from the planned contribution by Valero Energy
subsidiaries to Valero GP Holdings of notes issued by Valero GP
Holdings and held by Valero Energy subsidiaries. |
|
|
|
|
(g) |
To reflect the tax effect of the pro forma pre-tax income
adjustments related to the offering for the year ended
December 31, 2005. Although the pro forma pre-tax income
adjustments increase income, income tax expense is reduced as
the incremental general and administrative expenses affect an
entity subject to certain state income tax while the interest
expense reduction primarily affects an entity not subject to
state income tax. Amounts in the following table are in
thousands: |
|
|
|
|
|
Pro forma income tax expense
|
|
$ |
53 |
|
Less: Historical income tax expense
|
|
|
114 |
|
|
|
|
|
Adjustment to income tax expense
|
|
$ |
(61 |
) |
|
|
|
|
|
|
|
|
(h) |
To reflect the weighted-average units outstanding for the year
ended December 31, 2005, assuming the current ownership
interest held by Valero Energy subsidiaries in Valero GP
Holdings was exchanged for 44,510,258 units of Valero GP
Holdings on January 1, 2005. |
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Members
of Valero GP Holdings, LLC:
We have audited the accompanying combined balance sheets of
Valero GP Holdings, LLC (the Company) as of December 31,
2005 and 2004, and the related combined statements of income,
members equity and cash flows for the years then ended.
These combined financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these combined financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Valero GP Holdings, LLC as of December 31, 2005
and 2004, and the results of their operations and their cash
flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
San Antonio, Texas
March 24, 2006
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Members
of Valero GP Holdings, LLC:
We have audited the accompanying combined statements of income,
members equity and cash flows of Valero GP Holdings, LLC
(the Company) for the year ended December 31, 2003. These
combined financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined results
of operations and cash flows of Valero GP Holdings, LLC for the
year ended December 31, 2003, in conformity with
U.S. generally accepted accounting principles.
San Antonio, Texas
February 3, 2006
F-8
VALERO GP HOLDINGS, LLC
COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
121 |
|
|
$ |
120 |
|
|
Receivable from Valero L.P.
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,272 |
|
|
|
120 |
|
Investment in Valero L.P.
|
|
|
408,744 |
|
|
|
388,682 |
|
Deferred tax asset
|
|
|
298 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
410,314 |
|
|
$ |
388,991 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2 |
|
|
$ |
|
|
|
Income taxes payable
|
|
|
11 |
|
|
|
|
|
|
Accrued liabilities
|
|
|
2,560 |
|
|
|
4,419 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,573 |
|
|
|
4,419 |
|
Notes payable to affiliates
|
|
|
265,961 |
|
|
|
270,597 |
|
Members equity
|
|
|
141,780 |
|
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
410,314 |
|
|
$ |
388,991 |
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-9
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Operating revenues
|
|
$ |
|
|
|
$ |
|
|
|
$ |
24,868 |
|
Equity in earnings of Valero L.P.
|
|
|
37,646 |
|
|
|
35,314 |
|
|
|
27,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
37,646 |
|
|
|
35,314 |
|
|
|
52,286 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
9,484 |
|
|
General and administrative expenses
|
|
|
28 |
|
|
|
91 |
|
|
|
1,562 |
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
28 |
|
|
|
91 |
|
|
|
14,021 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
37,618 |
|
|
|
35,223 |
|
|
|
38,265 |
|
Equity in earnings of Skelly-Belvieu Pipeline Company
|
|
|
|
|
|
|
|
|
|
|
633 |
|
Other income, net
|
|
|
456 |
|
|
|
375 |
|
|
|
72 |
|
Interest income affiliated
|
|
|
111 |
|
|
|
26 |
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated
|
|
|
(17,778 |
) |
|
|
(17,110 |
) |
|
|
(18,691 |
) |
|
Nonaffiliated, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
(1,592 |
) |
Minority interest in net income of Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
20,407 |
|
|
|
18,514 |
|
|
|
16,287 |
|
Income tax expense
|
|
|
114 |
|
|
|
67 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,293 |
|
|
$ |
18,447 |
|
|
$ |
16,254 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-10
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF MEMBERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Balance as of beginning of year
|
|
$ |
113,975 |
|
|
$ |
105,960 |
|
|
$ |
244,771 |
|
Net income
|
|
|
20,293 |
|
|
|
18,447 |
|
|
|
16,254 |
|
Contributions from Valero Energy
|
|
|
29,411 |
|
|
|
|
|
|
|
1,513 |
|
Distributions to Valero Energy
|
|
|
(21,899 |
) |
|
|
(10,432 |
) |
|
|
(156,578 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$ |
141,780 |
|
|
$ |
113,975 |
|
|
$ |
105,960 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-11
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,293 |
|
|
$ |
18,447 |
|
|
$ |
16,254 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
2,975 |
|
|
|
Equity in earnings of Valero L.P.
|
|
|
(37,646 |
) |
|
|
(35,314 |
) |
|
|
(27,418 |
) |
|
|
Distributions of equity income from Valero L.P.
|
|
|
37,646 |
|
|
|
37,208 |
|
|
|
25,524 |
|
|
|
Equity in earnings of Skelly-Belvieu Pipeline Company
|
|
|
|
|
|
|
|
|
|
|
(633 |
) |
|
|
Distributions of equity income from Skelly-Belvieu Pipeline
Company
|
|
|
|
|
|
|
|
|
|
|
633 |
|
|
|
Gain on sale of Valero L.P. units in connection with employee
benefit plans
|
|
|
(456 |
) |
|
|
(375 |
) |
|
|
(33 |
) |
|
|
Minority interest in net income of Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
2,400 |
|
|
|
Deferred income tax expense (benefit)
|
|
|
67 |
|
|
|
(7 |
) |
|
|
(158 |
) |
|
|
Changes in current assets and liabilities
|
|
|
(2,997 |
) |
|
|
2,224 |
|
|
|
601 |
|
|
|
Other, net
|
|
|
(176 |
) |
|
|
|
|
|
|
2,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,731 |
|
|
|
22,183 |
|
|
|
23,033 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
(1,883 |
) |
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
(14,807 |
) |
|
Distributions in excess of equity income from Valero L.P.
|
|
|
7,099 |
|
|
|
756 |
|
|
|
|
|
|
Distributions in excess of equity income from Skelly-Belvieu
Pipeline Company
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
Investment in Valero L.P.
|
|
|
(29,747 |
) |
|
|
(597 |
) |
|
|
(1,474 |
) |
|
Proceeds from the sale of Valero L.P. units in connection with
employee benefit plans
|
|
|
3,042 |
|
|
|
1,362 |
|
|
|
1,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(19,606 |
) |
|
|
1,521 |
|
|
|
(17,060 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable to affiliates
|
|
|
(4,636 |
) |
|
|
(13,200 |
) |
|
|
7,388 |
|
|
Proceeds from senior note offering, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
247,819 |
|
|
Long-term debt repayments
|
|
|
|
|
|
|
|
|
|
|
(174 |
) |
|
Proceeds from issuance of common units by Valero L.P., net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
200,342 |
|
|
Contributions from Valero Energy
|
|
|
29,411 |
|
|
|
|
|
|
|
1,513 |
|
|
Distributions to Valero Energy
|
|
|
(21,899 |
) |
|
|
(10,432 |
) |
|
|
(156,578 |
) |
|
Cash distributions to minority interest in Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
(3,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,876 |
|
|
|
(23,632 |
) |
|
|
296,679 |
|
|
|
|
|
|
|
|
|
|
|
Valero L.P.s cash balance as of the date (March 18,
2003) that Valero GP Holdings ceased consolidation of Valero
L.P. (Note 2)
|
|
|
|
|
|
|
|
|
|
|
(336,139 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and temporary cash
investments
|
|
|
1 |
|
|
|
72 |
|
|
|
(33,487 |
) |
Cash and temporary cash investments at beginning of year
|
|
|
120 |
|
|
|
48 |
|
|
|
33,535 |
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments at end of year
|
|
$ |
121 |
|
|
$ |
120 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-12
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
|
|
1. |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Valero GP Holdings, LLC (Valero GP Holdings), a Delaware limited
liability company, was formed in June 2000 as UDS Logistics, LLC
(UDS Logistics). Valero Energy Corporation (Valero Energy)
acquired UDS Logistics in connection with its December 31,
2001 acquisition of Ultramar Diamond Shamrock Corporation (UDS).
The UDS Logistics name was changed to Valero GP Holdings in
January 2006. Valero GP Holdings is an indirect wholly owned
subsidiary of Valero Energy. Valero Energy is a publicly held
independent refining and marketing company (NYSE: VLO).
As of December 31, 2005, Valero GP Holdings owned:
|
|
|
|
|
a 99.9% limited partner interest in Riverwalk Logistics, L.P.
(Riverwalk), the 2% general partner of Valero L.P., and |
|
|
|
9,599,322 subordinated units and 614,572 common units of Valero
L.P. |
In addition, another indirect wholly owned subsidiary of Valero
Energy, Valero GP, LLC, owned 8,200 common units of Valero L.P.
Valero GP, LLC also held the general partner interest in
Riverwalk, and Riverwalk, as general partner of Valero L.P.,
owned certain incentive distribution rights of Valero L.P. As of
December 31, 2005, the combined interest of Valero GP
Holdings and Valero GP, LLC in Valero L.P. was 23.4%. Public
unitholders held the remaining 76.6% interest as of that date
through their ownership of 36,587,655 common units of Valero L.P.
Valero L.P. (NYSE: VLI) is a Delaware limited partnership that
owns and operates crude oil and refined product pipeline,
storage and terminalling assets that serve Valero Energys
McKee, Three Rivers, Texas City, Corpus Christi East and Corpus
Christi West Refineries in Texas, Benicia Refinery in
California, Paulsboro Refinery in New Jersey and Ardmore
Refinery in Oklahoma.
In accordance with its limited liability company agreement, the
members of Valero GP Holdings are not liable for its debts,
obligations or liabilities and are not required to make any
additional capital contributions to Valero GP Holdings. The
limited liability company agreement of Valero GP, LLC also does
not require its member to make any additional capital
contributions to Valero GP, LLC.
|
|
|
Basis of Presentation and Principles of Combination |
Valero Energys acquisition of UDS on December 31,
2001 was accounted for using the purchase method of accounting.
Accordingly, an allocation of the purchase price, approximately
$517.3 million, was assigned to the group of entities that
now comprise Valero GP Holdings. In connection with the
allocation of the purchase price to Valero GP Holdings,
approximately $258.6 million of debt (notes payable to
affiliates) was recorded in these financial statements as of
December 31, 2001.
These financial statements combine the financial statements of
Valero GP Holdings and the financial statements of Valero GP,
LLC. (As used in this report, the term Valero GP Holdings may
refer to Valero GP Holdings, Valero GP, LLC or Riverwalk
individually or Valero GP Holdings combined with Valero GP, LLC
and Riverwalk.) The consolidated financial statements of Valero
GP Holdings include the financial statements of Riverwalk. The
consolidated financial statements of Valero GP Holdings also
include the consolidated financial statements of Valero L.P.
until March 18, 2003, at which time Valero GP Holdings
began accounting for its investment in Valero L.P. under the
equity method. (See Note 2 for a discussion of the
transactions resulting in that reporting change in 2003 for
Valero GP Holdings investment in Valero L.P.) Intercompany
balances and transactions between companies in the combined
group have been eliminated. Investments in 50% or less owned
entities are accounted for using the equity method.
F-13
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
An initial public offering (IPO) of units of Valero GP
Holdings is planned for 2006. Prior to the IPO, the following
transactions are expected to occur:
|
|
|
|
|
Valero GP Holdings will contribute its subordinated units and
common units of Valero L.P. to a newly formed subsidiary of
Valero GP Holdings, Riverwalk Holdings, LLC; |
|
|
|
Valero GP Holdings will amend its limited liability company
agreement to provide for governance and certain anti-takeover
provisions; |
|
|
|
Valero Energy will fund certain employee benefit plan
liabilities of Valero GP Holdings through a capital contribution
to Valero GP Holdings; |
|
|
|
Valero Energy subsidiaries will contribute to Valero GP Holdings
notes issued by Valero GP Holdings and held by Valero Energy
subsidiaries; and |
|
|
|
Valero GP Holdings will issue 44,510,258 units to Valero
Energy subsidiaries in exchange for their current ownership
interests in Valero GP Holdings. |
These planned transactions are not reflected in these combined
financial statements.
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the combined financial statements and
accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates
based on currently available information. Changes in facts and
circumstances may result in revised estimates.
As discussed in Note 2, commencing in March 2003, Valero GP
Holdings began accounting for its investment in Valero L.P. on
the equity method. Valero GP Holdings evaluates its investment
in Valero L.P. for impairment when there is evidence that it may
not be able to recover the carrying amount of its investment or
the investee is unable to sustain an earnings capacity that
justifies the carrying amount. A loss in the value of its
investment that is other than a temporary decline is recognized
currently in earnings, and is based on the difference between
the estimated current fair value of the investment and its
carrying amount. Valero GP Holdings believes that the carrying
amount of its investment in Valero L.P. as of December 31,
2005 is recoverable.
Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC
(Skelly-Belvieu Pipeline Company) owns a liquefied petroleum gas
pipeline that begins in Skellytown, Texas and extends to Mont
Belvieu, Texas near Houston. Skelly-Belvieu Pipeline Company is
owned 50% by Valero L.P. and 50% by ConocoPhillips. Prior to
March 18, 2003 (the date Valero GP Holdings ceased
consolidation of Valero L.P., as discussed in Note 2),
Valero GP Holdings accounted for this investment under the
equity method of accounting.
In June 2005, the Financial Accounting Standards Board ratified
its consensus on Emerging Issues Task Force (EITF) Issue
No. 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights (EITF
No. 04-5), which
requires the general partner in a limited partnership to
determine whether the limited partnership is controlled by, and
therefore should be consolidated by, the general partner. The
guidance in EITF
No. 04-5 was
effective after June 29, 2005 for general partners of all
new partnerships formed and for existing
F-14
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
limited partnerships for which the partnership agreements are
modified. For general partners in all other limited
partnerships, the guidance in EITF
No. 04-5 was
effective no later than January 1, 2006. Valero GP Holdings
adopted EITF
No. 04-5 effective
January 1, 2006, the adoption of which had no impact on
Valero GP Holdings financial position or results of
operations.
Through March 18, 2003 (the date that Valero GP Holdings
ceased consolidation of Valero L.P. as discussed above),
operating revenues were derived from interstate and intrastate
pipeline transportation of refined products and crude oil,
terminalling, blending and filtering of refined products and the
movement of crude oil and other refinery feedstocks through
crude oil storage tanks. Transportation revenues (based on
pipeline tariff rates) were recognized as refined product or
crude oil was delivered through the pipelines. The costs of the
crude oil storage facilities associated with the crude oil
pipelines were considered in establishing the tariffs charged
for transporting crude oil from the storage facilities to the
refineries. Terminalling revenues (based on a terminalling fee)
were recognized as refined products moved through the terminal
and as additives were blended with refined products.
For the period through March 18, 2003, during which Valero
GP Holdings consolidated Valero L.P., Valero L.P. operated in
only one segment, the petroleum pipeline segment of the oil and
gas industry. Subsequent to that date, substantially all of
Valero GP Holdings earnings are derived from its equity
investment in Valero L.P.
Valero GP Holdings is a limited liability company which is
treated as a partnership for federal income tax purposes.
Therefore, Valero GP Holdings is not a taxable entity and
generally incurs no federal income tax liability. The taxable
income or loss of Valero GP Holdings is includable in the
federal and state income tax returns of its individual members.
Valero GP Holdings does, however, incur state income taxes under
the franchise tax laws of certain states, which is reflected as
income tax expense in the combined statements of income.
Income tax expense includes state income taxes currently payable
and deferred state income taxes resulting from temporary
differences between financial statement and tax bases of assets
and liabilities when such differences exist.
Valero GP Holdings financial instruments include cash,
receivables and payables. The estimated fair values of these
financial instruments approximate their carrying amounts as
reflected in the combined balance sheets.
As discussed in Note 9, employees of Valero GP Holdings
provide services to operate Valero L.P.s assets. Valero GP
Holdings has adopted various long-term incentive plans as
described in Note 9, which provide employees and directors
of Valero GP Holdings and certain corporate officers of Valero
Energy with the right to receive common units of Valero L.P.
under specified conditions. Commencing on March 18, 2003,
the date that Valero GP Holdings ceased consolidating Valero
L.P. and began accounting for its investment in Valero L.P. on
the equity method (see Note 2), unit options and unvested
restricted units are accounted for at fair value. Under these
plans, the fair value of unit options granted is recorded in
expense over the nominal vesting period, with appropriate
adjustments to recognize the effect of fair value adjustments on
expense previously recognized for the portion of the applicable
vesting period that has lapsed at the date of the fair value
adjustment. Fair value
F-15
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
adjustments related to unit options are recognized in expense
until the unit options are exercised. Restricted unit awards are
recorded in expense over the nominal vesting period based on the
fair value of the restricted unit, with appropriate adjustments
to recognize the effect of fair value adjustments on expense
previously recognized for the portion of the applicable vesting
period that has lapsed at the date of the fair value adjustment.
Fair value adjustments related to restricted unit awards cease
upon vesting. Amounts expensed are offset in accrued expenses
until the date of exercise or vesting.
For periods prior to March 18, 2003, Valero GP Holdings
accounted for unit options and restricted units granted under
its long-term incentive plans under APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations as permitted by Statement No. 123,
Accounting for Stock-Based Compensation. Because
Valero GP Holdings accounted for such grants using the intrinsic
value method, compensation cost was not recognized in the
combined statements of income from January 1, 2003 through
March 17, 2003 for unit option grants as all options
granted had an exercise price equal to the market value of the
underlying common units of Valero L.P. on the date of grant.
However, as discussed in Note 9, if compensation cost had
been recognized for the unit option grants, such costs would
have been reimbursed by either Valero L.P. or Valero Energy
affiliates outside of Valero GP Holdings. As a result, no pro
forma effect of recognizing compensation cost for the unit
options under Statement No. 123 is presented since any such
expense would not have affected the statement of income of
Valero GP Holdings.
Under Valero GP Holdings employee stock compensation
plans, certain awards provide that employees vest in the award
when they retire or will continue to vest in the award after
retirement over the nominal vesting period established in the
award. Through 2005, Valero GP Holdings accounted for such
awards by recognizing compensation cost over the nominal vesting
period. By analogy to the transition rules of Financial
Accounting Standards Board Statement No. 123 (revised
2004), Share-Based Payment, and the Securities and
Exchange Commissions (SEC) amended Rule 4-01(a)
of Regulation S-X,
Valero GP Holdings has changed its method of recognizing
compensation cost to the non-substantive vesting period approach
for any awards that are granted beginning January 1, 2006.
Under the non-substantive vesting period approach, compensation
cost is recognized immediately for awards granted to
retirement-eligible employees or over the period from the grant
date to the date retirement eligibility is achieved if that date
is expected to occur during the nominal vesting period. The
estimated increase in accrued liabilities related to the
non-substantive vesting period approach would be approximately
$600,000 at December 31, 2005. However, as discussed in
Note 9, such additional expense would have been reimbursed
by either Valero L.P. or Valero Energy affiliates outside of
Valero GP Holdings.
|
|
2. |
INVESTMENT IN AND TRANSACTIONS WITH VALERO L.P. AND VALERO
ENERGY |
As of December 31, 2004, Valero GP Holdings owned 45.7% of
Valero L.P. Prior to March 18, 2003 and the transactions
discussed below, Valero GP Holdings owned 73.6% of Valero L.P.
and therefore consolidated the financial statements of Valero
L.P. through that date.
Effective March 18, 2003, immediately prior to Valero GP
Holdings ceasing consolidation of Valero L.P., Valero L.P.
issued 5,750,000 common units to the public for aggregate
proceeds of $211.3 million and completed a private
placement of $250 million of debt. The net proceeds, after
issuance costs, of $200.3 million and $247.8 million,
respectively, combined with borrowings under Valero L.P.s
credit facility and a contribution of $4.3 million by
Valero GP Holdings to maintain its 2% general partner interest
in Valero L.P., were used to fund a redemption of common units
from Valero GP Holdings, discussed further below, and the
acquisition of certain storage tanks and a pipeline system from
Valero Energy.
Subsequent to Valero L.P.s equity and debt offerings,
Valero L.P. redeemed 3.8 million of its common units from
Valero GP Holdings for $134.1 million. In conjunction with
this redemption, Valero GP Holdings received $2.9 million
from Valero L.P. representing the redemption of a proportionate
amount of Valero GP Holdings general partner interest.
This redemption, combined with the common unit issuance
discussed above, reduced Valero GP Holdings ownership of
Valero L.P. to 49.5% as of March 18, 2003. At the same
time, Valero L.P.
F-16
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
amended its partnership agreement to reduce the minimum vote
required to remove the general partner from
662/3
% to 58% of Valero L.P.s outstanding common and
subordinated units, excluding the units held by Valero GP
Holdings (see discussion below for subsequent revisions to this
minimum vote which were effective on March 11, 2004). As a
result of the issuance and redemption of Valero L.P. common
units and the partnership agreement changes, effective
March 18, 2003, Valero GP Holdings ceased consolidation of
Valero L.P. and began using the equity method to account for its
investment in Valero L.P.
On April 16, 2003, an additional 581,000 common units of
Valero L.P. were issued as a result of the exercise by the
underwriters of a portion of their overallotment option related
to the March 18, 2003 common unit issuance, reducing Valero
GP Holdings ownership interest from 49.5% to 48.2%. In
conjunction with this issuance, Valero GP Holdings contributed
$0.5 million to Valero L.P. to maintain its 2% general
partner interest.
In August 2003, Valero L.P. consummated a public offering of
common units, selling 1,236,250 common units to the public. In
conjunction with this offering, Valero GP Holdings contributed
$1.0 million to Valero L.P. to maintain its 2% general
partner interest. Net proceeds from this common unit offering
further reduced Valero GP Holdings ownership interest in
Valero L.P. to slightly below 46%.
Effective March 11, 2004, Valero L.P. amended its
partnership agreement as follows:
|
|
|
|
|
capped the general partners distribution, including
incentive distributions, at 25% for all distributions in excess
of $0.66 per unit per quarter and |
|
|
|
reduced the minimum vote required to remove the general partner
from 58% to a simple majority of Valero L.P.s outstanding
common and subordinated units, excluding the units held by
Valero GP Holdings. |
On July 1, 2005, Valero L.P. completed its acquisition of
Kaneb Pipe Line Partners, L.P. (KPP) and Kaneb Services LLC
(together, the Kaneb Acquisition) in a transaction that included
the issuance of Valero L.P. common units in exchange for
KPPs units. Valero GP Holdings contributed approximately
$29 million to Valero L.P. to maintain Valero GP
Holdings 2% general partner interest in Valero L.P., and
Valero GP Holdings total ownership interest in Valero
L.P., including its 2% general partner interest, was reduced to
23.4%. Valero GP Holdings ownership interest in Valero
L.P. remained at 23.4% as of December 31, 2005, which was
composed of its 2% general partner interest and a 21.4% limited
partner interest represented by 622,772 common units and
9,599,322 subordinated units of Valero L.P.
As indicated above, Valero L.P. has from time to time issued
common units to the public, which have diluted Valero GP
Holdings ownership percentage in Valero L.P. Such
issuances have resulted in increases in Valero GP Holdings
proportionate share of Valero L.P.s capital because, in
each case, the issuance price per unit exceeded Valero GP
Holdings carrying amount per unit at the time of issuance.
SEC Staff Accounting Bulletin No. 51, Accounting
for Sales of Stock by a Subsidiary (SAB 51), provides
guidance on accounting for the effect of issuances of a
subsidiarys stock on the parents investment in that
subsidiary. SAB 51 allows registrants to elect an
accounting policy of recording such increases or decreases in a
parents investment (SAB 51 credits or charges,
respectively) either in income or directly in equity.
As of December 31, 2004, Valero GP Holdings had
approximately $7 million in accumulated pre-tax SAB 51
credits related to its investment in Valero L.P. On July 1,
2005, the issuance of common units by Valero L.P. in connection
with the Kaneb Acquisition generated an additional pre-tax
SAB 51 credit of approximately $151 million for Valero
GP Holdings. Valero GP Holdings has not recognized any
SAB 51 credits in its combined financial statements through
December 31, 2005 and is not permitted to do so until its
subordinated units convert to common units, which is expected to
occur in the second quarter of 2006. Valero GP Holdings expects
to adopt its accounting policy and recognize all of its
cumulative SAB 51 credits at that time.
F-17
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
Summary Financial Information |
Condensed financial information reported by Valero L.P. is
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Current assets
|
|
$ |
295,411 |
|
|
$ |
39,979 |
|
Property and equipment, net
|
|
|
2,160,213 |
|
|
|
784,999 |
|
Other long-term assets
|
|
|
911,368 |
|
|
|
32,529 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,366,992 |
|
|
$ |
857,507 |
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
205,588 |
|
|
$ |
33,609 |
|
Long-term debt
|
|
|
1,169,659 |
|
|
|
384,171 |
|
Other long-term liabilities
|
|
|
90,966 |
|
|
|
1,416 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,466,213 |
|
|
|
419,196 |
|
Partners equity
|
|
|
1,900,779 |
|
|
|
438,311 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
3,366,992 |
|
|
$ |
857,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Revenues
|
|
$ |
659,557 |
|
|
$ |
220,792 |
|
|
$ |
181,450 |
|
Operating income
|
|
|
153,694 |
|
|
|
98,024 |
|
|
|
83,037 |
|
Net income
|
|
|
111,073 |
|
|
|
78,418 |
|
|
|
69,593 |
|
|
|
|
Related Party Transactions |
Pursuant to a services agreement, Valero GP, LLC, a subsidiary
of Valero GP Holdings provides personnel to Valero L.P. to
perform operating and maintenance services with respect to
certain Valero L.P. assets, and to provide certain
administrative services, for which Valero GP Holdings receives
reimbursement from Valero L.P. Effective January 1, 2006,
the services agreement was amended and now provides for more
services by Valero GP Holdings due to the transfer to
Valero GP Holdings of a substantial number of employees of
Valero Energy subsidiaries who had previously provided services
to Valero GP Holdings under the prior services agreement.
For purposes of these financial statements, no corporate costs
have been allocated to Valero GP Holdings by Valero Energy as
management has determined that no such corporate costs were
incurred specifically on behalf of Valero GP Holdings.
As of December 31, 2005, Valero GP Holdings had a
receivable from Valero L.P. of $1,151,000 representing amounts
due for employee costs. The following table summarizes the
results of transactions with Valero L.P.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Expenses charged by Valero GP Holdings to Valero L.P.
|
|
$ |
66,421 |
|
|
$ |
36,869 |
|
|
$ |
22,736 |
|
F-18
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005 and 2004, Valero GP Holdings
investment in Valero L.P. (representing the 2% general partner
interest, all of Valero L.P.s subordinated units and
622,772 (2005) and 664,119 (2004) of Valero
L.P.s common units) reconciles to Valero L.P.s total
partners equity as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Valero L.P. total partners equity
|
|
$ |
1,900,779 |
|
|
$ |
438,311 |
|
Valero GP Holdings ownership interest in Valero L.P.
|
|
|
23.4 |
% |
|
|
45.7 |
% |
|
|
|
|
|
|
|
Valero GP Holdings share of Valero L.P.s
partners equity
|
|
|
444,782 |
|
|
|
200,308 |
|
Unrecognized SAB 51 gains
|
|
|
(158,170 |
) |
|
|
(7,094 |
) |
Step-up in basis related to Valero L.P.s assets and
liabilities, including equity method goodwill
|
|
|
122,132 |
|
|
|
195,468 |
|
|
|
|
|
|
|
|
Investment in Valero L.P.
|
|
$ |
408,744 |
|
|
$ |
388,682 |
|
|
|
|
|
|
|
|
As reflected above, as of December 31, 2005 and 2004,
Valero GP Holdings investment in Valero L.P. included
622,772 and 664,119 publicly traded common units, respectively,
which had an aggregate market value of $32.2 million and
$39.5 million, respectively. A quoted market price is not
available for either Valero GP Holdings 2% general partner
interest in Valero L.P. or the subordinated units held by Valero
GP Holdings. The subordinated units are expected to convert to
common units on a one-for-one basis in the second quarter of
2006.
|
|
3. |
DISTRIBUTIONS FROM VALERO L.P. |
Valero L.P.s partnership agreement, as amended, determines
the amount and priority of cash distributions that Valero
L.P.s common unitholders, subordinated unitholders and
general partner may receive. During the subordination period, if
there is sufficient available cash, the holders of Valero
L.P.s common units are entitled to receive each quarter a
minimum distribution of $0.60 per unit ($2.40 annualized)
prior to any distribution of available cash to holders of Valero
L.P.s subordinated units. In addition, the general partner
is entitled to incentive distributions, as defined below, if the
amount Valero L.P. distributes with respect to any quarter
exceeds $0.60 per unit. Effective March 11, 2004, the
partnership agreement was amended to lower the general
partners incentive distribution rights with respect to
distributions of available cash from 48% to 23% of the amount of
any quarterly distribution that exceeds $0.90 per unit. The
general partner will continue to receive a 2% distribution with
respect to its general partner interest.
F-19
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The following table reflects the allocation of the total cash
distributions paid by Valero L.P. among the general and limited
partners. The amounts presented reflect the distributions
applicable to the period in which the distributions are earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands, except per unit data) | |
General partner interest
|
|
$ |
2,589 |
|
|
$ |
1,595 |
|
|
$ |
1,404 |
|
General partner incentive distribution
|
|
|
8,711 |
|
|
|
4,449 |
|
|
|
2,620 |
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
11,300 |
|
|
|
6,044 |
|
|
|
4,024 |
|
Valero GP Holdings limited partner distribution
|
|
|
34,421 |
|
|
|
32,805 |
|
|
|
30,319 |
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Valero GP Holdings
|
|
|
45,721 |
|
|
|
38,849 |
|
|
|
34,343 |
|
Public unitholders distributions
|
|
|
83,757 |
|
|
|
40,928 |
|
|
|
35,860 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
129,478 |
|
|
$ |
79,777 |
|
|
$ |
70,203 |
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
3.365 |
|
|
$ |
3.20 |
|
|
$ |
2.95 |
|
During 2005, Valero L.P. paid quarterly cash distributions as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount | |
Distribution Related To: |
|
Payment Date | |
|
Per Unit | |
|
|
| |
|
| |
4th quarter 2004
|
|
|
February 14, 2005 |
|
|
$ |
0.800 |
|
1st quarter 2005
|
|
|
May 13, 2005 |
|
|
|
0.800 |
|
2nd quarter 2005
|
|
|
August 12, 2005 |
|
|
|
0.855 |
|
3rd quarter 2005
|
|
|
November 14, 2005 |
|
|
|
0.855 |
|
Cash distributions related to the fourth quarter of 2005 of
$0.855 per unit were paid by Valero L.P. on
February 14, 2006.
|
|
4. |
ACQUISITIONS BY VALERO L.P. PRIOR TO MARCH 18, 2003 |
On January 7, 2003, Valero L.P. completed its acquisition
of Telfer Oil Companys (Telfer) Pittsburg, California
asphalt terminal for $15.1 million. The asphalt terminal
includes two storage tanks with a combined storage capacity of
350,000 barrels, six
5,000-barrel polymer
modified asphalt tanks, a truck rack, rail facilities and
various other tanks and equipment. A portion of the purchase
price represented payment to the principal owner of Telfer for a
non-compete agreement and for the lease of certain facilities
adjacent to the terminal operations.
|
|
5. |
NOTES PAYABLE TO AFFILIATES |
Valero GP Holdings notes payable to affiliates reflects
the allocation to Valero GP Holdings of a portion of the debt
incurred by Valero Energy to fund its merger with UDS in
December 2001, as well as the effect of cash inflows and
outflows of Valero GP Holdings resulting from its normal
operations. The notes payable to affiliates have a maturity date
of January 1, 2008. As of December 31, 2005,
$151.1 million of the borrowing capacity under the notes
was available for borrowing. Valero Energy uses a centralized
cash management system under which cash receipts of Valero GP
Holdings are remitted to Valero Energy and cash disbursements of
Valero GP Holdings are funded by Valero Energy. Interest expense
is incurred by Valero GP Holdings on its notes payable to
affiliates at rates that are adjusted monthly to amounts that
represent Valero Energys overall cost of borrowing. Valero
GP Holdings borrowing rate was 6.91% and 6.33% as of
December 31, 2005 and 2004,
F-20
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
respectively. Valero Energy has represented to Valero GP
Holdings that, on or prior to the effective date of the IPO
discussed in Note 1, Valero Energy will contribute to
Valero GP Holdings notes issued by Valero GP Holdings and held
by Valero Energy subsidiaries.
|
|
6. |
DISTRIBUTIONS TO VALERO ENERGY |
Valero GP Holdings makes distributions to Valero Energy
affiliates in accordance with its limited liability company
agreement, under which cash receipts less cash expenditures are
distributed on a quarterly or more frequent basis to Valero GP
Holdings members. Distributions for the year ended
December 31, 2003 of $156.6 million include the
distribution from Valero L.P. of approximately
$132.7 million, received prior to the ceasing of
consolidation, representing (i) proceeds of
$137 million for the redemption of 3.8 million common
units and a proportionate amount of the general partner interest
held by Valero GP Holdings, reduced by (ii) a
$4.3 million investment by Valero GP Holdings to maintain
its 2% general partner interest as a result of the issuance of
5.75 million common units by Valero L.P. as discussed in
Note 2.
|
|
7. |
STATEMENTS OF CASH FLOWS |
In order to determine net cash provided by operating activities,
net income is adjusted by, among other things, changes in
current assets and liabilities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Decrease (increase) in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(249 |
) |
|
Receivable from Valero L.P.
|
|
|
(1,151 |
) |
|
|
985 |
|
|
|
2,937 |
|
|
Prepaid expenses and other
|
|
|
|
|
|
|
|
|
|
|
(1,194 |
) |
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2 |
|
|
|
|
|
|
|
823 |
|
|
Income taxes payable
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
(1,859 |
) |
|
|
1,239 |
|
|
|
(362 |
) |
|
Taxes other than income taxes
|
|
|
|
|
|
|
|
|
|
|
(1,354 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in current assets and liabilities
|
|
$ |
(2,997 |
) |
|
$ |
2,224 |
|
|
$ |
601 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows related to interest and income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Interest paid
|
|
$ |
17,778 |
|
|
$ |
17,110 |
|
|
$ |
20,283 |
|
Income taxes paid
|
|
|
47 |
|
|
|
74 |
|
|
|
191 |
|
Components of income tax expense (benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Current
|
|
$ |
47 |
|
|
$ |
74 |
|
|
$ |
191 |
|
Deferred
|
|
|
67 |
|
|
|
(7 |
) |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
114 |
|
|
$ |
67 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
F-21
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The tax effects of significant temporary differences
representing deferred income tax assets relate principally to
differences between the timing of expense recognition and the
deductibility for tax purposes of compensation and employee
benefit costs.
|
|
9. |
EMPLOYEE BENEFIT PLANS |
Valero L.P., which has no employees, relies on employees of
Valero Energy and its affiliates, including Valero GP Holdings,
to provide certain services to operate Valero L.P.s
assets. Effective January 1, 2003, most of the employees
providing operational services to Valero L.P. became employees
of Valero GP Holdings. The employees of Valero GP Holdings are
included in the various employee benefit plans of Valero Energy.
These plans include qualified, non-contributory defined benefit
retirement plans, defined contribution 401(k) plans, employee
and retiree medical, dental and life insurance plans, bonus
plans, long-term incentive plans (i.e., unit options and
restricted common units) and other such benefits. In addition,
prior to the ceasing of consolidation of Valero L.P. on
March 18, 2003, certain unit options and restricted common
units of Valero L.P. were granted by Valero GP Holdings to
certain corporate officers of Valero Energy.
All costs incurred by Valero GP Holdings related to these
employee benefit plans, excluding compensation expense related
to the long-term incentive plans, are reimbursed by Valero L.P.
at cost. Long-term incentive plan compensation expense
pertaining to employees of Valero GP Holdings is reimbursed by
Valero L.P., while such compensation expense pertaining to
corporate officers of Valero Energy is borne by Valero Energy
affiliates outside of Valero GP Holdings. Any liability of
Valero GP Holdings related to the various employee benefit plans
discussed above, other than the bonus plans and the long-term
incentive plans, are reflected in notes payable to
affiliates in the consolidated balance sheet of Valero GP
Holdings. The liability for the bonus plans is recorded by
Valero L.P., and the obligation under the long-term incentive
plans is reflected in accrued liabilities in the
consolidated balance sheet of Valero GP Holdings.
Valero GP Holdings has adopted the following plans:
|
|
|
|
|
the 2000 Long-Term Incentive Plan (the LTIP) under which Valero
GP Holdings may award up to 250,000 common units of Valero L.P.
to certain key employees of Valero Energys affiliates
providing services to Valero L.P. and to directors and officers
of Valero GP Holdings. Awards under the LTIP can include unit
options, restricted common units, distribution equivalent rights
(DERs) and contractual rights to receive common units of Valero
L.P. |
|
|
|
the 2002 Unit Option Plan (the UOP) under which Valero GP
Holdings may award up to 200,000 unit options of Valero
L.P. to officers and directors of Valero GP Holdings or its
affiliates. |
|
|
|
the 2003 Employee Unit Incentive Plan (the UIP) under which
Valero GP Holdings may award up to 500,000 common units of
Valero L.P. to employees of Valero GP Holdings or its
affiliates, excluding officers and directors of Valero GP
Holdings and its affiliates. Awards under the UIP can include
unit options, unit appreciation rights, restricted units,
performance awards, unit compensation and other unit-based
awards. |
F-22
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
The number of awards granted under the above-noted plans during
the years ended December 31, 2005, 2004 and 2003 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Granted | |
|
Vesting | |
|
Granted | |
|
Vesting | |
|
Granted | |
|
Vesting | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
LTIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
1/3 per year |
|
|
Unit options
|
|
|
25,075 |
|
|
|
1/5 per year |
|
|
|
|
|
|
|
|
|
|
|
28,625 |
|
|
|
1/5 per year |
|
|
Restricted units
|
|
|
14,920 |
|
|
|
1/5 per year |
|
|
|
9,425 |
|
|
|
1/5 per year |
|
|
|
2,280 |
|
|
|
1/5 per year |
|
|
Restricted units
|
|
|
1,340 |
|
|
|
1/3 per year |
|
|
|
579 |
|
|
|
1/3 per year |
|
|
|
|
|
|
|
|
|
UOP
|
|
|
14,925 |
|
|
|
1/5 per year |
|
|
|
23,775 |
|
|
|
1/5 per year |
|
|
|
32,000 |
|
|
|
1/5 per year |
|
UIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit options
|
|
|
128,300 |
|
|
|
1/5 per year |
|
|
|
49,575 |
|
|
|
1/5 per year |
|
|
|
|
|
|
|
|
|
|
Restricted units
|
|
|
31,800 |
|
|
|
1/5 per year |
|
|
|
2,680 |
|
|
|
1/5 per year |
|
|
|
1,440 |
|
|
|
1/5 per year |
|
As of December 31, 2005 and 2004, Valero GP Holdings had
accrued $2,293,000 and $4,419,000, respectively, for the
outstanding awards. See Note 1, Stock-Based
Compensation, for a discussion of the manner in which
Valero GP Holdings accounts for the above awards. As of
December 31, 2005, Valero L.P. common units that remained
available to be awarded totaled 38,772 under the LTIP, 250 under
the UOP and 287,730 under the UIP. Awards under these plans are
currently granted solely to individuals whose services are
entirely devoted to Valero L.P., and the costs related to such
awards are borne by Valero L.P.
F-23
VALERO L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
Introduction
The following unaudited pro forma combined statement of income
gives effect to the acquisition by Valero L.P. of Kaneb Services
LLC (KSL) and Kaneb Pipe Line Partners, L.P.
(KPP) (collectively referred to as
Kaneb) on July 1, 2005. Valero L.P. acquired
all of the equity securities of KSL in a fixed cash merger for
$43.31 per share. Immediately subsequent to the KSL merger,
unitholders of KPP exchanged their units for Valero L.P. common
units receiving 1.0231 common units of Valero L.P. for each KPP
unit tendered in the exchange.
As a condition to complete the acquisition of Kaneb, Valero L.P.
and the United States Federal Trade Commission agreed that
Valero L.P. would divest certain Kaneb assets within six months
of the close of the acquisition. The assets to be divested
included Kaneb terminals located in Richmond, CA; Martinez, CA;
Paulsboro, NJ; two terminals in Philadelphia, PA; and
Kanebs West Pipeline System. These assets are collectively
referred to as the Held Separate Businesses. On
September 30, 2005, Valero L.P. sold the Held Separate
Businesses to Pacific Energy Partners, L.P. for approximately
$455 million. On July 1, 2005 Valero L.P. sold the
stock of Martin Oil LLC (MOC), a wholly owned
subsidiary of KSL and acquired as part of the acquisition of
Kaneb, to a subsidiary of Valero Energy Corporation
(Valero Energy) for approximately $27 million.
Additionally, on March 30, 2006 Valero L.P. sold its
subsidiaries located in Australia and New Zealand (the Australia
and New Zealand Subsidiaries) for approximately $65 million
plus working capital adjustments. These subsidiaries had also
been acquired as part of the acquisition of Kaneb.
The unaudited pro forma combined statement of income for the
year ended December 31, 2005 assumes that the Kaneb
acquisition occurred on January 1, 2005, and it excludes
the results of operations of the Held Separate Businesses, MOC
and the Australia and New Zealand Subsidiaries. The Valero
L.P. historical statement of income information presented in the
unaudited pro forma combined statement of income includes
the results of operations of KPP and KSL from the date of
acquisition, July 1, 2005, through December 31, 2005.
Therefore, the adjusted KSL historical statement of income
information, which reflects the consolidation of KPP and KSL
with all intercompany transactions being eliminated, is only for
the six months ended June 30, 2005. The first set of pro
forma adjustments in the unaudited pro forma combined statement
of income reflects the effect of the KSL merger. The second set
of pro forma adjustments reflects the effect of the KPP merger
that occurred immediately upon the closing of the KSL merger.
The estimates of fair value of the assets acquired and
liabilities assumed are based on preliminary assumptions,
pending the completion of an independent appraisal, with any
excess of purchase price over the net fair value of assets
acquired and liabilities assumed assigned to goodwill.
An unaudited pro forma combined balance sheet as of
December 31, 2005 is not presented because the transactions
discussed above are reflected in Valero L.P.s historical
balance sheet as of December 31, 2005, other than the sale
of the Australia and New Zealand subsidiaries, the effect of
which is immaterial.
The unaudited pro forma combined statement of income should be
read in conjunction with the historical consolidated financial
statements of Valero L.P. and Kaneb Services LLC included
elsewhere in this prospectus. The unaudited pro forma combined
statement of income is not necessarily indicative of the
financial results that would have occurred if the Kaneb
acquisition had been consummated on the date indicated, nor is
it necessarily indicative of the results of operations in the
future. The pro forma adjustments, as described in the notes to
unaudited pro forma combined financial statements, are based
upon available information and certain assumptions that Valero
L.P.s management believes are reasonable.
The unaudited pro forma combined statement of income does not
give effect to any anticipated cost savings or other financial
benefits expected to result from the Kaneb acquisition.
F-24
VALERO L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb Services | |
|
|
|
|
|
|
|
|
|
|
|
|
LLC Historical | |
|
|
|
|
|
|
|
|
|
|
|
|
As Adjusted | |
|
KSL | |
|
Valero L.P. | |
|
KPP | |
|
Valero L.P. | |
|
|
|
|
(Six Months | |
|
Merger | |
|
Pro Forma | |
|
Merger | |
|
Pro Forma | |
|
|
Valero L.P. | |
|
Ended June 30, | |
|
Pro Forma | |
|
after KSL | |
|
Pro Forma | |
|
Combined | |
|
|
Historical | |
|
2005)(a) | |
|
Adjustment | |
|
Merger | |
|
Adjustments | |
|
with Kaneb | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars, except unit and per unit data) | |
Revenues
|
|
$ |
659,557 |
|
|
$ |
348,902 |
|
|
$ |
|
|
|
$ |
1,008,459 |
|
|
$ |
(2,797 |
)(d) |
|
$ |
1,005,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
229,806 |
|
|
|
171,551 |
|
|
|
|
|
|
|
401,357 |
|
|
|
|
|
|
|
401,357 |
|
|
Operating expenses
|
|
|
184,609 |
|
|
|
87,641 |
|
|
|
|
|
|
|
272,250 |
|
|
|
|
|
|
|
272,250 |
|
|
General and administrative expenses
|
|
|
26,553 |
|
|
|
38,975 |
|
|
|
|
|
|
|
65,528 |
|
|
|
|
|
|
|
65,528 |
|
|
Depreciation and amortization
|
|
|
64,895 |
|
|
|
24,649 |
|
|
|
|
|
|
|
89,544 |
|
|
|
4,636 |
(e) |
|
|
94,180 |
|
|
Provision for loss contingencies
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
505,863 |
|
|
|
364,816 |
|
|
|
|
|
|
|
870,679 |
|
|
|
4,636 |
|
|
|
875,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
153,694 |
|
|
|
(15,914 |
) |
|
|
|
|
|
|
137,780 |
|
|
|
(7,433 |
) |
|
|
130,347 |
|
|
Equity earnings in joint ventures
|
|
|
2,319 |
|
|
|
|
|
|
|
|
|
|
|
2,319 |
|
|
|
2,797 |
(d) |
|
|
5,116 |
|
|
Interest and other expense, net
|
|
|
(43,625 |
) |
|
|
(22,397 |
) |
|
|
946 |
(b) |
|
|
(65,076 |
) |
|
|
3,955 |
(f) |
|
|
(61,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before interest of outside non-controlling
partners and income tax expense
|
|
|
112,388 |
|
|
|
(38,311 |
) |
|
|
946 |
|
|
|
75,023 |
|
|
|
(681 |
) |
|
|
74,342 |
|
|
Interest of outside non-controlling partners
|
|
|
|
|
|
|
2,158 |
|
|
|
|
|
|
|
2,158 |
|
|
|
(2,158 |
)(g) |
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(4,713 |
) |
|
|
13,455 |
|
|
|
|
|
|
|
8,742 |
|
|
|
|
(h) |
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
107,675 |
|
|
$ |
(22,698 |
) |
|
$ |
946 |
|
|
$ |
85,923 |
|
|
$ |
(2,839 |
) |
|
$ |
83,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
107,675 |
|
|
$ |
(22,698 |
) |
|
$ |
946 |
|
|
$ |
85,923 |
|
|
$ |
(2,839 |
) |
|
$ |
83,084 |
|
|
General partners interest in income from continuing
operations
|
|
|
(10,758 |
) |
|
|
|
|
|
|
|
|
|
|
(10,758 |
) |
|
|
(3,053 |
)(i) |
|
|
(13,811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in income (loss) from continuing
operations
|
|
$ |
96,917 |
|
|
$ |
(22,698 |
) |
|
$ |
946 |
|
|
$ |
75,165 |
|
|
$ |
(5,892 |
) |
|
$ |
69,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per unit applicable to limited
partners
|
|
$ |
2.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of limited partnership units outstanding
|
|
|
35,023,250 |
|
|
|
|
|
|
|
|
|
|
|
35,023,250 |
|
|
|
11,786,696 |
(c) |
|
|
46,809,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Financial Statement.
F-25
VALERO L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
Kaneb Services LLCs Historical Statement of
Operations:
|
|
|
|
(a) |
KSLs historical statement of operations for the six months
ended June 30, 2005 has been adjusted on a pro forma basis
to reflect the elimination of the revenues and expenses of the
Held Separate Businesses, MOC and the Australia and New Zealand
Subsidiaries, as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb Services | |
|
|
Kaneb Services | |
|
Pro Forma | |
|
LLC Historical, | |
|
|
LLC Historical | |
|
Adjustments | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
Revenue
|
|
$ |
626,221 |
|
|
$ |
(277,319 |
) |
|
$ |
348,902 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
405,165 |
|
|
|
(233,614 |
) |
|
|
171,551 |
|
|
Operating expenses
|
|
|
104,731 |
|
|
|
(17,090 |
) |
|
|
87,641 |
|
|
General and administrative expenses
|
|
|
40,897 |
|
|
|
(1,922 |
) |
|
|
38,975 |
|
|
Depreciation and amortization
|
|
|
29,501 |
|
|
|
(4,852 |
) |
|
|
24,649 |
|
|
Provision for loss contingencies
|
|
|
42,000 |
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
622,294 |
|
|
|
(257,478 |
) |
|
|
364,816 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,927 |
|
|
|
(19,841 |
) |
|
|
(15,914 |
) |
|
Interest and other expense, net
|
|
|
(23,671 |
) |
|
|
1,274 |
|
|
|
(22,397 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before interest of outside non-controlling partners and
income tax expense
|
|
|
(19,744 |
) |
|
|
(18,567 |
) |
|
|
(38,311 |
) |
|
Interest of outside non-controlling partners
|
|
|
2,158 |
|
|
|
|
|
|
|
2,158 |
|
|
Income tax benefit
|
|
|
12,778 |
|
|
|
677 |
|
|
|
13,455 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$ |
(4,808 |
) |
|
$ |
(17,890 |
) |
|
$ |
(22,698 |
) |
|
|
|
|
|
|
|
|
|
|
Kaneb Services LLC Merger Pro Forma Adjustment:
|
|
|
|
(b) |
To reflect a net reduction in interest expense of $946,000
calculated on a net reduction in borrowings of $22 million
($525 million of new term debt, less $455 million due
to proceeds from the sale of the Held Separate Businesses, less
$27 million due to proceeds from the sale of MOC and less
$65 million due to proceeds from the sale of the Australia
and New Zealand Subsidiaries), offset by the amortization of
deferred debt issuance costs of $81,000. A 1/8% change in
the interest rate associated with these borrowings would have a
$13,750 effect on interest expense. |
Kaneb Pipe Line Partners, L.P. Pro Forma Adjustments:
|
|
|
|
(c) |
To reflect the purchase of KPPs remaining 82% limited
partner interest through an exchange of Valero L.P. common units. |
|
|
|
|
|
KPPs limited partner units outstanding as of June 30,
2005
|
|
|
28,327,590 |
|
Less: KSLs ownership of KPPs limited partner units
acquired by Valero L.P. in the KSL merger L.P. in the KSL merger
|
|
|
5,095,500 |
|
|
|
|
|
Number of KPP limited partner units exchanged for Valero L.P.
common units
|
|
|
23,232,090 |
|
Multiplied by the exchange ratio
|
|
|
1.0231 |
(1) |
|
|
|
|
Number of Valero L.P. common units issued in the exchange
|
|
|
23,768,751 |
|
|
|
|
|
F-26
VALERO L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
The following calculates the weighted average effect of the
common unit issuance for the year ended December 31, 2005: |
|
|
|
|
|
Number of Valero L.P. common units issued in the exchange
|
|
|
23,768,751 |
|
Multiplied by the ratio of total days during the six-month
period prior to the acquisition date to total days during the
year
|
|
|
181/365 |
|
|
|
|
|
Weighted average effect of common unit issuance
|
|
|
11,786,696 |
|
|
|
|
|
|
|
|
|
(1) |
Under the terms of the merger agreement with KPP, each unit of
KPP was exchanged for 1.0231 Valero L.P. common units. |
|
|
|
|
(d) |
To reclassify certain revenues as equity income from joint
ventures of $2,797,000 for the six months ended June 30,
2005 in order to conform the financial statement presentation to
that of Valero L.P. |
|
|
|
|
(e) |
To record depreciation and amortization expense on the excess
purchase price allocated to property and equipment and
intangible assets (exclusive of the Held Separate Businesses and
MOC). The pro forma adjustment to depreciation expense is
$1,736,000 based on an estimated life of 25 years and no
salvage value. The pro forma adjustment to amortization expense
is $2,900,000 based on an estimated life of 10 years. |
|
|
|
|
(f) |
To reflect interest expense reductions attributable to
amortization of the $55 million excess of fair value over
carrying value of Kanebs debt at June 30, 2005 (i.e.,
the fair value premium) of $3,955,000 for the six
months ended June 30, 2005. For pro forma presentation
purposes, the fair value premium associated with each Kaneb debt
instrument assumed has been amortized from January 1, 2005
or the date of issuance of the debt, whichever is later, over
the remaining term of the instrument using the effective
interest method. If market rates underlying the fair value of
each debt instrument were to increase 1/8%, the pro forma
increase in interest expense would be $266,000 for the six
months ended June 30, 2005. |
|
|
|
|
(g) |
To eliminate the deduction from income representing the interest
of outside non-controlling partners in KPP of $2,158,000 for the
six months ended June 30, 2005. As a result of the Kaneb
mergers, Valero L.P. owns 100% of KSLs and KPPs
ownership interests. |
|
|
(h) |
The pro forma adjustments to the statement of income have not
been tax-effected as the effect on income tax is not material. |
|
|
|
|
(i) |
To reflect the adjustment to the general partners interest
in income from continuing operations that has been calculated
assuming quarterly distributions per limited partner unit of
$0.855, which was declared and approved by Valero L.P.s
board of directors on January 27, 2006. The general
partners incentive distribution rights have been
calculated as defined by Valero L.P.s partnership
agreement. The income from continuing operations applicable to
the general partner is reflected in the KPP merger pro forma
adjustments to reflect the effect of both mergers. The following
reflects the general partners total interest in the pro
forma combined income from continuing operations for the year
ended December 31, 2005 (in thousands): |
|
|
|
|
|
General partners 2% ownership interest in income from
continuing operations
|
|
$ |
1,615 |
|
General partners incentive distribution
|
|
|
12,196 |
|
|
|
|
|
Total general partner interest in income from continuing
operations
|
|
$ |
13,811 |
|
|
|
|
|
F-27
Report of Independent Registered Public Accounting Firm
The Board of Directors of Valero GP, LLC
and Unitholders of Valero L.P.:
We have audited the accompanying consolidated balance sheets of
Valero L.P. and subsidiaries (a Delaware limited partnership)
(the Partnership) as of December 31, 2005 and 2004, and the
related consolidated statements of income, cash flows and
partners equity for the years then ended. These
consolidated financial statements are the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (the
PCAOB). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Valero L.P. and subsidiaries as of December 31,
2005 and 2004, and the results of their operations and their
cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
PCAOB, the effectiveness of Valero L.P. and subsidiaries
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 13, 2006 expressed an
unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial
reporting.
San Antonio, Texas
March 13, 2006
F-28
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Valero GP, LLC
and Unitholders of Valero L.P.
We have audited the consolidated statements of income, cash
flows and partners equity of Valero L.P. and subsidiaries
(a Delaware limited partnership, the Partnership)
for the year ended December 31, 2003. These financial
statements are the responsibility of the Partnerships
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Partnerships internal control over financial
reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnerships internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of Valero L.P. and subsidiaries for
the year ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
San Antonio, Texas
March 11, 2004
F-29
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars, | |
|
|
except unit data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
36,054 |
|
|
$ |
16,147 |
|
|
Receivable from Valero Energy
|
|
|
21,873 |
|
|
|
19,195 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,976 and $0 as of December 31, 2005 and 2004, respectively
|
|
|
110,066 |
|
|
|
3,395 |
|
|
Inventories
|
|
|
17,473 |
|
|
|
|
|
|
Other current assets
|
|
|
30,138 |
|
|
|
1,242 |
|
|
Assets of businesses held for sale
|
|
|
79,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
295,411 |
|
|
|
39,979 |
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
2,417,529 |
|
|
|
981,360 |
|
Accumulated depreciation and amortization
|
|
|
(257,316 |
) |
|
|
(196,361 |
) |
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,160,213 |
|
|
|
784,999 |
|
Intangible assets, net
|
|
|
59,159 |
|
|
|
4,695 |
|
Goodwill
|
|
|
767,587 |
|
|
|
4,715 |
|
Investment in joint ventures
|
|
|
73,986 |
|
|
|
15,674 |
|
Deferred charges and other assets, net
|
|
|
10,636 |
|
|
|
7,445 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,366,992 |
|
|
$ |
857,507 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
1,046 |
|
|
$ |
990 |
|
|
Payable to Valero Energy
|
|
|
12,800 |
|
|
|
4,166 |
|
|
Accounts payable
|
|
|
104,320 |
|
|
|
10,909 |
|
|
Accrued interest payable
|
|
|
16,391 |
|
|
|
7,693 |
|
|
Accrued liabilities
|
|
|
46,917 |
|
|
|
5,146 |
|
|
Taxes other than income taxes
|
|
|
9,013 |
|
|
|
4,705 |
|
|
Income taxes payable
|
|
|
4,001 |
|
|
|
|
|
|
Liabilities of businesses held for sale
|
|
|
11,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
205,588 |
|
|
|
33,609 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
1,169,659 |
|
|
|
384,171 |
|
Deferred income taxes
|
|
|
13,576 |
|
|
|
|
|
Other long-term liabilities
|
|
|
77,390 |
|
|
|
1,416 |
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Partners equity:
|
|
|
|
|
|
|
|
|
|
Common units (37,210,427 outstanding as of December 31,
2005 and 13,442,072 as of December 31, 2004)
|
|
|
1,749,007 |
|
|
|
310,537 |
|
|
Subordinated units (9,599,322 outstanding as of
December 31, 2005 and 2004)
|
|
|
114,127 |
|
|
|
117,968 |
|
|
General partners equity
|
|
|
38,913 |
|
|
|
9,836 |
|
|
Accumulated other comprehensive loss
|
|
|
(1,268 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
1,900,779 |
|
|
|
438,311 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
3,366,992 |
|
|
$ |
857,507 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-30
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars, except unit and | |
|
|
per unit data) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
407,194 |
|
|
$ |
220,792 |
|
|
$ |
181,450 |
|
|
Product
|
|
|
252,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
659,557 |
|
|
|
220,792 |
|
|
|
181,450 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
229,806 |
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
184,609 |
|
|
|
78,298 |
|
|
|
64,609 |
|
|
General and administrative expenses
|
|
|
26,553 |
|
|
|
11,321 |
|
|
|
7,537 |
|
|
Depreciation and amortization
|
|
|
64,895 |
|
|
|
33,149 |
|
|
|
26,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
505,863 |
|
|
|
122,768 |
|
|
|
98,413 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
153,694 |
|
|
|
98,024 |
|
|
|
83,037 |
|
|
Equity earnings in joint ventures
|
|
|
2,319 |
|
|
|
1,344 |
|
|
|
2,416 |
|
|
Interest and other expense, net
|
|
|
(43,625 |
) |
|
|
(20,950 |
) |
|
|
(15,860 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
expense
|
|
|
112,388 |
|
|
|
78,418 |
|
|
|
69,593 |
|
|
Income tax expense
|
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
107,675 |
|
|
|
78,418 |
|
|
|
69,593 |
|
Income from discontinued operations, net of income tax
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
111,073 |
|
|
|
78,418 |
|
|
|
69,593 |
|
Less general partners interest and incentive distributions
|
|
|
(10,758 |
) |
|
|
(5,927 |
) |
|
|
(3,959 |
) |
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$ |
100,315 |
|
|
$ |
72,491 |
|
|
$ |
65,634 |
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.76 |
|
|
$ |
3.15 |
|
|
$ |
3.02 |
|
|
Discontinued operations
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2.86 |
|
|
$ |
3.15 |
|
|
$ |
3.02 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic and diluted units outstanding
|
|
|
35,023,250 |
|
|
|
23,041,394 |
|
|
|
21,706,164 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-31
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
111,073 |
|
|
$ |
78,418 |
|
|
$ |
69,593 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
66,667 |
|
|
|
33,149 |
|
|
|
26,267 |
|
|
Provision for deferred income taxes
|
|
|
4,283 |
|
|
|
|
|
|
|
|
|
|
Equity earnings in joint ventures
|
|
|
(2,499 |
) |
|
|
(1,344 |
) |
|
|
(2,416 |
) |
|
Distributions of equity earnings in joint ventures
|
|
|
2,499 |
|
|
|
1,344 |
|
|
|
2,416 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in receivable from Valero Energy
|
|
|
(2,678 |
) |
|
|
(3,414 |
) |
|
|
(7,299 |
) |
|
|
(Increase) decrease in accounts receivable
|
|
|
(39,397 |
) |
|
|
1,938 |
|
|
|
(3,831 |
) |
|
|
Increase in inventories
|
|
|
(6,042 |
) |
|
|
|
|
|
|
|
|
|
|
Increase in other current assets
|
|
|
(11,475 |
) |
|
|
(260 |
) |
|
|
(1,098 |
) |
|
|
Increase (decrease) in payable to Valero Energy
|
|
|
8,634 |
|
|
|
(5,683 |
) |
|
|
9,849 |
|
|
|
(Decrease) increase in accrued interest payable
|
|
|
(259 |
) |
|
|
47 |
|
|
|
4,441 |
|
|
|
Increase in accounts payable and other accrued liabilities
|
|
|
54,604 |
|
|
|
3,339 |
|
|
|
4,091 |
|
|
|
(Decrease) increase in taxes other than income taxes
|
|
|
(3,323 |
) |
|
|
264 |
|
|
|
644 |
|
|
Other, net
|
|
|
4,343 |
|
|
|
705 |
|
|
|
3,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
186,430 |
|
|
|
108,503 |
|
|
|
106,108 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reliability capital expenditures
|
|
|
(23,707 |
) |
|
|
(9,701 |
) |
|
|
(10,353 |
) |
Expansion capital expenditures
|
|
|
(44,379 |
) |
|
|
(19,702 |
) |
|
|
(21,208 |
) |
Kaneb acquisition, net of cash acquired
|
|
|
(500,973 |
) |
|
|
(1,098 |
) |
|
|
|
|
Other acquisitions
|
|
|
|
|
|
|
(28,085 |
) |
|
|
(411,176 |
) |
Investment in other noncurrent assets
|
|
|
(3,319 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of Held Separate Businesses, net
|
|
|
454,109 |
|
|
|
|
|
|
|
|
|
Proceeds from dispositions of other assets
|
|
|
26,836 |
|
|
|
46 |
|
|
|
|
|
Distributions in excess of equity earnings in joint ventures
|
|
|
2,433 |
|
|
|
29 |
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(89,000 |
) |
|
|
(58,511 |
) |
|
|
(442,350 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 6.05% senior note offering, net of discount
and issuance costs
|
|
|
|
|
|
|
|
|
|
|
247,297 |
|
Proceeds from other long-term debt borrowings
|
|
|
746,472 |
|
|
|
43,000 |
|
|
|
25,000 |
|
Repayment of long-term debt
|
|
|
(735,064 |
) |
|
|
(15,468 |
) |
|
|
(25,298 |
) |
Distributions to unitholders and general partner
|
|
|
(127,789 |
) |
|
|
(78,240 |
) |
|
|
(65,916 |
) |
Redemption of common units held by UDS Logistics, LLC
|
|
|
|
|
|
|
|
|
|
|
(134,065 |
) |
General partner contributions, net of redemption
|
|
|
29,197 |
|
|
|
|
|
|
|
2,930 |
|
Proceeds from sale of common units to the public, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
269,026 |
|
Increase (decrease) in cash book overdrafts
|
|
|
10,006 |
|
|
|
1,118 |
|
|
|
(520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(77,178 |
) |
|
|
(49,590 |
) |
|
|
318,454 |
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
|
|
|
(345 |
) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
19,907 |
|
|
|
402 |
|
|
|
(17,788 |
) |
Cash and cash equivalents as of the beginning of year
|
|
|
16,147 |
|
|
|
15,745 |
|
|
|
33,533 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of the end of year
|
|
$ |
36,054 |
|
|
$ |
16,147 |
|
|
$ |
15,745 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
53,162 |
|
|
$ |
24,120 |
|
|
$ |
15,701 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
1,663 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-32
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS EQUITY
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Limited Partners | |
|
|
|
Other | |
|
Total | |
|
|
| |
|
General | |
|
Comprehensive | |
|
Partners | |
|
|
Common | |
|
Subordinated | |
|
Partner | |
|
Loss | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Balance as of January 1, 2003
|
|
$ |
170,655 |
|
|
$ |
117,042 |
|
|
$ |
6,198 |
|
|
$ |
|
|
|
$ |
293,895 |
|
|
Net income
|
|
|
36,832 |
|
|
|
28,802 |
|
|
|
3,959 |
|
|
|
|
|
|
|
69,593 |
|
|
Cash distributions to partners
|
|
|
(34,559 |
) |
|
|
(27,839 |
) |
|
|
(3,518 |
) |
|
|
|
|
|
|
(65,916 |
) |
|
Sales of 7,567,250 common units to the public in March, April
and August 2003 and related general partner interest
contributions
|
|
|
269,026 |
|
|
|
|
|
|
|
5,787 |
|
|
|
|
|
|
|
274,813 |
|
|
Redemption of 3,809,750 common units held by UDS Logistics, LLC
and related general partner interest redemption
|
|
|
(134,065 |
) |
|
|
|
|
|
|
(2,857 |
) |
|
|
|
|
|
|
(136,922 |
) |
|
Other
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
310,589 |
|
|
|
118,005 |
|
|
|
9,569 |
|
|
|
|
|
|
|
438,163 |
|
|
Net income
|
|
|
42,290 |
|
|
|
30,201 |
|
|
|
5,927 |
|
|
|
|
|
|
|
78,418 |
|
|
Other comprehensive loss foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
42,290 |
|
|
|
30,201 |
|
|
|
5,927 |
|
|
|
(30 |
) |
|
|
78,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions to partners
|
|
|
(42,342 |
) |
|
|
(30,238 |
) |
|
|
(5,660 |
) |
|
|
|
|
|
|
(78,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
310,537 |
|
|
|
117,968 |
|
|
|
9,836 |
|
|
|
(30 |
) |
|
|
438,311 |
|
|
Net income
|
|
|
72,383 |
|
|
|
27,932 |
|
|
|
10,758 |
|
|
|
|
|
|
|
111,073 |
|
|
Other comprehensive loss foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,238 |
) |
|
|
(1,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
72,383 |
|
|
|
27,932 |
|
|
|
10,758 |
|
|
|
(1,238 |
) |
|
|
109,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions to partners
|
|
|
(85,138 |
) |
|
|
(31,773 |
) |
|
|
(10,878 |
) |
|
|
|
|
|
|
(127,789 |
) |
|
Exchange of 23,768,355 common units for all common units of KPP
in July 2005 and related general partner interest contributions
|
|
|
1,451,225 |
|
|
|
|
|
|
|
29,197 |
|
|
|
|
|
|
|
1,480,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
1,749,007 |
|
|
$ |
114,127 |
|
|
$ |
38,913 |
|
|
$ |
(1,268 |
) |
|
$ |
1,900,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-33
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, 2004 and 2003
|
|
1. |
ORGANIZATION AND OPERATIONS |
Valero L.P. is a Delaware limited partnership formed in 1999
that completed its initial public offering of common units in
April 16, 2001.
As used in this report, references to we,
us, our or the Partnership
collectively refer, depending on the context, to Valero L.P. or
a wholly owned subsidiary of Valero L.P.
Riverwalk Logistics, L.P., a wholly owned subsidiary of Valero
Energy Corporation (Valero Energy), is the 2% general partner of
the Partnership. Valero Energy, through various affiliates, is
also a limited partner in us, resulting in a combined
partnership ownership of 23.4%. The remaining 76.6% limited
partnership interests are held by public unitholders.
On July 1, 2005, we completed our acquisition (Kaneb
Acquisition) of Kaneb Services LLC (KSL) and Kaneb Pipe
Line Partners, L.P. (KPP, and, together with KSL, Kaneb). We
acquired all of KSLs outstanding equity securities for
approximately $509 million in cash, which was primarily
funded by borrowings under a $525 million term credit
agreement. Additionally, we issued approximately
23.8 million of our common units valued at approximately
$1.45 billion in exchange for all of the outstanding common
units of KPP.
Our operations are managed by Valero GP, LLC. Valero GP, LLC is
the general partner of Riverwalk Logistics, L.P. Valero GP, LLC
is an indirect wholly owned subsidiary of Valero Energy.
We conduct our operations through our subsidiaries, primarily
Valero Logistics Operations, L.P. (Valero Logistics) and, as a
result of the Kaneb Acquisition, Kaneb Pipe Line Operating
Partnership, L.P. (KPOP). We have four business segments:
refined product terminals, refined product pipelines, crude oil
pipelines and crude oil storage tanks. As of December 31,
2005, our assets included:
|
|
|
|
|
76 refined product terminal facilities providing approximately
59.7 million barrels of storage capacity; |
|
|
|
8,389 miles of refined product pipelines, including
2,000 miles of anhydrous ammonia pipelines, with 21
associated terminals providing storage capacity of
4.7 million barrels; |
|
|
|
797 miles of crude oil pipelines with 11 associated storage
tanks providing storage capacity of 1.7 million
barrels; and |
|
|
|
60 crude oil storage tanks providing storage capacity of
12.5 million barrels. |
We have terminal facilities in the United States, Canada,
Mexico, the Netherlands Antilles, the Netherlands, Australia,
New Zealand and the United Kingdom. Our largest customer is
Valero Energy, which accounted for 34% of our consolidated
revenues for the year ended December 31, 2005 (See
Note 14. Related Party Transactions).
Valero Energy, an independent refining and marketing company,
owns and operates 18 refineries with a combined total throughput
capacity as of December 31, 2005 of approximately
3.3 million barrels per day. Valero Energys refining
operations rely on various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities,
refinery delivery racks and rail car loading equipment) that
support its refining and retail operations, including the
logistics assets we own and operated.
F-34
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying consolidated financial statements represent the
consolidated operations of the Partnership and our subsidiaries
in which we have a controlling interest. Inter-partnership
balances and transactions have been eliminated in consolidation.
The operations of certain crude oil, refined product pipelines
and refined product terminals in which we own an undivided
interest, are proportionately consolidated in the accompanying
consolidated financial statements. Investments in 50% or less
owned entities are accounted for using the equity method of
accounting.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. On an ongoing basis,
management reviews their estimates based on currently available
information. Changes in facts and circumstances may result in
revised estimates.
|
|
|
Cash and Cash Equivalents |
Cash equivalents are all highly liquid investments with an
original maturity of three months or less when acquired.
Accounts receivable represent valid claims against
non-affiliated customers for products sold or services rendered.
We extend credit terms to certain customers after review of
various credit indicators, including the customers credit
rating. Outstanding customer receivable balances are regularly
reviewed for possible non-payment indicators and allowances for
doubtful accounts are recorded based upon managements
estimate of collectibility at the time of their review.
Inventories consist of petroleum products purchased for resale
and are valued at the lower of cost or market. Cost is
determined using the weighted-average cost method.
Additions to property and equipment, including reliability and
expansion capital expenditures and capitalized interest, are
recorded at cost.
Reliability capital expenditures represent capital expenditures
to replace partially or fully depreciated assets to maintain the
existing operating capacity of existing assets and extend their
useful lives. Expansion capital expenditures represent capital
expenditures to expand or upgrade the operating capacity,
increase efficiency or increase the earnings potential of
existing assets, whether through construction or acquisition.
Repair and maintenance costs associated with existing assets
that are minor in nature and do not extend the useful life of
existing assets are charged to operating expenses as incurred.
Depreciation of property and equipment is recorded on a
straight-line basis over the estimated useful lives of the
related assets. Gains or losses on sales or other dispositions
of property are recorded in income and are reported in
interest and other expense, net in the consolidated
statements of income. When property and equipment is retired or
otherwise disposed of, the difference between the carrying value
and the net proceeds is recognized as gain or loss in the
consolidated statement of income in the year retired.
F-35
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Goodwill and Intangible Assets |
Goodwill represents the excess of cost of an acquired entity
over the fair value of net assets acquired less liabilities
assumed. Intangible assets are assets that lack physical
substance (excluding financial assets). Goodwill acquired in a
business combination is not amortized. Intangible assets with
finite useful lives are amortized on a straight-line basis over
5 to 47 years. Goodwill and intangible assets not subject
to amortization are tested for impairment annually or more
frequently if events or changes in circumstances indicate the
asset might be impaired. We use October 1 of each year as
our annual valuation date for the impairment test. Based on the
results of the impairment tests performed as of October 1,
2005, 2004 and 2003, no impairment had occurred.
|
|
|
Investment in Joint Ventures |
Skelly-Belvieu Pipeline Company, LLC. Formed in 1993, the
Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu) owns a
liquefied petroleum gas pipeline that begins in Skellytown,
Texas and extends to Mont Belvieu, Texas near Houston.
Skelly-Belvieu is owned 50% by the Partnership and 50% by
ConocoPhillips. We account for this investment under the equity
method of accounting.
ST Linden Terminals, LLC. Formed in 1998, the
44-acre facility
provides us with deep-water terminalling capabilities at New
York Harbor and primarily stores petroleum products, including
gasoline, jet fuel and fuel oils. ST Linden Terminals, LLC
(Linden) is owned 50% by the Partnership and 50% by Northville
Industries Corp. We account for this investment under the equity
method of accounting.
|
|
|
Deferred Charges and Other Assets |
Deferred charges and other assets, net primarily
include the following:
|
|
|
|
|
deferred financing costs amortized over the life of the related
debt obligation using the effective interest method; and |
|
|
|
deferred costs incurred in connection with acquiring a customer
contract, which will be amortized over the life of the contract. |
|
|
|
Impairment of Long-Lived Assets |
Long-lived assets, including property and equipment and
investment in joint ventures, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The evaluation of
recoverability is performed using undiscounted estimated net
cash flows generated by the related asset. If an asset is deemed
to be impaired, the amount of impairment is determined as the
amount by which the net carrying value exceeds discounted
estimated net cash flows. We believe that the carrying amounts
of our long-lived assets as of December 31, 2005 are
recoverable.
|
|
|
Taxes Other than Income Taxes |
Taxes other than income taxes include primarily liabilities for
ad valorem taxes, franchise taxes, and value added taxes.
We are a limited partnership and are not subject to federal or
state income taxes. Accordingly, the taxable income or loss of
the Partnership, which may vary substantially from income or
loss reported for financial reporting purposes, is generally
includable in the federal and state income tax returns of the
individual partners. For transfers of publicly held units
subsequent to the initial public offering, we have made an
election permitted by Section 754 of the Internal Revenue
Code to adjust the common unit purchasers tax basis in our
underlying
F-36
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets to reflect the purchase price of the units. This results
in an allocation of taxable income and expenses to the purchaser
of the common units, including depreciation deductions and gains
and losses on sales of assets, based upon the new
unitholders purchase price for the common units.
Due to the Kaneb Acquisition, we conduct certain of our
operations through separate taxable wholly owned corporate
subsidiaries. Income taxes are accounted for under the asset and
liability method. 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 taxes 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.
|
|
|
Asset Retirement Obligations |
Effective January 1, 2003, we adopted FASB Statement
No. 143, Accounting for Asset Retirement
Obligations, which establishes financial accounting and
reporting standards for legal obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. We record a liability for asset
retirement obligations in the period the obligation is incurred
if we can make a reasonable estimate of the fair value of the
obligation. 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 fair value.
We have asset retirement obligations with respect to certain of
our assets due to various legal obligations to clean and/or
dispose of those assets at the time they are retired. However,
these assets can be used for extended and indeterminate period
of time as long as they are properly maintained and/or upgraded.
It is our practice and current intent to maintain our assets and
continue making improvements to those assets based on
technological advances. As a result, we believe that our assets
have indeterminate lives for purposes of estimating asset
retirement obligations because dates or ranges of dates upon
which we would retire these assets cannot reasonably be
estimated at this time. When a date or range of dates can
reasonably be estimated for the retirement of any asset, we
estimate the cost of performing the retirement activities and
record a liability for the fair value of that cost using
established present value techniques.
We also have legal obligations in the form of leases and right
of way agreements, which require us to remove certain of our
assets upon termination of the agreement. However, these lease
or right of way agreements generally contain automatic renewal
provisions that extend our rights indefinitely or we have other
legal means available to extend our rights. As a result, we have
not recorded a liability for asset retirement obligations as the
timing of settlement cannot be reasonably determined.
|
|
|
Environmental Remediation Costs |
Environmental remediation costs are expensed and an associated
accrual established when site restoration and environmental
remediation and cleanup obligations are either known or
considered probable and can be reasonably estimated. Accrued
liabilities are based on estimates of probable undiscounted
future costs over a
20-year time period
using currently available technology and applying current
regulations, as well as our own internal environmental policies.
The environmental liabilities have not been reduced by possible
recoveries from third parties. Environmental costs include
initial site surveys, costs for remediation and restoration and
ongoing monitoring costs, as well as fines, damages and other
costs, when estimable. Adjustments to initial estimates are
recorded, from time to time, to reflect changing circumstances
and estimates based upon additional information developed in
subsequent periods.
Product imbalances occur when customers deliver more or less
refined product volumes into our pipelines than they are
entitled to receive. We value assets and liabilities related to
product imbalances at current market
F-37
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prices. Product imbalance liabilities are included in accrued
liabilities on the consolidated balance sheet. Included in other
current assets is $20.0 million of product imbalance assets
as of December 31, 2005. Prior to the Kaneb Acquisition, we
did not have product imbalances.
Revenues for the refined product terminals segment include fees
for tank storage agreements, whereby a customer agrees to pay
for a certain amount of storage in a tank over a period of time
(storage lease revenues), and throughput agreements, whereby a
customer pays a fee per barrel for volumes moving through our
terminals (throughput revenues). Certain of our terminals also
provide blending, handling and filtering services. Revenues for
the refined product terminals segment also include the sale of
bunker fuel, the fuel used by marine vessels, at Point Tupper
and St. Eustatius for which we earn revenues based upon a price
per metric ton applied to the number of metric tons delivered to
our customer. Our facilities at Point Tupper, Nova Scotia and
St. Eustatius, Netherland Antilles charge fees to provide
ancillary services such as pilotage, tug assistance, line
handling, launch service, emergency response services and other
ship services.
Throughput revenues (based on a terminalling fee) are recognized
as refined products are delivered out of our terminal. Storage
revenues are recognized when services are provided to the
customer. Product revenues are recognized when product is sold
and title and risk pass to the customer. Revenues for ancillary
services are recognized as those services are provided.
Revenues for the refined product and crude oil pipelines
segments are derived from interstate and intrastate pipeline
transportation of refined product and crude oil. The revenues
for the East Pipeline, North Pipeline and Ammonia Pipeline are
based upon volumes and the distance the product is shipped and
the related tariffs. Transportation revenues (based on pipeline
tariffs) are recognized as refined products or crude oil is
delivered out of the pipelines.
Crude oil storage tank revenues are recognized as crude oil and
certain other refinery feedstocks are received by the related
refinery.
Our net income for each quarterly reporting period is first
allocated to the general partner in an amount equal to the
general partners incentive distribution declared for the
respective reporting period. The remaining net income is
allocated among the limited and general partners in accordance
with their respective 98% and 2% interests.
|
|
|
Net Income per Unit Applicable to Limited Partners |
We have identified the general partner and the subordinated
units as participating securities and use the two-class method
when calculating the net income per unit applicable to limited
partners, which is based on the weighted-average number of
common and subordinated units outstanding during the period. Net
income per unit applicable to limited partners is computed by
dividing net income applicable to limited partners, after
deducting the general partners 2% interest and incentive
distributions, by the weighted-average number of limited
partnership units outstanding. Basic and diluted net income per
unit applicable to limited partners is the same because we have
no potentially dilutive securities outstanding. The general
partners incentive distribution allocation for the years
ended December 31, 2005, 2004 and 2003 was
$8.7 million, $4.4 million and $2.6 million,
respectively. The amount of net income per unit allocated to
common units was equal to the amount allocated to the
subordinated units for the years presented.
F-38
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive income consists of net income and other gains and
losses affecting partners equity that, under United States
generally accepted accounting principles, are excluded from net
income, such as foreign currency translation adjustments.
|
|
|
Risk Management Activities |
Beginning in 2003, we entered into interest rate swap agreements
for the purpose of hedging the interest rate risk associated
with a portion of our fixed-rate senior notes. We account for
the interest rate swaps as fair value hedges and recognize the
fair value of each interest rate swap in the consolidated
balance sheet as either an asset or liability. Changes in the
fair value of the interest rate swaps, along with the offsetting
gain or loss on the debt that is being hedged, are recognized
currently in the consolidated statement of income as an
adjustment to interest expense.
|
|
|
New Accounting Pronouncements |
FASB Statement 153. In December 2004, the FASB
issued Statement No. 153, Exchanges of Nonmonetary
Assets, which addresses the measurement of exchanges of
nonmonetary assets. Statement No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges
of similar productive assets, which was previously provided by
APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance. Statement
No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
Statement No 153 was effective for nonmonetary asset
exchanges occurring in the fiscal periods beginning after
June 15, 2005. The adoption of Statement No. 153 did
not affect our financial position or results of operations.
FASB Interpretation No. 47. In March 2005, the FASB
issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarifies that the term conditional asset
retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. Since the obligation to
perform the asset retirement activity is unconditional,
FIN 47 provides that a liability for the fair value of a
conditional asset retirement obligation should be recognized if
that fair value can be reasonably estimated, even though
uncertainty exists about the timing and/or method of settlement.
FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of a
conditional asset retirement obligation under FASB Statement
No. 143. FIN 47 became effective for us for the year
ended December 31, 2005, and did not affect our financial
position or results of operations.
Certain previously reported amounts in the 2004 and 2003
consolidated financial statements have been reclassified to
conform to the 2005 presentation.
COMPLETED DURING 2005
On July 1, 2005, we completed the Kaneb Acquisition. We
acquired all of KSLs outstanding equity securities for
approximately $509 million in cash, which was primarily
funded by borrowings under our
F-39
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$525 million term credit agreement. Additionally, we issued
approximately 23.8 million of our common units valued at
approximately $1.45 billion in exchange for all of the
outstanding common units of KPP.
The Kaneb Acquisition expands our geographic presence and
creates one of the largest terminal and pipeline operations in
the United States. The Kaneb Acquisition also provides us with a
more diversified customer base, which minimizes our dependence
on one customer.
The financial statements include the results of operations of
the Kaneb Acquisition commencing on July 1, 2005.
|
|
|
Purchase Price Allocation |
The Kaneb Acquisition was accounted for using the purchase
method. The purchase price has been preliminarily allocated
based on the estimated fair values of the individual assets
acquired and liabilities assumed at the date of acquisition
pending completion of an independent appraisal and other
evaluations.
The purchase price and the preliminary purchase price allocation
as of December 31, 2005 were as follows (in thousands):
|
|
|
|
|
|
Cash paid for the outstanding equity securities of KSL
|
|
$ |
509,307 |
|
Value of Valero L.P.s common units issued in exchange for
KPP units
|
|
|
1,451,249 |
|
Transaction costs
|
|
|
10,532 |
|
Fair value of long-term debt assumed
|
|
|
779,707 |
|
Fair value of other liabilities assumed
|
|
|
181,618 |
|
|
|
|
|
|
Total
|
|
$ |
2,932,413 |
|
|
|
|
|
Current assets
|
|
$ |
602,910 |
|
Property and equipment
|
|
|
1,443,289 |
|
Goodwill
|
|
|
762,872 |
|
Intangible assets
|
|
|
58,000 |
|
Other noncurrent assets
|
|
|
65,342 |
|
|
|
|
|
|
Total
|
|
$ |
2,932,413 |
|
|
|
|
|
|
|
|
Unaudited Pro Forma Information |
The unaudited pro forma financial information below includes the
historical financial information of Kaneb and the Partnership
for the periods indicated. This financial information assumes
the following:
|
|
|
|
|
we completed the Kaneb Acquisition on January 1, 2004; |
|
|
|
we borrowed $525.0 million to purchase all of the
outstanding equity securities of KSL; |
|
|
|
we issued approximately 23.8 million common units in
exchange for all of the outstanding common units of KPP; |
|
|
|
we received a contribution from our general partner of
$29.2 million to maintain its 2% interest; and |
|
|
|
the results of operations of the Held Separate Businesses,
Martin Oil LLC, (a marketing subsidiary of KSL) and the
Australian and New Zealand subsidiaries are reported as
discontinued operations. |
F-40
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unaudited pro forma information presented below is not
necessarily indicative of the results of future operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars, | |
|
|
except per unit data) | |
Revenues
|
|
$ |
1,005,662 |
|
|
$ |
787,475 |
|
Operating income
|
|
|
130,347 |
|
|
|
179,936 |
|
Income from continuing operations
|
|
$ |
83,084 |
|
|
$ |
132,374 |
|
Income from discontinued operations
|
|
|
9,853 |
|
|
|
13,985 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
92,937 |
|
|
$ |
146,359 |
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.48 |
|
|
$ |
2.52 |
|
|
Discontinued operations
|
|
|
0.21 |
|
|
|
0.29 |
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.69 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
COMPLETED DURING 2004
|
|
|
Royal Trading Asphalt Terminals |
On February 20, 2004, we acquired two asphalt terminals,
one in Catoosa, Oklahoma near Tulsa and one in Rosario, New
Mexico near Santa Fe, from Royal Trading Company (Royal
Trading) for $28.1 million. These terminals have an
aggregate storage capacity of 500,000 barrels in 32 tanks
and six loading stations. The purchase price was allocated to
the individual tangible and identifiable intangible assets
acquired based on their fair values as determined by an
independent appraisal. In conjunction with the Royal Trading
acquisition, we entered into an agreement with Valero Energy
(See Note 14. Related Party Transactions).
The results of operations for these two terminals are included
in the consolidated statements of income commencing on
February 20, 2004. The pro forma financial information for
the years ended December 31, 2004 and 2003 that give effect
to the acquisition of Royal Trading as of January 1, 2004
and 2003 have not been disclosed, as the effect is not
significant.
COMPLETED DURING 2003
On January 7, 2003, we completed our acquisition of Telfer
Oil Companys (Telfer) Pittsburg, California asphalt
terminal for $15.3 million. The asphalt terminal includes
two storage tanks with a combined storage capacity of
350,000 barrels, six
5,000-barrel polymer
modified asphalt tanks, a truck rack, rail facilities and
various other tanks and equipment. In conjunction with the
Telfer acquisition, we entered into a six-year Terminal Storage
and Throughput Agreement with Valero Energy. A portion of the
purchase price represented payment to the principal owner of
Telfer for a non-compete agreement and for the lease of certain
facilities adjacent to the terminal operations.
|
|
|
South Texas Pipelines and Terminals |
On March 18, 2003, Valero Energy contributed the South
Texas pipeline system to us for $150.1 million, including
transaction costs. The South Texas pipeline system was comprised
of the Houston pipeline system, the Valley pipeline system and
the San Antonio pipeline system (together referred to as
the South Texas Pipelines
F-41
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and Terminals). In conjunction with the South Texas Pipelines
and Terminals acquisition, we entered into several agreements
with Valero Energy (See Note 14. Related Party
Transactions).
The following unaudited pro forma financial information assumes
that the South Texas Pipelines and Terminals acquisition was
funded with $111.0 million of net proceeds from the
issuance of the 6.05% senior notes, $25.0 million of
borrowings under the revolving credit facility,
$6.7 million of net proceeds from the issuance of 185,422
common units and the related general partner capital
contribution and $7.4 million of available cash.
The unaudited pro forma financial information for the years
ended December 31, 2003 assumes that the South Texas
Pipelines and Terminals acquisition occurred on January 1,
2003.
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
(Thousands of dollars, | |
|
|
except per unit data) | |
Revenues
|
|
$ |
187,294 |
|
Operating income
|
|
|
85,028 |
|
Net income
|
|
|
69,930 |
|
Net income per unit applicable to limited partners
|
|
$ |
3.03 |
|
On March 18, 2003, Valero Energy contributed 58 crude oil
storage tanks and related assets (the Crude Oil Storage Tanks)
to us for $200.2 million, including transaction costs. The
Crude Oil Storage Tanks consisted of certain tank shells,
foundations, tank valves, tank gauges, pressure equipment,
temperature equipment, corrosion protection, leak detection,
tank lighting and related equipment located at Valero
Energys Corpus Christi refinery, Texas City refinery and
Benicia refinery.
Historically, the Crude Oil Storage Tanks were operated as part
of Valero Energys refining operations and, as a result, no
separate fee was charged related to these assets and,
accordingly, no revenues were recorded by Valero Energy. The
Crude Oil Storage Tanks were not accounted for separately by
Valero Energy and were not operated as an autonomous business
unit. As a result, the purchase of the Crude Oil Storage Tanks
represented an asset acquisition and, therefore, no pro forma
impact of this transaction has been included above. In
conjunction with the Crude Oil Storage Tanks acquisition, we
entered into several agreements with Valero Energy (See
Note 14. Related Party Transactions).
On May 1, 2003, we acquired Shell Pipeline Company,
LPs (Shell) 28% undivided interest in the Amarillo to
Abernathy refined product pipeline and Shells 46%
undivided interest in the Abernathy to Lubbock refined product
pipeline for $1.6 million. After this acquisition, we own a
67% undivided interest and ConocoPhillips owns the remaining 33%
undivided interest in the Amarillo to Abernathy refined product
pipeline and we own a 46% undivided interest and ConocoPhillips
owns the remaining 54% undivided interest in the Abernathy to
Lubbock refined product pipeline.
|
|
|
Southlake Refined Product Pipeline |
Effective August 1, 2003, we acquired the Southlake refined
product pipeline from Valero Energy for $29.9 million. The
pipeline, which has a capacity of 27,300 barrels per day,
is a 375-mile pipeline
connecting Valero Energys McKee refinery to our Southlake
refined product terminal near Dallas, Texas.
F-42
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Paulsboro Refined Product Terminal |
On September 3, 2003, we acquired the Paulsboro refined
product terminal from ExxonMobil Oil Corporation for
$14.1 million. The Paulsboro refined product terminal is
located in Paulsboro, New Jersey, next to Valero Energys
Paulsboro refinery. The terminal has a storage capacity of
90,800 barrels.
|
|
|
Purchase Price Allocations for 2003 Acquisitions |
The purchase prices for the Telfer, South Texas Pipelines and
Terminals, Crude Oil Storage Tanks, Shell, Southlake and
Paulsboro acquisitions were allocated based on the fair values
of the individual assets acquired at the date of acquisition.
The following summarizes the purchase price allocation of the
assets acquired in 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property | |
|
|
|
|
|
|
and | |
|
Intangible | |
|
|
|
|
Equipment | |
|
Assets | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Telfer (Pittsburg) Asphalt Terminal
|
|
$ |
15,047 |
|
|
$ |
250 |
|
|
$ |
15,297 |
|
South Texas Pipelines and Terminals
|
|
|
149,575 |
|
|
|
540 |
|
|
|
150,115 |
|
Crude Oil Storage Tanks
|
|
|
200,198 |
|
|
|
|
|
|
|
200,198 |
|
Shell Pipeline Interest
|
|
|
1,600 |
|
|
|
|
|
|
|
1,600 |
|
Southlake Refined Product Pipeline
|
|
|
29,911 |
|
|
|
|
|
|
|
29,911 |
|
Paulsboro Refined Product Terminal
|
|
|
14,055 |
|
|
|
|
|
|
|
14,055 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Price Allocations
|
|
$ |
410,386 |
|
|
$ |
790 |
|
|
$ |
411,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4. |
DISPOSITIONS AND ASSETS AND LIABILITIES OF BUSINESSES HELD
FOR SALE |
|
|
|
Sale of Held Separate Businesses |
In conjunction with the Kaneb Acquisition, we agreed with the
United States Federal Trade Commission to divest certain assets.
These assets consisted of two California terminals handling
refined products, blendstocks, and crude oil, three East Coast
refined product terminals, and a
550-mile refined
products pipeline with four truck terminals and storage in the
U.S. Rocky Mountains (collectively, the Held Separate
Businesses).
On September 30, 2005, we sold the Held Separate Businesses
to Pacific Energy Partners, L.P. for approximately
$455.0 million. Results of operations related to the Held
Separate Businesses are classified as income from discontinued
operations in the consolidated statement of income for the year
ended December 31, 2005. Revenues and pre-tax income
related to the Held Separate Businesses were $14.2 million
and $3.2 million, respectively, for the year ended
December 31, 2005. Income tax expense was not included in
discontinued operations related to the Held Separate Businesses
as they were owned by entities that were not subject to income
tax. Additionally, interest expense of approximately
$4.9 million was allocated to the Held Separate Businesses
as certain of our debt agreements required us to use the
proceeds from the sale of the Held Separate Businesses to repay
outstanding debt.
In a separate transaction that occurred simultaneously with the
closing of the Kaneb Acquisition, we sold all of our interest in
Kanebs commodity trading business, Martin Oil LLC, to
Valero Energy for approximately $26.8 million.
F-43
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Assets and Liabilities of Businesses Held for Sale |
On December 13, 2005, we entered into a definitive
agreement to sell our subsidiaries located in Australia and New
Zealand (the Australia and New Zealand Subsidiaries) for
approximately $65.0 million plus working capital
adjustments. These assets combined have a total capacity of
approximately 1.1 million barrels.
As a result, the assets and liabilities of the Australia and New
Zealand Subsidiaries have been classified as assets and
liabilities of businesses held for sale in the accompanying
consolidated balance sheet. The amounts are reflected within
current assets and liabilities as the sale closed in the first
quarter of 2006. The results of operations for the Australia and
New Zealand Subsidiaries for 2005 have been included in income
from discontinued operations. Revenues and pre-tax income
related to the Australia and New Zealand Subsidiaries, included
in income from discontinued operations, were $10.1 million
and $0.2 million, respectively, for the year ended
December 31, 2005. Income tax expense associated with the
Australia and New Zealand Subsidiaries totaled $0.1 million
for the year ended December 31, 2005. Additionally, the
income from discontinued operations includes interest expense of
approximately $1.5 million allocated to the Australia and
New Zealand Subsidiaries based upon the expected proceeds and
the interest rate applicable to our debt.
Assets and liabilities of businesses held for sale consisted of
the following:
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
(Thousand of dollars) | |
Current assets
|
|
$ |
8,047 |
|
Property and equipment, net
|
|
|
68,726 |
|
Other assets
|
|
|
3,034 |
|
|
|
|
|
Assets of businesses held for sale
|
|
|
79,807 |
|
|
|
|
|
Current liabilities
|
|
|
3,606 |
|
Deferred income taxes
|
|
|
3,604 |
|
Other liabilities
|
|
|
3,890 |
|
|
|
|
|
Liabilities of businesses held for sale
|
|
$ |
11,100 |
|
|
|
|
|
|
|
5. |
ALLOWANCE FOR DOUBTFUL ACCOUNTS |
The changes in the allowance for doubtful accounts consisted of
the following:
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2005 | |
|
|
| |
|
|
(Thousands of dollars) | |
Balance as of December 31, 2004
|
|
$ |
|
|
|
Fair value of amounts acquired in the Kaneb Acquisition
|
|
|
2,265 |
|
|
Accounts charged against the allowance, net of recoveries
|
|
|
(289 |
) |
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
1,976 |
|
|
|
|
|
F-44
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6. |
PROPERTY AND EQUIPMENT |
Property and equipment, at cost, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
December 31, | |
|
|
Useful | |
|
| |
|
|
Lives | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(Years) | |
|
|
|
|
|
|
(Thousands of dollars) | |
Land
|
|
|
|
|
|
$ |
92,741 |
|
|
$ |
8,526 |
|
Land and leasehold improvements
|
|
|
15 35 |
|
|
|
63,465 |
|
|
|
3,942 |
|
Buildings
|
|
|
25 40 |
|
|
|
26,282 |
|
|
|
10,464 |
|
Pipeline and equipment
|
|
|
20 35 |
|
|
|
2,096,415 |
|
|
|
876,905 |
|
Rights of way
|
|
|
20 35 |
|
|
|
96,554 |
|
|
|
68,446 |
|
Construction in progress
|
|
|
|
|
|
|
42,072 |
|
|
|
13,077 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
2,417,529 |
|
|
|
981,360 |
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(257,316 |
) |
|
|
(196,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$ |
2,160,213 |
|
|
$ |
784,999 |
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest costs included in property and equipment
were $1.0 million, $0.2 million and $0.1 million
for the years ended December 31, 2005, 2004 and 2003,
respectively.
In the fourth quarter of 2005, a portion of the Three Rivers to
Pettus to Corpus Christi refined product pipeline was
permanently idled. As a result, we recorded an impairment charge
of $2.1 million, included in interest and other
expense, net in the accompanying consolidated statement of
income.
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
|
|
Accumulated | |
|
|
|
Accumulated | |
|
|
Cost | |
|
Amortization | |
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
58,000 |
|
|
$ |
(2,900 |
) |
|
$ |
|
|
|
$ |
|
|
|
Non-compete agreements
|
|
|
1,765 |
|
|
|
(701 |
) |
|
|
1,765 |
|
|
|
(348 |
) |
|
Consulting agreements
|
|
|
1,150 |
|
|
|
(422 |
) |
|
|
1,150 |
|
|
|
(192 |
) |
|
Other
|
|
|
2,359 |
|
|
|
(92 |
) |
|
|
2,359 |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
63,274 |
|
|
$ |
(4,115 |
) |
|
$ |
5,274 |
|
|
$ |
(579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our intangible assets are subject to amortization.
Amortization expense for intangible assets was
$3.5 million, $0.6 million and $0.1 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. The estimated aggregate amortization expense is
approximately $6.4 million per year for the years ending
December 31, 2006 through 2008 and $5.9 million for
the years ending December 31, 2009 and 2010.
F-45
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8. |
INVESTMENT IN JOINT VENTURES |
The following presents summarized combined unaudited financial
information related to our joint ventures as of
December 31, 2005 and 2004 and for the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars) | |
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
9,138 |
|
|
$ |
2,928 |
|
Property, plant and equipment, net
|
|
|
71,066 |
|
|
|
45,235 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
80,204 |
|
|
$ |
48,163 |
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
3,686 |
|
|
$ |
378 |
|
Other long-term liabilities
|
|
|
1,076 |
|
|
|
|
|
Members equity
|
|
|
75,442 |
|
|
|
47,785 |
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
80,204 |
|
|
$ |
48,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005(a) | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Statement of Income Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
27,525 |
|
|
$ |
9,355 |
|
|
$ |
11,613 |
|
Net income
|
|
|
10,715 |
|
|
|
1,916 |
|
|
|
4,062 |
|
Our share of net income(b)
|
|
|
2,499 |
|
|
|
1,344 |
|
|
|
2,416 |
|
Our share of distributions
|
|
|
4,932 |
|
|
|
1,373 |
|
|
|
2,803 |
|
|
|
(a) |
Revenues and net income reflect the amounts for the year ended
December 31, 2005. Our share of net income and
distributions related to investments in the joint ventures
acquired as part of the Kaneb Acquisition reflect amounts for
the six months ended December 31, 2005. |
|
|
(b) |
For 2005, our share of net income shown in the table includes
$0.2 million of income that is included in income from
discontinued operations in the consolidated statement of income. |
|
|
|
Skelly-Belvieu Pipeline Company |
Upon the formation of Skelly-Belvieu, we contributed certain
equipment to Skelly-Belvieu in exchange for 50% of its
members equity. Our investment in Skelly-Belvieu was
recorded at the carrying amount of the contributed equipment.
However, the financial statements of Skelly-Belvieu reflect
these assets at fair value at the date of formation. As a
result, our 50% share of Skelly-Belvieus members
equity exceeds the carrying value of our investment. This
excess, which totaled $7.8 million as of December 31,
2005 and $8.2 million as of December 31, 2004, is
being accreted into income over the average life of the assets
held by Skelly-Belvieu, or 33 years.
As part of the Kaneb Acquisition, we acquired an investment in
Linden. As part of the preliminary allocation of the purchase
price of Kaneb, we increased the carrying amount of our
investment in Linden to its fair value. As a result, the
carrying value of our investment in Linden exceeds our 50% share
of its members equity. This excess totaled
$37.6 million as of December 31, 2005, of which
$8.0 million is being amortized into expense
F-46
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the average life of the assets held by Linden, or
25 years. The balance not being amortized has been
preliminarily allocated to goodwill of Linden.
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of | |
|
|
dollars) | |
Employee wage and benefit costs
|
|
$ |
9,819 |
|
|
$ |
3,941 |
|
Unearned income
|
|
|
9,525 |
|
|
|
48 |
|
Environmental costs
|
|
|
2,404 |
|
|
|
265 |
|
Product shortages
|
|
|
17,547 |
|
|
|
|
|
Other
|
|
|
7,622 |
|
|
|
892 |
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$ |
46,917 |
|
|
$ |
5,146 |
|
|
|
|
|
|
|
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars) | |
6.05% senior notes due 2013, net of unamortized discount of
$507 in 2005 and $577 in 2004 and a fair value adjustment of
$2,197 in 2005 and $441 in 2004
|
|
$ |
247,296 |
|
|
$ |
248,982 |
|
6.875% senior notes due 2012, net of unamortized discount
of $205 in 2005 and $237 in 2004 and a fair value adjustment of
$1,805 in 2005 and $776 in 2004
|
|
|
97,990 |
|
|
|
98,987 |
|
7.75% senior notes due 2012, including a fair value
adjustment of $37,893 in 2005
|
|
|
287,893 |
|
|
|
|
|
5.875% senior notes due 2013, including a fair value
adjustment of $13,714 in 2005
|
|
|
263,714 |
|
|
|
|
|
$525 million term credit agreement
|
|
|
225,000 |
|
|
|
|
|
$400 million revolving credit agreement
|
|
|
4,000 |
|
|
|
|
|
$175 million revolving credit facility
|
|
|
|
|
|
|
28,000 |
|
UK term loan
|
|
|
36,131 |
|
|
|
|
|
Port Authority of Corpus Christi note payable
|
|
|
8,681 |
|
|
|
9,192 |
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,170,705 |
|
|
|
385,161 |
|
Less current portion
|
|
|
(1,046 |
) |
|
|
(990 |
) |
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$ |
1,169,659 |
|
|
$ |
384,171 |
|
|
|
|
|
|
|
|
F-47
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The long-term debt repayments are due as follows (in thousands):
|
|
|
|
|
|
2006
|
|
$ |
1,046 |
|
2007
|
|
|
611 |
|
2008
|
|
|
660 |
|
2009
|
|
|
713 |
|
2010
|
|
|
265,901 |
|
Thereafter
|
|
|
854,881 |
|
|
|
|
|
|
Total repayments
|
|
|
1,123,812 |
|
Net fair value adjustment and unamortized discount
|
|
|
46,893 |
|
|
|
|
|
|
Total debt
|
|
$ |
1,170,705 |
|
|
|
|
|
Interest payments totaled $53.2 million, $24.1 million
and $15.7 million for the years ended December 31,
2005, 2004 and 2003, respectively.
On March 18, 2003, Valero Logistics completed the sale of
$250 million of 6.05% senior notes, issued in a
private placement to institutional investors, for net proceeds
of $247.3 million. Interest on the 6.05% senior notes
is payable semi-annually in arrears on March 15 and September 15
of each year beginning September 15, 2003. Although the
6.05% senior notes were not initially registered under the
Securities Act of 1933 or any other securities laws, we
exchanged the outstanding $250.0 million 6.05% senior
notes that were not registered for $250.0 million of
6.05% senior notes that have been registered under the
Securities Act of 1933 in July 2003.
On July 15, 2002, we completed the sale of
$100.0 million of 6.875% senior notes for net proceeds
of $98.2 million. The net proceeds were used to repay the
$91.0 million then outstanding under the revolving credit
facility. Interest on the 6.875% senior notes is payable
semi-annually in arrears on January 15 and July 15 of each year.
The 6.05% and the 6.875% senior notes do not have sinking
fund requirements. These notes rank equally with existing senior
unsecured indebtedness of Valero Logistics, including
indebtedness under the revolving credit agreement and term loan
agreement. Both series of senior notes contain restrictions on
Valero Logistics ability to incur secured indebtedness
unless the same security is also provided for the benefit of
holders of the senior notes. In addition, the senior notes limit
Valero Logistics ability to incur indebtedness secured by
certain liens and to engage in certain sale-leaseback
transactions.
At the option of Valero Logistics, the 6.05% and the
6.875% senior notes may be redeemed in whole or in part at
any time at a redemption price, which includes a make-whole
premium, plus accrued and unpaid interest to the redemption
date. The Valero Logistics senior notes also include a
change-in-control
provision, which requires (1) that Valero Energy or an
investment grade entity own, directly or indirectly, 51% of our
general partner interests and (2) that we (or an investment
grade entity) own, directly or indirectly, all of the general
partner and limited partner interests in Valero Logistics.
Otherwise, Valero Logistics must offer to purchase the senior
notes at a price equal to 100% of their outstanding principal
balance plus accrued interest through the date of purchase.
F-48
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
7.75% and 5.875% Senior Notes |
As a result of the Kaneb Acquisition, we assumed the outstanding
senior notes issued by KPOP, having an aggregate face value of
$500.0 million, and an aggregate fair value of
$555.0 million. The difference between the fair value and
the face value of the senior notes is being amortized as a
reduction of interest expense over the remaining lives of the
senior notes using the effective interest method.
The senior notes were issued in two series, the first of which
bears interest at 7.75% annually (due semi-annually on February
15 and August 15) and matures February 15, 2012. The
second series bears interest at 5.875% annually (due on
June 1 and December 1) and matures June 1, 2013.
The 7.75% and 5.875% senior notes do not contain sinking
fund requirements. These notes contain restrictions on our
ability to incur indebtedness secured by liens, to engage in
certain sale-leaseback transactions, to engage in certain
transactions with affiliates, as defined, and to utilize
proceeds from the disposition of certain assets. At the option
of KPOP, the 7.75% and 5.875% senior notes may be redeemed
in whole or in part at any time at a redemption price, which
includes a make-whole premium, plus accrued and unpaid interest
to the redemption date.
The senior notes issued by Valero Logistics are fully and
unconditionally guaranteed by Valero L.P. In connection with the
Kaneb Acquisition, effective July 1, 2005, Valero L.P.
fully and unconditionally guaranteed the outstanding senior
notes issued by KPOP. Additionally, effective July 1, 2005,
both Valero Logistics and KPOP fully and unconditionally
guaranteed the outstanding senior notes of the other.
|
|
|
$525 Million Term Loan Agreement |
On July 1, 2005, we borrowed $525.0 million under our
new $525 million term loan agreement dated July 1,
2005 (the $525 Term Loan Agreement), the majority of which was
used to fund the Kaneb Acquisition. The $525 Million Term
Loan Agreement matures on July 1, 2010 and bears interest
based on either an alternative base rate or LIBOR, which was
5.2% as of December 31, 2005. The weighted-average interest
rate related to outstanding borrowings under the
$525 Million Term Loan Agreement for the year ended
December 31, 2005 was 4.5%. With a portion of the proceeds
received from the sale of the Held Separate Businesses, we
repaid $300.0 million of the outstanding balance. As of
December 31, 2005, our outstanding balance under the
$525 Million Term Loan Agreement was $225.0 million.
No additional funds may be borrowed under the $525 Million
Term Loan Agreement.
|
|
|
$400 Million Revolving Credit Agreement |
On July 1, 2005, we borrowed $180.0 million under our
$400 million revolving credit agreement (the
$400 Million Revolving Credit Agreement), dated effective
December 20, 2004 as amended on June 30, 2005, which
expires on July 1, 2010 and bears interest based on either
an alternative base rate or LIBOR, which was 5.2% as of
December 31, 2005. Utilizing the $180.0 million
borrowing, other proceeds and cash on hand, on July 1,
2005, we repaid approximately $191.5 million of the
outstanding indebtedness of Kaneb and repaid $38.0 million
of indebtedness outstanding on our prior $175 million
revolving credit facility.
During the year ended December 31, 2005, we repaid the
$209.5 million outstanding under the $400 Million
Revolving Credit Agreement, including $160.0 million which
was repaid using a portion of the proceeds from the sale of the
Held Separate Businesses on September 30, 2005. As of
December 31, 2005, we had $395.1 million available for
borrowing under the $400 Million Revolving Credit
Agreement. The weighted-average interest rate related to
outstanding borrowings under the $400 Million Revolving
Credit Agreement for the year ended December 31, 2005 was
4.3%.
F-49
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
$175 Million Revolving Credit Facility |
We terminated our $175 million revolving credit facility on
July 1, 2005 by repaying the $38.0 million outstanding
amount using proceeds from our new $400 Million Revolving
Credit Agreement. At Valero Logistics option, borrowings
under the revolving credit facility bore interest based on
either an alternative base rate or LIBOR.
As a result of the Kaneb Acquisition, on July 1, 2005, we
amended and restated a term loan agreement of Kanebs UK
subsidiary dated January 29, 1999 (the UK Term Loan), and
assumed the outstanding obligation of 21,000,000 Pounds Sterling
($36.1 million as of December 31, 2005). The UK Term
Loan bears interest at 6.65% annually and matures June 30,
2010.
The $525 Million Term Loan Agreement, the $400 Million
Revolving Credit Agreement and the UK Term Loan all require that
we maintain certain financial ratios and include other
restrictive covenants, including a prohibition on distributions
if any defaults, as defined in the agreements, exists or would
result from the distribution. These agreements include a change
in control provision, which requires that Valero Energy continue
to own, directly or indirectly, a majority of Valero L.P.s
general partner interest and that Valero Energy and/or Valero
L.P. own 100% of the borrower or 100% of the outstanding limited
partner interest in borrower. Management believes that we are in
compliance with all of these ratios and covenants as of
December 31, 2005.
Valero Logistics and KPOP own and operate pipelines, terminals
and storage tanks and are issuers of the publicly traded senior
notes. Valero L.P. has no operations and has fully and
unconditionally guaranteed the senior notes issued by KPOP and
Valero Logistics and any obligations under Valero
Logistics $400 Million Revolving Credit Agreement and
$525 Million Term Loan Agreement and the Kaneb UK Term Loan.
|
|
|
Port Authority of Corpus Christi Note Payable |
The proceeds from the original $12.0 million note payable
due to the Port of Corpus Christi Authority of Nueces County,
Texas (Port Authority of Corpus Christi) were used for the
construction of a crude oil storage facility in Corpus Christi,
Texas. The note payable is due in annual installments of
$1.2 million through December 31, 2015 and is
collateralized by the crude oil storage facility. Interest on
the unpaid principal balance accrues at a rate of 8% per
annum. The land on which the crude oil storage facility was
constructed is leased from the Port Authority of Corpus Christi.
During 2003, we entered into interest rate swap agreements to
manage our exposure to changes in interest rates. The interest
rate swap agreements have an aggregate notional amount of
$167.5 million, of which $60.0 million is tied to the
maturity of the 6.875% senior notes and $107.5 million
is tied to the maturity of the 6.05% senior notes. Under
the terms of the interest rate swap agreements, we will receive
a fixed rate (6.875% and 6.05% for the $60.0 million and
$107.5 million of interest rate swap agreements,
respectively) and will pay a variable rate based on LIBOR plus a
percentage that varies with each agreement.
The interest rate swap contracts qualified for the shortcut
method of accounting prescribed by SFAS 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended. As a result, changes in the fair
value of the derivatives will completely offset the changes in
the fair value of the underlying hedged items.
As of December 31, 2005 and 2004, the weighted average
effective interest rate for the interest rate swaps was 6.6% and
4.7%, respectively. As of December 31, 2005 and 2004, the
aggregate estimated fair value of the interest rate swaps
included in other long-term liabilities in the consolidated
balance sheet was $4.0 million and $1.2 million,
respectively.
F-50
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11. |
HEALTH, SAFETY AND ENVIRONMENTAL MATTERS |
Our operations are subject to extensive federal, state and local
environmental laws and regulations, including those relating to
the discharge of materials into the environment, waste
management and pollution prevention measures. Our operations are
also subject to extensive federal and state health and safety
laws and regulations, including those relating to pipeline
safety. The principal environmental and safety risks associated
with our operations relate to unauthorized emissions into the
air, unauthorized releases into soil, surface water or
groundwater, and personal injury and property damage. Compliance
with these environmental and safety laws, regulations and
permits increases our capital expenditures and our overall cost
of business, and violations of these laws, regulations and/or
permits can result in significant civil and criminal
liabilities, injunctions or other penalties.
The pipelines in the Central West System, the East Pipeline, the
North Pipeline and the Ammonia Pipeline are subject to federal
regulation by one or more of the following governmental agencies
or laws: the Federal Energy Regulatory Commission (the FERC),
the Surface Transportation Board (the STB), the Department of
Transportation (DOT), the Environmental Protection Agency (EPA),
and the Homeland Security Act. Additionally, the operations and
integrity of the Pipelines are subject to the respective state
jurisdictions along the route of the systems.
We have adopted policies, practices and procedures in the areas
of pollution control, pipeline integrity, operator
qualifications, public relations and education, product safety,
occupational health and the handling, storage, use and disposal
of hazardous materials that are designed to prevent material
environmental or other damage, to ensure the safety of our
pipelines, our employees, the public and the environment and to
limit the financial liability that could result from such
events. Future governmental action and regulatory initiatives
could result in changes to expected operating permits and
procedures, additional remedial actions or increased capital
expenditures and operating costs that cannot be assessed with
certainty at this time. In addition, contamination resulting
from spills of crude oil and refined products occurs within the
industry. Risks of additional costs and liabilities are inherent
within the industry, and there can be no assurances that
significant costs and liabilities will not be incurred in the
future.
Valero Energy has agreed to indemnify us for a period of ten
years from the date of acquisition for pre-acquisition
environmental liabilities related to assets transferred or
otherwise acquired by the Partnership from Valero Energy or UDS.
Excluded from this indemnification are liabilities that result
from a change in environmental law after the date of acquisition.
Additionally, ExxonMobil has agreed to indemnify us for
pre-acquisition environmental liabilities in connection with off
site disposal activities performed prior to September 4,
2003 related to the Paulsboro refined product terminal
acquisition (See Note 3. Acquisitions).
As an operator or owner of the assets, we could be held liable
for pre-acquisition environmental liabilities should Valero
Energy or ExxonMobil be unable to fulfill their obligations.
However, we believe that such a situation is unlikely.
Environmental and safety exposures and liabilities are difficult
to assess and estimate due to unknown factors such as the timing
and extent of remediation, the determination of our liability in
proportion to other parties, improvements in cleanup
technologies and the extent to which environmental and safety
laws and regulations may change in the future. Although
environmental and safety costs may have a significant impact on
the results of operations for any single period, we believe that
such costs will not have a material adverse effect on our
financial position.
F-51
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The balance of and changes in the accruals for environmental
matters were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance as of beginning of year
|
|
$ |
343 |
|
|
$ |
125 |
|
|
Fair value of amounts acquired in the Kaneb Acquisition
|
|
|
22,234 |
|
|
|
|
|
|
Additions to accrual
|
|
|
1,157 |
|
|
|
271 |
|
|
Amounts related to Held Separate Businesses
|
|
|
(3,137 |
) |
|
|
|
|
|
Payments
|
|
|
(3,097 |
) |
|
|
(53 |
) |
|
Foreign currency translation
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$ |
17,509 |
|
|
$ |
343 |
|
|
|
|
|
|
|
|
Accruals for environmental matters are included in the
consolidated balance sheet as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued liabilities
|
|
$ |
2,404 |
|
|
$ |
265 |
|
Liabilities of businesses held for sale
|
|
|
3,051 |
|
|
|
|
|
Other long-term liabilities
|
|
|
12,054 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
Accruals for environmental matters
|
|
$ |
17,509 |
|
|
$ |
343 |
|
|
|
|
|
|
|
|
|
|
12. |
COMMITMENTS AND CONTINGENCIES |
We have contingent liabilities resulting from various
litigation, claims and commitments, the most significant of
which are discussed below. We record accruals for loss
contingencies when losses are considered probable and can be
reasonably estimated. Legal fees associated with defending our
self in legal matters are expensed as incurred. As of
December 31, 2005, we have recorded accruals for contingent
losses totaling $59.1 million. The actual payment of any
amounts accrued and the timing of such payments ultimately made
is uncertain. We believe that should we be unable to
successfully defend ourselves in any of these matters, the
ultimate payment of any or all of the amounts reserved would not
have a material adverse effect on our financial position or
liquidity. However, if any actual losses ultimately exceed the
amounts accrued, there could be a material adverse effect on our
results of operations.
Grace Energy Corporation Matter. In 1997, Grace Energy
Corporation (Grace Energy) sued subsidiaries of Kaneb in Texas
state court. The complaint sought recovery of the cost of
remediation of fuel leaks in the 1970s from a pipeline that had
once connected a former Grace Energy terminal with Otis Air
Force Base in Massachusetts (Otis AFB). Grace Energy alleges the
Otis AFB pipeline and related environmental liabilities had been
transferred in 1978 to an entity that was part of Kanebs
acquisition of Support Terminal Services, Inc. and its
subsidiaries from Grace Energy in 1993. Kaneb contends that it
did not acquire the Otis Air Force pipeline and never assumed
any responsibility for any associated environmental damage.
In 2000, the court entered final judgment that: (i) Grace
Energy could not recover its own remediation costs of
$3.5 million, (ii) Kaneb owned the Otis AFB pipeline
and its related environmental liabilities and (iii) Grace
Energy was awarded $1.8 million in attorney costs. Both
Kaneb and Grace Energy appealed the trial courts final
judgment to the Texas Court of Appeals in Dallas. In 2001, Grace
Energy filed a petition in bankruptcy, which created an
automatic stay of actions against Grace Energy. Once that stay
is lifted, we intend to resume vigorous prosecution of the
appeal.
F-52
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Otis Air Force Base is a part of a Superfund Site pursuant
to the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA). The site contains a number of
groundwater contamination plumes, two of which are allegedly
associated with the Otis Air Force pipeline. Relying on the
Texas state courts final judgment assigning ownership of
the Otis Air Force pipeline to Kaneb, the U.S. Department
of Justice advised Kaneb in 2001 that it intends to seek
reimbursement from Kaneb for the remediation costs associated
with the two spill areas. In 2002, the Department of Justice
asserted that it had incurred over $49.0 million in costs
and expected to incur additional costs of approximately
$19.0 million for remediation of the two spill areas. The
Department of Justice has not filed a lawsuit against us on this
matter.
Potomac Electric Power Company Matter. On
December 14, 2002, Potomac Electric Power Company sued
subsidiaries of Kaneb in the U.S. District Court for the
District of Maryland, seeking recovery of all its costs
associated with an oil spill in 2000 resulting from a rupture in
a fuel oil pipeline in Maryland owned by Potomac Electric and
operated by a subsidiary of Kaneb. Potomac Electric alleged that
it has incurred costs of approximately $80.0 million as a
result of the spill. This matter was settled, and the case was
dismissed and entered on December 19, 2005. The effect of
this settlement, net of insurance recoveries, were immaterial to
our financial position and our results of operations.
Port of Vancouver Matter. We own a refined products
terminal on property owned by the Port of Vancouver, and we
lease the land under the terminal from the Port of Vancouver.
Under an Agreed Order entered into with the Washington
Department of Ecology when Kaneb purchased the terminal in 1998,
Kaneb agreed to investigate and remediate a groundwater plume
contaminated by the terminals previous owner and operator.
Kaneb has submitted a final remedial action plan to the
Washington Department of Ecology and is waiting for it to
approve that plan. The Port of Vancouver also owns property near
the terminal site that has been contaminated by other parties,
some of which are in bankruptcy. Estimated costs to remediate
the terminal site depend on a number of factors, including the
outcome of litigation involving the other properties owned by
the Port of Vancouver that are near the terminal site. No
lawsuits have been filed against us in this matter, and our
liability for any portion of total future remediation costs is
not reasonably estimable at this time.
Xanser Tax Indemnification. In 2001, Xanser, Inc (Xanser)
distributed its interest in its pipeline, terminalling and
product marketing business to its shareholders, which resulted
in the formation of KSL. Pursuant to that distribution, KSL
agreed to indemnify Xanser for certain potential tax
liabilities, if any that resulted from the distribution.
St. Eustatius Tax Agreement. On June 1, 1989,
the governments of the Netherlands Antilles and St. Eustatius
approved a Free Zone and Profit Tax Agreement retroactive to
January 1, 1989, which expired on December 31, 2000.
This agreement required a subsidiary of Kaneb, which we acquired
on July 1, 2005, to pay the greater of 2% of taxable
income, as defined therein, or 500,000 Netherlands Antilles
guilders (approximately $0.3 million) per year. The
agreement further provided that any amounts paid in order to
meet the minimum annual payment were available to offset future
tax liabilities under the agreement to the extent that the
minimum annual payment is greater than 2% of taxable income.
On February 22, 2006, we entered into a revised agreement
(the 2005 Tax and Maritime Agreement) with the governments of
St. Eustatius and the Netherlands Antilles. The 2005 Tax and
Maritime Agreement is effective beginning January 1, 2005
and expires on December 31, 2014. Under the terms of the
2005 Tax and Maritime Agreement, we agreed to make a one-time
payment of five million Netherlands Antilles gilders
(approximately $2.8 million) in full and final settlement
of all of our liabilities, taxes, fees, levies, charges, or
otherwise (including settlement of audits) due or potentially
due to St. Eustatius. We further agreed to pay an annual minimum
profit tax to St. Eustatius of one million Netherlands Antilles
gilders (approximately $0.6 million), beginning as of
January 1, 2005. We agreed to pay the minimum annual profit
tax in twelve equal monthly installments. To the extent the
minimum annual profit tax exceeds 2% of taxable profit (as
defined), we can carryforward that excess to offset future tax
liabilities. If the minimum annual profit tax is less than 2% of
taxable profit (as defined), we agreed to pay that difference.
F-53
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We are also a party to additional claims and legal proceedings
arising in the ordinary course of business. We believe it is
unlikely that the final outcome of any of these claims or
proceedings to which we are a party would have a material
adverse effect on our financial position, results of operations
or liquidity; however, due to the inherent uncertainty of
litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse
effect on our results of operations, financial position or
liquidity.
Future minimum rental payments applicable to all noncancellable
operating leases as of December 31, 2005 are as follows (in
thousands):
|
|
|
|
|
|
2006
|
|
$ |
9,544 |
|
2007
|
|
|
6,424 |
|
2008
|
|
|
5,274 |
|
2009
|
|
|
4,434 |
|
2010
|
|
|
4,217 |
|
Thereafter
|
|
|
81,028 |
|
|
|
|
|
|
Future minimum lease payments
|
|
$ |
110,921 |
|
|
|
|
|
Rental expense for all operating leases totaled
$8.9 million, $1.2 million and $0.9 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
At December 31, 2005 we had a commitment to purchase a
minimum amount of inventory for resale to our customers. We
estimated the value of this commitment to be approximately
$214.8 million.
|
|
13. |
RISK MANAGEMENT ACTIVITIES |
The estimated fair value of our fixed-rate debt as of
December 31, 2005 and 2004 was $954.0 million and
$389.9 million, respectively, as compared to the carrying
amount of $941.7 million and $357.2 million,
respectively. These fair values were estimated using discounted
cash flow analysis, based on our current incremental borrowing
rates for similar types of borrowing arrangements.
We are exposed to market risk for changes in interest rates
related to our long-term debt obligations. We use interest rate
swap agreements to manage a portion of the exposure to changing
interest rates by converting certain fixed-rate debt to
variable-rate debt. Interest rates on borrowings under the
revolving credit facility float with market rates and thus the
carrying amount approximates fair value.
|
|
|
Concentration of Credit Risk |
For the year ended December 31, 2005, we derived
approximately 34% of our revenues from Valero Energy and its
subsidiaries, our largest customer. No other single customer
accounted for more than 10% of our consolidated operating
revenues. Valero Energy transports crude oil to six of its
refineries using Valero L.P.s various crude oil pipelines
and storage facilities and the crude oil storage tanks, and
transports refined products from seven of its refineries to its
company-owned retail operations or wholesale customers using
Valero L.P.s various refined product pipelines and
terminals. Valero Energy and its subsidiaries are investment
grade customers; therefore, we do not believe that the trade
receivable from Valero Energy represents a significant credit
risk. However, the concentration of business with Valero Energy,
which is a large refining and retail marketing company, has the
potential to impact Valero L.P., both positively and negatively,
to changes in the refining and marketing industry.
F-54
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14. |
RELATED PARTY TRANSACTIONS |
We have related party transactions with Valero Energy for
pipeline tariff, terminalling fee and crude oil storage tank fee
revenues, certain employee costs, insurance costs,
administrative costs, and lease expense. Under the terms of a
services agreement with Valero Energy (Services Agreement), we
reimburse Valero Energy for payroll costs of employees working
on our behalf. Additionally, Valero Energy charges us an
administrative service fee. The receivable from Valero Energy as
of December 31, 2005 and 2004 represents amounts due for
pipeline tariff, terminalling fee and crude oil storage tank fee
revenues and the payable to Valero Energy represents amounts due
for employee costs, insurance costs, operating expenses,
administrative costs and lease expense.
The following table summarizes information pertaining to
transactions with Valero Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005(a) | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Revenues
|
|
$ |
234,485 |
|
|
$ |
217,608 |
|
|
$ |
178,605 |
|
Operating expenses
|
|
|
60,921 |
|
|
|
31,960 |
|
|
|
24,196 |
|
General and administrative expenses
|
|
|
19,356 |
|
|
|
10,539 |
|
|
|
6,110 |
|
|
|
(a) |
The amounts reflected in the table include revenues and
operating expenses of $1,867 and $1,850, respectively, which are
included in income from discontinued operations in the
consolidated statement of income. |
In addition to owning a combined 23.4% general and limited
partner interest in us as of December 31, 2005, we have
entered into a number of operating agreements with Valero
Energy, which govern the required services provided to and
received from Valero Energy. Most of the operating agreements
include adjustment provisions, which allow us to increase the
handling, storage and throughput fees we charge to Valero Energy
based on a consumer price index. In addition, the pipeline
tariffs charged by us are reviewed annually and adjusted based
on an inflation index and may also be adjusted to take into
consideration additional costs incurred to provide the
transportation services. The following is a summary of the
significant terms of the individual agreements.
We do not have any employees. Under the Services Agreement, the
costs related to employees of Valero Energy who perform services
directly on our behalf (direct services), including salary,
wages and employee benefits are charged by Valero Energy to us.
Effective July 1, 2005, the Services Agreement (the 2005
Services Agreement) was amended to account for our significant
growth following the closing of the Kaneb Acquisition. The 2005
Services Agreement provided that the annual service fee would be
$13.8 million for the first year from July 1, 2005 to
June 30, 2006. In addition, we agreed to perform certain
services for Valero Energy, including control room services,
terminal operations oversight, mapping support and integrity
management program planning in exchange for an annual fee.
Effective January 1, 2006, pursuant to the new services
agreement (2006 Services Agreement), Valero GP LLC began
directly performing many of the services previously provided by
Valero Energy under the 2005 Services Agreement primarily
consisting of legal, corporate development and health, safety
and environmental functions. As a result, the employees
performing these services became employees of Valero GP LLC and
their costs are now directly charged to us. Accordingly, the
annual fee charged to us for administrative services was reduced
to approximately $1.9 million per year. This annual fee
will increase to approximately $2.9 million and
$3.4 million in years 2007 and 2008, respectively. The
annual fee will remain at approximately $3.4 million
through the term of the agreement. In addition, each annual fee
will be subject to adjustments to account for
F-55
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valero Energys annual salary increase. Subject to approval
by our Conflicts Committee, the amounts may also be adjusted for
changed service levels.
The term of the 2006 Services Agreement will expire on
December 31, 2010 with automatic two-year renewal options
unless terminated by either party at least six months prior to
the renewal period. We may cancel or reduce the level of
services that Valero Energy provides us with 60 days prior
written notice. The 2006 Services Agreement will terminate upon
the change of control of either us or Valero L.P.
A portion of our general and administrative costs is passed on
to third parties, which jointly own certain pipelines and
terminals with us. The net amount of general and administrative
costs allocated to partners of jointly owned pipelines totaled
$0.6 million, $0.7 million and $0.5 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
|
|
|
Amended and Restated Omnibus Agreement |
The Amended and Restated Omnibus Agreement governs potential
competition between Valero Energy and the Partnership. Under the
Amended and Restated Omnibus Agreement, Valero Energy has
agreed, and will cause its controlled affiliates to agree, for
so long as Valero Energy owns 20% or more of Valero L.P. or
Valero L.P.s general partner, not to engage in the
business of transporting crude oil and other feedstocks or
refined products, including petrochemicals, or operating crude
oil storage facilities or refined product terminalling assets in
the United States. This restriction does not apply to:
|
|
|
|
|
any business retained by Ultramar Diamond Shamrock Corporation
(UDS) as of April 16, 2001, the closing of Valero
L.P.s initial public offering, or any business owned by
Valero Energy at the date of its acquisition of UDS on
December 31, 2001; |
|
|
|
any business with a fair market value of less than
$10 million; |
|
|
|
any business acquired by Valero Energy in the future that
constitutes less than 50% of the fair market value of a larger
acquisition, provided Valero L.P. has been offered and declined
the opportunity to purchase the business; and |
|
|
|
any newly constructed pipeline, terminalling or storage assets
that we have not offered to purchase at fair market value within
one year of construction. |
Also under the Amended and Restated Omnibus Agreement, Valero
Energy has agreed to indemnify us for environmental liabilities
related to the assets transferred to us in connection with our
initial public offering, provided that such liabilities arose
prior to and are discovered within ten years after that date
(excluding liabilities resulting from a change in law after
April 16, 2001).
|
|
|
Pipelines and Terminals Usage Agreement McKee,
Three Rivers and Ardmore |
Under the terms of the Pipeline and Terminals Usage Agreement
dated April 16, 2001, we provide transportation services
that support Valero Energys refining and marketing
operations relating to the McKee, Three Rivers and Ardmore
refineries. Pursuant to the agreement, Valero Energy has agreed
through April 2008:
|
|
|
|
|
to transport in our crude oil pipelines at least 75% of the
aggregate volumes of crude oil shipped to the McKee, Three
Rivers and Ardmore refineries; |
|
|
|
to transport in our refined product pipelines at least 75% of
the aggregate volumes of refined products shipped from the
McKee, Three Rivers and Ardmore refineries; and |
|
|
|
to use our refined product terminals for terminalling services
for at least 50% of all refined products shipped from the McKee,
Three Rivers and Ardmore refineries. |
F-56
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If market conditions change with respect to the transportation
of crude oil or refined products, or to the end markets in which
Valero Energy sells refined products, in a material manner such
that Valero Energy would suffer a material adverse effect if it
were to continue to use our pipelines and terminals that service
the McKee, Three Rivers and Ardmore refineries at the required
levels, Valero Energys obligation to us will be suspended
during the period of the change in market conditions to the
extent required to avoid the material adverse effect.
In the event Valero Energy does not transport in our pipelines
or use our terminals to handle the minimum volume requirements
and if its obligation has not been suspended under the terms of
the agreement, Valero Energy will be required to make a cash
payment determined by multiplying the shortfall in volume by the
applicable weighted average pipeline tariff or terminal fee. For
the year ended December 31, 2005, Valero Energy exceeded
its obligations under the Pipelines and Terminals Usage
Agreement. Additionally, Valero Energy has agreed not to
challenge, or cause others to challenge, our interstate or
intrastate tariffs for the transportation of crude oil and
refined products until at least April 2008.
|
|
|
Crude Oil Storage Tank Agreements |
In conjunction with the acquisition of the Crude Oil Storage
Tanks in March 2003, we entered into the following agreements
with Valero Energy:
|
|
|
|
|
Handling and Throughput Agreement, dated March
2003, pursuant to which Valero Energy agreed to pay us a fee for
100% of crude oil and certain other feedstocks delivered to each
of the Corpus Christi West refinery, the Texas City refinery and
the Benicia refinery and to use our logistic assets for handling
all deliveries to these refineries. The throughput fees are
adjustable annually, generally based on 75% of the regional
consumer price index applicable to the location of each
refinery. The initial term of the handling and throughput
agreement is ten years, which may be extended by Valero Energy
for up to an additional five years. |
|
|
|
Services and Secondment Agreements, dated March
2003, pursuant to which Valero Energy agreed to provide
personnel to us who perform operating and routine maintenance
services related to the crude oil storage tank operations. The
annual reimbursement for those services is an aggregate
$3.5 million. The initial term of the services and
secondment agreements is ten years which we have the option to
extend for an additional five years. In addition to the fees we
have agreed to pay Valero Energy under the services and
secondment agreements, we are responsible for operating expenses
and specified capital expenditures related to the tank assets
that are not addressed in the services and secondment
agreements. These operating expenses and capital expenditures
include tank safety inspections, maintenance and repairs,
certain environmental expenses, insurance premiums and ad
valorem taxes. |
|
|
|
Lease and Access Agreements, dated March 2003,
pursuant to which Valero Energy leases to us the land on which
the crude oil storage tanks are located for an aggregate amount
of $0.7 million per year. The initial term of each lease is
25 years, subject to automatic renewal for successive
one-year periods thereafter. We may terminate any of these
leases upon 30 days notice after the initial term or at the
end of a renewal period. In addition, we may terminate any of
these leases upon 180 days notice prior to the expiration
of the current term if we cease to operate the crude oil storage
tanks or cease business operations. |
|
|
|
South Texas Pipelines and Terminals Agreements |
In conjunction with the acquisition of the South Texas Pipelines
and Terminals in March 2003, we entered into the following
agreements with Valero Energy:
|
|
|
|
|
Terminalling Agreement, dated March 2003, pursuant
to which Valero Energy agreed, during the initial period of five
years, to pay a terminalling fee for each barrel of refined
product stored or handled by or on behalf of Valero Energy at
the terminals, including an additive fee for gasoline additive
blended at the |
F-57
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
terminals. At the Houston Hobby Airport terminal, Valero Energy
agreed to pay a filtering fee for each barrel of jet fuel stored
or handled at the terminal. |
|
|
|
Throughput Commitment Agreement, dated March 2003,
pursuant to which Valero Energy agreed, for an initial period of
seven years: |
|
|
|
|
|
to transport in the Houston and Valley pipeline systems an
aggregate of 40% of the Corpus Christi refineries gasoline
and distillate production but only if the combined throughput in
these pipelines is less than 110,000 barrels per day; |
|
|
|
to transport in the Pettus to San Antonio refined product
pipeline 25% of the Three Rivers refinery gasoline and
distillate production and in the Pettus to Corpus Christi
refined product pipeline 90% of the Three Rivers refinery
raffinate production; |
|
|
|
to use the Houston asphalt terminal for an aggregate of 7% of
the asphalt production of the Corpus Christi refineries; |
|
|
|
to use the Edinburg refined product terminal for an aggregate of
7% of the gasoline and distillate production of the Corpus
Christi refineries, but only if the throughput at this terminal
is less than 20,000 barrels per day; and |
|
|
|
to use the San Antonio East terminal for 75% of the
throughput in the Pettus to San Antonio refined product
pipeline. |
In the event Valero Energy does not transport in our pipelines
or use our terminals to handle the minimum volume requirements
and if its obligation has not been suspended under the terms of
the agreement, Valero Energy will be required to make a cash
payment determined by multiplying the shortfall in volume by the
applicable weighted average pipeline tariff or terminal fee.
Valero Energys obligation to transport 90% of the Three
Rivers refinery raffinate production in the Pettus to Corpus
Christi refined product pipeline was suspended in the fourth
quarter of 2005 due to the temporary idling of the pipeline in
the fourth quarter of 2005.
|
|
|
Hydrogen Tolling Agreement |
A hydrogen tolling agreement, which provides that Valero Energy
will pay us minimum annual revenues of $1.4 million for
transporting crude hydrogen from the BOC Groups chemical
facility in Clear Lake, Texas to Valero Energys Texas City
refinery.
|
|
|
Pittsburg Asphalt Terminal Throughput Agreement |
A terminal storage and throughput agreement related to the
Pittsburg asphalt terminal, which provides that Valero Energy
will pay us a monthly lease fee of $0.2 million, a minimum
annual throughput fee of $0.4 million and will reimburse us
for utility costs.
|
|
|
Royal Trading Throughput Agreement |
In conjunction with the Royal Trading acquisition, we entered
into a five-year terminal storage and throughput agreement with
Valero Energy. The agreement provides a base throughput and
blending fee schedule with volume incentive discounts once
certain thresholds are met. In addition, Valero Energy has
agreed to utilize the acquired terminals for a minimum of 18.5%
of the combined McKee and Ardmore refineries asphalt
production.
|
|
|
Corpus Christi North Beach Storage Facility Lease |
We entered into a one-year shell barrel capacity lease agreement
with Valero Energy on January 1, 2004 for the
1.6 million barrels of capacity at our Corpus Christi North
Beach storage facility. This lease automatically
F-58
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
renews for additional one-year terms unless either party
terminates it with a
90-day written notice.
The use of this storage facility was previously included as part
of the crude oil pipeline tariff for our Corpus Christi to Three
Rivers crude oil pipeline.
In January of 2006, we entered into an Office Rental Agreement
(the Rental Agreement) with Valero Energy whereby we agreed to
lease approximately 65,000 square feet of office space at
an annual cost of approximately $1.6 million per year for
the first five years. For years six through ten, the annual fee
is subject to adjustment for changes in the Consumer Price
Index. For each subsequent five year period under the initial
term and during the ten-year renewal option, the annual rent
shall be adjusted to reflect the actual market rent of
comparable office spaces. Rental payments will commence upon the
completion of a new office facility presently being constructed
by Valero Energy. The completion of this facility is expected to
be in the second half of 2007. The Rental Agreement has an
initial term of 25 years with a ten year renewal option.
We have other minor storage and throughput contracts with Valero
Energy resulting from the Kaneb Acquisition.
|
|
15. |
EMPLOYEE BENEFIT PLANS |
We have no employees. We rely on employees of Valero Energy and
its affiliates to provide the necessary services to conduct our
operations. Those employees are included in the various employee
benefit plans of Valero Energy and its affiliates. These plans
include qualified, non-contributory defined benefit retirement
plans, defined contribution 401(k) plans, employee and retiree
medical, dental and life insurance plans, bonus plans, long-term
incentive plans (i.e. unit options and restricted common units)
and other such benefits.
Our share of allocated Valero Energy employee benefit plan
expenses, excluding the compensation expense related to the
contractual rights to receive common units, restricted units and
unit options, was $20.4 million, $11.2 million and
$4.8 million for the years ended December 31, 2005,
2004 and 2003, respectively. These employee benefit plan
expenses are included in costs and expenses with the related
payroll costs.
|
|
|
Long-Term Incentive Plans |
Valero GP, LLC adopted the 2000 Long-Term Incentive Plan (the
LTIP) under which Valero GP, LLC may award up to 250,000 common
units to certain key employees of Valero Energys
affiliates providing services to us and to directors and
officers of Valero GP, LLC. Awards under the LTIP can include
unit options, restricted units, performance awards, distribution
equivalent rights (DERs) and contractual rights to receive
common units. As of December 31, 2005, a total of 38,772
common units remained available to be awarded under the LTIP.
In June 2003, Valero GP, LLC adopted the 2003 Employee Unit
Incentive Plan (the UIP) under which Valero GP, LLC may award up
to 500,000 common units to employees of Valero GP, LLC or its
affiliates, excluding officers and directors of Valero GP, LLC
and its affiliates. Awards under the UIP can include unit
options, restricted units and distribution equivalent rights
(DERs). As of December 31, 2005, a total of 287,730 common
units remained available to be awarded under the UIP.
In addition, Valero GP, LLC adopted the 2002 Unit Option Plan
(the UOP) under which Valero GP, LLC may award up to
200,000 unit options to officers and directors of Valero
GP, LLC or its affiliates, of which substantially all of the
unit options have been awarded as of December 31, 2005.
Our share of compensation expense related to the contractual
rights to receive common units, restricted units and unit
options issued under the LTIP, the UIP and the UOP was
$1.5 million, $0.7 million and $0.9 million,
F-59
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively, for the years ended December 31, 2005, 2004
and 2003 and such amounts have been included in general and
administrative expenses in the consolidated statements of income
for those years.
|
|
16. |
PARTNERS EQUITY, ALLOCATIONS OF NET INCOME AND CASH
DISTRIBUTIONS |
We issued 23,768,355 of our common units valued at approximately
$1.45 billion in exchange for all of the outstanding common
units of KPP. In order to maintain a 2% general partner
interest, Riverwalk Logistics, L.P. contributed
$29.2 million to us. As of December 31, 2005, Valero
Energy and its affiliates owned 23.4% of our outstanding
partners equity, including the 2% general partner interest.
As of December 31, 2005, our outstanding partners
equity as of December 31, 2005 includes 37,210,427 common
units (622,772 of which are held by affiliates of Valero
Energy), 9,599,322 subordinated units held by UDS Logistics, LLC
and a 2% general partner interest held by Riverwalk Logistics,
L.P. UDS Logistics, LLC is a wholly owned subsidiary of Valero
Energy and the limited partner of Riverwalk Logistics, L.P.
|
|
|
March 2003 Common Unit Offering |
On March 18, 2003, we consummated a public offering of
common units, selling 5,750,000 common units to the public at
$36.75 per unit, before underwriters discount of
$1.56 per unit. Net proceeds were $202.3 million, or
$35.19 per unit, before offering expenses of
$2.0 million. In order to maintain a 2% general partner
interest, Riverwalk Logistics, L.P. contributed
$4.3 million to us. The net proceeds of the common unit
offering and the general partner contribution were primarily
used to fund the acquisition of the Crude Oil Storage Tanks (See
Note 3. Acquisitions).
On April 16, 2003, we closed on the exercise of a portion
of the underwriters over-allotment option, by selling
581,000 common units at $35.19 per unit. Net proceeds from
this sale were $20.4 million and Riverwalk Logistics, L.P.
contributed $0.5 million to maintain its 2% general partner
interest. The common unit proceeds and general partner
contribution were used to pay down the then outstanding balance
on the revolving credit facility.
|
|
|
Redemption of Common Units and Amendment to Partnership
Agreement |
On March 18, 2003, subsequent to the common unit offering
and private placement of 6.05% senior notes discussed
above, we redeemed from UDS Logistics, LLC 3,809,750 common
units at a total cost of $134.1 million, or $35.19 per
unit. In order to maintain a 2% general partner interest, we
redeemed a portion of Riverwalk Logistics, L.P.s general
partner interest at a total cost of $2.9 million. In
addition to the redemption transaction, we amended our
partnership agreement to reduce the vote required to remove the
general partner from
662/3
% to 58% of our outstanding units and to exclude from
participating in such a vote the common and subordinated units
held by affiliates of the general partner.
|
|
|
August 2003 Common Unit Offering |
On August 11, 2003, we consummated a public offering of
common units, selling 1,236,250 common units, which included
161,250 common units related to the underwriters
over-allotment option, to the public at $41.15 per unit,
before underwriters discount of $1.85 per unit. Net
proceeds were $48.6 million, or $39.30 per unit,
before offering expenses of $0.3 million. In order to
maintain its 2% general partner interest, Riverwalk Logistics,
L.P. contributed $1.0 million to the Partnership. The net
proceeds of the common unit offering and the general partner
contribution were primarily used to fund the acquisitions of the
Southlake refined product pipeline and the Paulsboro refined
product terminal (See Note 3. Acquisitions).
F-60
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There is no established public market for the trading of the
subordinated units. In addition, all of the subordinated units
may convert to common units on a one-for-one basis if we meet
the tests set forth in the partnership agreement as discussed
below. If the subordination period ends, the rights of the
holders of subordinated units will no longer be subordinated to
the rights of the holders of common units and the subordinated
units will be converted into common units.
Effective March 11, 2004, our partnership agreement was
amended to reduce the percentage of the vote required to remove
our general partner from 58% to a simple majority (excluding any
vote by the general partner and its affiliates).
|
|
|
Allocations of Net Income |
Our partnership agreement, as amended, sets forth the
calculation to be used to determine the amount and priority of
cash distributions that the common unitholders, subordinated
unitholders and general partner will receive. The partnership
agreement also contains provisions for the allocation of net
income and loss to the unitholders and the general partner. For
purposes of maintaining partner capital accounts, the
partnership agreement specifies that items of income and loss
shall be allocated among the partners in accordance with their
respective percentage interests. Normal allocations according to
percentage interests are done after giving effect, if any, to
priority income allocations in an amount equal to incentive cash
distributions allocated 100% to the general partner.
We make quarterly distributions of 100% of our available cash,
generally defined as cash receipts less cash disbursements and
cash reserves established by the general partner, in its sole
discretion. These quarterly distributions are declared and paid
within 45 days subsequent to each quarter-end. During the
subordination period, the holders of our common units are
entitled to receive each quarter a minimum quarterly
distribution of $0.60 per unit ($2.40 annualized) prior to
any distribution of available cash to holders of our
subordinated units. The subordination period is defined
generally as the period that will end on the first day of any
quarter beginning after March 31, 2006 if (1) we have
distributed at least the minimum quarterly distribution on all
outstanding units with respect to each of the immediately
preceding three consecutive, non-overlapping four-quarter
periods and (2) our adjusted operating surplus, as defined
in the partnership agreement, during such periods equals or
exceeds the amount that would have been sufficient to enable us
to distribute the minimum quarterly distribution on all
outstanding units on a diluted basis and the related
distribution on the 2% general partner interest during those
periods.
During the subordination period, our cash is first distributed
98% to the holders of common units and 2% to the general partner
until there has been distributed to the holders of common units
an amount equal to the minimum quarterly distribution and
arrearages in the payment of the minimum quarterly distribution
on the common units for any prior quarter. Secondly, cash is
distributed 98% to the holders of subordinated units and 2% to
the general partner until there has been distributed to the
holders of subordinated units an amount equal to the minimum
quarterly distribution. Thirdly, cash in excess of the minimum
quarterly distributions is distributed to the unitholders and
the general partner based on the percentages shown below.
The general partner is entitled to incentive distributions if
the amount we distribute with respect to any quarter exceeds
specified target levels shown below:
|
|
|
|
|
|
|
|
|
|
|
Percentage of Distribution | |
|
|
| |
Quarterly Distribution Amount per Unit |
|
Unitholders | |
|
General Partner | |
|
|
| |
|
| |
Up to $0.60
|
|
|
98 |
% |
|
|
2 |
% |
Above $0.60 up to $0.66
|
|
|
90 |
% |
|
|
10 |
% |
Above $0.66
|
|
|
75 |
% |
|
|
25 |
% |
F-61
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective March 11, 2004, our partnership agreement was
amended to lower the general partners incentive
distribution rights with respect to distributions of available
cash from 48% to 23% of the amount of any quarterly distribution
that exceeds $0.90 per unit. The general partner will
continue to receive a 2% distribution with respect to its
general partner interest.
The following table reflects the allocation of total cash
distributions to the general and limited partners applicable to
the period in which the distributions were earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars, | |
|
|
except per unit data) | |
General partner interest
|
|
$ |
2,589 |
|
|
$ |
1,595 |
|
|
$ |
1,404 |
|
General partner incentive distribution
|
|
|
8,711 |
|
|
|
4,449 |
|
|
|
2,620 |
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
11,300 |
|
|
|
6,044 |
|
|
|
4,024 |
|
Limited partners distribution
|
|
|
118,178 |
|
|
|
73,733 |
|
|
|
66,179 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
129,478 |
|
|
$ |
79,777 |
|
|
$ |
70,203 |
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
3.365 |
|
|
$ |
3.200 |
|
|
$ |
2.950 |
|
|
|
|
|
|
|
|
|
|
|
On January 27, 2006, we declared a quarterly distribution
of $0.855 per unit, which was paid on February 14,
2006 to unitholders of record on February 7, 2006. This
distribution related to the fourth quarter of 2005 totaled
$44.0 million, of which $3.9 million represented the
general partners share of such distribution. The general
partners distribution included a $3.0 million
incentive distribution.
Components of income tax expense related to certain of our
operations conducted through separate taxable wholly owned
corporate subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2005 | |
|
|
| |
|
|
(Thousands of dollars) | |
Current:
|
|
|
|
|
|
U.S.
|
|
$ |
|
|
|
Foreign
|
|
|
430 |
|
|
|
|
|
|
|
Total current
|
|
|
430 |
|
|
|
|
|
Deferred:
|
|
|
|
|
|
U.S.
|
|
|
892 |
|
|
Foreign
|
|
|
3,391 |
|
|
|
|
|
|
|
Total deferred
|
|
|
4,283 |
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
4,713 |
|
|
|
|
|
F-62
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of significant temporary differences
representing deferred income tax assets and liabilities were as
follows:
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
(Thousands of dollars) | |
Deferred tax assets:
|
|
|
|
|
Net operating losses
|
|
$ |
17,827 |
|
Environmental and legal reserves
|
|
|
14,509 |
|
Other
|
|
|
418 |
|
Valuation allowance
|
|
|
(6,106 |
) |
|
|
|
|
|
Deferred tax assets
|
|
|
26,648 |
|
|
|
|
|
Property and equipment
|
|
|
(40,224 |
) |
|
|
|
|
Net deferred tax liability
|
|
$ |
(13,576 |
) |
|
|
|
|
The U.S. corporate operations have net operating loss
carryforwards for tax purposes totaling approximately
$50.9 million, which are subject to various limitations on
use and expire in years 2008 through 2025.
As of December 31, 2005, we have recorded a valuation
allowance, substantially all of which was recorded in
conjunction with the allocation of the purchase price of the
Kaneb Acquisition, due to uncertainties related to our ability
to utilize some of our deferred income tax assets, primarily
consisting of certain federal net operating loss carryforwards,
before they expire. The valuation allowance is based on our
estimates of taxable income in the various jurisdictions in
which we operate and the period over which deferred income tax
assets will be recoverable.
The realization of net deferred income tax assets recorded as of
December 31, 2005 is dependent upon our ability to generate
future taxable income in the United States. We believe it is
more likely than not that the deferred income tax assets, net of
the valuation allowance, as of December 31, 2005 will be
realized, based on expected future taxable income and potential
tax planning strategies.
SFAS No. 109, Accounting for Income Taxes,
requires disclosure of the aggregate difference in the basis of
our net assets for financial and tax reporting purposes. Our
management does not believe that, in our circumstances, the
aggregate difference would be meaningful information.
Our operating segments consist of refined product pipelines,
crude oil pipelines, refined product terminals and crude oil
storage tanks. The operations acquired as a result of the Kaneb
Acquisition principally involve transporting refined petroleum
products and fertilizer as a common carrier, the storage of
petroleum products, specialty chemicals, and other liquids, and
delivery and sale of bunker fuel at St. Eustatius, Netherland
Antilles and Point Tupper, Nova Scotia. The results of
Kanebs transportation operations are included in our
refined product pipelines segment. The results of Kanebs
storage and bunker sales operations are included in our refined
product terminals segment.
These reportable segments are strategic business units that
offer different services and performance is evaluated based on
operating income, before general and administrative expenses.
General and administrative expenses are not allocated to the
operating segments since those expenses relate primarily to the
overall management at the entity level. Our principal services
include providing pipeline transportation services, terminalling
services and crude oil storage handling services.
F-63
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Results of operations for the reportable segments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
411,332 |
|
|
$ |
39,984 |
|
|
$ |
31,269 |
|
|
Refined product pipelines
|
|
|
149,853 |
|
|
|
86,418 |
|
|
|
72,276 |
|
|
Crude oil pipelines
|
|
|
51,429 |
|
|
|
52,462 |
|
|
|
50,741 |
|
|
Crude oil storage tanks
|
|
|
46,943 |
|
|
|
41,928 |
|
|
|
27,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
659,557 |
|
|
$ |
220,792 |
|
|
$ |
181,450 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
25,008 |
|
|
$ |
6,471 |
|
|
$ |
3,508 |
|
|
Refined product pipelines
|
|
|
27,778 |
|
|
|
14,715 |
|
|
|
12,380 |
|
|
Crude oil pipelines
|
|
|
4,612 |
|
|
|
4,499 |
|
|
|
5,379 |
|
|
Crude oil storage tanks
|
|
|
7,497 |
|
|
|
7,464 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
64,895 |
|
|
$ |
33,149 |
|
|
$ |
26,267 |
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
61,911 |
|
|
$ |
15,148 |
|
|
$ |
12,314 |
|
|
Refined product pipelines
|
|
|
57,404 |
|
|
|
34,371 |
|
|
|
30,982 |
|
|
Crude oil pipelines
|
|
|
30,439 |
|
|
|
32,495 |
|
|
|
30,166 |
|
|
Crude oil storage tanks
|
|
|
30,493 |
|
|
|
27,331 |
|
|
|
17,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
180,247 |
|
|
|
109,345 |
|
|
|
90,574 |
|
|
General and administrative expenses
|
|
|
26,553 |
|
|
|
11,321 |
|
|
|
7,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
153,694 |
|
|
$ |
98,024 |
|
|
$ |
83,037 |
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area for the years ended
December 31, 2005, 2004 and 2003 are shown in the table
below. The geographic area is based on the location of our
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
United States
|
|
$ |
347,765 |
|
|
$ |
220,792 |
|
|
$ |
181,450 |
|
Netherlands Antilles
|
|
|
255,893 |
|
|
|
|
|
|
|
|
|
Canada
|
|
|
35,639 |
|
|
|
|
|
|
|
|
|
Other countries
|
|
|
20,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$ |
659,557 |
|
|
$ |
220,792 |
|
|
$ |
181,450 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004, and 2003,
Valero Energy accounted for 34%, 99%, and 98% of our
consolidated revenues, respectively. No other single customer
accounted for more than 10% of our consolidated revenues.
F-64
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues from Valero Energy by operating segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
46,382 |
|
|
$ |
39,306 |
|
|
$ |
30,790 |
|
|
Refined product pipelines
|
|
|
89,731 |
|
|
|
83,912 |
|
|
|
69,910 |
|
|
Crude oil pipelines
|
|
|
51,429 |
|
|
|
52,462 |
|
|
|
50,741 |
|
|
Crude oil storage tanks
|
|
|
46,943 |
|
|
|
41,928 |
|
|
|
27,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
234,485 |
|
|
$ |
217,608 |
|
|
$ |
178,605 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets include property, plant and equipment,
intangible assets subject to amortization and certain long-lived
assets included in deferred charges and other assets,
net. Geographic information by country for long-lived
assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars) | |
United States
|
|
$ |
1,904,154 |
|
|
$ |
800,491 |
|
Netherlands Antilles
|
|
|
210,756 |
|
|
|
|
|
Canada
|
|
|
83,916 |
|
|
|
|
|
Other countries
|
|
|
105,168 |
|
|
|
12,322 |
|
|
|
|
|
|
|
|
|
Consolidated long-lived assets
|
|
$ |
2,303,994 |
|
|
$ |
812,813 |
|
|
|
|
|
|
|
|
Total assets by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Thousands of dollars) | |
Refined product terminals(a)
|
|
$ |
1,701,782 |
|
|
$ |
145,966 |
|
Refined product pipelines
|
|
|
1,286,571 |
|
|
|
347,008 |
|
Crude oil pipelines
|
|
|
123,698 |
|
|
|
127,668 |
|
Crude oil storage tanks
|
|
|
204,580 |
|
|
|
209,919 |
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
3,316,631 |
|
|
|
830,561 |
|
Other partnership assets (including current assets and
other noncurrent assets)
|
|
|
50,361 |
|
|
|
26,946 |
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$ |
3,366,992 |
|
|
$ |
857,507 |
|
|
|
|
|
|
|
|
|
|
(a) |
Total assets of the refined product terminals segment include
the assets of the Australia and New Zealand Subsidiaries. We
sold these subsidiaries for approximately $65.0 million,
plus working capital adjustments. |
F-65
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product | |
|
Refined Product | |
|
Crude Oil | |
|
|
|
|
Terminals | |
|
Pipelines | |
|
Pipelines | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Balance as of December 31, 2004
|
|
$ |
|
|
|
$ |
519 |
|
|
$ |
4,196 |
|
|
$ |
4,715 |
|
|
Kaneb Acquisition
|
|
|
569,745 |
|
|
|
193,127 |
|
|
|
|
|
|
|
762,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
569,745 |
|
|
$ |
193,646 |
|
|
$ |
4,196 |
|
|
$ |
767,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, including acquisitions, by reportable
segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Refined product terminals
|
|
$ |
761,099 |
|
|
$ |
41,148 |
|
|
$ |
62,927 |
|
Refined product pipelines
|
|
|
748,392 |
|
|
|
12,009 |
|
|
|
176,956 |
|
Crude oil pipelines
|
|
|
561 |
|
|
|
3,275 |
|
|
|
2,656 |
|
Crude oil storage tanks
|
|
|
1,860 |
|
|
|
1,056 |
|
|
|
200,198 |
|
Other partnership assets
|
|
|
2,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
1,514,693 |
|
|
$ |
57,488 |
|
|
$ |
442,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
19. |
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
Valero L.P. has no operations and its assets consist mainly of
its investments in Valero Logistics, KSL and KPP. KPP is the
majority owner of KPOP. Valero Logistics and KPOP own and
operate pipelines, terminals and storage tanks and are issuers
of publicly traded senior notes. The senior notes issued by
Valero Logistics were and continue to be fully and
unconditionally guaranteed by Valero L.P. In connection with the
Kaneb Acquisition, effective July 1, 2005, Valero L.P.
fully and unconditionally guaranteed the outstanding senior
notes issued by KPOP. Additionally, effective July 1, 2005,
both Valero Logistics and KPOP fully and unconditionally
guaranteed the outstanding senior notes of the other.
As a result, the following condensed consolidating financial
statements are being presented for the current year as an
alternative to providing separate financial statements for
Valero Logistics and KPOP. Condensed consolidating financial
statements for the comparable periods of 2004 and 2003 are not
presented as we did not own Kaneb.
Condensed Consolidating Balance Sheet
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
|
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Valero Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
44 |
|
|
$ |
196,481 |
|
|
$ |
622,669 |
|
|
$ |
240,741 |
|
|
$ |
(764,524 |
) |
|
$ |
295,411 |
|
Property and equipment, net
|
|
|
|
|
|
|
783,945 |
|
|
|
694,374 |
|
|
|
681,894 |
|
|
|
|
|
|
|
2,160,213 |
|
Goodwill
|
|
|
|
|
|
|
4,715 |
|
|
|
193,127 |
|
|
|
569,745 |
|
|
|
|
|
|
|
767,587 |
|
Investment in wholly owned subsidiaries
|
|
|
2,403,969 |
|
|
|
16,920 |
|
|
|
603,474 |
|
|
|
1,273,313 |
|
|
|
(4,297,676 |
) |
|
|
|
|
F-66
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
|
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Valero Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Equity investments
|
|
|
|
|
|
|
15,087 |
|
|
|
|
|
|
|
58,899 |
|
|
|
|
|
|
|
73,986 |
|
Other noncurrent assets, net
|
|
|
228 |
|
|
|
8,677 |
|
|
|
771 |
|
|
|
60,119 |
|
|
|
|
|
|
|
69,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,404,241 |
|
|
$ |
1,025,825 |
|
|
$ |
2,114,415 |
|
|
$ |
2,884,711 |
|
|
$ |
(5,062,200 |
) |
|
$ |
3,366,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners Equity |
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
502,194 |
|
|
$ |
50,252 |
|
|
$ |
40,341 |
|
|
$ |
377,325 |
|
|
$ |
(764,524 |
) |
|
$ |
205,588 |
|
Long-term debt, less current portion
|
|
|
|
|
|
|
581,921 |
|
|
|
551,607 |
|
|
|
36,131 |
|
|
|
|
|
|
|
1,169,659 |
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,576 |
|
|
|
|
|
|
|
13,576 |
|
Other long-term liabilities
|
|
|
|
|
|
|
4,821 |
|
|
|
2,124 |
|
|
|
70,445 |
|
|
|
|
|
|
|
77,390 |
|
Total partners equity
|
|
|
1,902,047 |
|
|
|
388,831 |
|
|
|
1,520,343 |
|
|
|
2,387,234 |
|
|
|
(4,297,676 |
) |
|
|
1,900,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
2,404,241 |
|
|
$ |
1,025,825 |
|
|
$ |
2,114,415 |
|
|
$ |
2,884,711 |
|
|
$ |
(5,062,200 |
) |
|
$ |
3,366,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
Condensed Consolidating Statements of Income
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
Valero | |
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Revenues
|
|
$ |
|
|
|
$ |
234,444 |
|
|
$ |
57,400 |
|
|
$ |
368,495 |
|
|
$ |
(782 |
) |
|
$ |
659,557 |
|
Costs and expenses
|
|
|
2,752 |
|
|
|
133,297 |
|
|
|
44,152 |
|
|
|
326,444 |
|
|
|
(782 |
) |
|
|
505,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(2,752 |
) |
|
|
101,147 |
|
|
|
13,248 |
|
|
|
42,051 |
|
|
|
|
|
|
|
153,694 |
|
Equity earnings in subsidiaries
|
|
|
113,825 |
|
|
|
(192 |
) |
|
|
38,462 |
|
|
|
40,392 |
|
|
|
(192,487 |
) |
|
|
|
|
Equity earnings in joint venture
|
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
1,943 |
|
|
|
|
|
|
|
2,319 |
|
Interest and other expense, net
|
|
|
|
|
|
|
(27,870 |
) |
|
|
(13,488 |
) |
|
|
(2,267 |
) |
|
|
|
|
|
|
(43,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
111,073 |
|
|
|
73,461 |
|
|
|
38,222 |
|
|
|
82,119 |
|
|
|
(192,487 |
) |
|
|
112,388 |
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,713 |
|
|
|
|
|
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
111,073 |
|
|
|
73,461 |
|
|
|
38,222 |
|
|
|
77,406 |
|
|
|
(192,487 |
) |
|
|
107,675 |
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
2,163 |
|
|
|
1,235 |
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
111,073 |
|
|
$ |
73,461 |
|
|
$ |
40,385 |
|
|
$ |
78,641 |
|
|
$ |
(192,487 |
) |
|
$ |
111,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
F-67
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
Valero | |
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
111,073 |
|
|
$ |
73,461 |
|
|
$ |
40,385 |
|
|
$ |
78,641 |
|
|
$ |
(192,487 |
) |
|
$ |
111,073 |
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
34,828 |
|
|
|
12,073 |
|
|
|
19,766 |
|
|
|
|
|
|
|
66,667 |
|
|
|
|
Equity income, net of distributions
|
|
|
13,964 |
|
|
|
192 |
|
|
|
(38,462 |
) |
|
|
(40,392 |
) |
|
|
64,698 |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities and other
|
|
|
4,274 |
|
|
|
12,523 |
|
|
|
3,645 |
|
|
|
(11,752 |
) |
|
|
|
|
|
|
8,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
129,311 |
|
|
|
121,004 |
|
|
|
17,641 |
|
|
|
46,263 |
|
|
|
(127,789 |
) |
|
|
186,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
(522,456 |
) |
|
|
(50,945 |
) |
|
|
82,824 |
|
|
|
397,614 |
|
|
|
3,963 |
|
|
|
(89,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
393,145 |
|
|
|
(84,510 |
) |
|
|
(100,351 |
) |
|
|
(409,288 |
) |
|
|
123,826 |
|
|
|
(77,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345 |
) |
|
|
|
|
|
|
(345 |
) |
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
(14,451 |
) |
|
|
114 |
|
|
|
34,244 |
|
|
|
|
|
|
|
19,907 |
|
Cash and cash equivalents at the beginning of the period
|
|
|
10 |
|
|
|
16,041 |
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
16,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
10 |
|
|
$ |
1,590 |
|
|
$ |
114 |
|
|
$ |
34,340 |
|
|
$ |
|
|
|
$ |
36,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
F-68
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20. |
QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
Quarter | |
|
Quarter | |
|
Quarter(b) | |
|
Quarter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Thousands of dollars, except per unit data) | |
2005(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
56,635 |
|
|
$ |
58,306 |
|
|
$ |
258,385 |
|
|
$ |
286,231 |
|
|
$ |
659,557 |
|
Operating income
|
|
|
24,715 |
|
|
|
24,309 |
|
|
|
56,007 |
|
|
|
48,663 |
|
|
|
153,694 |
|
Net income
|
|
|
19,264 |
|
|
|
18,852 |
|
|
|
45,167 |
|
|
|
27,790 |
|
|
|
111,073 |
|
Net income per unit applicable to limited partners
|
|
|
0.77 |
|
|
|
0.74 |
|
|
|
0.88 |
|
|
|
0.52 |
|
|
|
2.86 |
|
Cash distributions per unit applicable to limited partners
|
|
$ |
0.800 |
|
|
$ |
0.855 |
|
|
$ |
0.855 |
|
|
$ |
0.855 |
|
|
$ |
3.365 |
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
52,324 |
|
|
$ |
55,707 |
|
|
$ |
58,075 |
|
|
$ |
54,686 |
|
|
$ |
220,792 |
|
Operating income
|
|
|
24,543 |
|
|
|
24,600 |
|
|
|
24,448 |
|
|
|
24,433 |
|
|
|
98,024 |
|
Net income
|
|
|
19,970 |
|
|
|
19,706 |
|
|
|
19,387 |
|
|
|
19,355 |
|
|
|
78,418 |
|
Net income per unit applicable to limited partners
|
|
|
0.80 |
|
|
|
0.79 |
|
|
|
0.78 |
|
|
|
0.78 |
|
|
|
3.15 |
|
Cash distributions per unit applicable to limited partners
|
|
$ |
0.800 |
|
|
$ |
0.800 |
|
|
$ |
0.800 |
|
|
$ |
0.800 |
|
|
$ |
3.200 |
|
|
|
|
(a) |
|
The significant increase in revenues, operating income and net
income beginning in the third quarter of 2005 is due primarily
to the Kaneb Acquisition as discussed in Note 3.
Acquisitions. |
|
(b) |
|
On December 13, 2005, we entered into a definitive
agreement to sell the Australia and New Zealand Subsidiaries. As
such, revenues and operating income differ from the reported
amounts disclosed in the
Form 10-Q for the
period ended September 30, 2005 as the results of
operations for the Australia and New Zealand Subsidiaries have
been reclassified as income from discontinued operations.
Revenue and operating income reported in the
Form 10-Q were
$263.5 million and $56.7 million, respectively, for
the three months ended September 30, 2005. |
F-69
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands except per share amounts) | |
|
|
(Unaudited) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
102,183 |
|
|
$ |
94,058 |
|
|
$ |
201,405 |
|
|
$ |
184,756 |
|
|
Products
|
|
|
233,012 |
|
|
|
160,144 |
|
|
|
424,816 |
|
|
|
302,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
335,195 |
|
|
|
254,202 |
|
|
|
626,221 |
|
|
|
487,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
222,168 |
|
|
|
153,364 |
|
|
|
405,165 |
|
|
|
289,795 |
|
|
Operating costs
|
|
|
58,109 |
|
|
|
43,371 |
|
|
|
104,731 |
|
|
|
86,795 |
|
|
Depreciation and amortization
|
|
|
14,663 |
|
|
|
13,738 |
|
|
|
29,501 |
|
|
|
27,645 |
|
|
General and administrative
|
|
|
29,499 |
|
|
|
7,195 |
|
|
|
40,897 |
|
|
|
13,697 |
|
|
Provision for loss contingencies
|
|
|
42,000 |
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
366,439 |
|
|
|
217,668 |
|
|
|
622,294 |
|
|
|
417,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(31,244 |
) |
|
|
36,534 |
|
|
|
3,927 |
|
|
|
69,449 |
|
Interest and other income
|
|
|
107 |
|
|
|
61 |
|
|
|
313 |
|
|
|
93 |
|
Interest expense
|
|
|
(12,636 |
) |
|
|
(10,720 |
) |
|
|
(23,984 |
) |
|
|
(21,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and interest of outside
non-controlling partners in KPPs net (income) loss
|
|
|
(43,773 |
) |
|
|
25,875 |
|
|
|
(19,744 |
) |
|
|
48,193 |
|
Income tax benefit (expense)
|
|
|
14,304 |
|
|
|
(606 |
) |
|
|
12,778 |
|
|
|
(1,769 |
) |
Interest of outside non-controlling partners in KPPs net
(income) loss
|
|
|
18,012 |
|
|
|
(17,874 |
) |
|
|
2,158 |
|
|
|
(33,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(11,457 |
) |
|
$ |
7,395 |
|
|
$ |
(4,808 |
) |
|
$ |
13,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.97 |
) |
|
$ |
.63 |
|
|
$ |
(.41 |
) |
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(.97 |
) |
|
$ |
.62 |
|
|
$ |
(.41 |
) |
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Condensed Notes to Consolidated Financial Statements
F-70
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
17,291 |
|
|
$ |
38,415 |
|
|
Accounts receivable
|
|
|
88,090 |
|
|
|
85,976 |
|
|
Inventories
|
|
|
26,318 |
|
|
|
25,448 |
|
|
Prepaid expenses and other
|
|
|
20,559 |
|
|
|
12,614 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
152,258 |
|
|
|
162,453 |
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,468,873 |
|
|
|
1,451,176 |
|
Less accumulated depreciation
|
|
|
329,352 |
|
|
|
302,564 |
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
1,139,521 |
|
|
|
1,148,612 |
|
|
|
|
|
|
|
|
Investment in affiliates
|
|
|
26,828 |
|
|
|
25,939 |
|
Excess of cost over fair value of net assets of acquired
business and other assets
|
|
|
18,313 |
|
|
|
19,884 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,336,920 |
|
|
$ |
1,356,888 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
195,984 |
|
|
$ |
|
|
|
Accounts payable
|
|
|
45,145 |
|
|
|
54,280 |
|
|
Accrued expenses
|
|
|
40,156 |
|
|
|
46,993 |
|
|
Accrued interest payable
|
|
|
8,928 |
|
|
|
9,374 |
|
|
Accrued distributions payable to shareholders
|
|
|
|
|
|
|
5,801 |
|
|
Accrued distributions payable to outside non-controlling
partners in KPP
|
|
|
|
|
|
|
19,863 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
290,213 |
|
|
|
136,311 |
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
528,723 |
|
|
|
688,985 |
|
Other liabilities and deferred taxes
|
|
|
76,086 |
|
|
|
53,520 |
|
Commitments and contingencies (see note 6)
|
|
|
|
|
|
|
|
|
Interest of outside non-controlling partners in KPP
|
|
|
373,333 |
|
|
|
397,717 |
|
Shareholders equity
|
|
|
68,565 |
|
|
|
80,355 |
|
|
|
|
|
|
|
|
|
|
Total liability and shareholders equity
|
|
$ |
1,336,920 |
|
|
$ |
1,356,888 |
|
|
|
|
|
|
|
|
See Condensed Notes to Consolidated Financial Statements
F-71
KANEB SERVICES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
(Unaudited) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(4,808 |
) |
|
$ |
13,390 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (loss)
|
|
|
29,501 |
|
|
|
27,645 |
|
|
|
Provision for loss contingencies
|
|
|
42,000 |
|
|
|
|
|
|
|
Equity in earnings of affiliates, net of distributions
|
|
|
(889 |
) |
|
|
(497 |
) |
|
|
Interest of outside non-controlling partners in KPPs net
income (loss)
|
|
|
(2,158 |
) |
|
|
33,034 |
|
|
|
Deferred income taxes
|
|
|
(14,449 |
) |
|
|
(230 |
) |
|
|
Other
|
|
|
1,334 |
|
|
|
(792 |
) |
|
|
Changes in working capital components
|
|
|
(28,713 |
) |
|
|
(7,617 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,818 |
|
|
|
64,933 |
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures, primarily KPP
|
|
|
(22,030 |
) |
|
|
(17,340 |
) |
|
Acquisitions by KPP
|
|
|
(10,034 |
) |
|
|
(12,478 |
) |
|
Other
|
|
|
784 |
|
|
|
(722 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(31,280 |
) |
|
|
(30,540 |
) |
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance of debt
|
|
|
39,690 |
|
|
|
17,923 |
|
|
Payments on debt
|
|
|
|
|
|
|
(2,000 |
) |
|
Distributions to shareholders
|
|
|
(11,724 |
) |
|
|
(11,134 |
) |
|
Distributions to outside non-controlling partners in KPP
|
|
|
(39,727 |
) |
|
|
(39,014 |
) |
|
Other
|
|
|
99 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,662 |
) |
|
|
(34,138 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(21,124 |
) |
|
|
255 |
|
Cash and cash equivalents at beginning of period
|
|
|
38,415 |
|
|
|
43,457 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
17,291 |
|
|
$ |
43,712 |
|
|
|
|
|
|
|
|
Supplemental cash flow information cash paid for
interest
|
|
$ |
22,705 |
|
|
$ |
20,899 |
|
|
|
|
|
|
|
|
See Condensed Notes to Consolidated Financial Statements
F-72
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
SIGNIFICANT ACCOUNTING POLICIES |
The consolidated financial statements reflect the results of
operations of Kaneb Services LLC (the Company), its
wholly owned subsidiaries and Kaneb Pipe Line Partners, L.P.
(KPP). The Company controls the operations of KPP
through its 2% general partner interest and 18% limited partner
interest in KPP as of June 30, 2005. All significant
intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements of the
Company for the three and six month periods ended June 30,
2005 and 2004, have been prepared in accordance with accounting
principles generally accepted in the United States of America.
Significant accounting policies followed by the Company are
disclosed in the notes to the consolidated financial statements
included in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2004. In the opinion of the
Companys management, the accompanying condensed
consolidated financial statements contain all of the
adjustments, consisting of normal recurring accruals, necessary
to present fairly the consolidated financial position of the
Company and its consolidated subsidiaries at June 30, 2005,
and the consolidated results of their operations and cash flows
for the periods ended June 30, 2005 and 2004. Operating
results for the three and six months ended June 30, 2005
are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
On July 1, 2005, Valero L.P. acquired all of the
outstanding shares of the Company as well as all of the
outstanding units of KPP. Consequently, the Company and KPP
became wholly owned subsidiaries of Valero L.P.
In connection with the acquisition by Valero L.P., the Company
incurred certain costs directly related to the acquisition. For
the six months ended June 30, 2005, approximately
$23.0 million was included in general and administrative
expenses related principally to settling certain outstanding
stock awards and settling other employee compensation
obligations, and legal fees associated with the acquisition. In
addition, on June 30, 2005 the Company and KPP paid
approximately $4.4 million in contractual change of control
payments. Because these payments were contingent upon the
closing of the Valero L.P. merger, these payments were included
in prepaid expenses and other at June 30, 2005. To fund a
portion of these expenses, the Company and KPP borrowed
approximately $39.7 million in the second quarter of 2005.
On July 1, 2005, Valero L.P. sold all of the outstanding
equity interests of Martin Oil LLC, an indirect wholly owned
subsidiary of KSL, to Valero Marketing and Supply Company, a
wholly owned subsidiary of Valero Energy Corporation, for
approximately $27 million.
On July 1, 2005, Valero L.P. entered into a definitive
agreement to sell certain of KPPs assets to Pacific Energy
Partners L.P. for approximately $455 million. These asset
sales were required by the U.S. Federal Trade Commission as
a condition to closing the merger.
Comprehensive income (loss) for the three and six months ended
June 30, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net income (loss)
|
|
$ |
(11,457 |
) |
|
$ |
7,395 |
|
|
$ |
(4,808 |
) |
|
$ |
13,390 |
|
Foreign currency translation adjustment
|
|
|
(443 |
) |
|
|
(402 |
) |
|
|
(596 |
) |
|
|
(451 |
) |
Gain on interest rate hedging transaction
|
|
|
12 |
|
|
|
8 |
|
|
|
18 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(11,888 |
) |
|
$ |
7,001 |
|
|
$ |
(5,386 |
) |
|
$ |
12,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-73
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income aggregated
$2.6 million at June 30, 2005 and $3.2 million at
December 31, 2004, respectively.
Prior to the acquisition by Valero L.P., the Company made
quarterly distributions of 100% of its available cash, as
defined in the limited liability company agreement, to common
shareholders of record on the applicable record date, within
45 days after the end of each quarter. Available cash
consisted generally of all the cash receipts of the Company,
less all cash disbursements and reserves. Excess cash flow of
the Companys wholly owned marketing operations was used to
reduce working capital borrowings. Due to the acquisition by
Valero L.P., neither the Company nor KPP declared any
distributions subsequent to June 30, 2005. Accordingly, the
June 30, 2005 consolidated balance sheet of the Company
does not reflect any amounts for accrued distributions payable.
A cash distribution of $0.495 per share with respect to the
fourth quarter of 2004 was paid on February 14, 2005. A
cash distribution of $0.495 per share with respect to the
first quarter of 2005 was paid on May 13, 2005.
|
|
5. |
EARNINGS LOSS PER SHARE |
Earnings (loss) per share for the three and six months ended
June 30, 2005 and 2004, is calculated using the
Companys basic and diluted weighted average shares
outstanding for the period. For the three months ended
June 30, 2005 and 2004, basic weighted average shares
outstanding were 11,871,000 and 11,693,000, respectively, and
diluted weighted average shares outstanding were 11,871,000 and
11,911,000, respectively. For the six months ended June 30,
2005 and 2004, basic weighted average shares outstanding were
11,871,000 and 11,680,000, respectively, and diluted weighted
average shares outstanding were 11,871,000 and 11,907,000,
respectively.
The operations of KPP are subject to federal, state and local
laws and regulations in the United States and various foreign
locations relating to protection of the environment. Although
KPP believes its operations are in general compliance with
applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance that significant costs
and liabilities will not be incurred by KPP. Moreover, it is
possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons
resulting from the operations of KPP, could result in
substantial costs and liabilities to KPP.
|
|
|
LITIGATION AND ENVIRONMENTAL |
KPP has contingent liabilities resulting from various
litigation, claims and commitments, some of which are incident
to the ordinary course of business. Other contingencies, which
are considered more significant by KPP, are discussed below.
Subsequent to the acquisition of the Company by Valero L.P., new
management of the Company determined based on a comprehensive
review of the matters disclosed below that an additional
$42 million accrual for potential loss contingencies was
required, which was recorded in the quarter ended June 30,
2005. Accordingly, KPP has recorded estimated reserves totaling
approximately $44 million related to certain of the matters
discussed below. These reserves have been recorded in compliance
with generally accepted accounting principles, however,
management believes that there are defenses in each of these
matters and it intends to vigorously defend each matter. As a
result, the actual payment of any amounts reserved and the
timing of such payments ultimately made is uncertain. Management
also believes that should KPP be unable to successfully defend
itself in these matters, the ultimate payment of any or all of
the amounts reserved would not have a material adverse effect on
KPPs financial position. However, given the inherent
uncertainty in estimating
F-74
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reserves for such matters, KPP can give no assurance that the
amounts recorded will not require adjustment in the future, and
such adjustments could be significant and could have a material
adverse effect on KPPs financial position and results of
operations.
Grace Matter
Certain subsidiaries of KPP were sued in a Texas state court in
1997 by Grace Energy Corporation (Grace), the entity
from which KPP acquired ST Services in 1993. The lawsuit
involves environmental response and remediation costs allegedly
resulting from fuel leaks in the early 1970s from a
pipeline. The pipeline, which connected a former Grace terminal
with Otis Air Force Base in Massachusetts (the Otis
pipeline or the pipeline), ceased operations
in 1973 and was abandoned before 1978, when the connecting
terminal was sold to an unrelated entity. Grace alleged that
subsidiaries of KPP acquired the abandoned pipeline as part of
the acquisition of ST Services in 1993 and assumed
responsibility for environmental damages allegedly caused by the
fuel leaks. Grace sought a ruling from the Texas court that
these subsidiaries are responsible for all liabilities,
including all present and future remediation expenses,
associated with these leaks and that Grace has no obligation to
indemnify these subsidiaries for these expenses. In the lawsuit,
Grace also sought indemnification for expenses of approximately
$3.5 million that it had incurred since 1996 for response
and remediation required by the State of Massachusetts and for
additional expenses that it expects to incur in the future. The
consistent position of KPPs subsidiaries has been that
they did not acquire the abandoned pipeline as part of the 1993
ST Services transaction, and therefore did not assume any
responsibility for the environmental damage nor any liability to
Grace for the pipeline.
At the end of the trial, the jury returned a verdict including
findings that (1) Grace had breached a provision of the
1993 acquisition agreement by failing to disclose matters
related to the pipeline, and (2) the pipeline was abandoned
before 1978 15 years before KPPs
subsidiaries acquired ST Services. On August 30, 2000, the
Judge entered final judgment in the case that Grace take nothing
from the subsidiaries on its claims seeking recovery of
remediation costs. Although KPPs subsidiaries have not
incurred any expenses in connection with the remediation, the
court also ruled, in effect, that the subsidiaries would not be
entitled to indemnification from Grace if any such expenses were
incurred in the future. Moreover, the Judge let stand a prior
summary judgment ruling that the pipeline was an asset acquired
by KPPs subsidiaries as part of the 1993 ST Services
transaction and that any liabilities associated with the
pipeline would have become liabilities of the subsidiaries.
Based on that ruling, the Massachusetts Department of
Environmental Protection and Samson Hydrocarbons Company
(successor to Grace Petroleum Company) wrote letters to ST
Services alleging its responsibility for the remediation, and ST
Services responded denying any liability in connection with this
matter. The Judge also awarded attorney fees to Grace of
approximately $1.8 million. Both KPPs subsidiaries
and Grace have appealed the trial courts final judgment to
the Texas Court of Appeals in Dallas. In particular, the
subsidiaries have filed an appeal of the judgment finding that
the Otis pipeline and any liabilities associated with the
pipeline were transferred to them as well as the award of
attorney fees to Grace.
On April 2, 2001, Grace filed a petition in bankruptcy,
which created an automatic stay of actions against Grace. This
automatic stay covers the appeal of the Dallas litigation, and
the Texas Court of Appeals has issued an order staying all
proceedings of the appeal because of the bankruptcy. Once that
stay is lifted, KPPs subsidiaries that are party to the
lawsuit intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation (MMR Site), which has been declared a
Superfund Site pursuant to CERCLA. The MMR Site contains a
number of groundwater contamination plumes, two of which are
allegedly associated with the Otis pipeline, and various other
waste management areas of concern, such as landfills. The United
States Department of Defense, pursuant to a Federal Facilities
Agreement, has been responding to the Government remediation
demand for most of the contamination problems at the MMR Site.
Grace and others have also received and responded to formal
inquiries from the United States Government in connection with
the environmental damages allegedly resulting from the fuel
leaks.
F-75
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
KPPs subsidiaries voluntarily responded to an invitation
from the Government to provide information indicating that they
do not own the pipeline. In connection with a court-ordered
mediation between Grace and KPPs subsidiaries, the
Government advised the parties in April 1999 that it has
identified two spill areas that it believes to be related to the
pipeline that is the subject of the Grace suit. The Government
at that time advised the parties that it believed it had
incurred costs of approximately $34 million, and expected
in the future to incur costs of approximately $55 million,
for remediation of one of the spill areas. This amount was not
intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties
that it could not at that time allocate its costs attributable
to the second spill area.
By letter dated July 26, 2001, the United States Department
of Justice (DOJ) advised ST Services that the
Government intends to seek reimbursement from ST Services under
the Massachusetts Oil and Hazardous Material Release Prevention
and Response Act and the Declaratory Judgment Act for the
Governments response costs at the two spill areas
discussed above. The DOJ relied in part on the Texas state court
judgment, which in the DOJs view, held that ST Services
was the current owner of the pipeline and the
successor-in-interest
of the prior owner and operator. The Government advised ST
Services that it believed it had incurred costs exceeding
$40 million, and expected to incur future costs exceeding
an additional $22 million, for remediation of the two spill
areas. KPP believes that its subsidiaries have substantial
defenses. ST Services responded to the DOJ on September 6,
2001, contesting the Governments positions and declining
to reimburse any response costs. In 2002, the DOJ asserted that,
inclusive of both spill areas, it had incurred over
$49 million in costs and expected to incur additional costs
of approximately $19 million. The DOJ has not filed a
lawsuit against ST Services seeking cost recovery for its
environmental investigation and response costs. Representatives
of ST Services have met with representatives of the Government
on several occasions since September 6, 2001 to discuss the
Governments claims and to exchange information related to
such claims. Additional exchanges of information may occur in
the future and additional meetings may be held to discuss
possible resolution of the Governments claims without
litigation. KPP does not believe this matter will have a
material adverse effect on its financial condition, although
there can be no assurances as to the ultimate outcome.
PEPCO Matter
On April 7, 2000, a fuel oil pipeline in Maryland owned by
Potomac Electric Power Company (PEPCO) ruptured.
Some work performed with regard to the pipeline was conducted by
a partnership of which ST Services is general partner. PEPCO
alleges that it has incurred costs of approximately
$80 million as a result of the spill. PEPCO probably will
continue to incur some cleanup related costs for the foreseeable
future, primarily in connection with EPA requirements for
monitoring the condition of some of the impacted areas. Since
May 2000, ST Services has provisionally contributed a minority
share of the cleanup expense, which has been funded by ST
Services insurance carriers. ST Services and PEPCO have
not, however, reached a final agreement regarding ST
Services proportionate responsibility for this cleanup
effort, if any, and cannot predict the amount, if any, that
ultimately may be determined to be ST Services share of
the remediation expense, but ST Services believes that such
amount will be covered by insurance and therefore will not
materially adversely affect KPPs financial condition.
As a result of the rupture, purported class actions were filed
against PEPCO and ST Services in federal and state court in
Maryland by property and business owners alleging damages in
unspecified amounts under various theories, including under the
Oil Pollution Act (OPA) and Maryland common law. The
federal court consolidated all of the federal cases in a case
styled as In re Swanson Creek Oil Spill Litigation. A
settlement of the consolidated class action, and a companion
state-court class action, was reached and approved by the
federal judge. The settlement involved creation and funding by
PEPCO and ST Services of a $2,250,000 class settlement fund,
from which all participating claimants would be paid according
to a court-approved formula, as well as a court-approved payment
to plaintiffs attorneys. The settlement has been
consummated and the fund, to which PEPCO and ST Services
contributed equal amounts, has been distributed. Participating
claimants claims have been settled and dismissed with
prejudice. A number of class members elected not to participate
in the
F-76
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlement, i.e., to opt out, thereby preserving
their claims against PEPCO and ST Services. All non-participant
claims have been settled for immaterial amounts with ST
Services portion of such settlements provided by its
insurance carrier.
PEPCO and ST Services agreed with the federal government and the
State of Maryland to pay costs of assessing natural resource
damages arising from the Swanson Creek oil spill under OPA and
of selecting restoration projects. This process was completed in
mid-2002. ST Services insurer has paid ST Services
agreed 50 percent share of these assessment costs. In late
November 2002, PEPCO and ST Services entered into a Consent
Decree resolving the federal and state trustees claims for
natural resource damages. The decree required payments by ST
Services and PEPCO of a total of approximately $3 million
to fund the restoration projects and for remaining damage
assessment costs. The federal court entered the Consent Decree
as a final judgment on December 31, 2002. PEPCO and ST
Services have each paid their 50% share and thus fully performed
their payment obligations under the Consent Decree. ST
Services insurance carrier funded ST Services
payment.
The U.S. Department of Transportation (DOT) has
issued a Notice of Proposed Violation to PEPCO and ST Services
alleging violations over several years of pipeline safety
regulations and proposing a civil penalty of $647,000 jointly
against the two companies. ST Services and PEPCO have contested
the DOT allegations and the proposed penalty. A hearing was held
before the Office of Pipeline Safety at the DOT in late 2001. In
June of 2004, the DOT issued a final order reducing the penalty
to $256,250 jointly against ST Services and PEPCO and $74,000
against ST Services.
By letter dated January 4, 2002, the Attorney
Generals Office for the State of Maryland advised ST
Services that it intended to seek penalties from ST Services in
connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties
against ST Services and PEPCO totaling up to $12 million. A
settlement of this claim was reached in mid-2002 under which ST
Services insurer will pay a total of slightly more than
$1 million in installments over a five year period. PEPCO
has also reached a settlement of these claims with the State of
Maryland. Accordingly, KPP believes that this matter will not
have a material adverse effect on its financial condition.
On December 13, 2002, ST Services sued PEPCO in the
Superior Court, District of Columbia, seeking, among other
things, a declaratory judgment as to ST Services legal
obligations, if any, to reimburse PEPCO for costs of the oil
spill. On December 16, 2002, PEPCO sued ST Services in the
United States District Court for the District of Maryland,
seeking recovery of all its costs for remediation of and
response to the oil spill. Pursuant to an agreement between ST
Services and PEPCO, ST Services suit was dismissed,
subject to refiling. ST Services has moved to dismiss
PEPCOs suit. ST Services is vigorously defending against
PEPCOs claims and is pursuing its own counterclaims for
return of monies ST Services has advanced to PEPCO for
settlements and cleanup costs. KPP believes that any costs or
damages resulting from these lawsuits will be covered by
insurance and therefore will not materially adversely affect
KPPs financial condition. The amounts claimed by PEPCO, if
recovered, would trigger an excess insurance policy which has a
$600,000 retention, but KPP does not believe that such
retention, if incurred, would materially adversely affect
KPPs financial condition.
Paulsboro GATX
Matter
In 2003, Exxon Mobil filed a lawsuit in a New Jersey state court
against GATX Corporation, Kinder Morgan Liquid Terminals
(Kinder Morgan), the successor in interest to GATX
Terminals Corporation (GATX), and ST Services,
seeking reimbursement for remediation costs associated with the
Paulsboro, New Jersey terminal. The terminal was owned and
operated by Exxon Mobil from the early 1950s until 1990
when purchased by GATX. ST Services purchased the terminal in
2000 from GATX. GATX was subsequently acquired by Kinder Morgan.
As a condition to the sale to GATX in 1990, Exxon Mobil
undertook certain remediation obligations with respect to the
site. In the lawsuit, Exxon Mobil is claiming that it has
complied with its remediation and contractual obligations and is
entitled to reimbursement from GATX Corporation, the parent
F-77
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
company of GATX, Kinder Morgan, and ST Services for costs in the
amount of $400,000 that it claims are related to releases at the
site subsequent to its sale of the terminal to GATX. It is also
alleging that any remaining remediation requirements are the
responsibility of GATX Corporation, Kinder Morgan, or ST
Services. Kinder Morgan has alleged that it was relieved of any
remediation obligations pursuant to the sale agreement between
its predecessor, GATX, and ST Services. The terminal was sold to
Pacific Energy Corporation who assumed the liability for the
pending mediation of this matter.
Surface
Transportation Board Matter
A subsidiary of KPP purchased the approximately
2,000-mile ammonia
pipeline system from Koch Pipeline Company, L.P. and Koch
Fertilizer Storage and Terminal Company in 2002. The rates of
the ammonia pipeline are subject to regulation by the Surface
Transportation Board (the STB). The STB had issued
an order in May 2000, prescribing maximum allowable rates
KPPs predecessor could charge for transportation to
certain destination points on the pipeline system. In 2003, KPP
instituted a 7% general increase to pipeline rates. On
August 1, 2003, CF Industries, Inc. (CFI) filed
a complaint with the STB challenging these rate increases. On
August 11, 2004, STB ordered KPP to pay reparations to CFI
and to return CFIs rates to the levels permitted under the
rate prescription. KPP has complied with the order. The STB,
however, indicated in the order that it would lift the rate
prescription in the event KPP could show materially
changed circumstances. KPP has submitted evidence of
materially changed circumstances, which specifically
includes its capital investment in the pipeline. CFI has argued
that KPPs acquisition costs should not be considered by
the STB as a measure of KPPs investment base.
Also, on June 16, 2003, Dyno Nobel Inc. (Dyno)
filed a complaint with the STB challenging the 2003 rate
increase on the basis that (i) the rate increase
constitutes a violation of a contract rate, (ii) rates are
discriminatory and (iii) the rates exceed permitted levels.
Dyno also intervened in the CFI proceeding described above.
Unlike CFI, Dynos rates are not subject to a rate
prescription. On May 11, 2005, the STB held a hearing on
KPPs request to vacate the existing rate prescription and
Dynos contract claims, and post-hearing briefing was
completed on June 10, 2005. The case is currently pending
before the STB and a ruling is expected later this year. As of
June 30, 2005, Dyno would be entitled to approximately
$3.1 million in rate refunds, should it be successful. KPP
believes, however, that Dynos claims are of limited merit.
Port of Vancouver
ST Services (STS) currently owns a refined products
terminal on property owned by the Port of Vancouver
(Port) and leases the land under the terminal from
the Port. Under an Agreed Order entered into with the Washington
Department of Ecology (WDE) when STS purchased the
terminal in 1998, STS agreed to investigate and remediate a
groundwater plume contaminated by the terminals previous
owner and operator. STS has submitted a final remedial action
plan to WDE, and is waiting for WDE to approve that plan. The
Port also owns property near the STS terminal site that has been
contaminated by other parties, some of which are in bankruptcy.
Estimated costs to remediate the STS terminal site depend on a
number of factors, including the outcome of litigation involving
the other properties owned by the Port that are near the STS
terminal site. STSs liability for remediation of the STS
site is not the subject of any pending litigation. Until formal
claims asserting such liability are made, liability is difficult
to assess. Accordingly, STSs liability for any portion of
total future remediation costs is not reasonably estimable at
this time.
KPP has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of
business. Management of KPP believes, after consulting with
counsel, that the ultimate resolution of such contingencies will
not have a material adverse effect on the financial position,
results of operations or liquidity of KPP.
F-78
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company conducts business through three reportable business
segments: the Pipeline Operations Segment of KPP, which consists
primarily of the transportation of refined petroleum products
and fertilizer in the Midwestern states as a common carrier; the
Terminalling Operations Segment of KPP, which provides storage
for petroleum products, specialty chemicals and other liquids;
and the Companys Product Marketing Services Segment, which
provides wholesale motor fuel marketing services throughout the
Midwest and Rocky Mountain regions, delivers bunker fuels to
ships in the Caribbean and Nova Scotia, Canada, and sells bulk
petroleum products to various commercial interests. General
corporate includes accounting, tax, finance, legal, investor
relations and other corporate expenses not related to the
segments. General corporate assets include cash, receivables
from affiliates of the Company and other assets not related to
the segments.
The Company measures segment profit as operating income. Total
assets are those assets controlled by each reportable segment.
Business segment data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Business segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
32,706 |
|
|
$ |
30,610 |
|
|
$ |
62,798 |
|
|
$ |
58,513 |
|
|
Terminalling operations
|
|
|
69,477 |
|
|
|
63,448 |
|
|
|
138,607 |
|
|
|
126,243 |
|
|
Product marketing operations
|
|
|
233,012 |
|
|
|
160,144 |
|
|
|
424,816 |
|
|
|
302,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
335,195 |
|
|
$ |
254,202 |
|
|
$ |
626,221 |
|
|
$ |
487,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
7,232 |
|
|
$ |
12,024 |
|
|
$ |
18,969 |
|
|
$ |
23,234 |
|
|
Terminalling operations
|
|
|
(36,260 |
) |
|
|
20,876 |
|
|
|
(17,533 |
) |
|
|
39,360 |
|
|
Product marketing operations
|
|
|
5,803 |
|
|
|
4,156 |
|
|
|
11,370 |
|
|
|
7,910 |
|
|
General corporate
|
|
|
(8,019 |
) |
|
|
(522 |
) |
|
|
(8,879 |
) |
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(31,244 |
) |
|
|
36,534 |
|
|
|
3,927 |
|
|
|
69,449 |
|
|
Interest and other income
|
|
|
107 |
|
|
|
61 |
|
|
|
313 |
|
|
|
93 |
|
|
Interest expense
|
|
|
(12,636 |
) |
|
|
(10,720 |
) |
|
|
(23,984 |
) |
|
|
(21,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and interest of outside
non-controlling partners in KPPs net income (loss)
|
|
$ |
(43,773 |
) |
|
$ |
25,875 |
|
|
$ |
(19,744 |
) |
|
$ |
48,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Total assets:
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
346,580 |
|
|
$ |
351,195 |
|
|
Terminalling operations
|
|
|
886,805 |
|
|
|
917,966 |
|
|
Product marketing operations
|
|
|
100,092 |
|
|
|
83,404 |
|
|
General corporate
|
|
|
3,443 |
|
|
|
4,323 |
|
|
|
|
|
|
|
|
|
|
$ |
1,336,920 |
|
|
$ |
1,356,888 |
|
|
|
|
|
|
|
|
F-79
KANEB SERVICES LLC AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The business segment profit of the terminalling operations
segment includes the $42 million provision for loss
contingencies (see note 6) and a $4 million loss due
to an impairment of a terminal in the U.K.
|
|
8. |
ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS |
In March of 2005, the Financial Accounting Standards Board
issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations
(FIN 47), which requires companies to recognize
a liability for the fair value of a legal obligation to perform
asset-retirement activities, even though the timing and/or
method of settlement are conditional on a future event, if the
amount can be reasonably estimated. FIN 47 must be adopted
by the Company by the end of fiscal 2005. The impact of adoption
of FIN 47 on the Companys consolidated financial
statements is still being evaluated.
F-80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Kaneb Services LLC
We have audited the accompanying consolidated balance sheets of
Kaneb Services LLC and its subsidiaries (the Company) as of
December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders equity and cash flows
for the years then ended. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States)(the
PCAOB). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2004 and 2003,
and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally
accepted accounting principles.
As described in Note 2, the Company adopted Statement of
Financial Accounting Standards No. 143 Accounting for
Asset Retirement Obligations in 2003.
We have also audited, in accordance with the standards of the
PCAOB, the effectiveness of the Companys internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Controls Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated
March 11, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Dallas, Texas
March 11, 2005
F-81
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
379,155,000 |
|
|
$ |
354,591,000 |
|
|
Products
|
|
|
676,093,000 |
|
|
|
511,200,000 |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,055,248,000 |
|
|
|
865,791,000 |
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
647,733,000 |
|
|
|
486,310,000 |
|
|
Operating costs
|
|
|
177,829,000 |
|
|
|
169,380,000 |
|
|
Depreciation and amortization
|
|
|
56,676,000 |
|
|
|
53,195,000 |
|
|
General and administrative
|
|
|
36,231,000 |
|
|
|
28,402,000 |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
918,469,000 |
|
|
|
737,287,000 |
|
|
|
|
|
|
|
|
Operating income
|
|
|
136,779,000 |
|
|
|
128,504,000 |
|
Interest and other income
|
|
|
336,000 |
|
|
|
365,000 |
|
Interest expense
|
|
|
(43,579,000 |
) |
|
|
(39,576,000 |
) |
|
|
|
|
|
|
|
Income before gain on issuance of units by KPP, income taxes,
interest of outside non-controlling partners in KPPs net
income and cumulative effect of change in accounting principle
|
|
|
93,536,000 |
|
|
|
89,293,000 |
|
Gain on issuance of units by KPP
|
|
|
|
|
|
|
10,898,000 |
|
Income tax expense
|
|
|
(3,251,000 |
) |
|
|
(4,887,000 |
) |
Interest of outside non-controlling partners in KPPs net
income
|
|
|
(65,933,000 |
) |
|
|
(61,908,000 |
) |
|
|
|
|
|
|
|
Income before cumulative effect of change in accounting principle
|
|
|
24,352,000 |
|
|
|
33,396,000 |
|
Cumulative effect of change in accounting principle
adoption of new accounting standard for asset retirement
obligations
|
|
|
|
|
|
|
(313,000 |
) |
|
|
|
|
|
|
|
Net income
|
|
$ |
24,352,000 |
|
|
$ |
33,083,000 |
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$ |
2.07 |
|
|
$ |
2.89 |
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
$ |
2.07 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$ |
2.03 |
|
|
$ |
2.84 |
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
$ |
2.03 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-82
KANEB SERVICES LLC
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
38,415,000 |
|
|
$ |
43,457,000 |
|
|
Accounts receivable (net of allowance for doubtful accounts of
$2,255,000 in 2004 and $3,777,000 in 2003)
|
|
|
85,976,000 |
|
|
|
60,684,000 |
|
|
Inventories
|
|
|
25,448,000 |
|
|
|
18,637,000 |
|
|
Prepaid expenses and other
|
|
|
12,614,000 |
|
|
|
9,650,000 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
162,453,000 |
|
|
|
132,428,000 |
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,451,176,000 |
|
|
|
1,360,523,000 |
|
Less accumulated depreciation
|
|
|
302,564,000 |
|
|
|
247,503,000 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
1,148,612,000 |
|
|
|
1,113,020,000 |
|
|
|
|
|
|
|
|
Investment in affiliates
|
|
|
25,939,000 |
|
|
|
25,456,000 |
|
Excess of cost over fair value of net assets of acquired
businesses and other assets
|
|
|
19,884,000 |
|
|
|
20,663,000 |
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,356,888,000 |
|
|
$ |
1,291,567,000 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
54,280,000 |
|
|
$ |
36,916,000 |
|
|
Accrued expenses
|
|
|
38,142,000 |
|
|
|
39,307,000 |
|
|
Accrued interest payable
|
|
|
9,374,000 |
|
|
|
9,303,000 |
|
|
Accrued distributions payable to shareholders
|
|
|
5,801,000 |
|
|
|
5,567,000 |
|
|
Accrued distributions payable to outside non-controlling
partners in KPPs net income
|
|
|
19,863,000 |
|
|
|
19,507,000 |
|
|
Deferred terminalling fees
|
|
|
8,851,000 |
|
|
|
7,061,000 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
136,311,000 |
|
|
|
117,661,000 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
688,985,000 |
|
|
|
636,308,000 |
|
Other liabilities and deferred taxes
|
|
|
53,520,000 |
|
|
|
52,242,000 |
|
Interest of outside non-controlling partners in KPP
|
|
|
397,717,000 |
|
|
|
407,635,000 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Shareholders investment
|
|
|
77,136,000 |
|
|
|
75,291,000 |
|
|
Accumulated other comprehensive income
|
|
|
3,219,000 |
|
|
|
2,430,000 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
80,355,000 |
|
|
|
77,721,000 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
1,356,888,000 |
|
|
$ |
1,291,567,000 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-83
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
24,352,000 |
|
|
$ |
33,083,000 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
56,676,000 |
|
|
|
53,195,000 |
|
|
|
Equity in earnings of affiliates, net of distributions
|
|
|
(483,000 |
) |
|
|
148,000 |
|
|
|
Interest of outside non-controlling partners in KPPs net
income
|
|
|
65,933,000 |
|
|
|
61,908,000 |
|
|
|
Gain on issuance of units by KPP
|
|
|
|
|
|
|
(10,898,000 |
) |
|
|
Deferred income taxes
|
|
|
(671,000 |
) |
|
|
1,683,000 |
|
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
313,000 |
|
|
|
Other
|
|
|
(1,191,000 |
) |
|
|
1,468,000 |
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(25,292,000 |
) |
|
|
1,151,000 |
|
|
|
|
Inventories, prepaid expenses and other
|
|
|
(9,775,000 |
) |
|
|
(4,766,000 |
) |
|
|
|
Accounts payable and accrued expenses
|
|
|
17,135,000 |
|
|
|
7,639,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
126,684,000 |
|
|
|
144,924,000 |
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(41,853,000 |
) |
|
|
(1,644,000 |
) |
|
Capital expenditures
|
|
|
(42,214,000 |
) |
|
|
(44,747,000 |
) |
|
Other, net
|
|
|
2,684,000 |
|
|
|
(1,388,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(81,383,000 |
) |
|
|
(47,779,000 |
) |
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Issuance of debt
|
|
|
52,001,000 |
|
|
|
291,377,000 |
|
|
Payments of debt
|
|
|
(2,500,000 |
) |
|
|
(388,051,000 |
) |
|
Distributions to shareholders
|
|
|
(22,860,000 |
) |
|
|
(20,473,000 |
) |
|
Distributions to outside non-controlling partners in KPP
|
|
|
(78,732,000 |
) |
|
|
(73,004,000 |
) |
|
Net proceeds from issuance of units by KPP
|
|
|
|
|
|
|
109,056,000 |
|
|
Issuance of common shares upon exercise of stock options
|
|
|
111,000 |
|
|
|
164,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,980,000 |
) |
|
|
(80,931,000 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
1,637,000 |
|
|
|
2,766,000 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(5,042,000 |
) |
|
|
18,980,000 |
|
Cash and cash equivalents at beginning of period
|
|
|
43,457,000 |
|
|
|
24,477,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
38,415,000 |
|
|
$ |
43,457,000 |
|
|
|
|
|
|
|
|
Supplemental cash flow information cash paid for
interest
|
|
$ |
42,122,000 |
|
|
$ |
35,712,000 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-84
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Shareholders | |
|
Comprehensive | |
|
|
|
Comprehensive | |
|
|
Investment | |
|
Income | |
|
Total | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
Balance at January 1, 2003
|
|
|
63,350,000 |
|
|
|
304,000 |
|
|
|
63,654,000 |
|
|
|
|
|
|
Net income for the year
|
|
|
33,083,000 |
|
|
|
|
|
|
|
33,083,000 |
|
|
$ |
33,083,000 |
|
|
Distributions declared
|
|
|
(21,306,000 |
) |
|
|
|
|
|
|
(21,306,000 |
) |
|
|
|
|
|
Issuance of common shares and other
|
|
|
164,000 |
|
|
|
|
|
|
|
164,000 |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
2,457,000 |
|
|
|
2,457,000 |
|
|
|
2,457,000 |
|
|
Interest rate hedging transaction
|
|
|
|
|
|
|
(331,000 |
) |
|
|
(331,000 |
) |
|
|
(331,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,209,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
75,291,000 |
|
|
|
2,430,000 |
|
|
|
77,721,000 |
|
|
|
|
|
|
Net income for the year
|
|
|
24,352,000 |
|
|
|
|
|
|
|
24,352,000 |
|
|
$ |
24,352,000 |
|
|
Distributions declared
|
|
|
(23,094,000 |
) |
|
|
|
|
|
|
(23,094,000 |
) |
|
|
|
|
|
Issuance of common shares and other
|
|
|
587,000 |
|
|
|
|
|
|
|
587,000 |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
753,000 |
|
|
|
753,000 |
|
|
|
753,000 |
|
|
Interest rate hedging transaction
|
|
|
|
|
|
|
36,000 |
|
|
|
36,000 |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,141,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
77,136,000 |
|
|
$ |
3,219,000 |
|
|
$ |
80,355,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-85
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 27, 2000, the Board of Directors of Kaneb
Services, Inc. authorized the distribution of its pipeline,
terminalling and product marketing businesses (the
Distribution) to its stockholders in the form of a
new limited liability company, Kaneb Services LLC (the
Company). On June 29, 2001, the Distribution
was completed, with each stockholder of Kaneb Services, Inc.
receiving one common share of the Company for each three shares
of Kaneb Services, Inc.s common stock held on
June 20, 2001, the record date for the Distribution,
resulting in the distribution of 10.85 million shares of
the Company. On August 7, 2001, the stockholders of Kaneb
Services, Inc. approved an amendment to its certificate of
incorporation to change its name to Xanser Corporation
(Xanser).
In September 1989, Kaneb Pipe Line Company LLC
(KPL), now a wholly owned subsidiary of the Company,
formed Kaneb Pipe Line Partners, L.P. (KPP) to own
and operate its refined petroleum products pipeline business.
KPL manages and controls the operations of KPP through its
general partner interests and a 18% (at December 31, 2004)
limited partnership interest. KPP operates through Kaneb Pipe
Line Operating Partnership, L.P. (KPOP), a limited
partnership in which KPP holds a 99% interest as limited
partner. KPL owns a 1% interest as general partner of KPP and a
1% interest as general partner of KPOP.
KPL owns a petroleum product marketing business which provides
wholesale motor fuel marketing services in the Great Lakes and
Rocky Mountain regions of the United States. KPPs product
sales business delivers bunker fuels to ships in the Caribbean
and Nova Scotia, Canada, and sells bulk petroleum products to
various commercial customers at those locations. In the
bunkering business, KPP competes with ports offering bunker
fuels along the route of the vessel. Vessel owners or charterers
are charged berthing and other fees for associated services such
as pilotage, tug assistance, line handling, launch service and
emergency response services.
|
|
|
Valero L.P. Merger Agreement |
On October 31, 2004, Valero L.P. agreed to acquire by
merger (the KSL Merger) all of the outstanding
common shares of the Company for cash. Under the terms of that
agreement, Valero L.P. is offering to purchase all of the
outstanding shares of the Company at $43.31 per share.
In a separate definitive agreement, on October 31, 2004,
Valero L.P. and KPP agreed to merge (the KPP
Merger). Under the terms of that agreement, each holder of
units of limited partnership interests in KPP will receive a
number of Valero L.P. common units based on an exchange ratio
that fluctuates within a fixed range to provide $61.50 in value
of Valero L.P. units for each unit of KPP. The actual exchange
ratio will be determined at the time of the closing of the
proposed merger and is subject to a fixed value collar of plus
or minus five percent of Valero L.P.s per unit price of
$57.25 as of October 7, 2004. Should Valero L.P.s per
unit price fall below $54.39 per unit, the exchange ratio
will remain fixed at 1.1307 Valero L.P. units for each unit of
KPP. Likewise, should Valero L.P.s per unit price exceed
$60.11 per unit, the exchange ratio will remain fixed at
1.0231 Valero L.P. units for each unit of KPP.
The completion of the KSL Merger is subject to the customary
regulatory approvals including those under the Hart-Scott-Rodino
Antitrust Improvements Act. The completion of the KSL
Merger is also subject to completion of the KPP Merger. All
required shareholder and unitholder approvals have been
obtained. Upon completion of the mergers, the general partner of
the combined partnership will be owned by affiliates of Valero
Energy Corporation and the Company and KPP will become wholly
owned subsidiaries of Valero L.P.
|
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The following significant accounting policies are followed by
the Company in the preparation of the consolidated financial
statements.
F-86
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Cash and Cash Equivalents |
The Companys policy is to invest cash in highly liquid
investments with original maturities of three months or less.
Accordingly, uninvested cash balances are kept at minimum
levels. Such investments are valued at cost, which approximates
market, and are classified as cash equivalents.
Inventories consist primarily of petroleum products purchased
for resale in the product marketing business and are valued at
the lower of cost or market. Cost is determined by using the
weighted-average cost method.
Property and equipment are carried at historical cost. Additions
of new equipment and major renewals and replacements of existing
equipment are capitalized. Repairs and minor replacements that
do not materially increase values or extend useful lives are
expensed. Depreciation of property and equipment is provided on
a straight-line basis at rates based upon expected useful lives
of various classes of assets, as discussed in Note 5. The
rates used for pipeline and certain storage facilities, which
are subject to regulation, are the same as those which have been
promulgated by the Federal Energy Regulatory Commission. Upon
disposal of assets depreciated on an individual basis, the gains
and losses are included in current operating income. Upon
disposal of assets depreciated on a group basis, unless unusual
in nature or amount, residual cost, less salvage, is charged
against accumulated depreciation.
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The
adoption of SFAS No. 144 did not have a material
impact on the consolidated financial statements of the Company.
Under SFAS No. 144, the carrying value of the
Companys property and equipment is periodically evaluated
using undiscounted future cash flows as the basis for
determining if impairment exists. To the extent impairment is
indicated to exist, an impairment loss will be recognized by the
Company based on fair value.
|
|
|
Revenue and Income Recognition |
The pipeline business provides pipeline transportation of
refined petroleum products, liquified petroleum gases, and
anhydrous ammonia fertilizer. Pipeline revenues are recognized
as services are provided. KPPs terminalling services
business provides terminalling and other ancillary services.
Storage fees are generally billed one month in advance and are
reported as deferred income. Terminalling revenues are
recognized in the month services are provided. Revenues for the
product marketing business are recognized when product is sold
and title and risk pass to the customer.
|
|
|
Sales of Securities by Subsidiaries |
The Company recognizes gains and losses in the consolidated
statements of income resulting from subsidiary sales of
additional equity interest, including KPP limited partnership
units, to unrelated parties.
|
|
|
Foreign Currency Translation |
The Company translates the balance sheet of KPPs foreign
subsidiaries using year-end exchange rates and translates income
statement amounts using the average exchange rates in effect
during the year. The gains and losses resulting from the change
in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive
income (loss) in Shareholders Equity. Gains and losses
resulting from foreign currency transactions are included in the
consolidated statements of income. The local
F-87
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
currency is considered to be the functional currency, except in
the Netherland Antilles and Canada, where the U.S. dollar
is the functional currency.
|
|
|
Excess of Cost Over Fair Value of Net Assets of Acquired
Businesses |
Effective January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminates the amortization of goodwill
(excess of cost over fair value of net assets of acquired
businesses) and other intangible assets with indefinite lives.
Under SFAS No. 142, intangible assets with lives
restricted by contractual, legal, or other means will continue
to be amortized over their useful lives. At December 31,
2004, the Company had no intangible assets subject to
amortization under SFAS No. 142. Goodwill and other
intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired.
SFAS No. 142 requires a two-step process for testing
impairment. First, the fair value of each reporting unit is
compared to its carrying value to determine whether an
indication of impairment exists. If an impairment is indicated,
then the fair value of the reporting units goodwill is
determined by allocating the units fair value to its
assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill is measured
as the excess of its carrying value over its fair value. Based
on valuations and analysis performed by the Company at initial
adoption date and at each annual evaluation date, including
December 31, 2004, the Company determined that the implied
fair value of its goodwill exceeded carrying value and,
therefore, no impairment charge was necessary.
KPP environmental expenditures that relate to current operations
are expensed or capitalized, as appropriate. Expenditures that
relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation,
are expensed. Liabilities are recorded by KPP when environmental
assessments and/or remedial efforts are probable, and the costs
can be reasonably estimated. Generally, the timing of these
accruals coincides with the completion of a feasibility study or
KPPs commitment to a formal plan of action.
|
|
|
Asset Retirement Obligations |
Effective January 1, 2003, the Company adopted
SFAS No. 143 Accounting for Asset Retirement
Obligations, which establishes requirements for the
removal-type costs associated with asset retirements. At the
initial adoption date of SFAS No. 143, the Company
recorded an asset retirement obligation of approximately
$5.5 million and recognized a cumulative effect of change
in accounting principle of $0.3 million, after interest of
outside non-controlling partners in KPPs net income, for
its legal obligations to dismantle, dispose of, and restore
certain leased KPP pipeline and terminalling facilities,
including petroleum and chemical storage tanks, terminalling
facilities and barges. The Company did not record a retirement
obligation for certain of KPPs pipeline and terminalling
assets because sufficient information is presently not available
to estimate a range of potential settlement dates for the
obligation. In these cases, the obligation will be initially
recognized in the period in which sufficient information exists
to estimate the obligation. At December 31, 2004, the
Company had no assets which were legally restricted for purposes
of settling asset retirement obligations. The effect of
SFAS No. 143, assuming adoption on January 1,
2002, was not material to the results of operations of the
Company for the years ended December 31, 2004 and 2003. In
2004 and 2003, accretion expense of $0.2 million and
$0.4 million, respectively, was included in operating costs.
The Company follows the provisions of SFAS No. 130,
Reporting Comprehensive Income, for the reporting
and display of comprehensive income and its components in a full
set of general purpose financial
F-88
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements. SFAS No. 130 requires additional
disclosure and does not affect the Companys financial
position or results of operations.
Limited liability company operations are not subject to federal
or state income taxes. However, certain KPP terminalling
operations are conducted through separate taxable wholly owned
corporate subsidiaries. The income before tax expense for these
subsidiaries was $18.4 million and $18.9 million for
the years ended December 31, 2004 and 2003, respectively.
The income tax expense for KPPs taxable subsidiaries for
the years ended December 31, 2004, and 2003 was
$3.3 million and $5.2 million, respectively. KPP has
recorded a net deferred tax liability of $21.5 million and
$20.6 million at December 2004 and 2003, respectively,
which is associated with these subsidiaries.
On June 1, 1989, the governments of the Netherlands
Antilles and St. Eustatius approved a Free Zone and Profit Tax
Agreement retroactive to January 1, 1989, which expired on
December 31, 2000. This agreement required a subsidiary of
KPP, to pay a 2% rate on taxable income, as defined therein, or
a minimum payment of 500,000 Netherlands Antilles guilders
($0.3 million) per year. The agreement further provided
that any amounts paid in order to meet the minimum annual
payment were available to offset future tax liabilities under
the agreement to the extent that the minimum annual payment is
greater than 2% of taxable income. The subsidiary is currently
engaged in discussions with representatives appointed by the
Island Territory of St. Eustatius regarding the renewal or
modification of the agreement, but the ultimate outcome cannot
be predicted at this time. The subsidiary has accrued amounts
assuming a new agreement becomes effective, and continues to
make payments, as required, under the previous agreement.
The Company makes quarterly distributions of 100% of available
cash, as defined in the limited liability agreement, to the
common shareholders of record on the applicable record date,
within 45 days after the end of each quarter. Available
cash consists generally of all the cash receipts of the Company,
less all cash disbursements and reserves. Excess cash flow of
the Companys wholly owned product marketing operations is
being used to reduce working capital borrowings. Distributions
of $1.96, $1.825 per share were declared and paid to
shareholders with respect to the years ended December 31,
2004 and 2003, respectively.
Earnings per share has been calculated using basic and diluted
weighted average shares outstanding for each of the periods
presented. For the years ended December 31, 2004 and 2003,
basic weighted average shares outstanding were 11,746,000 and
11,554,000 and diluted weighted average shares outstanding were
11,981,000 and 11,792,000, respectively.
The Company follows the provisions of SFAS No. 133,
Accounting For Derivative Instruments and Hedging
Activities, which establishes the accounting and reporting
standards for such activities. Under SFAS No. 133,
companies must recognize all derivative instruments on their
balance sheet at fair value. Changes in the value of derivative
instruments, which are considered hedges, are offset against the
change in fair value of the hedged item through earnings, or
recognized in other comprehensive income until the hedged item
is recognized in earnings, depending on the nature of the hedge.
SFAS No. 133 requires that unrealized gains and losses
on derivatives not qualifying for hedge accounting be recognized
currently in earnings.
On May 19, 2003, KPP issued $250 million of
5.875% senior unsecured notes due June 1, 2013 (see
Note 6). In connection with the offering, on May 8,
2003, KPP entered into a treasury lock contract for the
F-89
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purpose of locking in the US Treasury interest rate component on
$100 million of the debt. The treasury lock contract, which
qualified as a cash flow hedging instrument under
SFAS No. 133, was settled on May 19, 2003 with a
cash payment by KPP of $1.8 million. The settlement cost of
the contract, net of interest of outside non-controlling
partners in KPPs accumulated other comprehensive income,
has been recorded as a component of accumulated other
comprehensive income and is being amortized, as interest
expense, over the life of the debt. For the year ended
December 31, 2004 and 2003, $0.2 million and
$0.1 million, respectively, of amortization is included in
interest expense.
In December of 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), which
addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for
equity instruments of the enterprise, or liabilities that are
based on the fair value of the enterprises equity
instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the
ability to account for share-based compensation transactions
using the intrinsic value method under Accounting Principles
Board (APB) Opinion 25, Accounting for Stock
Issued to Employees, and generally requires that such
transactions be accounted for using a fair-value-based method.
The Company is currently evaluating the provisions of
SFAS No. 123R to determine which fair-value-based
model and transitional provision to follow upon adoption. The
alternatives for transition include either the modified
prospective or the modified retrospective methods. The modified
prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock as
the requisite service is rendered beginning with the first
quarter of adoption. The modified retrospective method requires
recording compensation expense for stock options and restricted
stock beginning with the first period restated. Under the
modified retrospective method, prior periods may be restated
either as of the beginning of the year of adoption or for all
periods presented. SFAS No. 123R will be effective for
the Company beginning in the third quarter of 2005. The impact
of adoption on the Companys consolidated financial
statements is still being evaluated.
In accordance with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company
currently applies the provisions of APB Opinion 25 and related
interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by
SFAS 123. The Company also applies the disclosure
provisions of SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-based
Compensation Transition and Disclosure as if
the fair-value-based method had been applied in measuring
compensation expense. The Black-Scholes option pricing model has
been used to estimate the fair value of stock options issued and
the assumptions in the calculations under such model include
stock price variance or volatility ranging from 3.40% to 4.39%,
based on weekly average variances of KPPs units prior to
the Distribution and the Companys common shares after the
Distribution for the ten year period preceding issuance, a
risk-free rate of return ranging from 3.75% to 4.78%, based on
the 30-year
U.S. treasury bill rate for the ten-year expected life of
the options, and an annual dividend yield ranging from 6.89% to
8.36%.
F-90
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following illustrates the effect on net income and basic and
diluted earnings per share if the fair value based method had
been applied:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Reported net income
|
|
$ |
24,352,000 |
|
|
$ |
33,083,000 |
|
Share-based employee compensation expense determined under the
fair value based method
|
|
|
(178,000 |
) |
|
|
(85,000 |
) |
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
24,174,000 |
|
|
$ |
32,998,000 |
|
|
|
|
|
|
|
|
Earning per share:
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
2.07 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
2.06 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
2.03 |
|
|
$ |
2.81 |
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
2.02 |
|
|
$ |
2.80 |
|
|
|
|
|
|
|
|
The preparation of the Companys financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
|
|
|
Recent Accounting Pronouncements |
Effective January 1, 2003, the Company adopted
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which requires that all
restructurings initiated after December 31, 2002 be
recorded when they are incurred and can be measured at fair
value. The adoption of SFAS No. 146 had no effect on
the consolidated financial statements of the Company.
The Company has adopted the provisions of FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements of Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57, and 107, and a rescission of FASB Interpretation
No. 34. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after
December 31, 2002. The application of this interpretation
had no effect on the consolidated financial statements of the
Company.
In December 2003, the FASB issued Interpretation No. 46
(Revised December 2003), Consolidation of Variable
Interest Entities (FIN 46R), primarily to clarify the
required accounting for interests in variable interest entities
(VIEs). This standard replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, that was issued in
January 2003 to address certain situations in which a company
should include in its financial statements the assets,
liabilities and activities of another entity. For the Company,
application of FIN 46R is required for interests in certain
VIEs that are commonly referred to as special-purpose entities,
or SPEs, as of December 31, 2003 and for interests in all
other types of VIEs as of March 31, 2004. The application
of FIN 46R has not and is not expected to have a material
impact on the consolidated financial statements of the Company.
F-91
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has adopted the provisions of
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which
amends and clarifies financial accounting and reporting for
derivative instruments and hedging activities. The adoption of
SFAS No. 149, which was effective for derivative
contracts and hedging relationships entered into or modified
after June 30, 2003, had no impact on the Companys
consolidated financial statements.
On July 1, 2003, the Company adopted
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, which requires certain financial instruments,
which were previously accounted for as equity, to be classified
as liabilities. The adoption of SFAS No. 150 had no
effect on the consolidated financial statements of the Company.
|
|
3. |
PUBLIC OFFERING OF UNITS BY KPP |
In March of 2003, KPP issued 3,122,500 limited partnership units
in a public offering at $36.54 per unit, generating
approximately $109.1 million in net proceeds. The proceeds
were used to reduce bank borrowings (See Note 5). As a
result of KPP issuing additional units to unrelated parties, the
Companys share of net assets of KPP increased by
$10.9 million. Accordingly, the Company recognized a
$10.9 million gain in 2003.
|
|
4. |
PROPERTY AND EQUIPMENT |
The cost of property and equipment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
December 31, | |
|
|
useful | |
|
| |
|
|
life (years) | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Land
|
|
|
|
|
|
$ |
84,893,000 |
|
|
$ |
75,912,000 |
|
Buildings
|
|
|
25 35 |
|
|
|
39,077,000 |
|
|
|
36,244,000 |
|
Pipeline and terminalling equipment
|
|
|
15 40 |
|
|
|
1,187,323,000 |
|
|
|
1,115,458,000 |
|
Marine equipment
|
|
|
15 30 |
|
|
|
87,937,000 |
|
|
|
87,204,000 |
|
Furniture and fixtures
|
|
|
5 15 |
|
|
|
15,390,000 |
|
|
|
11,577,000 |
|
Transportation equipment
|
|
|
3 6 |
|
|
|
7,790,000 |
|
|
|
7,360,000 |
|
Construction and work-in-progress
|
|
|
|
|
|
|
28,766,000 |
|
|
|
26,768,000 |
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
|
1,451,176,000 |
|
|
|
1,360,523,000 |
|
Less accumulated depreciation
|
|
|
|
|
|
|
302,564,000 |
|
|
|
247,503,000 |
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
|
|
|
$ |
1,148,612,000 |
|
|
$ |
1,113,020,000 |
|
|
|
|
|
|
|
|
|
|
|
F-92
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Revolving credit facility, due in July of 2008
|
|
$ |
14,000,000 |
|
|
$ |
16,500,000 |
|
Revolving credit facility of subsidiary, due in April of 2007
|
|
|
3,033,000 |
|
|
|
2,112,000 |
|
KPP $400 million revolving credit facility, due in April of
2006
|
|
|
95,669,000 |
|
|
|
54,169,000 |
|
KPP $250 million 5.875% senior unsecured notes, due in
June of 2013
|
|
|
250,000,000 |
|
|
|
250,000,000 |
|
KPP $250 million 7.75% senior unsecured notes, due in
February of 2012
|
|
|
250,000,000 |
|
|
|
250,000,000 |
|
KPP term loans, due in April of 2006
|
|
|
40,770,000 |
|
|
|
29,243,000 |
|
KPP Australian bank facility, due in April of 2006
|
|
|
35,513,000 |
|
|
|
34,284,000 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
688,985,000 |
|
|
$ |
636,308,000 |
|
|
|
|
|
|
|
|
The Company has an agreement with a bank that provides for a
$50 million revolving credit facility through July 1,
2008. The credit facility, which bears interest at variable
rates, is secured by 4.6 million KPP limited partnership
units and has a variable rate commitment fee on unused amounts.
At December 31, 2004, $14.0 million was drawn on the
credit facility.
The Companys product marketing subsidiary has a credit
agreement with a bank that, as amended, provides for a
$15 million revolving credit facility through April of
2007. The credit facility bears interest at variable rates, has
a commitment fee of 0.25% per annum on unutilized amounts
and contains certain financial and operational covenants. At
December 31, 2004, the subsidiary was in compliance with
all covenants. The credit facility, which is without recourse to
the Company, is secured by essentially all of the tangible and
intangible assets of the product marketing business and by
250,000 KPP limited partnership units held by a subsidiary of
the Company. At December 31, 2004, $3.0 million was
drawn on the facility.
In April of 2003, KPP entered into a credit agreement with a
group of banks that provides for a $400 million unsecured
revolving credit facility through April of 2006. The credit
facility, which provides for an increase in the commitment up to
an aggregate of $450 million by mutual agreement between
KPP and the banks, bears interest at variable rates and has a
variable commitment fee on unused amounts. The credit facility
is without recourse to the Company and contains certain
financial and operating covenants, including limitations on
investments, sales of assets and transactions with affiliates
and, absent an event of default, does not restrict distributions
to the Company or to other partners. At December 31, 2004,
KPP was in compliance with all covenants. Initial borrowings on
the credit agreement ($324.2 million) were used to repay
all amounts outstanding under KPPs $275 million
credit agreement and $175 million bridge loan agreement. At
December 31, 2004, $95.7 million was outstanding under
the credit agreement.
On May 19, 2003, KPP issued $250 million of
5.875% senior unsecured notes due June 1, 2013. The
net proceeds from the public offering, $247.6 million, were
used to reduce amounts due under KPPs revolving credit
agreement. Under the note indenture, interest is payable
semi-annually in arrears on June 1 and December 1 of
each year. The notes are redeemable, as a whole or in part, at
the option of KPP, at any time, at a redemption price equal to
the greater of 100% of the principal amount of the notes, or the
sum of the present value of the remaining scheduled payments of
principal and interest, discounted to the redemption date at the
applicable U.S. Treasury rate, as defined in the indenture,
plus 30 basis points. The note indenture contains certain
financial and operational covenants, including certain
limitations on investments, sales of assets and
F-93
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transactions with affiliates and, absent an event of default,
such covenants do not restrict distributions to the Company or
to other partners. At December 31, 2004, KPP was in
compliance with all covenants.
In February of 2002, KPP issued $250 million of
7.75% senior unsecured notes due February 15, 2012.
The net proceeds from the public offering, $248.2 million,
were used to repay the KPPs revolving credit agreement and
to partially fund the acquisition of all of the liquids
terminating subsidiaries of Statia Terminals Group NV on
February 28, 2002. Under the note indenture, interest is
payable semi-annually in arrears on February 15 and August 15 of
each year. The notes, which are without recourse to the Company,
are redeemable, as a whole or in part, at the option of KPP, at
any time, at a redemption price equal to the greater of 100% of
the principal amount of the notes, or the sum of the present
value of the remaining scheduled payments of principal and
interest, discounted to the redemption date at the applicable
U.S. Treasury rate, as defined in the indenture, plus
30 basis points. The note indenture contains certain
financial and operational covenants, including certain
limitations on investments, sales of assets and transactions
with affiliates and, absent an event of default, such covenants
do not restrict distributions to the Company or to other
partners. At December 31, 2004, KPP was in compliance with
all covenants.
Substantially all of the Companys domestic employees are
covered by a defined contribution plan, which provides for
varying levels of employer matching. The Companys
contributions under these plans were $1.6 million,
$1.6 million and $1.2 million for 2004, 2003 and 2002,
respectively.
The changes in the number of issued and outstanding common
shares of the Company are summarized as follows:
|
|
|
|
|
|
|
Common Shares | |
|
|
Issued and | |
|
|
Outstanding | |
|
|
| |
Balance at January 1, 2002
|
|
|
11,242,746 |
|
Common shares issued
|
|
|
73,091 |
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
11,315,837 |
|
Common shares issued
|
|
|
206,628 |
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
11,522,465 |
|
Common shares issued
|
|
|
169,863 |
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
11,692,328 |
|
|
|
|
|
On June 27, 2001, the Board of Directors of the Company
declared a distribution of one right for each of its outstanding
common shares to each shareholder of record on June 27,
2001. Each right entitles the holder, upon the occurrence of
certain events, to purchase from the Company one of its common
shares at a purchase price of $60.00 per common share,
subject to adjustment. The rights will not separate from the
common shares or become exercisable until a person or group
either acquires beneficial ownership of 15% or more of the
Companys common shares or commences a tender or exchange
offer that would result in ownership of 20% or more, whichever
occurs earlier. The rights, which expire on June 27, 2011,
are redeemable in whole, but not in part, at the Companys
option at any time for a price of $0.01 per right. On
October 28, 2004, the rights agreement was amended to
generally provide that events referred to in the Valero L.P.
merger agreement (see Note 1) would not cause the rights to
become exercisable.
F-94
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has various plans for officers, directors and key
employees under which stock options, deferred stock units and
restricted shares may be issued.
Stock Options
The options granted under the plan generally expire ten years
from date of grant. All options were granted at prices greater
than or equal to the market price at the date of grant.
At December 31, 2004, options on 506,307 shares at
prices ranging from $5.26 to $28.75 were outstanding, of which
137,405 were exercisable at prices ranging from $5.26 to $19.73.
At December 31, 2003, options on 374,200 shares at
prices ranging from $3.27 to $19.73 were outstanding, of which
195,332 were exercisable at prices ranging from $3.27 to $19.73.
Deferred Stock Unit Plans
In 2002, the Company initiated a Deferred Stock Unit Plan (the
DSU Plan), pursuant to which key employees of the
Company have, from time to time, been given the opportunity to
defer a portion of their compensation for a specified period
toward the purchase of deferred stock units (DSUs),
an instrument designed to track the Companys common
shares. Under the plan, DSUs are purchased at a value equal to
the closing price of the Companys common shares on the day
by which the employee must elect (if they so desire) to
participate in the DSU Plan; which date is established by the
Compensation Committee, from time to time (the Election
Date). During a vesting period of one to three years
following the Election Date, a participants DSUs vest only
in an amount equal to the lesser of the compensation actually
deferred to date or the value (based upon the then-current
closing price of the Companys common shares) of the
pro-rata portion (as of such date) of the number of DSUs
acquired. After the expiration of the vesting period, which is
typically the same length as the deferral period, the DSUs
become fully vested, but may only be distributed through the
issuance of a like number of shares of the Companys common
shares on a pre-selected date, which is irrevocably selected by
the participant on the Election Date and which is typically at
or after the expiration of the vesting period and no later than
ten years after the Election Date, or at the time of a
change of control of the Company, if earlier. DSU
accounts are unfunded by the Company. Each person that elects to
participate in the DSU Plan is awarded, under the Companys
Share Incentive Plan, an option to purchase a number of shares
ranging from one-half to one and one-half times the number of
DSUs purchased by such person at 100% of the closing price of
the Companys common shares on the Election Date, which
options become exercisable over a specified period after the
grant, according to a schedule determined by the Compensation
Committee. At December 31, 2004, 3,802 DSUs had vested
under the 2002 Plan.
In 1996, Kaneb Services, Inc. implemented a DSU plan whereby
officers, directors and key executives were permitted to defer
compensation on a pretax basis to receive shares of Kaneb
Services, Inc. common stock at a predetermined date after the
end of the compensation deferral period. In connection with the
Distribution, the Company agreed to issue DSUs equivalent in
price to the Companys common shares at that time. For
every three Kaneb Services, Inc. DSUs held, the Company issued
one DSU, such that the intrinsic value of each holders
deferred compensation account remained unchanged as a result of
the Distribution. In addition, upon the payment date of any
distributions on the Companys common shares, the Company
agreed to credit each deferred account with the equivalent value
of the distribution. Upon the scheduled payment of the deferred
accounts, the Company agreed to issue one common share for each
DSU relative to Company DSUs previously issued and to pay the
equivalent of the accumulated deferred distributions, plus
interest, to the previously deferred account holder. All other
terms of the DSU plan remained unchanged. Similarly, Kaneb
Services, Inc. agreed to issue to employees of the Company who
hold DSUs, the number of shares of Kaneb Services, Inc. (now
Xanser) common stock subject to the Kaneb Services, Inc. DSUs
held by those employees. At December 31, 2004,
approximately 122,000 common shares of the Company are issuable
under this arrangement.
F-95
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted Stock
In August 2004 and September 2001, the Company issued 60,000 and
30,000, respectively, of restricted common shares to the outside
Directors of the Company. All of such shares vest or become
transferable in one-third increments on each anniversary date
after issuance. In conjunction will the issuance and
commencement of vesting of the restricted shares, the Company
recognized an expense of $0.5 million in 2004 and
$0.1 million in 2003.
|
|
8. |
COMMITMENTS AND CONTINGENCIES |
Total rent expense under operating leases amounted to
$14.6 million and $13.5 million for the years ended
December 31, 2003 and 2004, respectively.
The following is a schedule by years of future minimum lease
payments under the Companys, and KPPs, operating
leases as of December 31, 2004:
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2005
|
|
$ |
9,822,000 |
|
|
2006
|
|
|
8,593,000 |
|
|
2007
|
|
|
6,238,000 |
|
|
2008
|
|
|
5,338,000 |
|
|
2009
|
|
|
4,058,000 |
|
|
Thereafter
|
|
|
18,140,000 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
52,189,000 |
|
|
|
|
|
The operations of KPP are subject to federal, state and local
laws and regulations in the United States and various foreign
locations relating to protection of the environment. Although
KPP believes its operations are in general compliance with
applicable environmental regulations, risks of additional costs
and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance that significant costs
and liabilities will not be incurred by KPP. Moreover, it is
possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons
resulting from the operations of KPP, could result in
substantial costs and liabilities to KPP. KPP has recorded an
undiscounted reserve for environmental claims in the amount of
$23.0 million at December 31, 2004, including
$16.9 million related to acquisitions of pipelines and
terminals. During 2004 and 2003, respectively, KPP incurred
$6.7 million and $2.1 million of costs related to such
acquisition reserves and reduced the liability accordingly.
Certain subsidiaries of KPP were sued in a Texas state court in
1997 by Grace Energy Corporation (Grace), the entity
from which KPP acquired ST Services in 1993. The lawsuit
involves environmental response and remediation costs allegedly
resulting from jet fuel leaks in the early 1970s from a
pipeline. The pipeline, which connected a former Grace terminal
with Otis Air Force Base in Massachusetts (the Otis
pipeline or the pipeline), ceased operations
in 1973 and was abandoned before 1978, when the connecting
terminal was sold to an unrelated entity. Grace alleged that
subsidiaries of KPP acquired the abandoned pipeline as part of
the acquisition of ST Services in 1993 and assumed
responsibility for environmental damages allegedly caused by the
jet fuel leaks. Grace sought a ruling from the Texas court that
these subsidiaries are responsible for all liabilities,
including all present and future remediation expenses,
associated with these leaks and that Grace has no obligation to
indemnify these subsidiaries for these expenses. In the lawsuit,
Grace also sought indemnification for expenses of approximately
$3.5 million that it had incurred since 1996 for response
and remediation required by the State of Massachusetts and for
additional expenses that it expects to incur in the future. The
consistent position of KPPs subsidiaries has been that
they did not acquire the abandoned pipeline
F-96
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as part of the 1993 ST Services transaction, and therefore did
not assume any responsibility for the environmental damage nor
any liability to Grace for the pipeline.
At the end of the trial, the jury returned a verdict including
findings that (1) Grace had breached a provision of the
1993 acquisition agreement by failing to disclose matters
related to the pipeline, and (2) the pipeline was abandoned
before 1978 15 years before KPPs
subsidiaries acquired ST Services. On August 30, 2000, the
Judge entered final judgment in the case that Grace take nothing
from the subsidiaries on its claims seeking recovery of
remediation costs. Although KPPs subsidiaries have not
incurred any expenses in connection with the remediation, the
court also ruled, in effect, that the subsidiaries would not be
entitled to indemnification from Grace if any such expenses were
incurred in the future. Moreover, the Judge let stand a prior
summary judgment ruling that the pipeline was an asset acquired
by KPPs subsidiaries as part of the 1993 ST Services
transaction and that any liabilities associated with the
pipeline would have become liabilities of the subsidiaries.
Based on that ruling, the Massachusetts Department of
Environmental Protection and Samson Hydrocarbons Company
(successor to Grace Petroleum Company) wrote letters to ST
Services alleging its responsibility for the remediation, and ST
Services responded denying any liability in connection with this
matter. The Judge also awarded attorney fees to Grace of more
than $1.5 million. Both KPPs subsidiaries and Grace
have appealed the trial courts final judgment to the Texas
Court of Appeals in Dallas. In particular, the subsidiaries have
filed an appeal of the judgment finding that the Otis pipeline
and any liabilities associated with the pipeline were
transferred to them as well as the award of attorney fees to
Grace.
On April 2, 2001, Grace filed a petition in bankruptcy,
which created an automatic stay of actions against Grace. This
automatic stay covers the appeal of the Dallas litigation, and
the Texas Court of Appeals has issued an order staying all
proceedings of the appeal because of the bankruptcy. Once that
stay is lifted, KPPs subsidiaries that are party to the
lawsuit intend to resume vigorous prosecution of the appeal.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation (MMR Site), which has been declared a
Superfund Site pursuant to CERCLA. The MMR Site contains a
number of groundwater contamination plumes, two of which are
allegedly associated with the Otis pipeline, and various other
waste management areas of concern, such as landfills. The United
States Department of Defense, pursuant to a Federal Facilities
Agreement, has been responding to the Government remediation
demand for most of the contamination problems at the MMR Site.
Grace and others have also received and responded to formal
inquiries from the United States Government in connection with
the environmental damages allegedly resulting from the jet fuel
leaks. KPPs subsidiaries voluntarily responded to an
invitation from the Government to provide information indicating
that they do not own the pipeline. In connection with a
court-ordered mediation between Grace and KPPs
subsidiaries, the Government advised the parties in April 1999
that it has identified two spill areas that it believes to be
related to the pipeline that is the subject of the Grace suit.
The Government at that time advised the parties that it believed
it had incurred costs of approximately $34 million, and
expected in the future to incur costs of approximately
$55 million, for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs
or to include all categories of costs. The Government also
advised the parties that it could not at that time allocate its
costs attributable to the second spill area.
By letter dated July 26, 2001, the United States Department
of Justice (DOJ) advised ST Services that the
Government intends to seek reimbursement from ST Services under
the Massachusetts Oil and Hazardous Material Release Prevention
and Response Act and the Declaratory Judgment Act for the
Governments response costs at the two spill areas
discussed above. The DOJ relied in part on the Texas state court
judgment, which in the DOJs view, held that ST Services
was the current owner of the pipeline and the
successor-in-interest
of the prior owner and operator. The Government advised ST
Services that it believes it has incurred costs exceeding
$40 million, and expects to incur future costs exceeding an
additional $22 million, for remediation of the two spill
areas. KPP believes that its subsidiaries have substantial
defenses. ST Services responded to the DOJ on September 6,
2001, contesting the Governments positions and declining
to reimburse any response costs. The DOJ has not filed a lawsuit
against ST Services seeking cost recovery for its environmental
investigation and
F-97
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
response costs. Representatives of ST Services have met with
representatives of the Government on several occasions since
September 6, 2001 to discuss the Governments claims
and to exchange information related to such claims. Additional
exchanges of information are expected to occur in the future and
additional meetings may be held to discuss possible resolution
of the Governments claims without litigation. KPP does not
believe this matter will have a materially adverse effect on its
financial condition, although there can be no assurances as to
the ultimate outcome.
On April 7, 2000, a fuel oil pipeline in Maryland owned by
Potomac Electric Power Company (PEPCO) ruptured.
Work performed with regard to the pipeline was conducted by a
partnership of which ST Services is general partner. PEPCO has
reported that it has incurred total cleanup costs of
$70 million to $75 million. PEPCO probably will
continue to incur some cleanup related costs for the foreseeable
future, primarily in connection with EPA requirements for
monitoring the condition of some of the impacted areas. Since
May 2000, ST Services has provisionally contributed a minority
share of the cleanup expense, which has been funded by ST
Services insurance carriers. ST Services and PEPCO have
not, however, reached a final agreement regarding ST
Services proportionate responsibility for this cleanup
effort, if any, and cannot predict the amount, if any, that
ultimately may be determined to be ST Services share of
the remediation expense, but ST Services believes that such
amount will be covered by insurance and therefore will not
materially adversely affect KPPs financial condition.
As a result of the rupture, purported class actions were filed
against PEPCO and ST Services in federal and state court in
Maryland by property and business owners alleging damages in
unspecified amounts under various theories, including under the
Oil Pollution Act (OPA) and Maryland common law. The
federal court consolidated all of the federal cases in a case
styled as In re Swanson Creek Oil Spill Litigation. A settlement
of the consolidated class action, and a companion state-court
class action, was reached and approved by the federal judge. The
settlement involved creation and funding by PEPCO and ST
Services of a $2,250,000 class settlement fund, from which all
participating claimants would be paid according to a
court-approved formula, as well as a court-approved payment to
plaintiffs attorneys. The settlement has been consummated
and the fund, to which PEPCO and ST Services contributed equal
amounts, has been distributed. Participating claimants
claims have been settled and dismissed with prejudice. A number
of class members elected not to participate in the settlement,
i.e., to opt out, thereby preserving their claims
against PEPCO and ST Services. All non-participant claims have
been settled for immaterial amounts with ST Services
portion of such settlements provided by its insurance carrier.
PEPCO and ST Services agreed with the federal government and the
State of Maryland to pay costs of assessing natural resource
damages arising from the Swanson Creek oil spill under OPA and
of selecting restoration projects. This process was completed in
mid-2002. ST Services insurer has paid ST Services
agreed 50 percent share of these assessment costs. In late
November 2002, PEPCO and ST Services entered into a Consent
Decree resolving the federal and state trustees claims for
natural resource damages. The decree required payments by ST
Services and PEPCO of a total of approximately $3 million
to fund the restoration projects and for remaining damage
assessment costs. The federal court entered the Consent Decree
as a final judgment on December 31, 2002. PEPCO and ST
Services have each paid their 50% share and thus fully performed
their payment obligations under the Consent Decree. ST
Services insurance carrier funded ST Services
payment.
The U.S. Department of Transportation (DOT) has
issued a Notice of Proposed Violation to PEPCO and ST Services
alleging violations over several years of pipeline safety
regulations and proposing a civil penalty of $647,000 jointly
against the two companies. ST Services and PEPCO have contested
the DOT allegations and the proposed penalty. A hearing was held
before the Office of Pipeline Safety at the DOT in late 2001. In
June of 2004, the DOT issued a final order reducing the penalty
to $256,250 jointly against ST Services and PEPCO and $74,000
against ST Services. On September 14, 2004, ST Services
petitioned for reconsideration of the order.
F-98
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
By letter dated January 4, 2002, the Attorney
Generals Office for the State of Maryland advised ST
Services that it intended to seek penalties from ST Services in
connection with the April 7, 2000 spill. The State of
Maryland subsequently asserted that it would seek penalties
against ST Services and PEPCO totaling up to $12 million. A
settlement of this claim was reached in mid-2002 under which ST
Services insurer will pay a total of slightly more than
$1 million in installments over a five year period. PEPCO
has also reached a settlement of these claims with the State of
Maryland. Accordingly, KPP believes that this matter will not
have a material adverse effect on its financial condition.
On December 13, 2002, ST Services sued PEPCO in the
Superior Court, District of Columbia, seeking, among other
things, a declaratory judgment as to ST Services legal
obligations, if any, to reimburse PEPCO for costs of the oil
spill. On December 16, 2002, PEPCO sued ST Services in the
United States District Court for the District of Maryland,
seeking recovery of all its costs for remediation of and
response to the oil spill. Pursuant to an agreement between ST
Services and PEPCO, ST Services suit was dismissed,
subject to refiling. ST Services has moved to dismiss
PEPCOs suit. ST Services is vigorously defending against
PEPCOs claims and is pursuing its own counterclaims for
return of monies ST Services has advanced to PEPCO for
settlements and cleanup costs. KPP believes that any costs or
damages resulting from these lawsuits will be covered by
insurance and therefore will not materially adversely affect
KPPs financial condition. The amounts claimed by PEPCO, if
recovered, would trigger an excess insurance policy which has a
$600,000 retention, but KPP does not believe that such
retention, if incurred, would materially adversely affect
KPPs financial condition.
In 2003, Exxon Mobil filed a lawsuit in a New Jersey state court
against GATX Corporation, Kinder Morgan Liquid Terminals
(Kinder Morgan), the successor in interest to GATX
Terminals Corporation (GATX), and ST Services,
seeking reimbursement for remediation costs associated with the
Paulsboro, New Jersey terminal. The terminal was owned and
operated by Exxon Mobil from the early 1950s until 1990
when purchased by GATX. ST Services purchased the terminal in
2000 from GATX. GATX was subsequently acquired by Kinder Morgan.
As a condition to the sale to GATX in 1990, Exxon Mobil
undertook certain remediation obligations with respect to the
site. In the lawsuit, Exxon Mobil is claiming that it has
complied with its remediation and contractual obligations and is
entitled to reimbursement from GATX Corporation, the parent
company of GATX, Kinder Morgan, and ST Services for costs in the
amount of $400,000 that it claims are related to releases at the
site subsequent to its sale of the terminal to GATX. It is also
alleging that any remaining remediation requirements are the
responsibility of GATX Corporation, Kinder Morgan, or ST
Services. Kinder Morgan has alleged that it was relieved of any
remediation obligations pursuant to the sale agreement between
its predecessor, GATX, and ST Services. ST Services believes
that, except for remediation involving immaterial amounts, GATX
Corporation or Exxon Mobil are responsible for the remaining
remediation of the site. Costs of completing the required
remediation depend on a number of factors and cannot be
determined at the current time.
A subsidiary of KPP purchased the approximately
2,000-mile ammonia
pipeline system from Koch Pipeline Company, L.P. and Koch
Fertilizer Storage and Terminal Company in 2002. The rates of
the ammonia pipeline are subject to regulation by the Surface
Transportation Board (the STB). The STB had issued
an order in May 2000, prescribing maximum allowable rates
KPPs predecessor could charge for transportation to
certain destination points on the pipeline system. In 2003, KPP
instituted a 7% general increase to pipeline rates. On
August 1, 2003, CF Industries, Inc. (CFI) filed
a complaint with the STB challenging these rate increases. On
August 11, 2004, STB ordered KPP to pay reparations to CFI
and to return CFIs rates to the levels permitted under the
rate prescription. KPP has complied with the order. The STB,
however, indicated in the order that it would lift the rate
prescription in the event KPP could show materially
changed circumstances. KPP has submitted evidence of
materially changed circumstances, which specifically
includes its capital investment in the pipeline. CFI has argued
that KPPs acquisition costs should not be considered by
the STB as a measure of KPPs investment base. The STB is
expected to decide the issue within the second quarter of 2005.
F-99
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Also, on June 16, 2003, Dyno Nobel Inc. (Dyno)
filed a complaint with the STB challenging the 2003 rate
increase on the basis that (i) the rate increase
constitutes a violation of a contract rate, (ii) rates are
discriminatory and (iii) the rates exceed permitted levels.
Dyno also intervened in the CFI proceeding described above.
Unlike CFI, Dynos rates are not subject to a rate
prescription. As of December 31, 2004, Dyno would be
entitled to approximately $2 million in rate refunds,
should it be successful. KPP believes, however, that Dynos
claims are without merit.
Pursuant to the Distribution, the Company entered into an
agreement (the Distribution Agreement) with Xanser
whereby the Company is obligated to pay Xanser amounts equal to
certain expenses and tax liabilities incurred by Xanser in
connection with the Distribution. In January of 2002, the
Company paid Xanser $10 million in tax liabilities due in
connection with the Distribution Agreement. The Distribution
Agreement also requires the Company to pay Xanser an amount
calculated based on any income tax liability of Xanser that, in
the sole judgment of Xanser, (i) is attributable to
increases in income tax from past years arising out of
adjustments required by federal and state tax authorities, to
the extent that such increases are properly allocable to the
businesses that became part of the Company, or (ii) is
attributable to the distribution of the Companys common
shares and the operations of the Companys businesses prior
to the distribution date. In the event of an examination of
Xanser by federal or state tax authorities, Xanser will have
unfettered control over the examination, administrative appeal,
settlement or litigation that may be involved, notwithstanding
that the Company has agreed to pay any additional tax.
The Company, primarily KPP, has other contingent liabilities
resulting from litigation, claims and commitments incident to
the ordinary course of business. Management believes, after
consulting with counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the
financial position, results of operations or liquidity of the
Company.
The Company conducts business through three principal
operations: the Pipeline Operations, which consists
primarily of the transportation of refined petroleum products
and fertilizer in the Midwestern states as a common carrier; the
Terminalling Operations, which provide storage for
petroleum products, specialty chemicals and other liquids; and
the Product Marketing Operations, which provides
wholesale motor fuel marketing services throughout the Midwest
and Rocky Mountain regions and, since KPPs acquisition of
Statia delivers bunker fuel to ships in the Caribbean and Nova
Scotia, Canada and sells bulk petroleum products to various
commercial interests. General corporate includes general and
administrative costs, including accounting, tax, finance, legal,
investor relations and employee benefit services. General
corporate assets include cash and other assets not related to
the segments.
The Company measures segment profit as operating income. Total
assets are those assets controlled by each reportable segment.
Business segment data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Business segment revenues:
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
119,803,000 |
|
|
$ |
119,633,000 |
|
|
Terminalling operations
|
|
|
259,352,000 |
|
|
|
234,958,000 |
|
|
Product marketing operations
|
|
|
676,093,000 |
|
|
|
511,200,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,055,248,000 |
|
|
$ |
865,791,000 |
|
|
|
|
|
|
|
|
Business segment profit:
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
48,853,000 |
|
|
$ |
51,860,000 |
|
|
Terminalling operations
|
|
|
74,663,000 |
|
|
|
66,532,000 |
|
F-100
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
Product marketing operations
|
|
|
17,262,000 |
|
|
|
12,233,000 |
|
|
General corporate
|
|
|
(3,999,000 |
) |
|
|
(2,121,000 |
) |
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
136,779,000 |
|
|
|
128,504,000 |
|
|
Interest and other income
|
|
|
336,000 |
|
|
|
365,000 |
|
|
Interest expense
|
|
|
(43,579,000 |
) |
|
|
(39,576,000 |
) |
|
|
|
|
|
|
|
|
Income before gain on issuance of units by KPP, income taxes,
interest of outside non-controlling partners in KPPs net
income and cumulative effect of change in accounting principle
|
|
$ |
93,536,000 |
|
|
$ |
89,293,000 |
|
|
|
|
|
|
|
|
Business segment assets:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
14,538,000 |
|
|
$ |
14,117,000 |
|
|
|
Terminalling operations
|
|
|
41,232,000 |
|
|
|
38,089,000 |
|
|
|
Product marketing operations
|
|
|
906,000 |
|
|
|
989,000 |
|
|
|
|
|
|
|
|
|
|
$ |
56,676,000 |
|
|
$ |
53,195,000 |
|
|
|
|
|
|
|
|
|
Capital expenditures (excluding acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
10,334,000 |
|
|
$ |
9,584,000 |
|
|
|
|
Terminalling operations
|
|
|
29,511,000 |
|
|
|
34,572,000 |
|
|
|
|
Product marketing operations
|
|
|
2,369,000 |
|
|
|
591,000 |
|
|
|
|
|
|
|
|
|
|
$ |
42,214,000 |
|
|
$ |
44,747,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Total assets:
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
351,195,000 |
|
|
$ |
352,901,000 |
|
|
Terminalling operations
|
|
|
917,966,000 |
|
|
|
874,185,000 |
|
|
Product marketing operations
|
|
|
83,404,000 |
|
|
|
58,161,000 |
|
|
General corporate
|
|
|
4,323,000 |
|
|
|
6,320,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,356,888,000 |
|
|
$ |
1,291,567,000 |
|
|
|
|
|
|
|
|
F-101
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following geographical area data includes revenues and
operating income based on location of the operating segment and
net property and equipment based on physical location.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Geographical area revenues:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
658,814,000 |
|
|
$ |
535,895,000 |
|
|
United Kingdom
|
|
|
29,540,000 |
|
|
|
26,392,000 |
|
|
Netherlands Antilles
|
|
|
298,273,000 |
|
|
|
241,693,000 |
|
|
Canada
|
|
|
43,671,000 |
|
|
|
41,689,000 |
|
|
Australia and New Zealand
|
|
|
24,950,000 |
|
|
|
20,122,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,055,248,000 |
|
|
$ |
865,791,000 |
|
|
|
|
|
|
|
|
Geographical area operating income:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
93,954,000 |
|
|
$ |
87,965,000 |
|
|
United Kingdom
|
|
|
7,704,000 |
|
|
|
8,583,000 |
|
|
Netherlands Antilles
|
|
|
22,629,000 |
|
|
|
19,223,000 |
|
|
Canada
|
|
|
5,248,000 |
|
|
|
6,777,000 |
|
|
Australia and New Zealand
|
|
|
7,244,000 |
|
|
|
5,956,000 |
|
|
|
|
|
|
|
|
|
|
$ |
136,779,000 |
|
|
$ |
128,504,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Geographical area net property and equipment:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
718,257,000 |
|
|
$ |
693,345,000 |
|
|
United Kingdom
|
|
|
63,968,000 |
|
|
|
51,392,000 |
|
|
Netherlands Antilles
|
|
|
211,382,000 |
|
|
|
217,143,000 |
|
|
Canada
|
|
|
71,374,000 |
|
|
|
74,995,000 |
|
|
Australia and New Zealand
|
|
|
83,631,000 |
|
|
|
76,145,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,148,612,000 |
|
|
$ |
1,113,020,000 |
|
|
|
|
|
|
|
|
|
|
10. |
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF
CREDIT RISK |
The estimated fair value of all debt as of December 31,
2004 and 2003 was approximately $745 million and
$654 million, as compared to the carrying value of
$689 million and $636 million, respectively. These
fair values were estimated using discounted cash flow analysis,
based on the Companys current incremental borrowing rates
for similar types of borrowing arrangements. These estimates are
not necessarily indicative of the amounts that would be realized
in a current market exchange. See Note 2 regarding
derivative instruments.
The Company markets and sells its services to a broad base of
customers and performs ongoing credit evaluations of its
customers. The Company does not believe it has a significant
concentration of credit risk at December 31, 2004. No
customer constituted 10% of the Companys consolidated
revenues in 2004 or 2003.
F-102
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11. |
QUARTERLY FINANCIAL DATA (unaudited) |
Quarterly operating results for 2004 and 2003 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
233,179,000 |
|
|
$ |
254,202,000 |
|
|
$ |
272,242,000 |
|
|
$ |
295,625,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
32,915,000 |
|
|
$ |
36,534,000 |
|
|
$ |
34,927,000 |
|
|
$ |
32,403,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,995,000 |
|
|
$ |
7,395,000 |
|
|
$ |
6,811,000 |
|
|
$ |
4,151,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.51 |
|
|
$ |
0.63 |
|
|
$ |
0.58 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.50 |
|
|
$ |
0.62 |
|
|
$ |
0.57 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
218,469,000 |
|
|
$ |
218,654,000 |
|
|
$ |
214,592,000 |
|
|
$ |
214,076,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
33,724,000 |
|
|
$ |
32,705,000 |
|
|
$ |
32,251,000 |
|
|
$ |
29,824,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,559,000 |
(a)(b) |
|
$ |
5,488,000 |
|
|
$ |
5,862,000 |
|
|
$ |
5,174,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.44 |
|
|
$ |
0.48 |
|
|
$ |
0.50 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.41 |
|
|
$ |
0.47 |
|
|
$ |
0.49 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
Includes cumulative effect of change in accounting
principle adoption of new accounting standard for
asset retirement obligations of approximately $0.3 million. |
|
b) |
See Note 3 regarding gains on issuance of units by KPP. |
F-103
APPENDIX A
Form of Amended and Restated Limited Liability Company
Agreement of Valero GP Holdings, LLC
A-1
LOGO
16,500,000 Units
Representing Limited Liability Company Interests
PROSPECTUS
,
2006
Lehman
Brothers
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
|
Item 13. |
Other Expenses of Issuance and Distribution. |
Set forth below are the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered
hereby. With the exception of the SEC registration fee, the NASD
filing fee and the NYSE listing fee, the amounts set forth below
are estimates.
|
|
|
|
|
|
Commission registration fee
|
|
$ |
50,759 |
|
NASD filing fee
|
|
|
47,938 |
|
NYSE listing fee
|
|
|
150,000 |
|
Printing and engraving expenses
|
|
|
* |
|
Fees and expenses of legal counsel
|
|
|
* |
|
Accounting fees and expenses
|
|
|
* |
|
Transfer agent and registrar fees
|
|
|
* |
|
Miscellaneous
|
|
|
* |
|
|
|
|
|
|
Total
|
|
$ |
* |
|
|
|
|
|
|
|
* |
To be filed by amendment. |
|
|
Item 14. |
Indemnification of Directors and Officers. |
The section of the prospectus entitled Description of Our
Limited Liability Company Agreement
Indemnification discloses that we will generally indemnify
officers and members of our board of directors to the fullest
extent permitted by the law against all losses, claims, damages
or similar events and is incorporated herein by this reference.
Reference is also made to
Section of the Underwriting
Agreement to be filed as an exhibit to this registration
statement in which we will agree to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, and to contribute to
payments that may be required to be made with respect to these
liabilities. Subject to any terms, conditions or restrictions
set forth in the limited liability company agreement,
Section 18-108 of the Delaware Limited Liability Company
Act empowers a Delaware limited liability company to indemnify
and hold harmless any member or manager or other person from and
against all claims and demands whatsoever.
To the extent that the indemnification provisions of our limited
liability company agreement purport to include indemnification
for liabilities arising under the Securities Act of 1933, in the
opinion of the SEC, such indemnification is contrary to public
policy and is therefore unenforceable.
|
|
Item 15. |
Recent Sales of Unregistered Securities. |
In a transaction exempt from the registration requirements
pursuant to Section 4(2) of the Securities Act, immediately
prior to the closing of this offering, we will issue
44,510,258 units to subsidiaries of Valero Energy in
exchange for their current ownership interests in us.
II-1
The following documents are filed as exhibits to this
registration statement. With respect to exhibits that are
incorporated by reference to Exchange Act filings, the SEC file
number for Valero L.P. is 1-16417.
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
1 |
.01* |
|
Form of Underwriting Agreement |
|
|
|
3 |
.01* |
|
Certificate of Formation of Valero GP Holdings, LLC |
|
|
|
3 |
.02* |
|
Form of Amended and Restated Limited Liability Company Agreement
of Valero GP Holdings, LLC (included as Appendix A to the
Prospectus) |
|
|
|
4 |
.01 |
|
Amended and Restated Certificate of Limited Partnership of
Valero L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.3 |
|
4 |
.02 |
|
Third Amended and Restated Agreement of Limited Partnership of
Valero L.P. |
|
Valero L.P.s Quarterly Report on Form 10-Q for quarter
ended March 31, 2003, Exhibit 3.1 |
|
4 |
.03 |
|
First Amendment to Third Amended and Restated Agreement of
Limited Partnership of Valero L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2003, Exhibit 4.3 |
|
4 |
.04 |
|
Amendment No. 2 to Third Amended and Restated Agreement of
Limited Partnership of Valero L.P., dated as of July 1, 2005 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.01 |
|
4 |
.05 |
|
Certificate of Limited Partnership of Valero Logistics
Operations, L.P. |
|
Registration Statement on Form S-1 (File No. 333-
43668), Exhibit 3.4 |
|
4 |
.06 |
|
Certificate of Amendment to Certificate of Limited Partnership
of Valero Logistics Operations, L.P. |
|
Registration Statement on Form S-1 (File No. 333-
43668), Exhibit 3.5 |
|
4 |
.07 |
|
Second Amended and Restated Agreement of Limited Partnership of
Valero Logistics Operations, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.9 |
|
4 |
.08 |
|
Second Amendment to Second Amended and Restated Agreement of
Limited Partnership of Valero Logistics Operations, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.10 |
|
4 |
.09 |
|
Certificate of Limited Partnership of Riverwalk Logistics, L.P. |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 3.7 |
|
4 |
.10 |
|
Agreement of Limited Partnership of Riverwalk Logistics, L.P. |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 3.8 |
|
4 |
.11 |
|
First Amended and Restated Limited Partnership Agreement of
Riverwalk Logistics, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.16 |
|
4 |
.12 |
|
Certificate of Formation of Valero GP, LLC |
|
Registration Statement on Form S-1 (File
No. 333-43668), Exhibit 3.9 |
|
4 |
.13 |
|
Certificate of Amendment to Certificate of Formation of Valero
GP, LLC |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.14 |
|
4 |
.14* |
|
First Amended and Restated LLC Agreement of Valero GP, LLC |
|
Registration Statement on Form S-1 (File
No. 333-43668), Exhibit 3.10 |
|
4 |
.15 |
|
First Amendment to First Amended and Restated Limited Liability
Company Agreement of Valero GP, LLC |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.15 |
II-2
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
4 |
.16 |
|
Indenture, dated July 15, 2002, among Valero Logistics
Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The
Bank of New York, as Trustee, relating to Senior Debt Securities |
|
Valero L.P.s Current Report on Form 8-K filed
July 15, 2002, Exhibit 4.1 |
|
4 |
.17 |
|
First Supplemental Indenture, dated as of July 15, 2002, to
Indenture dated July 15, 2002, in each case among Valero
Logistics Operations, L.P., as Issuer, Valero L.P., as
Guarantor, and The Bank of New York, as Trustee, relating to
67/8
% Senior Notes Due 2012 |
|
Valero L.P.s Current Report on Form 8-K filed
July 15, 2002, Exhibit 4.2 |
|
4 |
.18 |
|
Second Supplemental Indenture, dated as of March 18, 2003,
to Indenture dated July 15, 2002, as amended and
supplemented by a First Supplemental Indenture thereto dated as
of July 15, 2002, in each case among Valero Logistics
Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The
Bank of New York, as Trustee (including, form of global note
representing $250,000,000 6.05% Senior Notes due 2013) |
|
Valero L.P.s Current Report on Form 8-K filed
May 9, 2003, Exhibit 4.1 |
|
4 |
.19 |
|
Third Supplemental Indenture, dated as of July 1, 2005, to
Indenture dated July 15, 2002, as amended and supplemented,
among Valero Logistics Operations, L.P.; Valero L.P.; Kaneb Pipe
Line Operating Partnership, L.P.; and The Bank of New York |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.02 |
|
4 |
.20 |
|
Indenture, dated as of February 21, 2002, between Kaneb
Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank
(Senior Debt Securities) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.03 |
|
4 |
.21 |
|
First Supplemental Indenture, dated as of February 21, 2002, to
Indenture dated as of February 21, 2002, between Kaneb Pipe Line
Operating Partnership, L.P. and JPMorgan Chase Bank (including
form of 7.750% Senior Unsecured Notes due 2012) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.04 |
|
4 |
.22 |
|
Second Supplemental Indenture, dated as of August 9, 2002
and effective as of April 4, 2002, to Indenture dated as of
February 21, 2002, as amended and supplemented, between Kaneb
Pipe Line Operating Partnership, L.P.; Statia Terminals Canada
Partnership; and JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.05 |
|
4 |
.23 |
|
Third Supplemental Indenture, dated and effective as of
May 16, 2003, to Indenture dated as of February 21, 2002,
as amended and supplemented, between Kaneb Pipe Line Operating
Partnership, L.P.; Statia Terminals Canada Partnership; and
JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.06 |
II-3
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
4 |
.24 |
|
Fourth Supplemental Indenture, dated and effective as of
May 27, 2003, to Indenture dated as of February 21,
2002, as amended and supplemented, between Kaneb Pipe Line
Operating Partnership, L.P. and JPMorgan Chase Bank (including
form of 5.875% Senior Unsecured Notes due 2013) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.07 |
|
4 |
.25 |
|
Fifth Supplemental Indenture, dated and effective as of
July 1, 2005, to Indenture dated as of February 21,
2002, as amended and supplemented, among Kaneb Pipe Line
Operating Partnership, L.P.; Valero L.P.; Valero Logistics
Operations, L.P.; and JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.08 |
|
4 |
.26* |
|
Specimen certificate representing units of Valero GP Holdings,
LLC |
|
|
|
5 |
.01* |
|
Opinion of Andrews Kurth LLP as to the legality of the
securities being registered |
|
|
|
8 |
.01* |
|
Opinion of Andrews Kurth LLP relating to tax matters |
|
|
|
10 |
.01* |
|
Form of Valero GP Holdings, LLC Credit Facility |
|
|
|
10 |
.02 |
|
5-Year Revolving Credit Agreement dated as of December 20,
2004 among Valero Logistics Operations, L.P., Valero L.P., the
Lenders party thereto and JPMorgan Chase Bank, N.A., as
Administrative Agent, Suntrust Bank, as Syndication Agent, and
Barclays Bank PLC, Mizuho Corporate Bank Ltd., and Royal Bank of
Canada, as Co-Documentation Agents |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.02 |
|
10 |
.03 |
|
First Amendment dated as of June 30, 2005 to 5-Year
Revolving Credit Agreement, dated as of December 20, 2004,
among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan
Chase Bank; and the Lenders party thereto |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 10.01 |
|
10 |
.04 |
|
5-Year Term Credit Agreement, dated as of July 1, 2005,
among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan
Chase Bank; and the Lenders party thereto |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 10.02 |
|
10 |
.05 |
|
Valero GP, LLC Amended and Restated 2003 Employee Unit Incentive
Plan |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2004, Exhibit 10.03 |
|
10 |
.06 |
|
Valero GP, LLC Amended and Restated 2002 Unit Option Plan |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.04 |
|
10 |
.07 |
|
Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.05 |
|
10 |
.08 |
|
Form of Restricted Unit Agreement under the Valero GP, LLC
Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, Exhibit 10.4 |
|
10 |
.09 |
|
Form of Unit Option Award Agreement under the Valero GP, LLC
Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, Exhibit 10.6 |
II-4
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
10 |
.10 |
|
Valero GP, LLC Short-Term Incentive Plan |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 10.4 |
|
10 |
.11 |
|
Valero GP, LLC Intermediate-Term Incentive Plan |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 10.9 |
|
10 |
.12 |
|
Performance Award Agreement dated January 22, 2003 between
Curtis V. Anastasio and Valero Energy Corporation |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2003, Exhibit 10.8 |
|
10 |
.13 |
|
Pipelines and Terminals Usage Agreement by and among Ultramar
Diamond Shamrock Corporation, Shamrock Logistics Operations,
L.P., Shamrock Logistics, L.P., Riverwalk Logistics, L.P. and
Shamrock Logistics GP, LLC, dated April 16, 2001 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 10.6 |
|
10 |
.14** |
|
Amended and Restated Omnibus Agreement among Valero Energy
Corporation, Valero GP, LLC, Riverwalk Logistics, L.P., Valero
L.P. and Valero Logistics Operations, L.P., dated March 31,
2006. |
|
|
|
10 |
.15** |
|
Third Amended and Restated Services Agreement among Diamond
Shamrock Refining and Marketing Company, Valero Corporate
Services Company; Valero L.P., Valero Logistics Operations,
L.P., Riverwalk Logistics, L.P.; and Valero GP, LLC, effective
as of January 1, 2006 |
|
|
|
10 |
.16 |
|
Operating Agreement by and between Shamrock Logistics
Operations, L.P. and Valero Pipeline Company, dated
January 1, 2002 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 10.13 |
|
10 |
.17 |
|
Contribution Agreement by and among Valero Refining
Company--California, Riverwalk Holdings, LLC, Valero L.P.,
Valero GP, Inc. and Valero Logistics Operations, L.P. dated as
of March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2002, Exhibit 10.13 |
|
10 |
.18 |
|
Contribution Agreement by and among Valero Refining
Company--Texas, L.P., UDS Logistics, LLC, Valero L.P., Valero
GP, Inc. and Valero Logistics Operations, L.P. dated as of
March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2002, Exhibit 10.14 |
|
10 |
.19 |
|
Contribution Agreement by and among Valero Pipeline Company, UDS
Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero
Logistics Operations, L.P. dated as of March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2002, Exhibit 10.15 |
|
10 |
.20 |
|
Handling and Throughput Agreement between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.1 |
|
10 |
.21 |
|
Amendment Number One to the Handling and Throughput Agreement
between Valero Marketing and Supply Company and Valero Logistics
Operations, L.P., effective as of April 27, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.3 |
II-5
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
10 |
.22 |
|
Services and Secondment Agreement between Valero Refining-Texas,
L.P. and Valero Logistics Operations, L.P., dated as of March
18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.3 |
|
10 |
.23 |
|
Services and Secondment Agreement between Valero Refining
Company-California and Valero Logistics Operations, L.P., dated
as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.2 |
|
10 |
.24 |
|
Throughput Commitment Agreement by and among Valero Marketing
and Supply Company, Valero Logistics Operations, L.P. and Valero
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.4 |
|
10 |
.25 |
|
Terminalling Agreement (Edinburg) between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.5 |
|
10 |
.26 |
|
Terminalling Agreement (Houston Asphalt) between Valero
Marketing and Supply Company and Valero Logistics Operations,
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.6 |
|
10 |
.27 |
|
Terminalling Agreement (Hobby Airport) between Valero Marketing
and Supply Company and Valero Logistics Operations, L.P., dated
as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.7 |
|
10 |
.28 |
|
Terminalling Agreement (Placedo) between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.8 |
|
10 |
.29 |
|
Terminalling Agreement (San Antonio East) between Valero
Marketing and Supply Company and Valero Logistics Operations,
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.9 |
|
10 |
.30 |
|
Terminal Storage and Throughput Agreement between Valero
Marketing and Supply Company and Valero Logistics Operation,
L.P. effective as of January 15, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.2 |
|
10 |
.31 |
|
Terminal Agreement (Corpus Christi Crude Terminal) between
Valero Marketing Supply Company and Valero Logistics Operation,
L.P. effective as of January 1, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.4 |
|
10 |
.32** |
|
Form of Administration Agreement between Valero GP Holdings, LLC
and Valero GP, LLC |
|
|
|
10 |
.36** |
|
Form of Non-Compete Agreement between Valero GP Holdings, LLC,
Valero L.P., Riverwalk Logistics, L.P. and Valero GP, LLC |
|
|
|
21 |
.01* |
|
List of Subsidiaries of Valero GP Holdings, LLC |
|
|
|
23 |
.01** |
|
Consent of KPMG LLP, dated March 30, 2006 |
|
|
|
23 |
.02* |
|
Consent of Andrews Kurth LLP (contained in Exhibit 5.1 and
Exhibit 8.1) |
|
|
II-6
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
23 |
.03** |
|
Consent of Ernst & Young LLP, dated March 30, 2006 |
|
|
|
24 |
.01 |
|
Powers of Attorney (included on signature page to this
registration statement) |
|
|
|
|
|
|
* |
To be filed by amendment. |
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
|
|
|
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective. |
|
|
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof. |
The registrant undertakes to send to each unitholder, at least
on an annual basis, a detailed statement of any transactions
with Valero Energy or its subsidiaries, and of fees,
commissions, compensation and other benefits paid, or accrued to
Valero Energy or its subsidiaries for the fiscal year completed,
showing the amount paid or accrued to each recipient and the
services performed.
The registrant undertakes to provide to the unitholders the
financial statements required by
Form 10-K for the
first full fiscal year of operations of the company.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Antonio,
State of Texas, on March 31, 2006.
|
|
|
|
By: |
/s/ Curtis V. Anastasio |
|
|
|
|
|
Curtis V. Anastasio |
|
President and Chief Executive Officer |
POWER OF ATTORNEY
The undersigned directors and officers of Valero GP Holdings,
LLC hereby constitute and appoint Steven A. Blank and
Bradley C. Barron, each with full power to act and with
full power of substitution and resubstitution, our true and
lawful
attorneys-in-fact and
agents with full power to execute in our name and behalf in the
capacities indicated below any and all amendments (including
post-effective amendments and amendments thereto) to this
registration statement and to file the same, with all exhibits
and other documents relating thereto and any registration
statement relating to any offering made pursuant to this
registration statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act with the
Securities and Exchange Commission and hereby ratify and confirm
all that such
attorney-in-fact or his
substitute shall lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by
the following persons in the capacities and the dates indicated.
|
|
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ William E. Greehey
William E. Greehey |
|
Chairman of the Board |
|
March 31, 2006 |
|
/s/ Curtis V. Anastasio
Curtis V. Anastasio |
|
President and Chief Executive Officer |
|
March 31, 2006 |
|
/s/ Steven A. Blank
Steven A. Blank |
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
March 31, 2006 |
|
/s/ Thomas R. Shoaf
Thomas R. Shoaf |
|
Vice President and Controller |
|
March 31, 2006 |
II-8
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
1 |
.01* |
|
Form of Underwriting Agreement |
|
|
|
3 |
.01* |
|
Certificate of Formation of Valero GP Holdings, LLC |
|
|
|
3 |
.02* |
|
Form of Amended and Restated Limited Liability Company Agreement
of Valero GP Holdings, LLC (included as Appendix A to the
Prospectus) |
|
|
|
4 |
.01 |
|
Amended and Restated Certificate of Limited Partnership of
Valero L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.3 |
|
4 |
.02 |
|
Third Amended and Restated Agreement of Limited Partnership of
Valero L.P. |
|
Valero L.P.s Quarterly Report on Form 10-Q for quarter
ended March 31, 2003, Exhibit 3.1 |
|
4 |
.03 |
|
First Amendment to Third Amended and Restated Agreement of
Limited Partnership of Valero L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2003, Exhibit 4.3 |
|
4 |
.04 |
|
Amendment No. 2 to Third Amended and Restated Agreement of
Limited Partnership of Valero L.P., dated as of July 1, 2005 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.01 |
|
4 |
.05 |
|
Certificate of Limited Partnership of Valero Logistics
Operations, L.P. |
|
Registration Statement on Form S-1 (File No. 333-
43668), Exhibit 3.4 |
|
4 |
.06 |
|
Certificate of Amendment to Certificate of Limited Partnership
of Valero Logistics Operations, L.P. |
|
Registration Statement on Form S-1 (File No. 333-
43668), Exhibit 3.5 |
|
4 |
.07 |
|
Second Amended and Restated Agreement of Limited Partnership of
Valero Logistics Operations, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.9 |
|
4 |
.08 |
|
Second Amendment to Second Amended and Restated Agreement of
Limited Partnership of Valero Logistics Operations, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.10 |
|
4 |
.09 |
|
Certificate of Limited Partnership of Riverwalk Logistics, L.P. |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 3.7 |
|
4 |
.10 |
|
Agreement of Limited Partnership of Riverwalk Logistics, L.P. |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 3.8 |
|
4 |
.11 |
|
First Amended and Restated Limited Partnership Agreement of
Riverwalk Logistics, L.P. |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.16 |
|
4 |
.12 |
|
Certificate of Formation of Valero GP, LLC |
|
Registration Statement on Form S-1 (File
No. 333-43668), Exhibit 3.9 |
|
4 |
.13 |
|
Certificate of Amendment to Certificate of Formation of Valero
GP, LLC |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.14 |
|
4 |
.14* |
|
First Amended and Restated LLC Agreement of Valero GP, LLC |
|
Registration Statement on Form S-1 (File
No. 333-43668), Exhibit 3.10 |
|
4 |
.15 |
|
First Amendment to First Amended and Restated Limited Liability
Company Agreement of Valero GP, LLC |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 3.15 |
|
4 |
.16 |
|
Indenture, dated July 15, 2002, among Valero Logistics
Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The
Bank of New York, as Trustee, relating to Senior Debt Securities |
|
Valero L.P.s Current Report on Form 8-K filed
July 15, 2002, Exhibit 4.1 |
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
4 |
.17 |
|
First Supplemental Indenture, dated as of July 15, 2002, to
Indenture dated July 15, 2002, in each case among Valero
Logistics Operations, L.P., as Issuer, Valero L.P., as
Guarantor, and The Bank of New York, as Trustee, relating to
67/8
% Senior Notes Due 2012 |
|
Valero L.P.s Current Report on Form 8-K filed
July 15, 2002, Exhibit 4.2 |
|
4 |
.18 |
|
Second Supplemental Indenture, dated as of March 18, 2003,
to Indenture dated July 15, 2002, as amended and
supplemented by a First Supplemental Indenture thereto dated as
of July 15, 2002, in each case among Valero Logistics
Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The
Bank of New York, as Trustee (including, form of global note
representing $250,000,000 6.05% Senior Notes due 2013) |
|
Valero L.P.s Current Report on Form 8-K filed
May 9, 2003, Exhibit 4.1 |
|
4 |
.19 |
|
Third Supplemental Indenture, dated as of July 1, 2005, to
Indenture dated July 15, 2002, as amended and supplemented,
among Valero Logistics Operations, L.P.; Valero L.P.; Kaneb Pipe
Line Operating Partnership, L.P.; and The Bank of New York |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.02 |
|
4 |
.20 |
|
Indenture, dated as of February 21, 2002, between Kaneb
Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank
(Senior Debt Securities) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.03 |
|
4 |
.21 |
|
First Supplemental Indenture, dated as of February 21, 2002, to
Indenture dated as of February 21, 2002, between Kaneb Pipe Line
Operating Partnership, L.P. and JPMorgan Chase Bank (including
form of 7.750% Senior Unsecured Notes due 2012) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.04 |
|
4 |
.22 |
|
Second Supplemental Indenture, dated as of August 9, 2002
and effective as of April 4, 2002, to Indenture dated as of
February 21, 2002, as amended and supplemented, between Kaneb
Pipe Line Operating Partnership, L.P.; Statia Terminals Canada
Partnership; and JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.05 |
|
4 |
.23 |
|
Third Supplemental Indenture, dated and effective as of
May 16, 2003, to Indenture dated as of February 21, 2002,
as amended and supplemented, between Kaneb Pipe Line Operating
Partnership, L.P.; Statia Terminals Canada Partnership; and
JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.06 |
|
4 |
.24 |
|
Fourth Supplemental Indenture, dated and effective as of
May 27, 2003, to Indenture dated as of February 21,
2002, as amended and supplemented, between Kaneb Pipe Line
Operating Partnership, L.P. and JPMorgan Chase Bank (including
form of 5.875% Senior Unsecured Notes due 2013) |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.07 |
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
4 |
.25 |
|
Fifth Supplemental Indenture, dated and effective as of
July 1, 2005, to Indenture dated as of February 21,
2002, as amended and supplemented, among Kaneb Pipe Line
Operating Partnership, L.P.; Valero L.P.; Valero Logistics
Operations, L.P.; and JPMorgan Chase Bank |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 4.08 |
|
4 |
.26* |
|
Specimen certificate representing units of Valero GP Holdings,
LLC |
|
|
|
5 |
.01* |
|
Opinion of Andrews Kurth LLP as to the legality of the
securities being registered |
|
|
|
8 |
.01* |
|
Opinion of Andrews Kurth LLP relating to tax matters |
|
|
|
10 |
.01* |
|
Form of Valero GP Holdings, LLC Credit Facility |
|
|
|
10 |
.02 |
|
5-Year Revolving Credit Agreement dated as of December 20,
2004 among Valero Logistics Operations, L.P., Valero L.P., the
Lenders party thereto and JPMorgan Chase Bank, N.A., as
Administrative Agent, Suntrust Bank, as Syndication Agent, and
Barclays Bank PLC, Mizuho Corporate Bank Ltd., and Royal Bank of
Canada, as Co-Documentation Agents |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.02 |
|
10 |
.03 |
|
First Amendment dated as of June 30, 2005 to 5-Year
Revolving Credit Agreement, dated as of December 20, 2004,
among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan
Chase Bank; and the Lenders party thereto |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 10.01 |
|
10 |
.04 |
|
5-Year Term Credit Agreement, dated as of July 1, 2005,
among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan
Chase Bank; and the Lenders party thereto |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, Exhibit 10.02 |
|
10 |
.05 |
|
Valero GP, LLC Amended and Restated 2003 Employee Unit Incentive
Plan |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2004, Exhibit 10.03 |
|
10 |
.06 |
|
Valero GP, LLC Amended and Restated 2002 Unit Option Plan |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.04 |
|
10 |
.07 |
|
Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2004, Exhibit 10.05 |
|
10 |
.08 |
|
Form of Restricted Unit Agreement under the Valero GP, LLC
Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, Exhibit 10.4 |
|
10 |
.09 |
|
Form of Unit Option Award Agreement under the Valero GP, LLC
Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004, Exhibit 10.6 |
|
10 |
.10 |
|
Valero GP, LLC Short-Term Incentive Plan |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 10.4 |
|
10 |
.11 |
|
Valero GP, LLC Intermediate-Term Incentive Plan |
|
Registration Statement on Form S-1 (File No. 333- 43668),
Exhibit 10.9 |
|
10 |
.12 |
|
Performance Award Agreement dated January 22, 2003 between
Curtis V. Anastasio and Valero Energy Corporation |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2003, Exhibit 10.8 |
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
10 |
.13 |
|
Pipelines and Terminals Usage Agreement by and among Ultramar
Diamond Shamrock Corporation, Shamrock Logistics Operations,
L.P., Shamrock Logistics, L.P., Riverwalk Logistics, L.P. and
Shamrock Logistics GP, LLC, dated April 16, 2001 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 10.6 |
|
10 |
.14** |
|
Amended and Restated Omnibus Agreement among Valero Energy
Corporation, Valero GP, LLC, Riverwalk Logistics, L.P., Valero
L.P. and Valero Logistics Operations, L.P., dated March 31,
2006. |
|
|
|
10 |
.15** |
|
Third Amended and Restated Services Agreement among Diamond
Shamrock Refining and Marketing Company, Valero Corporate
Services Company, Valero L.P., Valero Logistics Operations,
L.P., Riverwalk Logistics, L.P., and Valero GP, LLC; effective
as of January 1, 2006. |
|
|
|
10 |
.16 |
|
Operating Agreement by and between Shamrock Logistics
Operations, L.P. and Valero Pipeline Company, dated
January 1, 2002 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2001, Exhibit 10.13 |
|
10 |
.17 |
|
Contribution Agreement by and among Valero Refining
Company--California, Riverwalk Holdings, LLC, Valero L.P.,
Valero GP, Inc. and Valero Logistics Operations, L.P. dated as
of March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year
ended December 31, 2002, Exhibit 10.13 |
|
10 |
.18 |
|
Contribution Agreement by and among Valero Refining
Company--Texas, L.P., UDS Logistics, LLC, Valero L.P., Valero
GP, Inc. and Valero Logistics Operations, L.P. dated as of
March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2002, Exhibit 10.14 |
|
10 |
.19 |
|
Contribution Agreement by and among Valero Pipeline Company, UDS
Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero
Logistics Operations, L.P. dated as of March 6, 2003 |
|
Valero L.P.s Annual Report on Form 10-K for year ended
December 31, 2002, Exhibit 10.15 |
|
10 |
.20 |
|
Handling and Throughput Agreement between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.1 |
|
10 |
.21 |
|
Amendment Number One to the Handling and Throughput Agreement
between Valero Marketing and Supply Company and Valero Logistics
Operations, L.P., effective as of April 27, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.3 |
|
10 |
.22 |
|
Services and Secondment Agreement between Valero Refining-Texas,
L.P. and Valero Logistics Operations, L.P., dated as of March
18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.3 |
|
10 |
.23 |
|
Services and Secondment Agreement between Valero Refining
Company-California and Valero Logistics Operations, L.P., dated
as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.2 |
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
Number | |
|
Description |
|
Incorporated by Reference to the Following Document |
| |
|
|
|
|
|
10 |
.24 |
|
Throughput Commitment Agreement by and among Valero Marketing
and Supply Company, Valero Logistics Operations, L.P. and Valero
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.4 |
|
10 |
.25 |
|
Terminalling Agreement (Edinburg) between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.5 |
|
10 |
.26 |
|
Terminalling Agreement (Houston Asphalt) between Valero
Marketing and Supply Company and Valero Logistics Operations,
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.6 |
|
10 |
.27 |
|
Terminalling Agreement (Hobby Airport) between Valero Marketing
and Supply Company and Valero Logistics Operations, L.P., dated
as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.7 |
|
10 |
.28 |
|
Terminalling Agreement (Placedo) between Valero Marketing and
Supply Company and Valero Logistics Operations, L.P., dated as
of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.8 |
|
10 |
.29 |
|
Terminalling Agreement (San Antonio East) between Valero
Marketing and Supply Company and Valero Logistics Operations,
L.P., dated as of March 18, 2003 |
|
Valero L.P.s Quarterly Report on Form 10-Q for
quarter ended March 31, 2003, Exhibit 10.9 |
|
10 |
.30 |
|
Terminal Storage and Throughput Agreement between Valero
Marketing and Supply Company and Valero Logistics Operation,
L.P. effective as of January 15, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.2 |
|
10 |
.31 |
|
Terminal Agreement (Corpus Christi Crude Terminal) between
Valero Marketing Supply Company and Valero Logistics Operation,
L.P. effective as of January 1, 2004 |
|
Valero L.P.s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, Exhibit 10.4 |
|
10 |
.32** |
|
Form of Administration Agreement between Valero GP Holdings, LLC
and Valero GP, LLC |
|
|
|
10 |
.33** |
|
Form of Non-Compete Agreement between Valero GP Holdings, LLC,
Valero L.P., Riverwalk Logistics, L.P. and Valero GP, LLC |
|
|
|
21 |
.01* |
|
List of Subsidiaries of Valero GP Holdings, LLC |
|
|
|
23 |
.01** |
|
Consent of KPMG LLP, dated March 30, 2006 |
|
|
|
23 |
.02* |
|
Consent of Andrews Kurth LLP (contained in Exhibit 5.1 and
Exhibit 8.1) |
|
|
|
23 |
.03** |
|
Consent of Ernst & Young LLP, dated March 30, 2006 |
|
|
|
24 |
.01 |
|
Powers of Attorney (included on signature page to this
registration statement) |
|
|
* To be filed by amendment.
** Filed herewith.