sv1za
As filed with the Securities and Exchange Commission on
June 30, 2006
Registration
No. 333-132917
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
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
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 June 30,
2006
PROSPECTUS
17,250,000 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
$22.00 and $24.00 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. Our units have been approved for listing
on the New York Stock Exchange, subject to official notice of
issuance, 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 25,250,000 of
our units, or approximately 59% of our outstanding membership
interests.
Investing in our units involves risks. Please read Risk
Factors beginning on page 21.
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 $23.00 per
unit, you will experience immediate and substantial dilution of
$13.40 per unit. |
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Although we manage Valero L.P. through our indirect ownership of
its general partner, Valero L.P.s general partner owes
fiduciary duties to Valero L.P. and Valero L.P.s
unitholders, which may conflict with our interests. |
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If we or Valero L.P. were treated as a corporation for federal
or state income tax purposes, then our cash available for
distribution to you would be substantially reduced. |
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Even if you do not receive any cash distributions from us, you
will be required to pay taxes on your share of our taxable
income. |
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Per Unit |
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Total |
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Initial public offering price
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$ |
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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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$ |
Sigmor Corporation, a wholly owned subsidiary of Valero Energy
Corporation, has granted the underwriters a
30-day option to
purchase up to an additional 2,587,500 units on the same
terms and conditions as set forth in this prospectus if the
underwriters sell more than 17,250,000 units in this
offering. We will not receive any proceeds from any units to be
sold by such selling unitholder 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
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Citigroup |
Goldman, Sachs & Co. |
Morgan Stanley |
RBC Capital Markets |
UBS Investment Bank |
A.G. Edwards
,
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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99 |
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99 |
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Quantitative and Qualitative Disclosures about Market Risk
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101 |
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103 |
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103 |
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Valero L.P.s Relationship with Valero Energy
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144 |
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173 |
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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 $23.00 per unit, that the underwriters
do not exercise their option to purchase additional units and
gives effect to the 4.25-for-1 unit split to be effected
immediately prior to the completion of this offering.
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 wholly owned
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 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 independent terminals and
petroleum liquids pipeline systems in the United States and also
operates terminals in the Netherlands Antilles, Canada, Mexico,
the Netherlands and the United Kingdom. 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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10,225,491 common units of Valero L.P. representing a 21.4%
limited partner interest in Valero L.P. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 59% 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. Valero Energy believes that such divestiture will
provide a greater opportunity to both Valero Energy and
Valero L.P. to pursue their own strategic initiatives.
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 47.5%, from $0.60 per
unit, or $2.40 per unit on an annualized basis, to a
current level of $0.885 per unit, or $3.54 per unit on
an annualized basis. For the first quarter of 2006, we received
a cash distribution from Valero L.P. of approximately
$13.4 million (representing approximately
$53.8 million on an annualized basis), consisting of
$0.9 million on our 2% general partner interest,
$3.5 million on the incentive distribution rights and
$9.0 million
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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 $0.30 per unit, or $1.20 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 first quarter of 2006, the
total quarterly cash distributions declared and paid by Valero
L.P. with respect to all of its partnership interests increased
480%, 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 $45.8 million. Over
the same period, the adjusted quarterly cash distributions
declared and paid by Valero L.P. with respect to our ownership
interests increased 153%, from approximately $5.3 million,
or 67% of Valero L.P.s adjusted total quarterly
distributions, to approximately $13.4 million, or 29.3% 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 $0.885 declared and paid for the first quarter of
2006; and |
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the increases in Valero L.P.s distributions with respect
to the 2% general partner interest resulting from the issuance
of a total of 31,420,855 common units by Valero L.P. during such
period to finance acquisitions and capital improvements. |
Adjusted Quarterly Valero L.P. Distributions to Valero GP
Holdings, LLC (a)
2
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(a) |
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Actual distributions paid to Valero GP Holdings for quarters
prior to the March 18, 2003 redemption were as follows (in
millions, except per unit amounts): |
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Total Distribution Paid to | |
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Per Unit Distribution | |
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Valero GP Holdings, LLC | |
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2001:
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Second Quarter
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$ |
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 March 31, 2006, Valero L.P. paid a
distribution of $0.885 per unit, which meant we received
23.0% of the $0.225 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 $0.885 per unit, or
$3.54 per unit on an annualized basis, and is based upon
the following assumptions:
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Valero L.P.s 46,809,749 common units outstanding as of
May 8, 2006; and |
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our ownership of the 2% general partner interest in Valero L.P.,
the incentive distribution rights, and 10,225,491 common 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 (first
quarter 2006) 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 $0.30 per unit, or
$1.20 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 November 2006, we expect to pay you a
distribution equal to the initial quarterly distribution
prorated for the period ending September 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.
4
Our Structure and Management
We were formed in June 2000 as a Delaware limited liability
company. The charts below depict our organization and ownership
prior to and 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 41% limited
liability company interest in us represented by
17,250,000 units; |
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our current owners, subsidiaries of Valero Energy, will own an
approximate 59% limited liability company interest in us
represented by 25,250,000 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
Pre-Offering Ownership of Valero GP Holdings, LLC
6
Post-Offering Ownership of Valero GP Holdings, LLC
7
The Offering
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Units offered by subsidiaries of Valero Energy
Corporation |
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17,250,000 units or 19,837,500 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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42,500,000 units. |
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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
$0.30 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 November 2006, we expect
to pay you a distribution for the period from the closing date
of this offering to and including September 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 59% 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. |
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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 20% 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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Our units have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, 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). Valero L.P. operates
independent terminals and petroleum liquids pipeline systems in
the United States and also operates terminals in the Netherlands
Antilles, Canada, Mexico, 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 March 31,
2006, Valero L.P.s assets consisted of a diversified
portfolio of logistics assets, including:
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67 refined product terminal facilities providing approximately
58.2 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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854 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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external growth initiatives from acquisitions that meet its
financial and strategic criteria; and |
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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. |
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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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
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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Valero L.P.s Common Units |
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Our Units |
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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. Valero L.P. operates terminals in the United States,
the Netherlands Antilles, Canada, Mexico, 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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No Limitation on Issuance of Additional Units
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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 and ability to make distributions is therefore
completely dependent upon the ability of Valero L.P. to make
cash distributions to its partners, including us. If Valero L.P.
does not make cash distributions or reduces the level of cash
distributions to its partners, we may not have sufficient cash
to pay distributions at our estimated initial quarterly
distribution level or at all. |
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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 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 $23.00 per
unit, you will experience immediate and substantial dilution of
$13.40 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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Our limited liability company agreement limits and modifies our
directors fiduciary duties and 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 |
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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. |
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 59% 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.
Valero Energy believes that such divestiture will provide a
greater opportunity to both Valero Energy and Valero L.P.
to pursue their own strategic initiatives. Valero Energy, in
evaluating its decision of whether to further divest its
ownership interest in us, will take into account, among other
things, whether such divestiture is economically attractive to
Valero Energy. For example, if the then current market price of
our publicly traded units exceeds our intrinsic value, as
determined by Valero Energy in its sole discretion, Valero
Energy may be inclined to further divest its ownership interest
in us.
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
14
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.
Our limited liability company agreement limits the liability and
reduces the fiduciary duties of our board of directors to our
unitholders. Our limited liability company agreement also
restricts the remedies available to unitholders for actions that
might otherwise constitute a breach of our board of
directors fiduciary duties owed to unitholders. 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
constitute a breach of fiduciary or other duties under
applicable state law. Please read Conflicts of Interest
and Fiduciary Duties Potential Future
Conflicts Fiduciary Duties.
Our limited liability company agreement permits affiliates of
our directors to invest or engage in other businesses or
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. and Riverwalk Holdings, LLC. 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 March 31, 2006 and for
the years ended December 31, 2003, 2004 and 2005 and the
three months ended March 31, 2005 and 2006 should be read
in conjunction with the financial statements of Valero GP
Holdings, Valero L.P. and Kaneb included elsewhere in this
prospectus. The summary pro forma financial data as of
March 31, 2006 and for the year ended December 31,
2005 and the three months ended March 31, 2006 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 and the three months ended
March 31, 2006 reflects the pro forma effect of two
separate transactions. First, Valero GP Holdings equity in
income of Valero L.P. for the year ended December 31, 2005
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 incremental general and administrative expenses
that Valero GP Holdings will incur under a new Administration
Agreement with Valero GP, LLC for certain administrative
services to be provided by Valero GP, LLC. 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 March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months | |
|
|
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
Year Ended | |
|
Three Months | |
|
|
| |
|
| |
|
December 31, | |
|
Ended | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
(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 |
|
|
$ |
8,660 |
|
|
$ |
11,175 |
|
|
$ |
25,951 |
|
|
$ |
11,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
9,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
7,023 |
|
|
|
1,562 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
|
500 |
(e) |
|
|
125 |
(e) |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
13,708 |
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
58,569 |
|
|
|
14,021 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
|
500 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
59,889 |
|
|
|
38,265 |
|
|
|
35,223 |
|
|
|
37,618 |
|
|
|
8,660 |
|
|
|
11,167 |
|
|
|
25,451 |
|
|
|
11,050 |
|
|
Other income, net
|
|
|
3,179 |
|
|
|
3,190 |
|
|
|
705 |
|
|
|
401 |
|
|
|
567 |
|
|
|
381 |
|
|
|
34 |
|
|
|
456 |
|
|
|
1 |
|
|
Interest expense
|
|
|
(3,811 |
) |
|
|
(21,686 |
) |
|
|
(20,283 |
) |
|
|
(17,110 |
) |
|
|
(17,778 |
) |
|
|
(4,414 |
) |
|
|
(4,743 |
) |
|
|
|
|
|
|
|
|
|
Minority interest (a)
|
|
|
(9,393 |
) |
|
|
(14,109 |
) |
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
36,480 |
|
|
|
27,284 |
|
|
|
16,287 |
|
|
|
18,514 |
|
|
|
20,407 |
|
|
|
4,627 |
|
|
|
6,458 |
|
|
|
25,907 |
|
|
|
11,051 |
|
|
Income tax expense
|
|
|
|
|
|
|
396 |
|
|
|
33 |
|
|
|
67 |
|
|
|
114 |
|
|
|
67 |
|
|
|
83 |
|
|
|
99 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
36,480 |
|
|
$ |
26,888 |
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
4,560 |
|
|
$ |
6,375 |
|
|
$ |
25,808 |
|
|
$ |
10,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.61 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
(at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
729,188 |
|
|
$ |
760,256 |
|
|
$ |
392,937 |
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
|
|
|
|
$ |
407,995 |
|
|
|
|
|
|
$ |
416,919 |
|
|
Total debt (b)
|
|
|
285,519 |
|
|
|
386,816 |
|
|
|
283,797 |
|
|
|
270,597 |
|
|
|
265,961 |
|
|
|
|
|
|
|
265,354 |
|
|
|
|
|
|
|
|
|
|
Members equity (c)
|
|
|
309,278 |
|
|
|
244,771 |
|
|
|
105,960 |
|
|
|
113,975 |
|
|
|
141,780 |
|
|
|
|
|
|
|
141,043 |
|
|
|
|
|
|
|
407,954 |
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
|
| |
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
60,369 |
|
|
$ |
23,033 |
|
|
$ |
22,183 |
|
|
$ |
16,731 |
|
|
$ |
3,131 |
|
|
$ |
6,432 |
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(17,060 |
) |
|
|
1,521 |
|
|
|
(19,606 |
) |
|
|
2,520 |
|
|
|
1,286 |
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
45,975 |
|
|
|
296,679 |
|
|
|
(23,632 |
) |
|
|
2,876 |
|
|
|
(5,650 |
) |
|
|
(7,719 |
) |
|
Distributions received from Valero L.P. (d)
|
|
|
15,872 |
|
|
|
39,130 |
|
|
|
36,013 |
|
|
|
37,964 |
|
|
|
44,745 |
|
|
|
9,703 |
|
|
|
12,661 |
|
|
|
|
(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 and
March 31, 2006 represents notes payable by Valero GP
Holdings to subsidiaries of Valero Energy. The pro forma total
debt as of March 31, 2006 is zero as the result of a
planned 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
March 31, 2006 is significantly higher than the
members equity in the historical balance sheet as of the
same date due to the planned 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, and
therefore these amounts are not derived from the historical
statements of cash flows. |
|
(e) |
|
Reflects contractual amounts incurred pursuant to the
Administration Agreement. Please read Certain
Relationships and Related Transactions Related Party
Transactions. |
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. (dollars in thousands, except per unit data). The
summary historical financial data as of December 31, 2004
and 2005 and March 31, 2006 and for the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2005 and 2006 should be read in conjunction with
the 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 financial data as of and for the three months
ended March 31, 2006 is not presented because the
transactions discussed above are reflected in Valero L.P.s
historical financial statements as of and for the three months
ended March 31, 2006.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
|
| |
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
56,635 |
|
|
$ |
274,004 |
|
|
$ |
1,005,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,806 |
|
|
|
|
|
|
|
114,218 |
|
|
|
401,357 |
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
64,609 |
|
|
|
78,298 |
|
|
|
184,609 |
|
|
|
19,685 |
|
|
|
71,070 |
|
|
|
272,250 |
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
6,950 |
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
3,503 |
|
|
|
8,560 |
|
|
|
65,528 |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
16,440 |
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
8,732 |
|
|
|
24,189 |
|
|
|
94,180 |
|
|
Provision for loss contingencies (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
61,228 |
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
31,920 |
|
|
|
218,037 |
|
|
|
875,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
57,230 |
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
24,715 |
|
|
|
55,967 |
|
|
|
130,347 |
|
|
Equity earnings in joint ventures
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,319 |
|
|
|
378 |
|
|
|
1,206 |
|
|
|
5,116 |
|
|
Interest and other expense, net
|
|
|
(3,811 |
) |
|
|
(4,880 |
) |
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
(5,829 |
) |
|
|
(15,465 |
) |
|
|
(61,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax (expense)
benefit
|
|
|
45,873 |
|
|
|
55,538 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
112,388 |
|
|
|
19,264 |
|
|
|
41,708 |
|
|
|
74,342 |
|
Income tax (expense) benefit (c)
|
|
|
|
|
|
|
(395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
|
|
|
|
(2,119 |
) |
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
45,873 |
|
|
|
55,143 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
107,675 |
|
|
|
19,264 |
|
|
|
39,589 |
|
|
$ |
83,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
45,873 |
|
|
$ |
55,143 |
|
|
$ |
69,593 |
|
|
$ |
78,418 |
|
|
$ |
111,073 |
|
|
$ |
19,264 |
|
|
$ |
39,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
$ |
0.800 |
|
|
$ |
0.885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
387,070 |
|
|
$ |
415,508 |
|
|
$ |
827,557 |
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
|
|
|
|
$ |
3,323,180 |
|
|
|
|
|
Long-term debt, less current portion
|
|
|
25,660 |
|
|
|
108,911 |
|
|
|
353,257 |
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
|
|
|
|
1,187,662 |
|
|
|
|
|
Partners equity
|
|
|
342,166 |
|
|
|
293,895 |
|
|
|
438,163 |
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
|
|
|
|
1,898,480 |
|
|
|
|
|
Operating Data (barrels/day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil pipeline throughput
|
|
|
303,811 |
|
|
|
348,023 |
|
|
|
355,008 |
|
|
|
381,358 |
|
|
|
358,965 |
|
|
|
381,086 |
|
|
|
427,675 |
|
|
|
|
|
Refined product pipeline throughput
|
|
|
308,047 |
|
|
|
295,456 |
|
|
|
392,145 |
|
|
|
442,596 |
|
|
|
556,654 |
|
|
|
443,993 |
|
|
|
700,969 |
|
|
|
|
|
Refined product terminal throughput
|
|
|
176,771 |
|
|
|
175,559 |
|
|
|
225,426 |
|
|
|
256,576 |
|
|
|
245,084 |
|
|
|
253,531 |
|
|
|
252,275 |
|
|
|
|
|
Crude oil storage tank throughput
|
|
|
|
|
|
|
|
|
|
|
366,986 |
|
|
|
473,714 |
|
|
|
517,409 |
|
|
|
505,643 |
|
|
|
513,073 |
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
77,656 |
|
|
$ |
106,108 |
|
|
$ |
108,503 |
|
|
$ |
186,430 |
|
|
$ |
15,300 |
|
|
$ |
57,052 |
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(442,350 |
) |
|
|
(58,511 |
) |
|
|
(89,000 |
) |
|
|
(6,239 |
) |
|
|
39,935 |
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
28,688 |
|
|
|
318,454 |
|
|
|
(49,590 |
) |
|
|
(77,178 |
) |
|
|
(16,410 |
) |
|
|
(25,703 |
) |
|
|
|
|
|
|
|
(a) |
|
Cost of product sales relates to the sale of bunker fuel. Valero
L.P. purchases bunker fuel for resale and records cost of
product sales for barrels of fuel sold. |
19
|
|
|
(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
Notes to Consolidated Financial Statements
Note 10. Commitments and 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. The historical and pro forma income tax amounts
for the year ended December 31, 2005 and the historical
income tax amounts for the three months ended March 31,
2006 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 also
acquired as part of the acquisition of Kaneb, for
$65 million plus working capital adjustments. The results
of operations of these assets and subsidiaries are included in
income (loss) 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. |
20
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 and ability to make distributions is
therefore completely dependent upon the ability of Valero L.P.
to make cash distributions to its partners, including us. If
Valero L.P. does not make cash distributions or reduces the
level of cash distributions to its partners, we may not have
sufficient cash to pay distributions at our estimated initial
quarterly distribution level or at all. |
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
21
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 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
$0.885 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 $0.30 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 twelve
months ending June 30, 2007 represents the minimum amount
of cash we need to pay our estimated minimum initial
distribution of $0.30 per unit, or $1.20 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 $0.30 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
22
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, these common units or the
investments made with the cash over time may not provide us with
as much distributable cash as or be as valuable as 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.
23
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. |
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 25,250,000 units, or
approximately 59% 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.
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Distributions on our incentive distribution rights 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 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.
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 in Valero L.P. as compared to cash
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distributions we receive from Valero L.P. on our 2% general
partner interest in Valero L.P. and our Valero L.P. common units.
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Assuming an initial public offering price of
$23.00 per unit, you will experience immediate and
substantial dilution of $13.40 per unit. |
The assumed initial public offering price of $23.00 per
unit exceeds our pro forma net tangible book value of
$9.60 per unit after the offering. Based on these amounts,
you will incur immediate and substantial dilution of
$13.40 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.
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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.
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Valero Energys contemplated further divestiture of
its ownership interest in us remaining after this offering may
cause an increase in Valero L.P.s administrative costs and
expenses, which may reduce the cash available for distribution
to Valero L.P.s partners and, as a result, to our
unitholders. |
Should Valero Energy reduce its ownership in us below 50%,
Valero L.P. will be required to purchase and maintain separate
software license agreements. The estimated purchase cost of such
licenses is approximately $4.3 million, with associated
annual maintenance fees of approximately $0.8 million. In
addition to software licenses, Valero L.P. also benefits from
common overhead infrastructure with Valero Energy
primarily in the areas of information technology systems and
employee benefit plan administration. If Valero L.P. ceases to
obtain services from Valero Energy or upon expiration of the
Services Agreement in 2011, Valero L.P.s results of
operations would be adversely impacted. The annual license fees
or any additional administrative costs incurred upon termination
or expiration of the Services Agreement, respectively, may
reduce the cash available for distribution to Valero L.P.s
partners, including us, and as a result reduce the cash
available for distribution to our unitholders.
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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
25
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.
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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.
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Our cash distribution policy limits our growth because we
do not retain earnings to reinvest in any acquisitions or growth
capital expenditures. |
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.
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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 to 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.
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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.
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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:
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our unitholders proportionate ownership interest in us
will decrease; |
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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
27
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. |
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.
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Staggered Board. In addition, our limited liability
company agreement divides our board of directors into two
classes serving staggered two-year terms and permits the board
to be divided into three classes serving staggered three-year
terms upon the election of a fifth director to our board. This
provision, when coupled with the provision of our limited
liability company agreement authorizing only the board of
directors to fill vacant or newly created directorships or
increase the size of the board of directors and the provision
providing that directors may only be removed at a meeting of
unitholders and cannot be done by written consent, may deter a
unitholder from gaining control of our board of directors by
removing incumbent directors or increasing the number of
directorships and simultaneously filling the vacancies or newly
created directorships with its own nominees.
Preferred Unit Purchase Rights. Further, concurrently
with the completion of this offering, we intend to issue
preferred unit purchase rights which will be attached to each of
our outstanding units. The rights become exercisable under
specified circumstances, including any person or group (an
acquiring person) becoming the beneficial owner of
15% or more of our outstanding units, subject to specified
exceptions. If events specified in the unit purchase rights plan
occur, each holder of rights other than the acquiring person can
exercise their rights. When a holder exercises a right, the
holder will be entitled to receive units valued at some multiple
of the exercise price of the right. In some cases, the holder
will receive cash, property or other securities instead of
units. We may redeem the rights prior to a person or group
becoming an acquiring person.
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. Please read
Description of Our Limited Liability Company
Agreement Anti-Takeover Provisions.
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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 and may
therefore become liable for certain of Valero L.P.s
obligations, which may impact the cash we have available to make
distributions. |
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 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.
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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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Our limited liability company agreement limits and
modifies our directors fiduciary duties and the fiduciary
duties of our officers and directors may conflict with those of
Valero L.P.s general partners officers and
directors. |
Our limited liability company agreement contains provisions that
modify and limit our directors fiduciary duties to our
unitholders. For example, our limited liability company
agreement provides that:
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our directors will not have any liability to us or our
unitholders for decisions made in good faith, meaning they
believed the decision was in our best interests; and |
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our board of directors will not be liable for monetary damages
to us or our unitholders for any acts or omissions unless there
has been a final and non-appealable judgment entered by a court
of competent jurisdiction determining that the board of
directors acted in bad faith or engaged in fraud or willful
misconduct or, in the case of a criminal matter, acted with
knowledge that such conduct was unlawful. |
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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 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
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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 59% of the outstanding
units, or approximately 53% 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 59% 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 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 March 31, 2006, 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 59% 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 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 and
the three months ended March 31, 2006, Valero Energy
accounted for approximately 34% and 22%, respectively, 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% and 15.3% of Valero L.P.s operating
expenses for the year ended December 31, 2005 and the three
months ended March 31, 2006, respectively. 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 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
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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 March 31, 2006, Valero L.P. has
recorded liabilities for contingent losses, including settled
matters, and environmental liabilities, totaling approximately
$66 million. Please read Business of Valero
L.P. Legal Proceedings and Other Contingencies
and Valero L.P. and Subsidiaries Notes to
Financial Statements Note 11. Health, Safety
and Environmental Matters and Note 12.
Commitments and Contingencies beginning on
page F-54.
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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 March 31, 2006, 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 until May 2007. 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 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
result in a lower demand for refined products; and |
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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.
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
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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
without unitholder approval, diluting existing interests of its
unitholders, including us. |
Valero L.P.s partnership agreement allows it to issue an
unlimited number of additional limited partnership units and
certain other equity securities without unitholder approval.
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 59% 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 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 |
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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 incentive distributions. |
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 and could be
limited or reduced 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 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
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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.
|
|
|
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.
|
|
|
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.
39
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.
|
|
|
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, and other
reasons, 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.
Partnerships and limited liability companies, unless
specifically exempted, will also generally be subject to a state
level tax imposed on Texas source revenues with respect to the
tax year ending December 31, 2007. Imposition of an entity
level tax on us or Valero L.P. by Texas, or any additional
states, will reduce the cash available for distribution
to you.
|
|
|
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.
40
|
|
|
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.
|
|
|
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.
|
|
|
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 original cost. A substantial portion of the
amount realized, whether or not representing gain, may be
ordinary income to you.
|
|
|
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.
41
|
|
|
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.
|
|
|
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.
|
|
|
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.
42
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 March 31, 2006 (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
| |
|
|
|
|
Offering | |
|
As Adjusted | |
|
|
Historical | |
|
Adjustments | |
|
for Offering | |
|
|
| |
|
| |
|
| |
Cash
|
|
$ |
120 |
|
|
$ |
3,417 |
|
|
$ |
3,537 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliates
|
|
$ |
265,354 |
|
|
$ |
(265,354 |
) |
|
$ |
|
|
Members equity
|
|
|
141,043 |
|
|
|
266,911 |
|
|
|
407,954 |
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
406,397 |
|
|
$ |
1,557 |
|
|
$ |
407,954 |
|
|
|
|
|
|
|
|
|
|
|
43
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 March 31, 2006, our net tangible book value was
$408.0 million, or $9.60 per unit. This remains
unchanged when adjusted for the sale by the selling unitholders
of 17,250,000 units at an assumed initial public offering
price of $23.00 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
|
|
$ |
23.00 |
|
Less: Net tangible book value per unit before and after the
offering (a)
|
|
|
9.60 |
|
|
|
|
|
Immediate dilution in net tangible book value per unit to
purchasers in this offering (b)
|
|
$ |
13.40 |
|
|
|
|
|
|
|
(a) |
Determined by dividing the total number of units outstanding
after this offering (42,500,000 units) into our net
tangible book value. |
|
|
(b) |
If the initial public offering price were to increase or
decrease by $1.00 per unit, immediate dilution in net
tangible book value per unit would increase by $1.00 or decrease
by $1.00, respectively. |
44
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,
2003, 2004 and 2005 and the three months ended March 31,
2005 and 2006, the historical financial statements of Kaneb for
the years ended December 31, 2002, 2003 and 2004 and the
six months ended June 30, 2004 and 2005, the pro forma
combined financial statements of Valero GP Holdings as of
March 31, 2006 and for the year ended December 31,
2005 and the three months ended March 31, 2006, and the pro
forma condensed combined statement of income of 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. |
45
|
|
|
|
|
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 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
$0.30 per unit, or $1.20 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 $12.8 million per complete
quarter or $51.0 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
November 2006, we expect to pay a prorated quarterly
distribution to you (based on our initial quarterly distribution
of $0.30 per unit) for the period between the consummation
of this offering and September 30, 2006.
46
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 $0.30 per unit, or
$1.20 per unit on an annualized basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions | |
|
|
|
|
| |
|
|
Number | |
|
One | |
|
Four | |
|
|
of Units | |
|
Quarter | |
|
Quarters | |
|
|
| |
|
| |
|
| |
Publicly held units
|
|
|
17,250,000 |
|
|
$ |
5,175,000 |
|
|
$ |
20,700,000 |
|
Units held by subsidiaries of Valero Energy
|
|
|
25,250,000 |
|
|
|
7,575,000 |
|
|
|
30,300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
42,500,000 |
|
|
$ |
12,750,000 |
|
|
$ |
51,000,000 |
|
|
|
|
|
|
|
|
|
|
|
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.
47
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 |
|
|
|
10,229 |
|
|
|
8,204 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,715 |
|
|
|
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 |
|
|
|
10,241 |
|
|
|
8,192 |
|
|
|
399 |
|
|
|
1,112 |
|
|
|
9,703 |
|
|
|
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 |
|
|
|
31,289 |
|
|
|
8,733 |
|
|
|
879 |
|
|
|
3,049 |
|
|
|
12,661 |
|
|
|
43,950 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
0.885 |
|
|
|
32,377 |
|
|
|
9,050 |
|
|
|
916 |
|
|
|
3,480 |
|
|
|
13,446 |
|
|
|
45,823 |
|
|
|
(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 $0.30 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 and the twelve
months ended March 31, 2006, 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; |
48
|
|
|
|
|
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 |
|
|
|
a quarterly cash distribution from Valero L.P. of
$0.885 per limited partner unit, or $3.54 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 twelve months ending June 30,
2007. |
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.
|
|
|
Pro Forma Cash Available for Distribution |
Our pro forma cash available for distribution for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006 would have been sufficient to pay the
initial quarterly distribution of $0.30 per unit on all
units to be outstanding following the completion of this
offering. Our ability to pay our initial distribution of
approximately $51.0 million on all our units for the year
ended December 31, 2005 and the twelve months ended
March 31, 2006 is predicated primarily on Valero
L.P.s ability to pay a pro forma distribution of
$3.54 per unit for each of those periods. 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 $3.54 per unit
for the year ended December 31, 2005 and the twelve months
ended March 31, 2006, net of cash reserves withheld at the
discretion of Valero L.P.s general partner of
$26.0 million and $35.7 million, respectively.
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.
49
The following table illustrates, on a pro forma basis for the
year ended December 31, 2005 and for the twelve months
ended March 31, 2006, 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
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months | |
|
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Valero L.P. Data:
|
|
|
|
|
|
|
|
|
|
Pro Forma Income from Continuing Operations
|
|
$ |
83,084 |
|
|
$ |
90,280 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
61,121 |
|
|
|
62,605 |
|
|
|
|
Income tax benefit
|
|
|
(8,742 |
) |
|
|
(7,751 |
) |
|
|
|
Depreciation and amortization expense
|
|
|
94,180 |
|
|
|
94,965 |
|
|
|
|
Provision for loss contingencies
|
|
|
42,000 |
|
|
|
42,000 |
|
|
|
|
Other non-cash charges
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
Cash payments by Kaneb related to acquisition costs (a)
|
|
|
23,022 |
|
|
|
20,600 |
|
|
|
|
|
|
|
|
|
Pro Forma Adjusted EBITDA (b)
|
|
|
298,665 |
|
|
|
306,699 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from joint ventures
|
|
|
6,841 |
|
|
|
7,977 |
|
|
|
|
Borrowings to fund strategic capital expenditures
|
|
|
51,436 |
|
|
|
56,629 |
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
(5,116 |
) |
|
|
(4,745 |
) |
|
|
|
Interest expense, net
|
|
|
(61,121 |
) |
|
|
(62,605 |
) |
|
|
|
Income tax benefit
|
|
|
8,742 |
|
|
|
7,751 |
|
|
|
|
Strategic capital expenditures
|
|
|
(51,436 |
) |
|
|
(56,629 |
) |
|
|
|
Reliability capital expenditures
|
|
|
(38,680 |
) |
|
|
(36,051 |
) |
|
|
|
|
|
|
|
|
Pro Forma Cash Available for Distribution Prior to Cash
Reserves
|
|
|
209,331 |
|
|
|
219,026 |
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Cash reserves (c)
|
|
|
(26,041 |
) |
|
|
(35,736 |
) |
|
|
|
|
|
|
|
|
Pro Forma Cash Available for Distribution to All Valero L.P.
Partners (d)
|
|
$ |
183,290 |
|
|
$ |
183,290 |
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months | |
|
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
Pro Forma Cash Distributed to All Valero L.P. Partners
(e):
|
|
|
|
|
|
|
|
|
|
|
Distributions to Valero GP Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
2% general partner interest
|
|
$ |
3,666 |
|
|
$ |
3,666 |
|
|
|
|
Incentive distribution rights
|
|
|
13,918 |
|
|
|
13,918 |
|
|
|
|
Limited partner units
|
|
|
36,158 |
|
|
|
36,198 |
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Valero GP Holdings, LLC
|
|
|
53,742 |
|
|
|
53,782 |
|
|
|
|
Distributions to public unitholders
|
|
|
129,548 |
|
|
|
129,508 |
|
|
|
|
|
|
|
|
|
|
|
|
Total pro forma cash distributed to all Valero L.P.
partners
|
|
$ |
183,290 |
|
|
$ |
183,290 |
|
|
|
|
|
|
|
|
|
Debt Covenant Ratios Calculated Pursuant to Credit
Agreements (f):
|
|
|
|
|
|
|
|
|
|
|
Debt-to-EBITDA
|
|
|
4.03 |
x |
|
|
4.01 |
x |
|
|
EBITDA-to-Interest
|
|
|
4.76 |
x |
|
|
4.73 |
x |
|
Valero GP Holdings, LLC Data:
|
|
|
|
|
|
|
|
|
|
Pro Forma Cash Distributions Received from Valero
L.P.
|
|
$ |
53,742 |
|
|
$ |
53,782 |
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses (g)
|
|
|
(2,350 |
) |
|
|
(2,350 |
) |
|
|
|
Income tax expense
|
|
|
(53 |
) |
|
|
(53 |
) |
|
|
|
Cash reserves (c)
|
|
|
(339 |
) |
|
|
(379 |
) |
|
|
|
|
|
|
|
|
Pro Forma Cash Available for Distribution
|
|
$ |
51,000 |
|
|
$ |
51,000 |
|
|
|
|
|
|
|
|
|
Expected Cash Distributions by Valero GP Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
Expected distribution per unit
|
|
$ |
1.20 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
Distributions paid to public unitholders (based on
17,250,000 units)
|
|
$ |
20,700 |
|
|
$ |
20,700 |
|
|
|
Distributions paid to Valero Energy (based on
25,250,000 units)
|
|
|
30,300 |
|
|
|
30,300 |
|
|
|
|
|
|
|
|
|
|
|
Total expected cash distributions paid to our unitholders
|
|
$ |
51,000 |
|
|
$ |
51,000 |
|
|
|
|
|
|
|
|
|
|
|
(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 |
51
|
|
|
|
|
amounts that are assumed to be reserved such that the cash
available for distribution equals the quarterly distribution of
$0.885 per unit and $0.30 per unit for Valero L.P. and
Valero GP Holdings, respectively. |
|
(d) |
|
Pro Forma Cash Available for Distribution is a financial measure
used by investors to compare partnership performance, even
though it is not defined in GAAP, and has therefore been
reconciled to pro forma income from continuing operations. |
|
(e) |
|
Based on units outstanding as of December 31, 2005 and
March 31, 2006, respectively, and a Valero L.P.
distribution of $0.885 per quarter. |
|
(f) |
|
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. |
|
(g) |
|
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 $319.5 million in order to provide us
with the minimum amount of cash distributions from Valero L.P.
for the twelve months ending June 30, 2007 of
$53.8 million which is necessary to permit us to fund our
initial quarterly cash distribution of $0.30 per unit for
each of the four quarters ending June 30, 2007. 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 twelve months ending
June 30, 2007, 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
$319.5 million for the twelve months ending June 30,
2007 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
$0.30 per unit per quarter (or $1.20 per unit on an
annualized basis) for the twelve months ending June 30,
2007. 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 twelve months ending June 30, 2007
will exceed the estimated minimum EBITDA of
$319.5 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
52
consecutive quarters ending June 30, 2007 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).
Valero GP Holdings, LLC
Estimated Minimum Cash Available for Distribution
Based upon Estimated Minimum EBITDA of Valero L.P.
For the Twelve Months Ending June 30, 2007
(unaudited)
|
|
|
|
|
|
|
|
|
Valero L.P. Data:
|
|
|
|
|
|
Estimated Minimum Income from Continuing Operations
|
|
$ |
139,585 |
|
|
|
Plus:
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
70,926 |
|
|
|
|
Income tax expense
|
|
|
10,308 |
|
|
|
|
Depreciation and amortization expense
|
|
|
98,709 |
|
|
|
|
|
|
Estimated Minimum EBITDA (a)
|
|
|
319,528 |
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
Distributions from joint ventures
|
|
|
6,000 |
|
|
|
|
Borrowings to fund strategic capital expenditures
|
|
|
146,614 |
|
|
|
Less:
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
(6,059 |
) |
|
|
|
Interest expense, net
|
|
|
(70,926 |
) |
|
|
|
Income tax expense
|
|
|
(10,308 |
) |
|
|
|
Strategic capital expenditures
|
|
|
(146,614 |
) |
|
|
|
Reliability capital expenditures
|
|
|
(54,945 |
) |
|
|
|
Cash reserves
|
|
|
|
|
|
|
|
|
|
Estimated Minimum Cash Available for Distribution to All
Valero L.P. Partners (b)
|
|
$ |
183,290 |
|
|
|
|
|
|
Estimated Minimum Cash Distributions to All Valero L.P.
Partners (c):
|
|
|
|
|
|
|
Estimated Minimum Cash Distributions to Valero GP Holdings, LLC:
|
|
|
|
|
|
|
|
2% general partner interest
|
|
$ |
3,666 |
|
|
|
|
Incentive distribution rights
|
|
|
13,918 |
|
|
|
|
Common units
|
|
|
36,198 |
|
|
|
|
|
|
|
|
|
Total estimated minimum cash distributions to Valero GP
Holdings, LLC
|
|
|
53,782 |
|
|
|
Estimated minimum cash distributions to public unitholders
|
|
|
129,508 |
|
|
|
|
|
|
|
|
|
Total estimated minimum cash distributions by Valero L.P.
|
|
$ |
183,290 |
|
|
|
|
|
|
Debt Covenant Ratio Calculated Pursuant to Credit
Agreements (d):
|
|
|
|
|
|
|
|
Debt-to-EBITDA
|
|
|
4.03 |
x |
53
|
|
|
|
|
|
|
|
|
Valero GP Holdings, LLC Data:
|
|
|
|
|
|
Estimated Minimum Cash Distributions to be Received from
Valero L.P.
|
|
$ |
53,782 |
|
|
|
Less:
|
|
|
|
|
|
|
|
General and administrative expenses (e)
|
|
|
(2,350 |
) |
|
|
|
Income tax expense
|
|
|
(53 |
) |
|
|
|
Cash reserves (f)
|
|
|
(379 |
) |
|
|
|
|
|
Estimated Minimum Cash Available for Distribution
|
|
$ |
51,000 |
|
|
|
|
|
|
Expected Minimum Cash Distributions by Valero GP Holdings,
LLC:
|
|
|
|
|
|
|
Expected distribution per unit
|
|
$ |
1.20 |
|
|
|
|
|
|
|
Distributions paid to public unitholders (based on
17,250,000 units)
|
|
$ |
20,700 |
|
|
|
Distributions paid to Valero Energy (based on
25,250,000 units)
|
|
|
30,300 |
|
|
|
|
|
|
|
|
|
Total distributions paid to our unitholders
|
|
$ |
51,000 |
|
|
|
|
|
|
|
|
(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) |
|
Estimated Minimum Cash Available for Distribution is a financial
measure used by investors to compare partnership performance,
even though it is not defined in GAAP and has therefore been
reconciled to estimated income from continuing operations. |
|
(c) |
|
Based on units outstanding as of March 31, 2006 and Valero
L.P.s current distribution of $0.885 per quarter. |
|
(d) |
|
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. In June 2006, Valero L.P. amended its credit
agreements to eliminate the requirement that Valero L.P.
maintain a minimum consolidated interest coverage ratio.
Therefore, Valero L.P.s EBITDA-to-interest ratio is not
shown for the twelve months ending June 30, 2007. |
|
(e) |
|
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. |
|
(f) |
|
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 $0.30 per unit, or $1.20 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 $0.30 per unit on all of our units for
the four quarters ending June 30, 2007. Our ability to make
these distributions assumes that Valero L.P. will pay its
recently declared quarterly distribution of $0.885 per common
unit for each of the four quarters ending June 30, 2007,
which means that the total amount of cash distributions we
receive from Valero L.P. during that period would be
$53.8 million.
54
The primary determinant in Valero L.P.s ability to pay a
distribution of $0.885 per common unit for each of the four
quarters ending June 30, 2007, is its ability to generate
EBITDA of at least $319.5 million during that period, which
in turn is dependent upon its ability to generate income from
continuing operations of at least $139.6 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 will have sufficient cash available to
pay the initial distribution on our units for each quarter
through June 30, 2007, 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
$139.6 million in income from continuing operations, which
is based on a minimum of $257.0 million in operating income
from its business segments (before general and administrative
expenses). This minimum estimate of $139.6 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 $319.5 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 twelve months
ending June 30, 2007 will exceed $139.6 million. This
belief is in part based upon the fact that only a portion of the
anticipated income from several strategic capital projects to be
completed during the twelve months ending June 30, 2007 is
necessary to achieve the estimated minimum income from
continuing operations for this period. |
|
|
|
|
|
For example, Valero L.P.s estimate of minimum income from
continuing operations includes approximately $6 million of
EBITDA and $5 million of operating income from a project
involving the construction of 110 miles of pipeline from Burgos
in Northeastern Mexico to Brownsville, Texas, which is expected
to be completed in July of 2006. This project is expected to
generate approximately $8.2 million of EBITDA and
$6.7 million of operating income on an annual basis.
Further, Valero L.P.s estimate of minimum income from
continuing operations includes no income contribution from
several other strategic capital projects which are expected to
be completed during the twelve months ending June 30, 2007. |
|
|
|
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 twelve
months ending June 30, 2007 and those amounts are compared
to pro forma amounts for the year ended December 31, 2005
and the twelve months ended March 31, 2006 (in thousands). |
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
Estimated | |
|
|
| |
|
Minimum | |
|
|
|
|
Twelve Months | |
|
for the | |
|
|
Year Ended | |
|
Ended | |
|
Twelve Months | |
|
|
December 31, | |
|
March 31, | |
|
Ending June 30, | |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
|
| |
|
| |
|
| |
Valero L.P.s Operating Income by Business Segment (Before
General and Administrative Expenses and Provision for Loss
Contingencies):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil pipelines
|
|
$ |
30,439 |
|
|
$ |
31,326 |
|
|
$ |
38,282 |
|
|
Refined products pipelines
|
|
|
80,350 |
|
|
|
82,402 |
|
|
|
90,267 |
|
|
Refined products terminals
|
|
|
96,593 |
|
|
|
99,431 |
|
|
|
98,424 |
|
|
Crude oil storage tanks
|
|
|
30,493 |
|
|
|
29,368 |
|
|
|
30,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,875 |
|
|
|
242,527 |
|
|
|
257,006 |
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
5,116 |
|
|
|
4,745 |
|
|
|
6,059 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(65,528 |
) |
|
|
(60,138 |
) |
|
|
(42,246 |
) |
|
Provision for loss contingencies
|
|
|
(42,000 |
) |
|
|
(42,000 |
) |
|
|
|
|
|
Interest and other expenses, net
|
|
|
(61,121 |
) |
|
|
(62,605 |
) |
|
|
(70,926 |
) |
|
Income tax (expense) benefit
|
|
|
8,742 |
|
|
|
7,751 |
|
|
|
(10,308 |
) |
|
|
|
|
|
|
|
|
|
|
Valero L.P.s Income from Continuing Operations
|
|
$ |
83,084 |
|
|
$ |
90,280 |
|
|
$ |
139,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 68% 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 32% 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 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 $0.41
for the twelve months ending June 30, 2007, as compared to
$0.39 for the year ended December 31, 2005 and the twelve
months ended March 31, 2006. The estimated 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 twelve months
ending June 30, 2007. Valero L.P. management believes
that Valero L.P. will transport at least this volume of
crude oil per day because the acquisition of the Capwood
pipeline on January 1, 2006 is expected to increase
throughput by 34,000 barrels per day, as compared to the pro
forma throughput for the twelve months ended March 31,
2006. The following table provides Valero L.P.s
assumptions for the average throughput fee per barrel and
estimated minimum throughput volumes for the twelve months
ending June 30, 2007 compared to pro forma throughput
volumes for the year ended December 31, 2005 and the twelve
months ended March 31, 2006, respectively. |
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
Estimated Minimum for |
Year Ended |
|
Twelve Months |
|
the Twelve Months |
December 31, 2005 |
|
Ended March 31, 2006 |
|
Ending June 30, 2007 |
|
|
|
|
|
Throughput |
|
Average |
|
Throughput |
|
Average |
|
Throughput |
|
Average |
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
per Day) |
|
Fees/Barrel |
|
per Day) |
|
Fees/Barrel |
|
per Day) |
|
Fees/Barrel |
|
|
|
|
|
|
|
|
|
|
|
|
358,965 |
|
|
$ |
0.39 |
|
|
|
370,453 |
|
|
$ |
0.39 |
|
|
|
404,453 |
|
|
$ |
0.41 |
|
|
|
|
|
|
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 $0.87 for the twelve months ending June 30,
2007, as compared to $0.83 and $0.84 for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006, respectively. The estimated 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 refined products to be transported per day during the twelve
months ending June 30, 2007. Valero L.P. management
believes that Valero L.P. will transport at least this
volume of refined products per day because the completion of
pipeline construction in South Texas is expected to increase
throughput by 35,000 barrels per day, as compared to the
pro forma throughput for the twelve months ended March 31,
2006. The following table provides Valero L.P.s
assumptions for the average throughput fee per barrel and
estimated minimum throughput volumes for the twelve months
ending June 30, 2007 compared to pro forma throughput
volumes for the year ended December 31, 2005 and the twelve
months ended March 31, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
Estimated Minimum for |
Year Ended |
|
Twelve Months |
|
the Twelve Months |
December 31, 2005 |
|
Ended March 31, 2006 |
|
Ending June 30, 2007 |
|
|
|
|
|
Throughput |
|
Average |
|
Throughput |
|
Average |
|
Throughput |
|
Average |
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
per Day) |
|
Fee/Barrel |
|
per Day) |
|
Fees/Barrel |
|
per Day) |
|
Fee/Barrel |
|
|
|
|
|
|
|
|
|
|
|
|
670,761 |
|
|
$ |
0.83 |
|
|
|
680,228 |
|
|
$ |
0.84 |
|
|
|
699,309 |
|
|
$ |
0.87 |
|
|
|
|
|
|
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
$231.6 million for the twelve months ending June 30,
2007 as compared to $224.5 million and $230.1 million
on a pro forma basis for the year ended December 31, 2005
and the twelve months ended March 31, 2006, respectively.
For throughput fee revenue, the average fee per barrel is
estimated to be $0.50 for the twelve months ending June 30,
2007, as compared to $0.49 for the year ended December 31,
2005 and the twelve months ended March 31, 2006. The
estimated increase is primarily the result of a full
twelve-month effect from 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 twelve months ending June 30, 2007.
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 the
twelve months ended March 31, 2006, 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 twelve months ending June 30, 2007 compared
to pro forma throughput volumes for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006. The table also compares estimated storage
fee revenues for the twelve months ending June 30, 2007 to
pro forma amounts for the year ended December 31, 2005 and
the twelve months ended March 31, 2006 (dollars in
thousands, except per barrel amounts). |
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Minimum for |
Year Ended |
|
Twelve Months Ended |
|
the Twelve Months Ending |
December 31, 2005 |
|
March 31, 2006 |
|
June 30, 2007 |
|
|
|
|
|
Throughput |
|
Average |
|
Storage |
|
Throughput |
|
Average |
|
Storage |
|
Throughput |
|
Average |
|
Storage |
(Barrels |
|
Throughput |
|
Fee |
|
(Barrels |
|
Throughput |
|
Fee |
|
(Barrels |
|
Throughput |
|
Fee |
per Day) |
|
Fee/Barrel |
|
Revenues |
|
per Day) |
|
Fee/Barrel |
|
Revenues |
|
per Day) |
|
Fee/Barrel |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,084 |
|
|
$ |
0.49 |
|
|
$ |
224,514 |
|
|
|
244,775 |
|
|
$ |
0.49 |
|
|
$ |
230,051 |
|
|
|
244,300 |
|
|
$ |
0.50 |
|
|
$ |
231,630 |
|
|
|
|
|
|
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 $0.260 for the twelve months ending
June 30, 2007, as compared to $0.249 and $0.250 for the
year ended December 31, 2005 and the twelve months ended
March 31, 2006, respectively. The estimated increase is
primarily the result of a full twelve- month effect from fee
increases that were effective January 1, 2006 and
April 1, 2006. The estimated increase also results from fee
increases that will be effective January 1, 2007 and
April 1, 2007. 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 twelve
months ending June 30, 2007. 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 twelve months ended
March 31, 2006, 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 twelve months ending June 30, 2007 compared
to the pro forma throughput volumes for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
|
|
|
|
|
|
|
|
|
Estimated Minimum for |
Year Ended |
|
Twelve Months Ended |
|
the Twelve Months Ending |
December 31, 2005 |
|
March 31, 2006 |
|
June 30, 2007 |
|
|
|
|
|
Throughput |
|
Average |
|
Throughput |
|
Average |
|
Throughput |
|
Average |
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
|
(Barrels |
|
Throughput |
per Day) |
|
Fee/Barrel |
|
per Day) |
|
Fee/Barrel |
|
per Day) |
|
Fee/Barrel |
|
|
|
|
|
|
|
|
|
|
|
|
517,409 |
|
|
$ |
0.249 |
|
|
|
519,241 |
|
|
$ |
0.250 |
|
|
|
518,818 |
|
|
$ |
0.260 |
|
|
|
|
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
$108.1 million for the twelve months ending June 30,
2007, as compared to approximately $88.1 million and
$94.4 million on a pro forma basis for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006, respectively. Valero L.P.s estimate
for the twelve months ending June 30, 2007 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 the twelve months ended
March 31, 2006, 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 and the twelve months ended
March 31, 2006. |
|
|
|
Power costs are estimated to be approximately $49.1 million
for the twelve months ending June 30, 2007 as compared to
approximately $41.5 million and $42.9 million on a pro
forma basis for the year ended December 31, 2005 and the
twelve months ended March 31, 2006, respectively. 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. |
58
|
|
|
|
|
Accordingly, Valero L.P.s power costs typically fluctuate
with natural gas prices, which can vary widely. Electric power
usage during the twelve months ending June 30, 2007 is
expected to be consistent with the usage during the year ended
December 31, 2005 and the twelve months ended
March 31, 2006. Valero L.P. assumed that natural gas prices
will average $7.84 per MMBTU during the twelve months
ending June 30, 2007. |
|
|
|
|
|
Maintenance expenses are estimated to be approximately
$38.1 million for the twelve months ending June 30,
2007, as compared to approximately $36.4 million and
$39.1 million on a pro forma basis for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006, respectively. Valero L.P. assumed that
maintenance requirements during the twelve months ending
June 30, 2007 will decrease in frequency compared to those
encountered during the twelve months ended March 31, 2006.
Valero L.P. also assumed that primary maintenance costs
incurred, such as contract labor and materials, will increase 3%
in the twelve months ending June 30, 2007. This increase is
consistent with actual increases Valero L.P. experienced for
these costs during the year ended December 31, 2005 and the
twelve months ended March 31, 2006. |
|
|
|
|
|
General and Administrative Expenses. General and
administrative expenses are estimated to be approximately
$42.2 million for the twelve months ending June 30,
2007 compared to $65.5 million and $60.1 million
included in the pro forma amounts for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006, respectively. The decrease 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 estimate of $42.2 million
for the twelve months ending June 30, 2007 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
$0.6 million in the twelve months ending June 30, 2007. |
|
|
|
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 the twelve months ending June 30, 2007
because Valero L.P. does not expect to fund any recorded amounts
in the twelve months ending June 30, 2007. |
|
|
|
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 5.37% for the twelve months ending June 30,
2007. 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 $146.6 million
during the twelve months ending June 30, 2007, to fund
Valero L.P.s strategic capital expenditures program. |
|
|
|
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 6.9% effective income tax rate for the twelve
months ending June 30, 2007. Valero L.P.s pro forma
income from continuing operations for the year ended
December 31, 2005 and the twelve months ended
March 31, 2006 reflects a benefit of approximately
$8.7 million and $7.8 million, respectively, 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 earnings expectations for these joint
ventures, Valero L.P. assumed it will receive cash distributions
of approximately $6 million for the twelve months ending
June 30, 2007. |
59
|
|
|
|
|
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 $146.6 million for the twelve
months ending June 30, 2007. Valero L.P. assumed that it
will fund these expenditures with borrowings under its existing
revolving credit agreement. |
|
|
|
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 $54.9 million for the twelve months ending
June 30, 2007. The projects expected to be completed during
the twelve months ending June 30, 2007 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 |
|
|
|
10,225,491 common units of Valero L.P. representing a 21.4%
limited partner interest in Valero L.P. |
|
|
|
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 $0.885 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 46,809,749 common units outstanding as
of May 8, 2006; and |
|
|
|
our ownership of (i) the 2% general partner interest,
(ii) the incentive distribution rights and
(iii) 10,225,491 of Valero L.P.s common units. |
60
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 (dollars in thousands, except
per unit data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
87,802 |
|
|
|
77% |
|
|
$ |
2,293 |
|
|
$ |
|
|
|
$ |
24,541 |
|
|
$ |
26,834 |
|
|
|
23% |
|
|
0.660 |
|
|
|
127,119 |
|
|
|
96,583 |
|
|
|
76% |
|
|
|
2,542 |
|
|
|
999 |
|
|
|
26,995 |
|
|
|
30,536 |
|
|
|
24% |
|
|
0.885 |
|
|
|
183,290 |
|
|
|
129,508 |
|
|
|
71% |
|
|
|
3,666 |
|
|
|
13,918 |
|
|
|
36,198 |
|
|
|
53,782 |
|
|
|
29% |
|
|
0.925 |
|
|
|
193,276 |
|
|
|
135,361 |
|
|
|
70% |
|
|
|
3,866 |
|
|
|
16,215 |
|
|
|
37,834 |
|
|
|
57,915 |
|
|
|
30% |
|
|
0.970 |
|
|
|
204,511 |
|
|
|
141,947 |
|
|
|
69% |
|
|
|
4,090 |
|
|
|
18,799 |
|
|
|
39,675 |
|
|
|
62,564 |
|
|
|
31% |
|
Valero L.P. made incentive cash distributions to Riverwalk
Logistics, L.P. of $2.6 million, $4.4 million,
$10.3 million and $3.5 million during the years ended
December 31, 2003, 2004 and 2005, and the three months
ended March 31, 2006, respectively. For a further
description of Valero L.P.s cash distribution policy,
please read Our Initial Distribution
Rate.
61
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.
62
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. and Riverwalk Holdings, LLC. 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 March 31, 2006 and for the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2005 and 2006 should be read in conjunction with
the financial statements of Valero GP Holdings, Valero L.P. and
Kaneb included elsewhere in this prospectus. The selected pro
forma financial data as of March 31, 2006 and for the year
ended December 31, 2005 and the three months ended
March 31, 2006 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 and the three months ended
March 31, 2006 reflects the pro forma effect of two
separate transactions. First, Valero GP Holdings equity in
income of Valero L.P. for the year ended December 31, 2005
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
incremental general and administrative expenses that Valero GP
Holdings will incur under a new Administration Agreement with
Valero GP, LLC for certain administrative services to be
provided by Valero GP, LLC. 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
March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
Three Months | |
|
|
| |
|
| |
|
December 31, | |
|
Ended | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
(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 |
|
|
|
8,660 |
|
|
|
11,175 |
|
|
|
25,951 |
|
|
|
11,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
98,827 |
|
|
|
118,458 |
|
|
|
52,286 |
|
|
|
35,314 |
|
|
|
37,646 |
|
|
|
8,660 |
|
|
|
11,175 |
|
|
|
25,951 |
|
|
|
11,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
9,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
7,023 |
|
|
|
1,562 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
|
500 |
(e) |
|
|
125 |
(e) |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
13,708 |
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
58,569 |
|
|
|
14,021 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
|
500 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
59,889 |
|
|
|
38,265 |
|
|
|
35,223 |
|
|
|
37,618 |
|
|
|
8,660 |
|
|
|
11,167 |
|
|
|
25,451 |
|
|
|
11,050 |
|
|
Equity in earnings of Skelly-Belvieu Pipeline Company
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
375 |
|
|
|
456 |
|
|
|
369 |
|
|
|
1 |
|
|
|
456 |
|
|
|
1 |
|
|
Interest income affiliated
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
26 |
|
|
|
111 |
|
|
|
12 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
Three Months | |
|
|
| |
|
| |
|
December 31, | |
|
Ended | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
(16,806 |
) |
|
|
(18,691 |
) |
|
|
(17,110 |
) |
|
|
(17,778 |
) |
|
|
(4,414 |
) |
|
|
(4,743 |
) |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
4,627 |
|
|
|
6,458 |
|
|
|
25,907 |
|
|
|
11,051 |
|
|
Income tax expense
|
|
|
|
|
|
|
396 |
|
|
|
33 |
|
|
|
67 |
|
|
|
114 |
|
|
|
67 |
|
|
|
83 |
|
|
|
99 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
36,480 |
|
|
$ |
26,888 |
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
4,560 |
|
|
$ |
6,375 |
|
|
$ |
25,808 |
|
|
$ |
10,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.61 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
729,188 |
|
|
$ |
760,256 |
|
|
$ |
392,937 |
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
|
|
|
|
$ |
407,995 |
|
|
|
|
|
|
$ |
416,919 |
|
|
Total debt (b)
|
|
|
285,519 |
|
|
|
386,816 |
|
|
|
283,797 |
|
|
|
270,597 |
|
|
|
265,961 |
|
|
|
|
|
|
|
265,354 |
|
|
|
|
|
|
|
|
|
|
Members equity (c)
|
|
|
309,278 |
|
|
|
244,771 |
|
|
|
105,960 |
|
|
|
113,975 |
|
|
|
141,780 |
|
|
|
|
|
|
|
141,043 |
|
|
|
|
|
|
|
407,954 |
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
60,369 |
|
|
$ |
23,033 |
|
|
$ |
22,183 |
|
|
$ |
16,731 |
|
|
$ |
3,131 |
|
|
$ |
6,432 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(17,060 |
) |
|
|
1,521 |
|
|
|
(19,606 |
) |
|
|
2,520 |
|
|
|
1,286 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
45,975 |
|
|
|
296,679 |
|
|
|
(23,632 |
) |
|
|
2,876 |
|
|
|
(5,650 |
) |
|
|
(7,719 |
) |
|
|
|
|
|
|
|
|
|
Distributions received from Valero L.P. (d)
|
|
|
15,872 |
|
|
|
39,130 |
|
|
|
36,013 |
|
|
|
37,964 |
|
|
|
44,745 |
|
|
|
9,703 |
|
|
|
12,661 |
|
|
|
|
|
|
|
|
|
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 and
March 31, 2006 represents notes payable by Valero GP
Holdings to subsidiaries of Valero Energy. The pro forma total
debt as of March 31, 2006 is zero as the result of a
planned 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
March 31, 2006 is significantly higher than the
members equity in the historical balance sheet as of the
same date due to the assumed planned 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, and
therefore these amounts are not derived from the historical
statements of cash flows. |
|
(e) |
|
Reflects contractual amounts incurred pursuant to the
Administration Agreement. Please read Certain
Relationships and Related Transactions Related Party
Transactions. |
64
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 March 31, 2006 and for the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2005 and 2006 should be read in conjunction with
the 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 financial data as of and for the three months
ended March 31, 2006 is not presented because the
transactions discussed above are reflected in Valero L.P.s
historical financial statements as of and for the three months
ended March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
|
| |
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
98,827 |
|
|
$ |
118,458 |
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
56,635 |
|
|
$ |
274,004 |
|
|
$ |
1,005,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,806 |
|
|
|
|
|
|
|
114,218 |
|
|
|
401,357 |
|
|
Operating expenses
|
|
|
33,583 |
|
|
|
37,838 |
|
|
|
64,609 |
|
|
|
78,298 |
|
|
|
184,609 |
|
|
|
19,685 |
|
|
|
71,070 |
|
|
|
272,250 |
|
|
General and administrative expenses
|
|
|
5,349 |
|
|
|
6,950 |
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
3,503 |
|
|
|
8,560 |
|
|
|
65,528 |
|
|
Depreciation and amortization expense
|
|
|
13,390 |
|
|
|
16,440 |
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
8,732 |
|
|
|
24,189 |
|
|
|
94,180 |
|
|
Provision for loss contingencies (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
52,322 |
|
|
|
61,228 |
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
31,920 |
|
|
|
218,037 |
|
|
|
875,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
46,505 |
|
|
|
57,230 |
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
24,715 |
|
|
|
55,967 |
|
|
|
130,347 |
|
|
Equity earnings in joint ventures
|
|
|
3,179 |
|
|
|
3,188 |
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,319 |
|
|
|
378 |
|
|
|
1,206 |
|
|
|
5,116 |
|
|
Interest and other expense, net
|
|
|
(3,811 |
) |
|
|
(4,880 |
) |
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
(5,829 |
) |
|
|
(15,465 |
) |
|
|
(61,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax (expense)
benefit
|
|
|
45,873 |
|
|
|
55,538 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
112,388 |
|
|
|
19,264 |
|
|
|
41,708 |
|
|
|
74,342 |
|
Income tax (expense) benefit (c)
|
|
|
|
|
|
|
(395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,713 |
) |
|
|
|
|
|
|
(2,119 |
) |
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
45,873 |
|
|
|
55,143 |
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
107,675 |
|
|
|
19,264 |
|
|
|
39,589 |
|
|
$ |
83,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
45,873 |
|
|
$ |
55,143 |
|
|
$ |
69,593 |
|
|
$ |
78,418 |
|
|
$ |
111,073 |
|
|
$ |
19,264 |
|
|
$ |
39,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
|
| |
|
| |
|
December 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005(e) | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
|
Discontinued operations (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.82 |
|
|
$ |
2.72 |
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
$ |
0.800 |
|
|
$ |
0.885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
387,070 |
|
|
$ |
415,508 |
|
|
$ |
827,557 |
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
|
|
|
|
$ |
3,323,180 |
|
|
|
|
|
Long-term debt, less current portion
|
|
|
25,660 |
|
|
|
108,911 |
|
|
|
353,257 |
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
|
|
|
|
1,187,662 |
|
|
|
|
|
Partners equity
|
|
|
342,166 |
|
|
|
293,895 |
|
|
|
438,163 |
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
|
|
|
|
1,898,480 |
|
|
|
|
|
Operating Data (barrels/day):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil pipeline throughput
|
|
|
303,811 |
|
|
|
348,023 |
|
|
|
355,008 |
|
|
|
381,358 |
|
|
|
358,965 |
|
|
|
381,086 |
|
|
|
427,675 |
|
|
|
|
|
Refined product pipeline throughput
|
|
|
308,047 |
|
|
|
295,456 |
|
|
|
392,145 |
|
|
|
442,596 |
|
|
|
556,654 |
|
|
|
443,993 |
|
|
|
700,969 |
|
|
|
|
|
Refined product terminal throughput
|
|
|
176,771 |
|
|
|
175,559 |
|
|
|
225,426 |
|
|
|
256,576 |
|
|
|
245,084 |
|
|
|
253,531 |
|
|
|
252,275 |
|
|
|
|
|
Crude oil storage tank throughput
|
|
|
|
|
|
|
|
|
|
|
366,986 |
|
|
|
473,714 |
|
|
|
517,409 |
|
|
|
505,643 |
|
|
|
513,073 |
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
77,132 |
|
|
$ |
77,656 |
|
|
$ |
106,108 |
|
|
$ |
108,503 |
|
|
$ |
186,430 |
|
|
$ |
15,300 |
|
|
$ |
57,052 |
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,926 |
) |
|
|
(80,607 |
) |
|
|
(442,350 |
) |
|
|
(58,511 |
) |
|
|
(89,000 |
) |
|
|
(6,239 |
) |
|
|
39,935 |
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(51,414 |
) |
|
|
28,688 |
|
|
|
318,454 |
|
|
|
(49,590 |
) |
|
|
(77,178 |
) |
|
|
(16,410 |
) |
|
|
(25,703 |
) |
|
|
|
|
|
|
|
(a) |
|
Cost of product sales relates to the sale of bunker fuel. Valero
L.P. purchases bunker fuel for resale and records cost of
product 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 Notes
to Consolidated Financial Statements Note 10.
Commitments and 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. The historical and pro forma income tax amounts
for the year ended December 31, 2005 and the historical
income tax amounts for the three months ended March 31,
2006, 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 also
acquired as part of the acquisition of Kaneb, for
$65 million plus working capital adjustments. The results
of operations of these assets and subsidiaries are included in
income (loss) 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. |
66
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, which on May 8,
2006 automatically converted to common units, of
Valero L.P. to Riverwalk Holdings, LLC, our 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 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 independent terminals and petroleum liquids pipeline
systems in the United States, the Netherlands Antilles, Canada,
Mexico, the Netherlands and the United Kingdom. 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 |
|
|
|
10,225,491 common units of Valero L.P. representing a 21.4%
limited partner interest in Valero L.P. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 59% 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. Valero Energy believes that
67
such divestiture will provide a greater opportunity to both
Valero Energy and Valero L.P. to pursue their own strategic
initiatives.
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 47.5%, from $0.60 per unit, or
$2.40 per unit on an annualized basis, to a current level of
$0.885 per unit, or $3.54 per unit on an annualized basis. For
the first quarter of 2006, we received a cash distribution from
Valero L.P. of approximately $13.4 million (representing
$53.8 million on an annualized basis), consisting of
$0.9 million on our 2% general partner interest,
$3.5 million on the incentive distribution rights and
$9.0 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 $0.30 per unit, or $1.20 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 $0.30 per unit, or $1.20 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 March 31, 2006, 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 $0.885 declared and paid for the first quarter of
2006; |
|
|
|
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. |
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions Made by Valero L.P.(a) | |
|
|
| |
|
|
|
|
Three | |
|
|
|
|
|
|
Months | |
|
|
April 16, 2001 to | |
|
Year Ended December 31, | |
|
Ended | |
|
|
December 31, | |
|
| |
|
March 31, | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash distributions per unit
|
|
$ |
1.70 |
|
|
$ |
2.75 |
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
$ |
0.885 |
|
Average number of Valero L.P. limited partner units
outstanding (b)
|
|
|
19,217 |
|
|
|
19,261 |
|
|
|
22,423 |
|
|
|
23,041 |
|
|
|
40,868 |
|
|
|
46,810 |
|
Total cash distributions made by Valero L.P. to all
partners (c)
|
|
$ |
33,359 |
|
|
$ |
55,175 |
|
|
$ |
70,203 |
|
|
$ |
79,776 |
|
|
$ |
151,795 |
|
|
$ |
45,823 |
|
Cash distributions we received from Valero L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions on general partner interest
|
|
$ |
667 |
|
|
$ |
1,103 |
|
|
$ |
1,405 |
|
|
$ |
1,596 |
|
|
$ |
3,036 |
|
|
$ |
916 |
|
|
Distributions on incentive distribution rights (d)
|
|
|
|
|
|
|
1,103 |
|
|
|
2,620 |
|
|
|
4,448 |
|
|
|
10,259 |
|
|
|
3,480 |
|
|
Distributions on our limited partnership interests
|
|
|
23,889 |
|
|
|
38,729 |
|
|
|
30,320 |
|
|
|
32,802 |
|
|
|
34,407 |
|
|
|
9,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions received by us
|
|
$ |
24,556 |
|
|
$ |
40,935 |
|
|
$ |
34,345 |
|
|
$ |
38,846 |
|
|
$ |
47,702 |
|
|
$ |
13,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to us as a percentage of total cash
distributions (e)
|
|
|
73.6 |
% |
|
|
74.2 |
% |
|
|
48.9 |
% |
|
|
48.7 |
% |
|
|
31.4 |
% |
|
|
29.3 |
% |
|
|
(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. |
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(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, and the three months ended March 31,
2006. Valero GP Holdings does not currently anticipate a
further lowering of the incentive distribution rights. |
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(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. |
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),
69
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
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 occurred on May 8, 2006. We expect to adopt
our accounting policy and recognize all of our cumulative
SAB 51 credits in our financial statements for the second
quarter of 2006.
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
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.
We expect that this new three-year credit facility will be
entered into by us, as borrower, JPMorgan Chase Bank, N.A., as
Administrative Agent, SunTrust Bank, as Syndication Agent, and
JPMorgan Chase Bank, N.A. and SunTrust Bank as the lenders. We
expect the new credit facility to have an initial aggregate
commitment of $20 million, of which up to $10 million
may be available for letters of credit.
Our obligations under the new credit facility will be unsecured.
We anticipate being subject to customary covenants and
provisions including limitations on indebtedness, liens,
dispositions of material property, mergers and asset transfers.
Borrowings under the new credit facility will bear interest
under one of two rate options, selected by us, equal to either:
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the higher of (a) JPMorgan Chase Bank, N.A.s prime
rate and (b) the federal funds effective rate plus one-half
percent; or |
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Eurodollar rate, as adjusted for statutory reserve requirements
for Eurocurrency liabilities, plus an applicable margin that
will vary between 0.27% and 0.70% based upon our credit rating. |
The applicable margins are determined based upon the ratings
assigned by Standard & Poors Rating Services and
Moodys Investor Services for our senior unsecured
non-credit enhanced debt or, should our debt be unrated, then
the applicable margins are determined based upon the ratings
assigned by Standard & Poors Rating Services and
Moodys Investor Services for Valero Logistics Operations,
L.P.s senior unsecured non-credit enhanced debt.
Valero L.P. will be required to maintain a total debt-to-EBITDA
ratio of less than 4.75-to-1.0 for any four consecutive
quarters, subject to adjustment following certain acquisitions.
We also expect to be subject to a requirement that we have
received, as of the last day of each fiscal quarter, cash
distributions of not less than $25,000,000 in respect to our
interests in Valero L.P. during the preceding four fiscal
quarters.
70
The new credit facility will contain customary events of
default, including upon a change in control, that
could result in the acceleration of all amounts and cancellation
of all commitments outstanding under the credit facility. We
expect a change in control to be defined to mean any
of the following events:
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we cease, indirectly or directly, to own all of the issued and
outstanding equity interests of the general partner(s) of Valero
L.P., or we no longer have the power, directly or indirectly, to
direct or to cause the direction of the management or the
policies of Valero L.P.; or |
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the occurrence of any transaction that results in any person or
group, other than Valero Energy or an entity with unsecured
senior debt with an investment grade rating, becoming the
beneficial owner of more than 50% of the equity interests in us. |
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:
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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 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
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.
Upon the closing of this offering:
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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. |
71
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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. |
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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. |
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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. |
As previously discussed, our only cash-generating assets are our
indirect ownership interests in Valero L.P. Valero L.P. is
subject to certain loss contingencies, the outcome of which
could have an effect on Valero L.P.s cash flow.
Specifically, Valero L.P. may be required to make substantial
payments to the U.S. Department of Justice for certain
remediation costs. Please read Business of Valero
L.P. Legal Proceedings and Other
Contingencies Grace Energy Corporation Matter.
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 March 31, 2006, 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, the
Netherlands Antilles, Canada, Europe, Australia and New Zealand.
72
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
(loss) from discontinued operations in Valero L.P.s
consolidated statement of income.
Valero L.P. purchased a 23.77% interest in Capwood pipeline from
Valero Energy for approximately $13.0 million, which was
paid from borrowings under its existing revolving credit
agreement. The Capwood pipeline is a 57-mile crude oil pipeline
that extends from Patoka, Illinois to Wood River, Illinois.
Plains All American Pipeline L.P., the operator of the Capwood
pipeline, owns the remaining 76.23% interest. Valero L.P.s
financial statements include the results of operations of its
interest in the Capwood pipeline in the crude oil pipelines
segment for the three months ended March 31, 2006.
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.
operates terminals in the United States, the Netherlands
Antilles, Canada, Mexico, 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 the
Netherlands Antilles and Canada 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. As of March 31, 2006, Valero
L.P.s debt-to-capitalization ratio was 38.5%.
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
73
mile anhydrous ammonia pipeline located in Louisiana, Arkansas,
Missouri, Illinois, Indiana, Iowa and Nebraska.
Crude Oil Pipelines. Valero L.P. owns 854 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.
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:
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company-specific factors, such as asset integrity issues and
maintenance requirements that impact the throughput rates of its
assets; |
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seasonal factors that affect the demand for refined products and
fertilizers transported by and/or stored in its assets; |
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industry factors, such as changes in the prices of petroleum
products that affect demand and operations of its customers; and |
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other factors such as refinery utilization rates and maintenance
turnaround schedules that impact the operations of refineries
served by its assets. |
74
Results of Operations
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Three Months Ended March 31, 2005 Compared to Three
Months Ended March 31, 2006 |
Valero L.P. Financial Highlights
(Thousands of Dollars, Except Unit and Per Unit Data)
(unaudited)
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Three Months Ended March 31, | |
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2005 | |
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2006 | |
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Statement of Income Data:
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Revenues:
|
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|
|
|
|
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|
|
Services revenues
|
|
$ |
56,635 |
|
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$ |
147,929 |
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Product sales
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|
|
|
126,075 |
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|
|
|
|
|
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Total revenues
|
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|
56,635 |
|
|
|
274,004 |
|
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|
|
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|
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Costs and expenses:
|
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|
|
|
|
|
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|
|
Cost of product sales
|
|
|
|
|
|
|
114,218 |
|
|
Operating expenses
|
|
|
19,685 |
|
|
|
71,070 |
|
|
General and administrative expenses
|
|
|
3,503 |
|
|
|
8,560 |
|
|
Depreciation and amortization
|
|
|
8,732 |
|
|
|
24,189 |
|
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|
|
|
|
|
|
|
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Total costs and expenses
|
|
|
31,920 |
|
|
|
218,037 |
|
|
|
|
|
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|
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Operating income
|
|
|
24,715 |
|
|
|
55,967 |
|
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Equity income from joint ventures
|
|
|
378 |
|
|
|
1,206 |
|
|
Interest and other expenses, net
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|
(5,829 |
) |
|
|
(15,465 |
) |
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|
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|
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|
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Income from continuing operations before income tax
expense
|
|
|
19,264 |
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|
|
41,708 |
|
|
Income tax expense
|
|
|
|
|
|
|
2,119 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
19,264 |
|
|
|
39,589 |
|
Loss from discontinued operations
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|
|
|
|
(138 |
) |
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|
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Net income
|
|
|
19,264 |
|
|
|
39,451 |
|
Less general partners interest and incentive distributions
|
|
|
(1,476 |
) |
|
|
(4,199 |
) |
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|
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Limited partners interest in net income
|
|
$ |
17,788 |
|
|
$ |
35,252 |
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|
|
|
|
|
|
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Weighted-average units outstanding
|
|
|
23,041,394 |
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|
|
46,809,749 |
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|
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Net income per unit applicable to limited partners:
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|
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|
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Continuing operations
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
Discontinued operations
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|
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|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.77 |
|
|
$ |
0.75 |
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|
|
|
|
|
|
|
|
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|
December 31, | |
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March 31, | |
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2005 | |
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2006 | |
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Balance Sheet Data:
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Long-term debt, including current portion
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$ |
1,170,705 |
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$ |
1,188,228 |
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Partners equity
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|
|
1,900,779 |
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|
|
1,898,480 |
|
|
Debt-to-capitalization ratio (a)
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38.1% |
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|
|
38.5% |
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(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. |
75
Valero L.P. Segment Operating Highlights
(Thousands of Dollars, Except Barrels/ Day Information)
(unaudited)
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|
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Three Months Ended | |
|
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March 31, | |
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2005 | |
|
2006 | |
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| |
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Refined Product Terminals:
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|
|
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|
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|
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Throughput (barrels/day)
|
|
|
253,531 |
|
|
|
252,275 |
|
|
Throughput revenues
|
|
$ |
9,937 |
|
|
$ |
10,540 |
|
|
Storage lease revenues
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|
|
|
|
|
|
59,533 |
|
|
Product sales (bunkering)
|
|
|
|
|
|
|
126,075 |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
9,937 |
|
|
|
196,148 |
|
|
Cost of product sales
|
|
|
|
|
|
|
114,218 |
|
|
Operating expenses
|
|
|
4,497 |
|
|
|
43,979 |
|
|
Depreciation and amortization
|
|
|
1,859 |
|
|
|
10,906 |
|
|
|
|
|
|
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|
|
Segment operating income
|
|
$ |
3,581 |
|
|
$ |
27,045 |
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|
|
|
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|
Refined Product Pipelines:
|
|
|
|
|
|
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Throughput (barrels/day)
|
|
|
443,993 |
|
|
|
700,969 |
|
|
Revenues
|
|
$ |
22,182 |
|
|
$ |
52,046 |
|
|
Operating expenses
|
|
|
9,303 |
|
|
|
19,802 |
|
|
Depreciation and amortization
|
|
|
3,857 |
|
|
|
10,139 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
9,022 |
|
|
$ |
22,105 |
|
|
|
|
|
|
|
|
Crude Oil Pipelines:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day)
|
|
|
381,086 |
|
|
|
427,675 |
|
|
Revenues
|
|
$ |
13,185 |
|
|
$ |
14,049 |
|
|
Operating expenses
|
|
|
3,823 |
|
|
|
3,697 |
|
|
Depreciation and amortization
|
|
|
1,146 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
8,216 |
|
|
$ |
9,103 |
|
|
|
|
|
|
|
|
Crude Oil Storage Tanks:
|
|
|
|
|
|
|
|
|
|
Throughput (barrels/day)
|
|
|
505,643 |
|
|
|
513,073 |
|
|
Revenues
|
|
$ |
11,331 |
|
|
$ |
11,761 |
|
|
Operating expenses
|
|
|
2,062 |
|
|
|
3,592 |
|
|
Depreciation and amortization
|
|
|
1,870 |
|
|
|
1,895 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$ |
7,399 |
|
|
$ |
6,274 |
|
|
|
|
|
|
|
|
Consolidated Information:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
56,635 |
|
|
$ |
274,004 |
|
|
Cost of product sales
|
|
|
|
|
|
|
114,218 |
|
|
Operating expenses
|
|
|
19,685 |
|
|
|
71,070 |
|
|
Depreciation and amortization
|
|
|
8,732 |
|
|
|
24,189 |
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
28,218 |
|
|
|
64,527 |
|
|
|
General and administrative expenses
|
|
|
3,503 |
|
|
|
8,560 |
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$ |
24,715 |
|
|
$ |
55,967 |
|
|
|
|
|
|
|
|
76
Net income for the three months ended March 31, 2006
increased $20.2 million compared to the three months ended
March 31, 2005 due to higher consolidated 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.
Consolidated segmental operating income for the three months
ended March 31, 2006 increased $36.3 million compared
to the three months ended March 31, 2005, primarily due to
a $23.5 million increase in operating income for the
refined product terminals segment and a $13.1 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
fuel 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 are affected by
scheduled maintenance turnarounds or other operational issues at
refineries that Valero L.P. serves.
|
|
|
Refined Product Terminals |
Revenues increased by $186.2 million for the three months
ended March 31, 2006, compared to the three months ended
March 31, 2005, primarily due to the Kaneb acquisition,
which contributed $126.1 million of bunkering revenues and
$59.5 million of storage lease revenues.
Cost of product sales totaled $114.2 million for the three
months ended March 31, 2006. Cost of product 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 $39.5 million for the three
months ended March 31, 2006, compared to the three months
ended March 31, 2005, primarily due to the inclusion of
operating expenses related to the assets acquired in the Kaneb
acquisition. Operating expenses further increased compared to
the three months ended March 31, 2005, due to increased
regulatory and maintenance expense mainly related to the assets
acquired with the Kaneb acquisition and increased internal
overhead expense resulting from increased headcount.
Depreciation and amortization expense increased
$9.0 million for the three months ended March 31,
2006, compared to the three months ended March 31, 2005,
primarily due to an increase in Valero L.P.s property and
equipment related to the Kaneb acquisition.
|
|
|
Refined Product Pipelines |
Revenues increased by $29.9 million for the three months
ended March 31, 2006, compared to the three months ended
March 31, 2005, primarily due to the Kaneb acquisition,
which increased throughputs by 218,394 barrels per day,
resulting in additional revenues of $27.2 million. Revenues
also increased due to the expansion of a refined product
pipeline in South Texas, which commenced operations on the
Edinburg to Harlingen segment in October 2005, and the Harlingen
to Brownsville segment in March 2006. In addition, revenues
increased due to increased volumes in the Dos Laredos pipeline
system.
Operating expenses increased by $10.5 million for the three
months ended March 31, 2006, compared to the three months
ended March 31, 2005, primarily due to the inclusion of
operating expenses of $11.2 million related to the assets
acquired in the Kaneb acquisition. Partially offsetting the
increase in operating expenses was a decrease in power costs due
to Valero L.P.s power optimization program and decreased
environmental expenses.
Depreciation and amortization expense increased by
$6.3 million for the three months ended March 31, 2006
compared to the three months ended March 31, 2005,
primarily due to increases in Valero L.P.s property and
equipment related to the Kaneb acquisition.
77
Revenues increased by $0.9 million for the three months
ended March 31, 2006, compared to the three months ended
March 31, 2005, primarily from Valero L.P.s purchase
of the Capwood pipeline, which increased throughputs by
45,859 barrels per day, resulting in additional revenues of
$0.5 million. Revenues also increased on the Ringgold to
Wasson crude oil pipeline, despite lower overall throughputs to
the Ardmore refinery, as throughputs increased in this higher
tariff rate pipeline.
Revenues increased by $0.4 million for the three months
ended March 31, 2006, compared to the three months ended
March 31, 2005, primarily due to increased throughput in
Valero L.P.s Corpus Christi crude oil storage tanks.
Operating expenses increased by $1.5 million for the three
months ended March 31, 2006, compared to the three months
ended March 31, 2005, due to higher maintenance expense on
the Corpus Christi and Texas City crude oil storage tanks.
General and administrative expenses increased by
$5.1 million for the three months ended March 31,
2006, compared to the three months ended March 31, 2005,
primarily due to increased headcount as a result of the Kaneb
acquisition.
Interest expense increased by $9.9 million for the three
months ended March 31, 2006, compared to the three months
ended March 31, 2005, due to higher average debt balances
resulting from debt assumed in the Kaneb acquisition and debt
incurred to fund the Kaneb acquisition combined with higher
interest rates in 2006.
Income tax expense was $2.1 million for the three months
ended March 31, 2006, all of which related to certain
operations acquired in the Kaneb acquisition that are conducted
through separate taxable wholly owned corporate subsidiaries.
78
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 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. |
79
Valero L.P. Segment Operating Highlights
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 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. |
80
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; |
81
|
|
|
|
|
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 |
|
|
|
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.
82
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 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 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. |
83
Valero L.P. Segment Operating Highlights
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 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. |
84
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.
85
|
|
|
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.
86
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 1.6 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.
Valero L.P. expects certain refineries that it serves to undergo
turnaround activity in the second and third quarters of 2006.
Valero L.P. expects this turnaround activity to negatively
impact its earnings by approximately $3.6 million. Despite
the turnaround activity in the third quarter, Valero L.P.
expects overall earnings for the second half of 2006 to increase
compared to the first half of the year primarily due to
increases in pipeline tariffs, which go into effect on
July 1, 2006, and higher throughput volumes from its
strategic growth projects.
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
87
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 Three Months Ended March 31, 2005
and 2006 |
Net cash provided by operating activities for the three months
ended March 31, 2006 was $57.1 million compared to
$15.3 million for the three months ended March 31,
2005. The increase in cash generated from operating activities
is primarily due to higher net income and depreciation expense
resulting from the Kaneb acquisition.
Net cash provided by operating activities for the three months
ended March 31, 2006, combined with available cash on hand,
was used to fund distributions to unitholders and the general
partner in the amount of $44.0 million. The proceeds from
long-term debt borrowings totaling $34.0 million were used
to fund the purchase of the Capwood pipeline and capital
expenditures. The proceeds from the sale of the Australia and
New Zealand subsidiaries totaling $68.6 million increased
Valero L.P.s cash balance as of March 31, 2006.
Net cash provided by operating activities for the three months
ended March 31, 2005 was $15.3 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 amount of $19.9 million.
Additionally, Valero L.P. used cash from those sources in
combination with long-term debt borrowings totaling
$4.0 million to fund $4.3 million of capital
expenditures and pre-acquisition costs associated with the Kaneb
acquisition totaling $2.0 million.
|
|
|
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 Loan
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
88
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.
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 and
general partner may receive. 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. This amendment was effected to reduce
Valero L.P.s cost of equity capital to allow Valero L.P.
to better compete for acquisitions. Valero GP Holdings
limited liability company agreement provides that Valero GP
Holdings board of directors may consent to the
elimination, reduction or modification of the incentive
distribution rights without unitholder approval if Valero GP
Holdings board of directors determines that the
elimination, reduction or modification will not adversely affect
Valero GP Holdings unitholders in any material respect.
Valero L.P. does not currently anticipate a further lowering of
the incentive distribution rights. 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
(in thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
General partner interest
|
|
$ |
1,404 |
|
|
$ |
1,595 |
|
|
$ |
2,589 |
|
|
$ |
399 |
|
|
$ |
916 |
|
General partner incentive distribution
|
|
|
2,620 |
|
|
|
4,449 |
|
|
|
8,711 |
|
|
|
1,112 |
|
|
|
3,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
4,024 |
|
|
|
6,044 |
|
|
|
11,300 |
|
|
|
1,511 |
|
|
|
4,396 |
|
Limited partners distribution
|
|
|
66,179 |
|
|
|
73,733 |
|
|
|
118,178 |
|
|
|
18,433 |
|
|
|
41,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
70,203 |
|
|
$ |
79,777 |
|
|
$ |
129,478 |
|
|
$ |
19,944 |
|
|
$ |
45,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
2.950 |
|
|
$ |
3.200 |
|
|
$ |
3.365 |
|
|
$ |
0.800 |
|
|
$ |
0.885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Subordinated Units. Valero L.P. satisfied all the
conditions included in its partnership agreement for the
subordination period to end. Accordingly, the subordination
period ended on April 1, 2006 and all 9,599,322
89
subordinated units automatically converted into common units on
a one-for-one basis on May 8, 2006, the first business day
after the record date for the distribution related to the first
quarter of 2006. Riverwalk Holdings, LLC held the 9,599,322
subordinated units at the time of conversion.
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. |
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).
During the three months ended March 31, 2006,
Valero L.P. incurred reliability capital expenditures of
$6.2 million primarily related to the upgrade and
enhancement of the assets acquired with the Kaneb acquisition.
Expansion capital expenditures of $9.4 million during the
three months ended March 31, 2006 were primarily related to
the Dos Paises Project, which Valero L.P. expects to
complete in July of 2006.
For 2006, Valero L.P. expects to incur approximately
$176.0 million of capital expenditures, including
$45.0 million for reliability capital projects and
$131.0 million for expansion capital projects.
Valero L.P. continuously evaluates its capital forecast and
makes changes as economic conditions warrant. If conditions
warrant, Valero L.P.s actual capital expenditures for
2006 may exceed the forecasted 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 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
90
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.
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 Million 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 5.6% as of
March 31, 2006. 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 March 31, 2006, 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 5.5% as of March 31, 2006. 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.
91
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.
During the three months ended March 31, 2006,
Valero L.P. borrowed $34.0 million under the
$400 Million Revolving Credit Agreement to fund the
purchase of the Capwood pipeline and its capital expenditures.
Additionally, Valero L.P. repaid $11.0 million during
the three months ended March 31, 2006. The
$400 Million Revolving Credit Agreement bears interest
based on either an alternative base rate or LIBOR, which was
5.5% as of March 31, 2006. As of March 31, 2006,
Valero L.P. had $372.1 million available for borrowing
under the $400 Million Revolving Credit Agreement.
|
|
|
$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 ($36.5 million as of
March 31, 2006). The UK Term Loan bears interest at
6.65% annually and matures June 30, 2010.
|
|
|
Credit Agreement Provisions |
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, exist 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 March 31, 2006.
On June 6, 2006, Valero L.P. completed certain amendments
to its $525 Million Term Loan Agreement and its
$400 Million Revolving Credit Agreement. Both agreements
were amended to (i) eliminate the provision that the
failure of Valero Energy to own or control the general partner
of Valero L.P. constitutes a change of control;
(ii) extend the maturities of the agreements to 2011;
(iii) include certain material construction projects in the
definition of Consolidated EBITDA; and
(iv) eliminate the requirement that Valero L.P. maintain a
minimum consolidated interest coverage ratio. Additionally, the
amendments reduced the applicable margin on LIBOR loans to vary
from 0.40% to 0.95% for the $525 Million Term Loan
Agreement and 0.27% to 0.70% for the $400 Million Revolving
Credit Agreement, depending upon Valero L.P.s credit
rating. Additionally, the UK Term Loan was amended to
(i) extend the maturity to 2011; (ii) include certain
material construction projects in the definition of
Consolidated EBITDA; and (iii) eliminate the
requirement that Valero L.P. maintain a minimum
consolidated interest coverage ratio.
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
92
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.
Valero Energy intends to ultimately sell all of its interest in
Valero GP Holdings pending market conditions. If Valero Energy
ultimately sells all of its interests in Valero GP Holdings, it
will no longer own Valero L.P.s general partner, which
would trigger certain requirements in Valero L.P.s debt
instruments. Additionally, if Valero Energys or an
investment grade entitys ownership interest in Valero
GP Holdings 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.
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 March 31, 2006, the weighted-average interest rate of
Valero L.P.s interest rate swaps was 7.1%. As of
March 31, 2006, the aggregate estimated fair value of the
interest rate swaps included in other long-term liabilities in
its consolidated balance sheet was $7.9 million.
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 |
|
On April 13, 2006, Valero L.P. entered into an agreement to
purchase three 30,000 barrel and two 52,000 barrel tank barges
over the next two years. The contract price is
$34.1 million, which is subject to adjustment based on the
actual cost incurred for the steel.
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 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.
93
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.
Valero L.P. is subject to certain loss contingencies, the
outcome of which could have an effect on Valero L.P.s cash
flow. Specifically, Valero L.P. may be required to make
substantial payments to the U.S. Department of Justice for
certain remediation costs. Please read Business of
Valero L.P. Legal Proceedings and Other
Contingencies Grace Energy Corporation Matter.
Related Party Transactions
In addition to owning a combined 23.4% general and limited
partner interest in Valero L.P. as of March 31, 2006,
Valero Energy has entered into a number of operating agreements
with Valero L.P., 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 table summarizes information pertaining to Valero
L.P.s transactions with Valero Energy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005(a) | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
178,605 |
|
|
$ |
217,608 |
|
|
$ |
234,485 |
|
|
$ |
55,341 |
|
|
$ |
60,671 |
|
Operating expenses
|
|
|
24,196 |
|
|
|
31,960 |
|
|
|
60,921 |
|
|
|
8,041 |
|
|
|
20,457 |
|
General and administrative expenses
|
|
|
6,110 |
|
|
|
10,539 |
|
|
|
19,356 |
|
|
|
2,757 |
|
|
|
5,700 |
|
|
|
|
(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. |
Valero L.P. has related party transactions with Valero
Energy for pipeline tariff, terminalling fee and crude oil
storage tank fee revenues, which we believe are comparable to
the fees charged to third parties for similar services. In
addition, Valero L.P. reimburses Valero Energy for the
actual costs of Valero Energy employees working solely on its
behalf and for charges incurred on its behalf. Valero L.P.
believes that the terms and conditions of the existing
pipelines, terminals and storage tank agreements with Valero
Energy, described below, substantially represent current market
conditions. Valero L.P. currently intends to negotiate with
Valero Energy at the conclusion of these agreements and replace
such agreements with contractual terms that represent current
market conditions at that time. However, Valero Energy is not
obligated to negotiate these agreements and Valero L.P. may
be unable to renegotiate these agreements on favorable terms.
Valero L.P. cannot determine the overall effect of these new
provisions as they will directly depend on market conditions
that exist at the time the agreements expire.
Valero L.P. is not presently charged office rent from Valero
Energy. Valero L.P. will begin paying market-based rent upon the
completion of a new office facility. Please read
Office Rental Agreement below.
Valero L.P. also benefits from common overhead infrastructure
with Valero Energy primarily in the areas of
information technology systems, software licenses and employee
benefit plan administration. The use of this common
infrastructure is provided to Valero L.P. under the
Services Agreement, described below. If Valero L.P. ceases to
obtain such services from Valero Energy, Valero L.P.s
results of operations would be adversely impacted. Should Valero
Energy reduce its ownership in Valero GP Holdings below 50%,
Valero L.P. will be
94
required to purchase and maintain separate software license
agreements. The estimated purchase cost of such licenses is
approximately $4.3 million, with associated annual
maintenance fees of approximately $0.8 million.
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. For the year ended December 31, 2005, Valero Energy
charged Valero L.P. $6.6 million for these administrative
services.
For the three months ended March 31, 2005, Valero Energy
charged Valero L.P. $0.3 million for administrative
services. 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 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 a change of control, which occurs
when Valero Energy ceases to hold a majority ownership interest
in us, and a party, other than Valero Energy, acquires more than
20% of either us or Valero L.P. Valero GP, LLCs conflicts
committee has approved the terms of the new Services Agreement.
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, and
$0.2 million for each of the three months ended
March 31, 2005 and 2006.
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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 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; |
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any business with a fair market value of less than
$10 million; |
95
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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 ten years after that date (excluding liabilities
resulting from a change in law after April 16, 2001).
Valero GP, LLCs conflicts committee approved the terms of
the Amended and Restated Omnibus Agreement.
Valero GP Holdings 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 Valero GP Holdings is no
longer subject to the Amended and Restated Omnibus Agreement
described above. Under the Non-Compete Agreement, Valero GP
Holdings 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 Valero GP Holdings nor Valero L.P. are
prohibited from engaging in any business, even if Valero GP
Holdings and Valero L.P. would have a conflict of interest with
respect to such other business opportunity. Valero GP,
LLCs conflicts committee has approved the terms of the
Non-Compete Agreement.
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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; |
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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 |
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|
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. The concepts of a material change
in market conditions and material adverse effect on Valero
Energy are not defined in the Pipelines and Terminals Usage
Agreement. However, situations that might constitute a material
change in market conditions having a material adverse effect on
Valero Energy include the cost of transporting crude oil or
refined products by Valero L.P.s pipelines becoming
materially more expensive than transporting crude oil or refined
products by other means or a material change in refinery profit
that makes it materially more advantageous for Valero Energy to
shift large volumes of refined products from markets served by
Valero L.P.s pipelines to pipelines owned by Valero
Energy or third parties. Valero Energy may suspend obligations
by presenting a certificate from its chief financial officer
that there has been a material change in market conditions
having a material adverse effect on Valero Energy. This
agreement does not limit the duration
96
of any such suspension. If Valero L.P. disagrees with
Valero Energy, Valero L.P. has the right to refer the
matter to an independent accounting firm for resolution.
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 and the three months ended March 31,
2006, Valero Energy exceeded its obligations under the Pipelines
and Terminals Usage Agreement. Additionally, Valero Energy has
contractually 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.
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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:
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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. |
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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. |
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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 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. |
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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. |
97
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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.
98
On January 26, 2006, the board of directors of Valero GP,
LLC approved the terms of an Office Rental Agreement between
Valero Logistics Operations and Valero Corporate Services
Company, a wholly owned subsidiary of Valero Energy, whereby
Valero Logistics Operations agreed to lease approximately
65,000 square feet of office space at an annual cost of
approximately $1.6 million per year. Base rent is fixed for
the first five years of the lease term and will be adjusted
thereafter based on changes to the Consumer Price Index as well
as local rental market factors. Rental payments will commence
upon 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. In the event of a
change of control of Valero L.P. or certain of its affiliates,
Valero Corporate Services Company may declare a default by
Valero Logistics Operations and may evict Valero Logistics
Operations with six months notice.
Valero L.P. has other minor storage and throughput contracts
with Valero Energy resulting from the Kaneb acquisition.
As of May 8, 2006, Valero GP Holdings owned 10,225,491 of
Valero L.P.s outstanding common units. In January 2006, in
anticipation of its initial public offering, Valero GP
Holdings transferred all of its units to one of its 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 indirectly 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.
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
99
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 an 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.
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 the time period that restoration, remediation
or cleanup activities are expected to occur, not to exceed
20 years. Estimated costs assume the use of currently
available technology and the application of 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
100
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.
Quantitative and Qualitative Disclosures about Market Risk
The principal market risk (i.e., the risk of loss arising from
adverse changes in market rates and prices) to which Valero L.P.
is exposed is interest rate risk on its debt. Additionally,
Valero L.P. is exposed to exchange rate fluctuations on
transactions related to its foreign operations.
Valero L.P. manages its debt considering various financing
alternatives available in the market and it manages its exposure
to changing interest rates principally through the use of a
combination of fixed-rate debt and variable-rate debt. In
addition, Valero L.P. utilizes 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.
Borrowings under the $400 Million Revolving Credit
Agreement expose Valero L.P. to increases in the benchmark
interest rate underlying its variable rate revolving credit
agreement.
The following table (in thousands, except interest rates)
provides information about Valero L.P.s long-term
debt and interest rate derivative instruments, all of which are
sensitive to changes in interest rates. For long-term debt,
principal cash flows and related weighted-average interest rates
by expected maturity dates are presented. For interest rate
swaps, the table presents notional amounts and weighted-average
interest rates by expected (contractual) maturity dates.
Weighted-average variable rates are based on implied forward
interest rates in the yield curve at the reporting date.
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|
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|
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|
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|
December 31, 2004 | |
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| |
|
|
Expected Maturity Dates | |
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| |
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|
|
Fair | |
|
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term Debt:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$ |
990 |
|
|
$ |
566 |
|
|
$ |
611 |
|
|
$ |
660 |
|
|
$ |
713 |
|
|
$ |
355,652 |
|
|
$ |
359,192 |
|
|
$ |
389,933 |
|
|
|
Average interest rate
|
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
|
|
|
Variable rate
|
|
$ |
|
|
|
$ |
28,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,000 |
|
|
$ |
28,000 |
|
|
|
Average interest rate
|
|
|
|
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
% |
|
|
|
|
Interest Rate Swaps Fixed to Variable:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
167,500 |
|
|
$ |
167,500 |
|
|
$ |
(1,217 |
) |
|
|
Average pay rate
|
|
|
5.1 |
% |
|
|
5.7 |
% |
|
|
6.0 |
% |
|
|
6.2 |
% |
|
|
6.6 |
% |
|
|
7.0 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
Average receive rate
|
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Expected Maturity Dates | |
|
|
|
|
| |
|
|
|
Fair | |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$ |
1,046 |
|
|
$ |
611 |
|
|
$ |
660 |
|
|
$ |
713 |
|
|
$ |
36,901 |
|
|
$ |
854,881 |
|
|
$ |
894,812 |
|
|
$ |
954,039 |
|
|
|
Average interest rate
|
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
6.7 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
|
|
|
Variable rate
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
229,000 |
|
|
$ |
|
|
|
$ |
229,000 |
|
|
$ |
229,000 |
|
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2 |
% |
|
|
|
|
|
|
5.2 |
% |
|
|
|
|
Interest Rate Swaps Fixed to Variable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
167,500 |
|
|
$ |
167,500 |
|
|
$ |
(4,002 |
) |
|
|
Average pay rate
|
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
6.7 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
|
|
|
|
Average receive rate
|
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
| |
|
|
Expected Maturity Dates | |
|
|
|
|
| |
|
|
|
Fair | |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$ |
566 |
|
|
$ |
611 |
|
|
$ |
660 |
|
|
$ |
713 |
|
|
$ |
37,239 |
|
|
$ |
854,881 |
|
|
$ |
894,670 |
|
|
$ |
926,685 |
|
|
|
Average interest rate
|
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
6.7 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
|
|
|
Variable rate
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
252,000 |
|
|
$ |
|
|
|
$ |
252,000 |
|
|
$ |
252,000 |
|
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.6 |
% |
|
|
|
|
|
|
5.6 |
% |
|
|
|
|
Interest Rate Swaps Fixed to Variable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
167,500 |
|
|
$ |
167,500 |
|
|
$ |
(7,910 |
) |
|
|
Average pay rate
|
|
|
7.1 |
% |
|
|
7.0 |
% |
|
|
7.0 |
% |
|
|
7.0 |
% |
|
|
7.1 |
% |
|
|
7.1 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
Average receive rate
|
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
6.3 |
% |
|
|
|
|
102
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 independent terminals and
petroleum liquids pipeline systems in the United States and also
operates terminals in the Netherlands Antilles, Canada, Mexico,
the Netherlands and the United Kingdom. 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 |
|
|
|
10,225,491 common units of Valero L.P. representing a 21.4%
limited partner interest in Valero L.P. |
We are currently 100% owned by subsidiaries of Valero Energy.
After this offering, Valero Energy will indirectly own
approximately 59% 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 47.5%, from $0.60 per unit,
or $2.40 per unit on an annualized basis, to a current level of
$0.885 per unit, or $3.54 per unit on an annualized
basis. For the first quarter of 2006 we received a cash
distribution from Valero L.P. of approximately
$13.4 million (representing approximately
$53.8 million on an annualized basis), consisting of
$0.9 million on our 2% general partner interest,
$3.5 million on the incentive distribution rights and
$9.0 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 $0.30 per unit, or $1.20 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 first quarter of 2006, the
total quarterly cash distributions declared and paid by Valero
L.P. with respect to all of its partnership interests increased
480%, 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 $45.8 million. Over
the same period, the adjusted quarterly cash distributions
declared and paid by Valero L.P. with respect to our ownership
interests increased 153%, from $5.3 million, or 67% of
Valero L.P.s adjusted total quarterly distributions,
to $13.4 million, or 29.3% of Valero L.P.s total
quarterly distributions. The changes in the adjusted historical
cash
103
distributions on our ownership interests reflected in the graph
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 $0.885 declared and paid for the first quarter of
2006; 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. |
Adjusted Quarterly Valero L.P. Distributions to Valero GP
Holdings, LLC (a)
|
|
(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): |
|
|
|
|
|
|
|
|
|
|
|
Per Unit |
|
Total Distribution Paid to |
|
|
Distribution |
|
Valero GP Holdings, LLC |
|
|
|
|
|
2001:
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
$ |
0.501 |
(b) |
|
$ |
7.2 |
|
Third Quarter
|
|
|
0.600 |
|
|
|
8.6 |
|
Fourth Quarter
|
|
|
0.600 |
|
|
|
8.7 |
|
2002:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.650 |
|
|
|
9.5 |
|
Second Quarter
|
|
|
0.700 |
|
|
|
10.5 |
|
Third Quarter
|
|
|
0.700 |
|
|
|
10.5 |
|
Fourth Quarter
|
|
|
0.700 |
|
|
|
10.5 |
|
|
|
(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:
|
|
|
|
|
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 |
|
|
|
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. |
104
For the quarter ended March 31, 2006, Valero L.P. paid a
distribution of $0.885 per unit, which meant we received
23.0% of the $0.225 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 $0.885 per unit, or
$3.54 per unit on an annualized basis and is based upon the
following assumptions:
|
|
|
|
|
Valero L.P.s 46,809,749 common units outstanding as
of May 8, 2006; and |
|
|
|
our ownership of the general partner interest in Valero L.P.,
the incentive distribution rights, and 10,225,491 common
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
|
|
(a) |
This represents the most recent distribution (first quarter
2006) 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 $0.30 per unit, or $1.20 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
105
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 November 2006, we expect to pay you a
distribution equal to the initial quarterly distribution
prorated for the period ending September 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 April 30, 2006, Valero
GP, LLC had 1,258 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.
106
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 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 March 31, 2006, Valero L.P.s assets
included:
|
|
|
|
|
67 refined product terminal facilities providing approximately
58.2 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
4.9 million barrels; |
|
|
|
854 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. |
Valero L.P. generates revenues by:
|
|
|
|
|
charging tariffs for transporting crude oil, refined products
and ammonia through its pipelines; |
|
|
|
charging fees for the use of its terminals and crude oil storage
tanks and related ancillary services; and |
|
|
|
selling bunker fuel, the fuel consumed by marine vessels. |
Valero L.P.s business strategy is to increase per
unit cash distributions to its partners through:
|
|
|
|
|
continuous improvement of its operations, by improving safety
and environmental stewardship, cost controls and asset
reliability and integrity; |
|
|
|
external growth from acquisitions that meet its financial and
strategic criteria; and |
|
|
|
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.
Currently, Valero L.P. has identified over
$250 million of potential terminal expansion opportunities
primarily on the East, West, and Gulf Coasts of the United
States and at Valero L.P.s facilities in
St. Eustatius, Point Tupper, the United Kingdom and
Amsterdam. Additionally, Valero L.P. has identified over
$30 million of potential debottlenecking and pipeline
extension projects on its ammonia pipeline and approximately
$13 million of growth projects to increase its ethanol
blending and biodiesel capabilities. |
Valero L.P.s largest customer is Valero Energy, which
accounted for 34% and 22% of Valero L.P.s revenues for the
year ended December 31, 2005 and the three months ended
March 31, 2006, 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 of
Kaneb Services LLC (KSL) and Kaneb Pipe Line
Partners, L.P. (KPP, and, together with KSL, Kaneb).
Valero L.P. operates terminals 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
107
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 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 March 31, 2006, Valero L.P.
owned and operated:
|
|
|
|
|
57 terminals in the United States, with a total storage capacity
of approximately 32.6 million barrels; |
|
|
|
A terminal on the island of St. Eustatius, Netherlands Antilles
with a tank capacity of 11.3 million barrels and a
transshipment facility; |
|
|
|
A terminal located in Point Tupper, Nova Scotia with a tank
capacity of 7.6 million barrels and a transshipment
facility; |
|
|
|
Six terminals located in the United Kingdom and one terminal
located in the Netherlands, having a total storage capacity of
approximately 6.7 million barrels; and |
|
|
|
A terminal located in Nuevo Laredo, Mexico. |
108
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.
|
|
|
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 large 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 15,000 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 has access to
the East Coast and Canada as well as the Midwestern United
States via the St. Lawrence Seaway and the Great Lakes
system. Through its jetty facilities in North America, the Point
Tupper facility can accommodate substantially all 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. 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
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 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.
109
The following table outlines Valero L.P.s terminal
locations, capacities, tanks and primary products handled:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tankage | |
|
No. of | |
|
|
Facility |
|
Capacity | |
|
Tanks | |
|
Primary Products Handled |
|
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
Major U.S. Terminals:
|
|
|
|
|
|
|
|
|
|
|
Piney Point, MD
|
|
|
5,403,000 |
|
|
|
28 |
|
|
Petroleum |
Linden, NJ (a)
|
|
|
3,906,000 |
|
|
|
28 |
|
|
Petroleum |
Selby, CA
|
|
|
3,042,000 |
|
|
|
24 |
|
|
Petroleum, ethanol |
Jacksonville, FL
|
|
|
2,069,000 |
|
|
|
30 |
|
|
Petroleum |
Texas City, TX
|
|
|
2,008,000 |
|
|
|
124 |
|
|
Chemicals, petrochemicals, petroleum |
Other U.S. Terminals:
|
|
|
|
|
|
|
|
|
|
|
Montgomery, AL
|
|
|
162,000 |
|
|
|
7 |
|
|
Petroleum, jet fuel |
Moundville, AL
|
|
|
310,000 |
|
|
|
6 |
|
|
Petroleum |
Tucson, AZ (b)
|
|
|
87,000 |
|
|
|
4 |
|
|
Petroleum |
Los Angeles, CA
|
|
|
607,000 |
|
|
|
20 |
|
|
Petroleum |
Pittsburg, CA
|
|
|
380,000 |
|
|
|
8 |
|
|
Asphalt |
Stockton, CA
|
|
|
706,000 |
|
|
|
32 |
|
|
Petroleum, ethanol, fertilizer |
Colorado Springs, CO
|
|
|
324,000 |
|
|
|
8 |
|
|
Petroleum |
Denver, CO
|
|
|
111,000 |
|
|
|
10 |
|
|
Petroleum |
Bremen, GA
|
|
|
182,000 |
|
|
|
9 |
|
|
Petroleum |
Brunswick, GA
|
|
|
303,000 |
|
|
|
5 |
|
|
Fertilizer, pulp liquor |
Columbus, GA
|
|
|
175,000 |
|
|
|
24 |
|
|
Petroleum, chemicals, caustic |
Macon, GA
|
|
|
307,000 |
|
|
|
10 |
|
|
Petroleum |
Savannah, GA
|
|
|
903,000 |
|
|
|
28 |
|
|
Petroleum, caustic |
Blue Island, IL
|
|
|
752,000 |
|
|
|
19 |
|
|
Petroleum, ethanol |
Chillicothe, IL (a)
|
|
|
270,000 |
|
|
|
6 |
|
|
Petroleum |
Peru, IL (c)
|
|
|
221,000 |
|
|
|
8 |
|
|
Fertilizer |
Indianapolis, IN
|
|
|
410,000 |
|
|
|
18 |
|
|
Petroleum |
Westwego, LA
|
|
|
849,000 |
|
|
|
53 |
|
|
Molasses, caustic, chemicals, lube oil, fertilizer |
Andrews AFB Pipeline, MD
|
|
|
72,000 |
|
|
|
3 |
|
|
Petroleum |
Baltimore, MD
|
|
|
832,000 |
|
|
|
50 |
|
|
Chemicals, asphalt |
Salisbury, MD
|
|
|
177,000 |
|
|
|
14 |
|
|
Petroleum |
Winona, MN
|
|
|
267,000 |
|
|
|
8 |
|
|
Fertilizer |
Reno, NV
|
|
|
107,000 |
|
|
|
7 |
|
|
Petroleum |
Linden, NJ
|
|
|
371,000 |
|
|
|
13 |
|
|
Petroleum |
Paulsboro, NJ
|
|
|
71,000 |
|
|
|
9 |
|
|
Petroleum |
Alamogordo, NM
|
|
|
120,000 |
|
|
|
5 |
|
|
Petroleum |
Albuquerque, NM
|
|
|
248,000 |
|
|
|
11 |
|
|
Petroleum |
Rosario, NM
|
|
|
160,000 |
|
|
|
8 |
|
|
Asphalt |
Catoosa, OK
|
|
|
340,000 |
|
|
|
24 |
|
|
Asphalt |
Drumright, OK (c)
|
|
|
315,000 |
|
|
|
4 |
|
|
Petroleum |
Portland, OR
|
|
|
1,119,000 |
|
|
|
31 |
|
|
Petroleum, ethanol |
Abernathy, TX
|
|
|
171,000 |
|
|
|
11 |
|
|
Petroleum |
Almeda, TX (c)
|
|
|
106,000 |
|
|
|
6 |
|
|
Petroleum |
Amarillo, TX
|
|
|
270,000 |
|
|
|
11 |
|
|
Petroleum |
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tankage | |
|
No. of | |
|
|
Facility |
|
Capacity | |
|
Tanks | |
|
Primary Products Handled |
|
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
Corpus Christi, TX
|
|
|
359,000 |
|
|
|
12 |
|
|
Petroleum |
Edinburg, TX
|
|
|
189,000 |
|
|
|
7 |
|
|
Petroleum |
El Paso, TX (b)
|
|
|
348,000 |
|
|
|
14 |
|
|
Petroleum |
Harlingen, TX
|
|
|
315,000 |
|
|
|
7 |
|
|
Petroleum |
Houston, TX (Hobby Airport)
|
|
|
106,000 |
|
|
|
6 |
|
|
Petroleum |
Houston, TX
|
|
|
90,000 |
|
|
|
6 |
|
|
Asphalt |
Laredo, TX
|
|
|
202,000 |
|
|
|
6 |
|
|
Petroleum |
Placedo, TX
|
|
|
97,000 |
|
|
|
4 |
|
|
Petroleum |
San Antonio (east), TX
|
|
|
151,000 |
|
|
|
10 |
|
|
Petroleum |
San Antonio (south), TX
|
|
|
219,000 |
|
|
|
8 |
|
|
Petroleum |
Southlake, TX
|
|
|
286,000 |
|
|
|
6 |
|
|
Petroleum |
Texas City, TX
|
|
|
153,000 |
|
|
|
12 |
|
|
Petroleum |
Dumfries, VA
|
|
|
554,000 |
|
|
|
16 |
|
|
Petroleum, asphalt |
Virginia Beach, VA
|
|
|
40,000 |
|
|
|
2 |
|
|
Petroleum |
Tacoma, WA
|
|
|
377,000 |
|
|
|
15 |
|
|
Petroleum, ethanol |
Vancouver, WA
|
|
|
227,000 |
|
|
|
49 |
|
|
Chemicals |
Vancouver, WA
|
|
|
316,000 |
|
|
|
6 |
|
|
Petroleum |
Milwaukee, WI
|
|
|
308,000 |
|
|
|
7 |
|
|
Petroleum, ethanol |
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Terminals
|
|
|
32,570,000 |
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Terminals:
|
|
|
|
|
|
|
|
|
|
|
St. Eustatius, Netherlands Antilles
|
|
|
11,315,000 |
|
|
|
51 |
|
|
Petroleum, crude oil |
Point Tupper, Canada
|
|
|
7,555,000 |
|
|
|
37 |
|
|
Petroleum, crude oil |
Grays, England
|
|
|
1,945,000 |
|
|
|
53 |
|
|
Petroleum |
Eastham, England
|
|
|
2,185,000 |
|
|
|
162 |
|
|
Chemicals, petroleum, animal fats |
Runcorn, England
|
|
|
146,000 |
|
|
|
4 |
|
|
Molten sulfur |
Grangemouth, Scotland
|
|
|
530,000 |
|
|
|
46 |
|
|
Petroleum, chemicals and molasses |
Glasgow, Scotland
|
|
|
344,000 |
|
|
|
16 |
|
|
Petroleum |
Belfast, Northern Ireland
|
|
|
407,000 |
|
|
|
41 |
|
|
Petroleum |
Amsterdam, the Netherlands
|
|
|
1,129,000 |
|
|
|
44 |
|
|
Petroleum |
Nuevo Laredo, Mexico
|
|
|
34,000 |
|
|
|
5 |
|
|
Petroleum |
|
|
|
|
|
|
|
|
|
|
Total Foreign Terminals
|
|
|
25,590,000 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Valero L.P. owns 50% of this terminal through a joint venture. |
|
|
(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. |
|
|
(c) |
Terminal is temporarily 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
111
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.
|
|
|
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 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 these periods.
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.
|
|
|
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
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
112
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 March 31, 2006, Valero L.P. operated:
|
|
|
|
|
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); |
|
|
|
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); |
|
|
|
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 |
|
|
|
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.
113
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
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 |
|
|
|
33,570 |
|
|
|
84% |
|
McKee to Colorado Springs, CO (a)
|
|
McKee |
|
|
256 |
|
|
|
100% |
|
|
|
38,000 |
|
|
|
11,844 |
|
|
|
81% |
|
Colorado Springs, CO to Airport
|
|
McKee |
|
|
2 |
|
|
|
100% |
|
|
|
14,000 |
|
|
|
1,084 |
|
|
|
8% |
|
Colorado Springs to Denver, CO
|
|
McKee |
|
|
101 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
19,457 |
|
|
|
61% |
|
McKee to Denver, CO
|
|
McKee |
|
|
321 |
|
|
|
30% |
|
|
|
9,870 |
|
|
|
8,973 |
|
|
|
91% |
|
McKee to Amarillo, TX (6) (a)(b)
|
|
McKee |
|
|
49 |
|
|
|
100% |
|
|
|
51,000 |
|
|
|
30,832 |
|
|
|
68% |
|
McKee to Amarillo, TX (8) (a)(b)
|
|
McKee |
|
|
49 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amarillo to Abernathy, TX (a)
|
|
McKee |
|
|
102 |
|
|
|
67% |
|
|
|
11,733 |
|
|
|
6,516 |
|
|
|
63% |
|
Amarillo, TX to Albuquerque, NM
|
|
McKee |
|
|
293 |
|
|
|
50% |
|
|
|
17,150 |
|
|
|
9,270 |
|
|
|
54% |
|
Abernathy to Lubbock, TX (a)
|
|
McKee |
|
|
19 |
|
|
|
46% |
|
|
|
8,029 |
|
|
|
888 |
|
|
|
11% |
|
McKee to Skellytown, TX
|
|
McKee |
|
|
53 |
|
|
|
100% |
|
|
|
52,000 |
|
|
|
6,607 |
|
|
|
13% |
|
Skellytown to Mont Belvieu, TX
|
|
McKee |
|
|
572 |
|
|
|
50% |
|
|
|
26,000 |
|
|
|
12,026 |
|
|
|
46% |
|
McKee to Southlake, TX
|
|
McKee |
|
|
375 |
|
|
|
100% |
|
|
|
27,300 |
|
|
|
23,749 |
|
|
|
87% |
|
Three Rivers to San Antonio, TX
|
|
Three Rivers |
|
|
81 |
|
|
|
100% |
|
|
|
33,600 |
|
|
|
30,442 |
|
|
|
91% |
|
Three Rivers to US/Mexico International Border near Laredo, TX
|
|
Three Rivers |
|
|
108 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
22,741 |
|
|
|
71% |
|
Corpus Christi to Three Rivers, TX
|
|
Corpus Christi |
|
|
68 |
|
|
|
100% |
|
|
|
32,000 |
|
|
|
7,468 |
|
|
|
23% |
|
Three Rivers to Corpus Christi, TX
|
|
Three Rivers |
|
|
72 |
|
|
|
100% |
|
|
|
15,000 |
|
|
|
11,762 |
|
|
|
78% |
|
Three Rivers to Pettus to San Antonio, TX
|
|
Three Rivers |
|
|
103 |
|
|
|
100% |
|
|
|
24,000 |
|
|
|
22,419 |
|
|
|
93% |
|
Three Rivers to Pettus to Corpus Christi, TX (c)
|
|
Three Rivers |
|
|
95 |
|
|
|
100% |
|
|
|
15,000 |
|
|
|
|
|
|
|
0% |
|
Ardmore to Wynnewood, OK (d)
|
|
Ardmore |
|
|
31 |
|
|
|
100% |
|
|
|
90,000 |
|
|
|
64,389 |
|
|
|
72% |
|
El Paso, TX to Kinder Morgan
|
|
McKee |
|
|
12 |
|
|
|
67% |
|
|
|
40,000 |
|
|
|
26,725 |
|
|
|
67% |
|
Corpus Christi to Pasadena, TX
|
|
Corpus Christi |
|
|
208 |
|
|
|
100% |
|
|
|
105,000 |
|
|
|
95,895 |
|
|
|
91% |
|
Corpus Christi to Harlingen, TX
|
|
Corpus Christi |
|
|
167 |
|
|
|
100% |
|
|
|
27,100 |
|
|
|
35,918 |
|
|
|
133% |
|
Other refined product pipeline (e)
|
|
|
|
|
289 |
|
|
|
50% |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
3,834 |
|
|
|
|
|
|
|
740,782 |
|
|
|
482,575 |
|
|
|
68% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
(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 for the year ended
December 31, 2005 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
11.5 million barrels for the three months ended
March 31, 2006.
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 4.1 million barrels for the three months
ended March 31, 2006.
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.
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
and the pipeline to which each such terminal was connected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Pipeline |
Location of Terminals |
|
Number of Tanks | |
|
Tank Capacity | |
|
System |
|
|
| |
|
| |
|
|
|
|
|
|
(Barrels) | |
|
|
Iowa:
|
|
|
|
|
|
|
|
|
|
|
|
LeMars
|
|
|
9 |
|
|
|
103,000 |
|
|
East |
|
Milford
|
|
|
11 |
|
|
|
172,000 |
|
|
East |
|
Rock Rapids
|
|
|
12 |
|
|
|
366,000 |
|
|
East |
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Pipeline |
Location of Terminals |
|
Number of Tanks | |
|
Tank Capacity | |
|
System |
|
|
| |
|
| |
|
|
|
|
|
|
(Barrels) | |
|
|
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
3.0 million barrels (converted from tons) for the three
months ended March 31, 2006.
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.
116
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.
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
117
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 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.
118
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 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. Certain of the East
Pipelines and the North Pipelines delivery terminals
are 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 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
119
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 March 31, 2006, Valero L.P. had an ownership interest
in eleven crude oil pipelines with an aggregate length of 854
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
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 |
|
|
|
100.0% |
|
|
|
17,500 |
|
|
|
9,807 |
|
|
|
56% |
|
Dixon, TX to McKee
|
|
McKee |
|
|
44 |
|
|
|
100.0% |
|
|
|
85,000 |
|
|
|
38,493 |
|
|
|
45% |
|
Hooker, OK to Clawson, TX(a)
|
|
McKee |
|
|
41 |
|
|
|
50.0% |
|
|
|
22,000 |
|
|
|
18,421 |
|
|
|
84% |
|
Clawson, TX to McKee(b)
|
|
McKee |
|
|
31 |
|
|
|
100.0% |
|
|
|
36,000 |
|
|
|
15,873 |
|
|
|
95% |
|
Wichita Falls, TX to McKee
|
|
McKee |
|
|
272 |
|
|
|
100.0% |
|
|
|
110,000 |
|
|
|
67,315 |
|
|
|
61% |
|
Corpus Christi, TX to Three Rivers
|
|
Three Rivers |
|
|
70 |
|
|
|
100.0% |
|
|
|
120,000 |
|
|
|
75,398 |
|
|
|
63% |
|
Ringgold, TX to Wasson, OK(b)
|
|
Ardmore |
|
|
44 |
|
|
|
100.0% |
|
|
|
90,000 |
|
|
|
62,865 |
|
|
|
70% |
|
Healdton to Ringling, OK
|
|
Ardmore |
|
|
4 |
|
|
|
100.0% |
|
|
|
52,000 |
|
|
|
3,585 |
|
|
|
7% |
|
Wasson, OK to Ardmore (8-10)(c)
|
|
Ardmore |
|
|
24 |
|
|
|
100.0% |
|
|
|
90,000 |
|
|
|
67,897 |
|
|
|
75% |
|
Wasson, OK to Ardmore (8)(c)
|
|
Ardmore |
|
|
15 |
|
|
|
100.0% |
|
|
|
40,000 |
|
|
|
22,162 |
|
|
|
55% |
|
Patoka, IL to Wood River, IL
|
|
N/A |
|
|
57 |
|
|
|
23.8% |
|
|
|
60,600 |
|
|
|
45,859 |
|
|
|
76% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
854 |
|
|
|
|
|
|
|
723,100 |
|
|
|
427,675 |
|
|
|
62% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
The following table sets forth information about Valero
L.P.s crude oil storage facilities associated with the
crude oil pipeline segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput | |
|
|
Valero Energy |
|
|
|
Number | |
|
Mode of | |
|
Mode of | |
|
Three Months Ended | |
Location |
|
Refinery |
|
Capacity | |
|
of Tanks | |
|
Receipt | |
|
Delivery | |
|
March 31, 2006 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
|
|
|
(Barrels/Day) | |
Dixon, TX
|
|
McKee |
|
|
240,000 |
|
|
|
3 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
38,493 |
|
Ringgold, TX
|
|
Ardmore |
|
|
600,000 |
|
|
|
2 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
62,865 |
|
Wichita Falls, TX
|
|
McKee |
|
|
660,000 |
|
|
|
4 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
67,315 |
|
Wasson, OK
|
|
Ardmore |
|
|
225,000 |
|
|
|
2 |
|
|
|
pipeline |
|
|
|
pipeline |
|
|
|
90,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
1,725,000 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
258,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
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 March 31, 2006, 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 the tanks at the Benicia, Corpus
Christi and Texas City refineries are subject to long-term
operating leases with Valero Energy. For further discussion,
please read Managements Discussion and Analysis of
Financial Condition and Results of Operations Valero
L.P. Related Party Transactions Crude
Oil Storage Tank Agreements. The land underlying the tanks
at the Corpus Christi, TX (North Beach) facility is subject to a
20-year noncancellable
lease with the port authority of Corpus Christi of approximately
$142,000 annually through 2014, at which time the lease is
renewable every five years, for a total of 20 renewable
years. 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 | |
|
|
Valero Energy |
|
|
|
Number | |
|
|
|
Mode of | |
|
Three Months Ended | |
Location |
|
Refinery |
|
Capacity | |
|
of Tanks | |
|
Mode of Receipt |
|
Delivery | |
|
March 31, 2006 | |
|
|
|
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
|
(Barrels) | |
|
|
|
|
|
|
|
(Barrels/Day) | |
Benicia, CA
|
|
Benicia |
|
|
3,815,000 |
|
|
|
16 |
|
|
marine/pipeline |
|
|
pipeline |
|
|
|
147,412 |
|
Corpus Christi, TX
|
|
Corpus Christi |
|
|
4,023,000 |
|
|
|
26 |
|
|
marine |
|
|
pipeline |
|
|
|
163,926 |
|
Texas City, TX
|
|
Texas City |
|
|
3,087,000 |
|
|
|
14 |
|
|
marine |
|
|
pipeline |
|
|
|
201,735 |
|
Corpus Christi, TX (North Beach)(a)
|
|
Three Rivers |
|
|
1,600,000 |
|
|
|
4 |
|
|
marine |
|
|
pipeline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,525,000 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
513,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
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
121
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 April 30, 2006, Valero GP, LLC had
1,258 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 contractually committed to refrain from
challenging several of Valero L.P.s petroleum products and
crude oil tariffs until at least April 2008. Please read
Certain Relationships and Related Transactions
Related Party Transactions Pipelines and Terminals
Usage Agreement McKee, Three Rivers and
Ardmore. 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
122
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.
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.
123
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.
|
|
|
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
124
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.
|
|
|
Capital Expenditures Attributable to Compliance with
Environmental Regulations |
In 2005, Valero L.P.s capital expenditures attributable to
compliance with environmental regulations were approximately
$0.1 million, and are currently estimated to be
approximately $2.5 million for 2006. The increase in
capital expenditures between 2005 and 2006 is due to the Kaneb
acquisition. The estimates for 2006 do not include amounts
related to capital investments at Valero L.P.s facilities
that Valero L.P.s management has deemed to be strategic
investments rather than expenditures relating to environmental
regulatory compliance.
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.
125
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.
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 and
Valero L.P. has not made any payments toward costs incurred
by the Department of Justice.
Port of Vancouver Matter. Valero L.P. owns a chemical and
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
groundwater contamination by the terminals previous owner
and operator originating from the terminal. Investigation and
remediation at the terminal are ongoing in compliance with the
Agreed Order. In April 2006, the Washington Department of
Ecology commented on Valero L.P.s site investigation work
plan and asserted that the groundwater contamination at the
terminal was commingled with a groundwater contamination plume
under other property owned by the Port of Vancouver. Valero L.P.
disputes this assertion. 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 of the commingled
plume is not reasonably estimable at this time. Factors that
could affect estimated remediation costs include whether Kaneb
will have ultimate responsibility for some portion of the
commingled plume, the Port of Vancouvers contribution to
the remediation effort and the amount the Port of Vancouver
actually receives from other potentially responsible parties.
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 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
126
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. The California Bay Area Air
Quality Management District also proposed penalties for air
violations at the Selby Terminal. In June 2006, the California
Bay Area Air Quality Management District agreed to settle the
air violations at the Selby Terminal for penalties totaling
approximately $256,000.
Valero L.P. is also a party to additional claims and legal
proceedings arising in the ordinary course of business. Valero
L.P. believes that the possibility is remote 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.
127
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 one independent
director at the closing of this offering. The board also expects
to appoint two additional independent directors within
90 days of the close 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 four functioning
committees: an audit committee, a conflicts committee, a
compensation committee and a nominating 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 59% of our outstanding
units. Although we will not be required to have a majority of
independent directors, nor compensation or nominating
committees, we expect to have a majority of independent
directors within 90 days of the close of this offering and
we expect to have compensation and 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.
Compensation Committee. Even though we will not be
required to have a compensation committee, we currently
contemplate having a compensation committee consisting of two or
more independent members. The compensation committee will have
the limited function of administering our long-term incentive
plan and any future compensation plans. Please read
Long-Term Incentive Plan.
Nominating/Governance Committee. We currently
contemplate that the nominating/governance committee will
consist of up to three directors. This committee will nominate
candidates to serve on our board of directors. The nominating
committee also will be responsible for monitoring a process to
assess director, board and committee effectiveness, developing
and implementing our corporate governance guidelines and
otherwise taking a leadership role in shaping the corporate
governance of our company.
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.
128
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.
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 59% 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
|
|
|
70 |
|
|
Chairman of the Board |
Stan McLelland
|
|
|
61 |
|
|
Independent Director Nominee |
Curtis V. Anastasio
|
|
|
50 |
|
|
President and Chief Executive Officer |
Steven A. Blank
|
|
|
51 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
Thomas R. Shoaf
|
|
|
47 |
|
|
Vice President and Controller |
Bradley C. Barron
|
|
|
40 |
|
|
Vice President General Counsel and Secretary |
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) 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, 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.
129
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 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, consultants 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. In addition to
vesting based on the passage of time, the committee may
condition the vesting of units on performance criteria which may
include 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. 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, consultants 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. If a grantees employment or membership on
the board of directors terminates for any reason, the
grantees unvested unit options and unit appreciation
rights will be automatically forfeited, unless and to the extent
the compensation committee provides otherwise. 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, consultants and directors and to
align their economic interests with those of unitholders.
130
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. The officers of Valero
GP, LLC will devote substantially all of their time to
overseeing the management, operations, corporate development and
future acquisition initiatives of our and
Valero L.P.s businesses. 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:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position Held with Valero GP, LLC |
|
|
| |
|
|
William E. Greehey
|
|
|
70 |
|
|
Chairman of the Board |
Curtis V. Anastasio
|
|
|
50 |
|
|
President, Chief Executive Officer and Director |
J. Dan Bates
|
|
|
61 |
|
|
Director |
Dan J. Hill
|
|
|
65 |
|
|
Director |
Gregory C. King
|
|
|
45 |
|
|
Director |
William R. Klesse
|
|
|
59 |
|
|
Director |
Stan McLelland
|
|
|
61 |
|
|
Director |
Rodman D. Patton
|
|
|
63 |
|
|
Director |
Steven A. Blank
|
|
|
51 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
James R. Bluntzer
|
|
|
51 |
|
|
Senior Vice President-Operations |
Mary F. Morgan
|
|
|
54 |
|
|
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 |
Bradley C. Barron
|
|
|
40 |
|
|
Vice President General Counsel and Secretary |
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. Bates became a director of Valero GP, LLC in
April 2006. Mr. Bates has been President and Chief
Executive Officer of the Southwest Research Institute since
1997. Mr. Bates also serves as Chairman Pro-Tem of the
Federal Reserve Bank of Dallas San Antonio Branch
board of directors, and as Chairman of the Board of Signature
Science L.L.C. and Southwest Automotive Research Center.
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
131
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 the end of December 2005. 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 2002 until
January 2003. 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 has served as a director of
three privately held companies, Continuum Chemical Corporation,
Patton Surgical Corp. and the general partner of Yorktown
Technologies, LP since November 2002,
November 2003 and June 2004, respectively.
Mr. McLelland was U.S. Ambassador to Jamaica from January
1997 until March 2001. Prior to being named U.S. Ambassador to
Jamaica, 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.
Mr. Barron became Vice President - General Counsel
and Secretary of Valero GP, LLC in January 2006. He served as
Managing Counsel and Corporate Secretary of Valero L.P. from
July 2003 until January 2006. Mr. Barron served as Senior
Counsel, Refining & Procurement from January 2002 until
July 2003. From January 2001 until January 2002, Mr. Barron
served as Counsel to Valero Energy.
132
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
27,499 |
|
|
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 |
|
|
$ |
17,185 |
|
|
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 |
|
133
|
|
(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. |
|
|
(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 $7,247 received as
reimbursement of certain membership dues. |
134
Option Grants and Related Information
The following table sets forth further information regarding the
grants of Valero L.P. unit options to the named executive
officers reflected in the Summary Compensation Table.
|
|
|
Option Grants in the Last Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Securities |
|
Total Options |
|
|
|
Market |
|
|
|
|
|
|
Underlying |
|
Granted to |
|
|
|
Price at |
|
|
|
Grant Date |
|
|
Options |
|
Employees in |
|
Exercise Price |
|
Grant Date |
|
Expiration |
|
Present Value |
Name |
|
Granted (#) |
|
Fiscal Year |
|
($/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 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. |
135
|
|
|
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. |
136
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.
137
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.
138
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, director nominees or
officers, as the case may be.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units |
|
Units |
|
|
Beneficially Owned |
|
Beneficially Owned |
|
|
Prior to Offering |
|
After Offering |
|
|
|
|
|
Name of Beneficial Owner (a) |
|
Units |
|
Percent |
|
Units |
|
Percent |
|
|
|
|
|
|
|
|
|
Diamond Shamrock Refining and Marketing Company (b)
|
|
|
21,926,636 |
|
|
|
51.6 |
% |
|
|
21,926,636 |
|
|
|
51.6 |
% |
Sigmor Corporation (b)
|
|
|
12,523,275 |
|
|
|
29.5 |
|
|
|
3,323,364 |
|
|
|
7.8 |
(c) |
The Shamrock Pipe Line Corporation (b)
|
|
|
5,750,032 |
|
|
|
13.5 |
|
|
|
|
|
|
|
0.00 |
|
Diamond Shamrock Refining Company, L.P. (b)
|
|
|
2,298,782 |
|
|
|
5.4 |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining New Orleans, L.L.C. (b)
|
|
|
425 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining Company California (b)
|
|
|
425 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
Valero Refining Texas, L.P. (b)
|
|
|
425 |
|
|
|
* |
|
|
|
|
|
|
|
0.00 |
|
William E. Greehey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stan McLelland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtis V. Anastasio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven A. Blank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas R. Shoaf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley C. Barron
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All current directors, director nominees and executive officers
as a group (6 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents less than 1%. |
|
(a) |
|
The business address for all beneficial owners listed above is
One Valero Way, San Antonio, Texas 78249. |
|
(b) |
|
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
59.4% 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. |
|
(c) |
|
If the underwriters exercise their option to purchase additional
units in full, Sigmor Corporations beneficial interest
will be reduced to 1.7%. |
139
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 March 31, 2006. Unless
otherwise indicated in the 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
|
|
|
76,609 |
|
|
|
|
|
|
|
* |
|
|
|
4,248,895 |
|
|
|
8,402,376 |
|
|
|
2.02 |
% |
Curtis V. Anastasio
|
|
|
28,706 |
|
|
|
30,645 |
|
|
|
* |
|
|
|
52,555 |
|
|
|
146,600 |
|
|
|
* |
|
J. Dan Bates (h)
|
|
|
135 |
|
|
|
|
|
|
|
* |
|
|
|
90 |
|
|
|
|
|
|
|
* |
|
Dan J. Hill
|
|
|
1,932 |
|
|
|
|
|
|
|
* |
|
|
|
3,000 |
|
|
|
|
|
|
|
* |
|
Gregory C. King
|
|
|
10,215 |
|
|
|
|
|
|
|
* |
|
|
|
376,005 |
|
|
|
654,800 |
|
|
|
* |
|
William R. Klesse
|
|
|
27,132 |
|
|
|
|
|
|
|
* |
|
|
|
528,820 |
|
|
|
856,064 |
|
|
|
* |
|
Stan McLelland
|
|
|
344 |
|
|
|
|
|
|
|
* |
|
|
|
9,034 |
|
|
|
|
|
|
|
* |
|
Rodman D. Patton
|
|
|
9,082 |
|
|
|
|
|
|
|
* |
|
|
|
10,000 |
|
|
|
|
|
|
|
* |
|
Steven A. Blank
|
|
|
18,638 |
|
|
|
11,521 |
|
|
|
* |
|
|
|
6,897 |
|
|
|
20,320 |
|
|
|
* |
|
James R. Bluntzer
|
|
|
3,885 |
|
|
|
6,065 |
|
|
|
* |
|
|
|
77,103 |
|
|
|
74,420 |
|
|
|
* |
|
Brad R. Ramsey
|
|
|
2,697 |
|
|
|
240 |
|
|
|
* |
|
|
|
994 |
|
|
|
12,680 |
|
|
|
* |
|
Rodney L. Reese
|
|
|
7,937 |
|
|
|
3,143 |
|
|
|
* |
|
|
|
28,453 |
|
|
|
17,120 |
|
|
|
* |
|
All directors and executive officers as a group
(12 persons)
|
|
|
187,312 |
|
|
|
51,614 |
|
|
|
0.64 |
% |
|
|
5,341,816 |
|
|
|
10,184,380 |
|
|
|
2.48 |
% |
|
|
|
|
* |
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 March 31, 2006, 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 March 31, 2006 through the exercise of
common unit options. |
|
(e) |
|
As of March 31, 2006, 615,141,352 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 March 31, 2006, 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 |
140
|
|
|
|
|
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 March 31, 2006 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 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. |
|
(h) |
|
J. Dan Bates was elected to the board of directors on
April 18, 2006, and his ownership reported above is as of
that date. |
Except as otherwise indicated, the following table sets forth
certain information as of May 8, 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 | |
|
|
Common | |
|
Common | |
Name and Address of Beneficial Owner |
|
Units | |
|
Units | |
|
|
| |
|
| |
Valero Energy Corporation (a)
|
|
|
10,225,491 |
|
|
|
21.8 |
% |
|
One Valero Way
|
|
|
|
|
|
|
|
|
|
San Antonio, Texas 78249
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Valero Energy owns the common 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 units. |
141
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 |
|
|
|
10,225,491 common units of Valero L.P., representing a 21.4%
limited partner interest in Valero L.P. |
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 (1) any person who is or was a
member, partner, officer, director, tax matters partner,
fiduciary or trustee of us, or any of our subsidiaries,
(2) any person who is or was serving at our request as an
officer, director, member, partner, tax matters partner,
fiduciary or trustee of another person and (3) any person
designated as an indemnitee under the limited liability company
agreement.
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. 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. Please read Risk
Factors Risks Related to Valero L.P.s
Business 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.
142
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:
|
|
|
|
|
all of our employees will be employees of our wholly owned
subsidiary Valero GP, LLC; and |
|
|
|
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. Valero GP, LLCs conflicts committee has approved
the terms of the Administration Agreement.
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. Valero GP, LLCs conflicts committee has
approved the terms of the Non-Compete Agreement.
Effective June 1, 2006 we entered into a Contribution
Agreement with Diamond Shamrock Refining and Marketing Company
(DSRMC), a wholly owned subsidiary of Valero Energy, pursuant to
which DSRMC contributed to us all of its 100% membership
interest in Valero GP, LLC in exchange for an additional member
interest in us representing 0.051103% of all of our member
interests. The membership interests of the other members were
adjusted proportionally.
Riverwalk Holdings, LLC owns 10,213,894 common units of
Valero L.P. representing an aggregate 21.38% 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 11,597 common units
of Valero L.P. representing a 0.03% limited partner interest in
Valero L.P.
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 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%
and 22% of Valero L.P.s total revenues for 2005 and the
first quarter of 2006, respectively.
Valero L.P. has related party transactions with Valero
Energy for pipeline tariff, terminalling fee and crude oil
storage tank fee revenues, which we believe are comparable to
the fees charged to third parties for similar services. In
addition, Valero L.P. reimburses Valero Energy for the
actual costs of Valero Energy employees working solely on its
behalf and for charges incurred on its behalf. Valero L.P.
believes that the terms and conditions of the existing
pipelines, terminals and storage tank agreements with Valero
Energy, described below, substantially represent current market
conditions. Valero L.P. currently intends to negotiate with
Valero Energy at the conclusion of these agreements and replace
such agreements with contractual terms that represent current
market conditions at that time. However, Valero Energy is not
obligated to negotiate these agreements and Valero L.P. may be
unable to renegotiate these agreements on favorable terms.
Valero L.P. cannot determine the overall effect of these new
provisions as they will directly depend on market conditions
that exist at the time the agreements expire.
Valero L.P. is not presently charged office rent from Valero
Energy. Valero L.P. will begin paying market-based rent upon the
completion of a new office facility. Please read
Office Rental Agreement below.
Valero L.P. also benefits from common overhead infrastructure
with Valero Energy primarily in the areas of
information technology systems, software licenses and employee
benefit plan administration. The use of this common
infrastructure is provided to Valero L.P. under the Services
Agreement, discussed below. If Valero L.P. ceases to obtain such
services from Valero Energy, Valero L.P.s results of
operations would be adversely impacted. Should Valero Energy
reduce its ownership in Valero GP Holdings below 50%, Valero
L.P. will be required to purchase and maintain separate software
license agreements. The estimated purchase cost of such licenses
is approximately $4.3 million, with associated annual
maintenance fees of approximately $0.8 million.
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 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. For the year
December 31, 2005, Valero Energy charged Valero L.P.
$6.6 million for these administrative services
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
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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. Valero GP, LLCs conflicts
committee has approved the terms of the new Services Agreement.
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 is not charged for office space it
occupies 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.
On January 26, 2006, the board of directors of
Valero GP, LLC approved the terms of an Office Rental
Agreement between Valero Logistics Operations and Valero
Corporate Services Company, a wholly owned subsidiary of Valero
Energy, whereby Valero Logistics Operations agreed to lease
approximately 65,000 square feet of office space at an
annual cost of approximately $1.6 million per year. Base
rent is fixed for the first five years of the lease term and
will be adjusted thereafter based on changes to the Consumer
Price Index as well as local rental market factors. Rental
payments will commence upon 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. In
the event of a change of control of Valero L.P. or certain of
its affiliates, Valero Corporation Services Company may declare
a default by Valero Logistics Operations and may evict Valero
Logistics Operations with six months notice.
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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. |
145
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).
Valero GP, LLCs conflicts committee has determined that
the terms of the Amended and Restated Omnibus Agreement are fair
and reasonable. 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. The concepts of a material change
in market conditions and material adverse effect on Valero
Energy are not defined in the Pipelines and Terminals Usage
Agreement. However, situations that might constitute a material
change in market conditions having a material adverse effect on
Valero Energy include the cost of transporting crude oil or
refined products by Valero L.P.s pipelines becoming
materially more expensive than transporting crude oil or refined
products by other means or a material change in refinery profit
that makes it materially more advantageous for Valero Energy to
shift large volumes of refined products from markets served by
Valero L.P.s pipelines to pipelines owned by Valero
Energy or third parties. Valero Energy may suspend obligations
by presenting a certificate from its chief financial officer
that there has been a material change in market conditions
having a material adverse effect on Valero Energy. This
agreement does not limit the duration of any such suspension. If
Valero L.P. disagrees with Valero Energy, Valero L.P.
has the right to refer the matter to an independent accounting
firm for resolution.
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 2005 and the
three months ended March 31, 2006, 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.
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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. |
146
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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
147
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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Valero L.P. has other minor storage and throughput contracts
with Valero Energy resulting from the Kaneb acquisition. |
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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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Year Ended | |
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Three Months Ended | |
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December 31, | |
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March 31, | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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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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$ |
55,341 |
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$ |
60,671 |
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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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8,041 |
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20,457 |
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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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2,757 |
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5,700 |
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148
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 board of directors will not be in breach of its obligations
under the limited liability company agreement or its duties to
us or our unitholders if the resolution of the conflict is:
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approved by the conflicts committee, although our board of
directors is not obligated to seek such approval; |
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approved by the vote of a majority of the outstanding units held
by disinterested parties; |
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on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or |
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fair and reasonable to us, taking into account the totality of
the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us. |
Our board of directors may, but is not required to, seek the
approval of such resolution from the conflicts committee. If our
board of directors does not seek approval from the conflicts
committee and our board of directors determines that the
resolution or course of action taken with respect to the
conflict of interest satisfies either of the standards set forth
in the third and fourth bullet points above, then it will be
presumed that, in making its decision, the board of directors
acted in good faith, and in any proceeding brought by or on
behalf of any unitholder, the person bringing or prosecuting
such proceeding will have the burden of overcoming such
presumption. When our limited liability company agreement
requires someone to act in good faith, it requires that person
to believe that he is acting in our best interests.
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
149
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 59% 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. Valero
Energy, in evaluating its decision of whether to further divest
its ownership interest in us, will take into account, among
other things, whether such divestiture is economically
attractive to Valero Energy. For example, if the then current
market price of our publicly traded units exceeds our intrinsic
value, as determined by Valero Energy in its sole discretion,
Valero Energy may be inclined to further divest its ownership
interest in us.
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
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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.
Our limited liability company agreement contains provisions that
modify and limit our directors fiduciary duties to our
unitholders. Specifically, our directors will not have any
liability to us or our unitholders for decisions made in good
faith, meaning they believed the decision was in our best
interests. Our limited liability company agreement also provides
that our board of directors will not be liable for monetary
damages to us or our unitholders for any acts or omissions
unless there has been a final and non-appealable judgment
entered by a court of competent jurisdiction determining that
the board of directors acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that such conduct was unlawful. 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.
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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
Please read Conflicts of Interest and Fiduciary
Duties Potential Future Conflicts
Fiduciary Duties.
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 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
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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 28 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 12 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. Please
read Anti-Takeover Provisions. |
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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 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.
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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. |
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 75% 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, 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
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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.
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.
Our limited liability company agreement also provides for a
staggered board of directors and the adoption of preferred unit
purchase rights. Please read Risk Factors
Risks Inherent in an Investment in Us 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.
The existence of these provisions 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 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
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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.
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 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 Delaware law, from and against all losses, claims,
damages or similar events, any
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person who is or was (1) a member, partner, officer,
director, tax matters partner, fiduciary or trustee of us or any
of our subsidiaries, (2) any person who is or was serving
at our request as an officer, director, member, partner, tax
matters partner, fiduciary or trustee of another person and
(3) any person we designate as an indemnitee under the
limited liability company agreement.
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.
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 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.
There are no restrictions 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. 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 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
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common 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 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; 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. |
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 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 |
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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.
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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. A unit majority consists 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
to continue. |
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
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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 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 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.
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.
Withdrawal or removal of the general partner of Valero L.P. also
constitutes withdrawal or removal of the general partner of
Valero Logistics Operations.
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
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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.
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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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
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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
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
168
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.
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.
169
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
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 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.
Distributions of Available Cash from Operating Surplus
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
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. |
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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.
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, 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, 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.
175
UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the units offered by this prospectus,
subsidiaries of Valero Energy will hold an aggregate of
25,250,000 of our units, representing approximately 59% 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. 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, certain of our affiliates, our executive officers and
directors and the selling 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.
176
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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(3) |
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 6% 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 less than
20% 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
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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.
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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.
191
SELLING UNITHOLDERS
Immediately prior to the closing of this offering, we will issue
to the selling unitholders an aggregate of units representing an
aggregate 48.4% membership interest in us. The selling
unitholders, or their predecessors, are indirect wholly owned
subsidiaries of Valero Energy and received their respective
membership interests in us at the time of our formation in
connection with the initial public offering of Valero L.P. in
April 2001. 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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Units Owned |
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Assuming |
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Assuming |
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Prior to |
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Assuming |
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Underwriters |
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Assuming |
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Underwriters |
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Offering(b) |
|
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(a) |
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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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12,523,275 |
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29.5% |
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9,199,911 |
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11,787,411 |
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3,323,364 |
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7.8% |
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735,864 |
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1.7% |
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The Shamrock Pipe Line Corporation
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5,750,032 |
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13.5 |
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5,750,032 |
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5,750,032 |
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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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2,298,782 |
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5.4 |
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2,298,782 |
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2,298,782 |
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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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425 |
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* |
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425 |
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425 |
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0.0 |
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0.0 |
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Valero Refining Company California
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425 |
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* |
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425 |
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425 |
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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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425 |
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* |
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425 |
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425 |
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0.0 |
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0.0 |
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* |
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Represents less than 1%. |
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(a) |
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The address of each selling unitholder is One Valero Way, San
Antonio, Texas 78249. |
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(b) |
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Gives effect to the
4.25-for-1 unit split
to be effected immediately prior to the completion of this
offering. |
192
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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Citigroup Global Markets Inc.
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Goldman, Sachs & Co.
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Morgan Stanley & Co. Incorporated
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RBC Capital Markets Corporation
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UBS Securities LLC
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A.G. Edwards & Sons, Inc.
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Wachovia Capital Markets, LLC
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Credit Suisse Securities (USA) LLC
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Deutsche Bank Securities Inc.
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J.P. Morgan Securities Inc.
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KeyBanc Capital Markets, a division of McDonald Investments,
Inc.
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Raymond James & Associates, Inc.
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Oppenheimer & Co. Inc.
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Petrie Parkman & Co., Inc.
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Sanders Morris Harris Inc.
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Total
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17,250,000 |
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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.
193
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately
$2.3 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 2,587,500 additional units at the public offering
price less underwriting discounts and commissions. This option
may be exercised if the underwriters sell more than
17,250,000 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
1,207,500 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 under the Directed Unit Program will be
subject to a 180 day
lock-up agreement. 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. Lehman Brothers
Inc. has advised us that it has no present intent to release the
lock-ups prior to the expiration of the 180-day restricted
period described above.
194
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.
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
195
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.
New York Stock Exchange
Our units have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance, 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.
196
Selling Restrictions
Each of the underwriters has represented and agreed that:
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(a) it has not made or will not make an offer of units to
the public in the United Kingdom within the meaning of section
102B of the Financial Services and Markets Act 2000 (as amended)
(FSMA) except to legal entities which are authorized or
regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in securities or otherwise in circumstances which do not
require the publication by the company of a prospectus pursuant
to the Prospectus Rules of the Financial Services Authority
(FSA); |
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(b) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
Valero GP Holdings; and |
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(c) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the units in, from or otherwise involving the
United Kingdom. |
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of units to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
units which has been approved by the competent authority in that
Relevant Member State or, where appropriate, approved in another
Relevant Member State and notified to the competent authority in
that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and
including the Relevant Implementation Date, make an offer of
units to the public in that Relevant Member State at any time:
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(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities; |
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(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as
shown in its last annual or consolidated accounts; or |
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(c) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an
offer of units to the public in relation to any
units in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the units to be offered so as to enable an
investor to decide to purchase or subscribe the units, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
The units may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
units or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of Hong
Kong, and no advertisement, invitation or document relating to
the units may be issued, whether in Hong Kong or elsewhere,
which is directed at, or the contents of which are likely to be
accessed or read by, the public in
197
Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to units
which are or are intended to be disposed of only to persons
outside Hong Kong or only to professional investors
within the meaning of the Securities and Futures Ordinance (Cap.
571) of Hong Kong and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
units may not be circulated or distributed, nor may the units be
offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the units are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the units under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The units have not been and will not be registered under the
Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or sell any units, directly or indirectly, in Japan or to,
or for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
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, 2004 and 2005, the
consolidated financial statements of Valero L.P. as of and for
the years ended December 31, 2004 and 2005, and the
consolidated financial statements of Kaneb Services LLC as of
December 31, 2003 and 2004 and for each of the years in the
three-year period ended December 31, 2004 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.
198
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.
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:
|
|
|
|
|
Our ability to pay distributions to our unitholders; |
|
|
|
Our expected receipt of distributions from Valero L.P.; |
|
|
|
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.; |
199
|
|
|
|
|
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; |
|
|
|
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.
200
INDEX TO FINANCIAL STATEMENTS
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Page | |
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| |
VALERO GP HOLDINGS, LLC
|
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|
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|
|
Introduction
|
|
|
F-2 |
|
|
|
|
|
|
F-3 |
|
|
|
Unaudited Pro Forma Combined Statement of Income for the Year
Ended December 31, 2005
|
|
|
F-4 |
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
F-6 |
|
|
Combined Financial Statements:
|
|
|
|
|
|
|
|
|
|
F-8 |
|
|
|
|
|
|
F-10 |
|
|
|
|
|
|
F-11 |
|
|
|
|
|
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F-12 |
|
|
|
|
|
|
F-13 |
|
|
|
|
|
|
F-14 |
|
VALERO L.P. AND SUBSIDIARIES
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Financial
Statement:
|
|
|
|
|
|
|
|
|
|
F-25 |
|
|
|
|
|
|
F-26 |
|
|
|
|
|
|
F-27 |
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
F-29 |
|
|
|
|
|
|
F-31 |
|
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|
|
F-32 |
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F-33 |
|
|
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F-34 |
|
|
|
|
|
|
F-35 |
|
KANEB SERVICES LLC
|
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
F-76 |
|
|
|
|
|
|
F-77 |
|
|
|
|
|
|
F-78 |
|
|
|
|
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F-79 |
|
|
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|
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F-80 |
|
|
|
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|
|
F-81 |
|
F-1
VALERO GP HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction
The unaudited pro forma combined statements of income for the
year ended December 31, 2005 and the three months ended
March 31, 2006 reflect 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 statements of income reflect 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
incremental general and administrative expenses that Valero GP
Holdings will incur under a new Administration Agreement with
Valero GP, LLC for certain administrative services to be
provided by Valero GP, LLC. 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 March 31, 2006.
The unaudited pro forma combined financial information should be
read in conjunction with the audited and unaudited 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
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero GP | |
|
|
|
|
|
|
Holdings | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Adjustments | |
|
as Adjusted | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
120 |
|
|
$ |
3,417 |
(b) |
|
$ |
3,537 |
|
|
Receivable from Valero L.P.
|
|
|
73 |
|
|
|
|
|
|
|
73 |
|
|
Accounts receivable
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
198 |
|
|
|
3,417 |
|
|
|
3,615 |
|
|
|
|
|
|
|
|
|
|
|
Long-term receivable from Valero L.P.
|
|
|
|
|
|
|
5,507 |
(b) |
|
|
5,507 |
|
Investment in Valero L.P.
|
|
|
407,458 |
|
|
|
|
|
|
|
407,458 |
|
Deferred tax asset
|
|
|
339 |
|
|
|
|
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
407,995 |
|
|
$ |
8,924 |
|
|
$ |
416,919 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
14 |
|
|
$ |
|
|
|
$ |
14 |
|
|
Income taxes payable
|
|
|
27 |
|
|
|
|
|
|
|
27 |
|
|
Accrued liabilities
|
|
|
1,557 |
|
|
|
|
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,598 |
|
|
|
|
|
|
|
1,598 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliates
|
|
|
265,354 |
|
|
|
(7,367 |
)(a) |
|
|
|
|
|
|
|
|
|
|
|
(257,987 |
)(c) |
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
7,367 |
(a) |
|
|
7,367 |
|
Members equity
|
|
|
141,043 |
|
|
|
8,924 |
(b) |
|
|
407,954 |
|
|
|
|
|
|
|
|
257,987 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
407,995 |
|
|
$ |
8,924 |
|
|
$ |
416,919 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
472 |
(e) |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
472 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
37,618 |
|
|
|
(11,695 |
) |
|
|
25,923 |
|
|
|
(472 |
) |
|
|
25,451 |
|
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 |
|
|
|
17,195 |
|
|
|
25,907 |
|
Income tax expense
|
|
|
114 |
|
|
|
(12 |
)(g) |
|
|
102 |
|
|
|
(3 |
)(g) |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,293 |
|
|
$ |
(11,683 |
) |
|
$ |
8,610 |
|
|
$ |
17,198 |
|
|
$ |
25,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit basic and assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding (in thousands) (h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-4
VALERO GP HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valero GP | |
|
|
|
|
|
|
Holdings | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Adjustments | |
|
as Adjusted | |
|
|
| |
|
| |
|
| |
|
|
(Thousands of dollars) | |
Equity in earnings of Valero L.P.
|
|
$ |
11,175 |
|
|
$ |
|
|
|
$ |
11,175 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
8 |
|
|
|
117 |
(e) |
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
8 |
|
|
|
117 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,167 |
|
|
|
(117 |
) |
|
|
11,050 |
|
Other income, net
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Interest income affiliated
|
|
|
33 |
|
|
|
(33 |
)(f) |
|
|
|
|
Interest expense affiliated
|
|
|
(4,743 |
) |
|
|
4,743 |
(f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
6,458 |
|
|
|
4,593 |
|
|
|
11,051 |
|
Income tax expense
|
|
|
83 |
|
|
|
2 |
(g) |
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
6,375 |
|
|
$ |
4,591 |
|
|
$ |
10,966 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit basic and assuming dilution
|
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding (in thousands) (h)
|
|
|
|
|
|
|
|
|
|
|
42,500 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-5
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 and $0.3 million of
long-term disability 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 $8.9 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 $3.4 million of cash and a $5.5 million
receivable from Valero L.P. held by Valero Energy. |
|
|
|
|
(c) |
To reflect a planned $258.0 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. (in thousands): |
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2005 | |
|
|
| |
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. |
F-6
VALERO GP HOLDINGS, LLC
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
(e) |
To reflect an adjustment to general and administrative expenses
as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Three Months | |
|
|
December 31, | |
|
Ended March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Administration agreement with Valero GP, LLC (1)
|
|
$ |
500 |
|
|
$ |
125 |
|
Less: Historical general and administrative expenses
|
|
|
(28 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
Adjustment to general and administrative expenses
|
|
$ |
472 |
|
|
$ |
117 |
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
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 pre-tax income adjustments
related to the Kaneb pro forma and offering adjustments.
Although the net pre-tax income adjustments increase income,
income tax expense is substantially unchanged as the interest
expense reduction primarily affects an entity not subject to
significant state income tax. Amounts in the following table are
in thousands: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
March 31, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Pro forma income tax expense
|
|
$ |
99 |
|
|
$ |
85 |
|
Less: Historical income tax expense
|
|
|
114 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Adjustment to income tax expense
|
|
$ |
(15 |
) |
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
(h) |
To reflect the weighted-average units outstanding for the year
ended December 31, 2005 and the three months ended
March 31, 2006, assuming the 42,500,000 units of
Valero GP Holdings that will be outstanding after the offering
were outstanding on January 1, 2005. |
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 balance sheets of
Valero GP Holdings, LLC (the Company) as of December 31,
2004 and 2005, 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, 2004
and 2005, 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-8
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-9
VALERO GP HOLDINGS, LLC
COMBINED BALANCE SHEETS
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
120 |
|
|
$ |
121 |
|
|
$ |
120 |
|
|
Receivable from Valero L.P.
|
|
|
|
|
|
|
1,151 |
|
|
|
73 |
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
120 |
|
|
|
1,272 |
|
|
|
198 |
|
Investment in Valero L.P.
|
|
|
388,682 |
|
|
|
408,744 |
|
|
|
407,458 |
|
Deferred tax asset
|
|
|
189 |
|
|
|
298 |
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
$ |
407,995 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
14 |
|
|
Income taxes payable
|
|
|
|
|
|
|
11 |
|
|
|
27 |
|
|
Accrued liabilities
|
|
|
4,419 |
|
|
|
2,560 |
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,419 |
|
|
|
2,573 |
|
|
|
1,598 |
|
Notes payable to affiliates
|
|
|
270,597 |
|
|
|
265,961 |
|
|
|
265,354 |
|
Members equity
|
|
|
113,975 |
|
|
|
141,780 |
|
|
|
141,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
388,991 |
|
|
$ |
410,314 |
|
|
$ |
407,995 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-10
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF INCOME
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Operating revenues
|
|
$ |
24,868 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Equity in earnings of Valero L.P.
|
|
|
27,418 |
|
|
|
35,314 |
|
|
|
37,646 |
|
|
|
8,660 |
|
|
|
11,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
52,286 |
|
|
|
35,314 |
|
|
|
37,646 |
|
|
|
8,660 |
|
|
|
11,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
9,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,562 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
Depreciation expense
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
14,021 |
|
|
|
91 |
|
|
|
28 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
38,265 |
|
|
|
35,223 |
|
|
|
37,618 |
|
|
|
8,660 |
|
|
|
11,167 |
|
Equity in earnings of Skelly-Belvieu Pipeline Company
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
72 |
|
|
|
375 |
|
|
|
456 |
|
|
|
369 |
|
|
|
1 |
|
Interest income affiliated
|
|
|
|
|
|
|
26 |
|
|
|
111 |
|
|
|
12 |
|
|
|
33 |
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated
|
|
|
(18,691 |
) |
|
|
(17,110 |
) |
|
|
(17,778 |
) |
|
|
(4,414 |
) |
|
|
(4,743 |
) |
|
Nonaffiliated, net of capitalized interest
|
|
|
(1,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in net income of Valero L.P.
|
|
|
(2,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
16,287 |
|
|
|
18,514 |
|
|
|
20,407 |
|
|
|
4,627 |
|
|
|
6,458 |
|
Income tax expense
|
|
|
33 |
|
|
|
67 |
|
|
|
114 |
|
|
|
67 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
4,560 |
|
|
$ |
6,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-11
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF MEMBERS EQUITY
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended | |
|
|
| |
|
March 31, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Balance as of beginning of period
|
|
$ |
244,771 |
|
|
$ |
105,960 |
|
|
$ |
113,975 |
|
|
$ |
141,780 |
|
Net income
|
|
|
16,254 |
|
|
|
18,447 |
|
|
|
20,293 |
|
|
|
6,375 |
|
Contributions from Valero Energy
|
|
|
1,513 |
|
|
|
|
|
|
|
29,411 |
|
|
|
|
|
Distributions to Valero Energy
|
|
|
(156,578 |
) |
|
|
(10,432 |
) |
|
|
(21,899 |
) |
|
|
(7,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$ |
105,960 |
|
|
$ |
113,975 |
|
|
$ |
141,780 |
|
|
$ |
141,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-12
VALERO GP HOLDINGS, LLC
COMBINED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,254 |
|
|
$ |
18,447 |
|
|
$ |
20,293 |
|
|
$ |
4,560 |
|
|
$ |
6,375 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Valero L.P.
|
|
|
(27,418 |
) |
|
|
(35,314 |
) |
|
|
(37,646 |
) |
|
|
(8,660 |
) |
|
|
(11,175 |
) |
|
|
Distributions of equity income from Valero L.P.
|
|
|
25,524 |
|
|
|
37,208 |
|
|
|
37,646 |
|
|
|
8,660 |
|
|
|
11,175 |
|
|
|
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
|
|
|
(33 |
) |
|
|
(375 |
) |
|
|
(456 |
) |
|
|
(369 |
) |
|
|
|
|
|
|
Minority interest in net income of Valero L.P.
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
(158 |
) |
|
|
(7 |
) |
|
|
67 |
|
|
|
56 |
|
|
|
23 |
|
|
|
Changes in current assets and liabilities
|
|
|
601 |
|
|
|
2,224 |
|
|
|
(2,997 |
) |
|
|
(1,070 |
) |
|
|
98 |
|
|
|
Other, net
|
|
|
2,888 |
|
|
|
|
|
|
|
(176 |
) |
|
|
(46 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23,033 |
|
|
|
22,183 |
|
|
|
16,731 |
|
|
|
3,131 |
|
|
|
6,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
(14,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in excess of equity income from Valero L.P.
|
|
|
|
|
|
|
756 |
|
|
|
7,099 |
|
|
|
1,043 |
|
|
|
1,486 |
|
|
Distributions in excess of equity income from Skelly-Belvieu
Pipeline Company
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Valero L.P.
|
|
|
(1,474 |
) |
|
|
(597 |
) |
|
|
(29,747 |
) |
|
|
(550 |
) |
|
|
(1,635 |
) |
|
Proceeds from the sale of Valero L.P. units in connection with
employee benefit plans
|
|
|
1,086 |
|
|
|
1,362 |
|
|
|
3,042 |
|
|
|
2,027 |
|
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(17,060 |
) |
|
|
1,521 |
|
|
|
(19,606 |
) |
|
|
2,520 |
|
|
|
1,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable to affiliates
|
|
|
7,388 |
|
|
|
(13,200 |
) |
|
|
(4,636 |
) |
|
|
(2,516 |
) |
|
|
(607 |
) |
|
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
|
|
|
1,513 |
|
|
|
|
|
|
|
29,411 |
|
|
|
|
|
|
|
|
|
|
Distributions to Valero Energy
|
|
|
(156,578 |
) |
|
|
(10,432 |
) |
|
|
(21,899 |
) |
|
|
(3,134 |
) |
|
|
(7,112 |
) |
|
Cash distributions to minority interest in Valero L.P.
|
|
|
(3,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
296,679 |
|
|
|
(23,632 |
) |
|
|
2,876 |
|
|
|
(5,650 |
) |
|
|
(7,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(33,487 |
) |
|
|
72 |
|
|
|
1 |
|
|
|
1 |
|
|
|
(1 |
) |
Cash and temporary cash investments at beginning of period
|
|
|
33,535 |
|
|
|
48 |
|
|
|
120 |
|
|
|
120 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments at end of period
|
|
$ |
48 |
|
|
$ |
120 |
|
|
$ |
121 |
|
|
$ |
121 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements.
F-13
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. The subordinated units converted to common units on a
one-for-one basis on May 8, 2006. |
On January 25, 2006, Riverwalk Holdings, LLC (Riverwalk
Holdings) was formed as a wholly owned subsidiary of Valero GP
Holdings, and Valero GP Holdings contributed its 99.9% limited
partner interest in Riverwalk and its subordinated units and
common units of Valero L.P. to Riverwalk Holdings.
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, Riverwalk Holdings
or Riverwalk individually or Valero GP Holdings combined with
Valero GP, LLC, Riverwalk Holdings and Riverwalk.) The
consolidated financial statements of Valero GP Holdings include
the financial statements of Riverwalk and Riverwalk Holdings.
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
F-14
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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.
All information presented in these combined financial statements
as of March 31, 2006 and for the three-month periods ended
March 31, 2005 and 2006 is unaudited. The unaudited
combined financial statements as of March 31, 2006 and for
the three months ended March 31, 2005 and 2006 have been
prepared in accordance with United States generally accepted
accounting principles (GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10
of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and
notes required by GAAP for complete combined financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
All such adjustments are of a normal recurring nature unless
disclosed otherwise. Operating results for the three months
ended March 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2006.
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 Energy will contribute its 100% ownership interest in
Valero GP, LLC to Valero GP Holdings; |
|
|
|
The existing percentage ownership interests of the members of
Valero GP Holdings will be represented by unit
certificates, and a
4.25-for-1 unit split
will be effected, with the members of Valero GP Holdings
maintaining their current percentage ownership interests after
the split; |
|
|
|
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; and |
|
|
|
Valero Energy subsidiaries will contribute to Valero GP Holdings
notes issued by Valero GP Holdings and held by Valero Energy
subsidiaries. |
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
F-15
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Holdings believes that the carrying amount of its investment in
Valero L.P. as of December 31, 2005 and March 31, 2006
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 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.
F-16
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 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 have been
approximately $600,000 at December 31, 2005 and
March 31, 2006. 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.
F-17
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
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. 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.
F-18
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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
March 31, 2006 and is not permitted to do so until its
subordinated units convert to common units, which occurred on
May 8, 2006. Valero GP Holdings expects to adopt its
accounting policy and recognize all of its cumulative
SAB 51 credits in its financial statements for the second
quarter of 2006.
|
|
|
Summary Financial Information |
Condensed financial information reported by Valero L.P. is
summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Current assets
|
|
$ |
39,979 |
|
|
$ |
295,411 |
|
|
$ |
251,229 |
|
Property and equipment, net
|
|
|
784,999 |
|
|
|
2,160,213 |
|
|
|
2,156,552 |
|
Other long-term assets
|
|
|
32,529 |
|
|
|
911,368 |
|
|
|
915,399 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
33,609 |
|
|
$ |
205,588 |
|
|
$ |
144,741 |
|
Long-term debt
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
1,187,662 |
|
Other long-term liabilities
|
|
|
1,416 |
|
|
|
90,966 |
|
|
|
92,297 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
419,196 |
|
|
|
1,466,213 |
|
|
|
1,424,700 |
|
Partners equity
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
1,898,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
56,635 |
|
|
$ |
274,004 |
|
Operating income
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
24,715 |
|
|
|
55,967 |
|
Net income
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
111,073 |
|
|
|
19,264 |
|
|
|
39,451 |
|
|
|
|
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
F-19
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 and March 31, 2006, Valero GP
Holdings had a receivable from Valero L.P. of $1,151,000 and
$73,000, respectively, representing amounts due for employee
costs. The following table summarizes the results of
transactions with Valero L.P. (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Expenses charged by Valero GP Holdings to Valero L.P.
|
|
$ |
22,736 |
|
|
$ |
36,869 |
|
|
$ |
66,421 |
|
|
$ |
9,713 |
|
|
$ |
23,903 |
|
As of December 31, 2004 and 2005 and March 31, 2006,
Valero GP Holdings investment in Valero L.P. (representing
the 2% general partner interest, all of Valero L.P.s
subordinated units and 664,119 (2004), 622,772 (2005) and
627,339 (March 31, 2006) of Valero L.P.s common
units) reconciles to Valero L.P.s total partners
equity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Valero L.P. total partners equity
|
|
$ |
438,311 |
|
|
$ |
1,900,779 |
|
|
$ |
1,898,480 |
|
Valero GP Holdings ownership interest in Valero L.P.
|
|
|
45.7 |
% |
|
|
23.4 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
Valero GP Holdings share of Valero L.P.s
partners equity
|
|
|
200,308 |
|
|
|
444,782 |
|
|
|
444,244 |
|
Unrecognized SAB 51 gains
|
|
|
(7,094 |
) |
|
|
(158,170 |
) |
|
|
(158,170 |
) |
Step-up in basis related to Valero L.P.s assets and
liabilities, including equity method goodwill
|
|
|
195,468 |
|
|
|
122,132 |
|
|
|
121,384 |
|
|
|
|
|
|
|
|
|
|
|
Investment in Valero L.P.
|
|
$ |
388,682 |
|
|
$ |
408,744 |
|
|
$ |
407,458 |
|
|
|
|
|
|
|
|
|
|
|
The step-up in basis
related to Valero L.P.s assets and liabilities, including
equity method goodwill, reflected in the table above relates to
purchase accounting adjustments resulting from Valero
Energys acquisition of Ultramar Diamond Shamrock
Corporation on December 31, 2001 (the UDS Acquisition). The
amount represents the unamortized excess of the fair value over
carrying amount applicable to Valeros proportionate 73.6%
interest in Valero L.P.s identifiable assets and
liabilities as of December 31, 2001. This amount also
includes the portion of goodwill resulting from the UDS
Acquisition that was attributed to Valero GP Holdings
investment in Valero L.P. Since 26.4% of the equity interest in
Valero L.P. was owned by public unitholders as of the date of
the UDS Acquisition, a significant portion of the total
ownership interest in Valero L.P. was deemed to be held by the
public under generally accepted accounting principles, thereby
precluding the inclusion of these fair value adjustments in the
reported financial statements of Valero L.P. These amounts were
reclassified as part of the investment in Valero L.P. on
March 18, 2003 when Valero GP Holdings ceased consolidating
Valero L.P. and began using the equity method to account for its
investment, as discussed above in this Note 2.
As reflected above, as of December 31, 2004 and 2005 and
March 31, 2006, Valero GP Holdings investment in
Valero L.P. included 664,119, 622,772 and 627,339 publicly
traded common units, respectively, which had an aggregate market
value of $39.5 million, $32.2 million and
$31.8 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 converted to common units on
a one-for-
F-20
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
one basis on May 8, 2006. Subsequent to this conversion,
the aggregate market value of the publicly traded common units
held by Valero GP Holdings was $529.6 million.
|
|
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 and general partner may receive.
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.
The following table reflects the allocation of the cash
distributions earned among the general and limited partners (in
thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
General partner interest
|
|
$ |
1,404 |
|
|
$ |
1,595 |
|
|
$ |
2,589 |
|
|
$ |
399 |
|
|
$ |
916 |
|
General partner incentive distribution
|
|
|
2,620 |
|
|
|
4,449 |
|
|
|
8,711 |
|
|
|
1,112 |
|
|
|
3,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
4,024 |
|
|
|
6,044 |
|
|
|
11,300 |
|
|
|
1,511 |
|
|
|
4,396 |
|
Valero GP Holdings limited partner distribution
|
|
|
30,319 |
|
|
|
32,805 |
|
|
|
34,421 |
|
|
|
8,190 |
|
|
|
9,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Valero GP Holdings
|
|
|
34,343 |
|
|
|
38,849 |
|
|
|
45,721 |
|
|
|
9,701 |
|
|
|
13,446 |
|
Public unitholders distributions
|
|
|
35,860 |
|
|
|
40,928 |
|
|
|
83,757 |
|
|
|
10,243 |
|
|
|
32,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
70,203 |
|
|
$ |
79,777 |
|
|
$ |
129,478 |
|
|
$ |
19,944 |
|
|
$ |
45,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
2.95 |
|
|
$ |
3.20 |
|
|
$ |
3.365 |
|
|
$ |
0.800 |
|
|
$ |
0.885 |
|
During 2005 and the three months ended March 31, 2006,
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 |
|
4th quarter 2005
|
|
|
February 14, 2006 |
|
|
|
0.855 |
|
Cash distributions related to the first quarter of 2006 of
$0.885 per unit were paid by Valero L.P. on May 12,
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 approximately $15 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
F-21
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
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 and
March 31, 2006, $151.1 million and
$174.7 million, respectively, 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 6.33%,
6.91% and 7.15% as of December 31, 2004 and 2005 and
March 31, 2006, 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 plans to
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Decrease (increase) in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$ |
(249 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(5 |
) |
|
Receivable from Valero L.P.
|
|
|
2,937 |
|
|
|
985 |
|
|
|
(1,151 |
) |
|
|
|
|
|
|
1,078 |
|
|
Prepaid expenses and other
|
|
|
(1,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
823 |
|
|
|
|
|
|
|
2 |
|
|
|
3 |
|
|
|
12 |
|
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
2 |
|
|
|
16 |
|
|
Accrued liabilities
|
|
|
(362 |
) |
|
|
1,239 |
|
|
|
(1,859 |
) |
|
|
(1,075 |
) |
|
|
(1,003 |
) |
|
Taxes other than income taxes
|
|
|
(1,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in current assets and liabilities
|
|
$ |
601 |
|
|
$ |
2,224 |
|
|
$ |
(2,997 |
) |
|
$ |
(1,070 |
) |
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Cash flows related to interest and income taxes were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Interest paid
|
|
$ |
20,283 |
|
|
$ |
17,110 |
|
|
$ |
17,778 |
|
|
$ |
4,414 |
|
|
$ |
4,743 |
|
Income taxes paid
|
|
|
191 |
|
|
|
74 |
|
|
|
47 |
|
|
|
11 |
|
|
|
60 |
|
Components of income tax expense (benefit) were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
Current
|
|
$ |
191 |
|
|
$ |
74 |
|
|
$ |
47 |
|
Deferred
|
|
|
(158 |
) |
|
|
(7 |
) |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
33 |
|
|
$ |
67 |
|
|
$ |
114 |
|
|
|
|
|
|
|
|
|
|
|
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. |
F-23
VALERO GP HOLDINGS, LLC
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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. |
The number of awards granted under the above-noted plans were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
Granted | |
|
Vesting | |
|
Granted | |
|
Vesting | |
|
Granted | |
|
Vesting | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
LTIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual rights
|
|
|
30,000 |
|
|
|
1/3 per year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit options
|
|
|
28,625 |
|
|
|
1/5 per year |
|
|
|
|
|
|
|
|
|
|
|
25,075 |
|
|
|
1/5 per year |
|
|
Restricted units
|
|
|
2,280 |
|
|
|
1/5 per year |
|
|
|
9,425 |
|
|
|
1/5 per year |
|
|
|
14,920 |
|
|
|
1/5 per year |
|
|
Restricted units
|
|
|
|
|
|
|
|
|
|
|
579 |
|
|
|
1/3 per year |
|
|
|
1,340 |
|
|
|
1/3 per year |
|
UOP
|
|
|
32,000 |
|
|
|
1/5 per year |
|
|
|
23,775 |
|
|
|
1/5 per year |
|
|
|
14,925 |
|
|
|
1/5 per year |
|
UIP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit options
|
|
|
|
|
|
|
|
|
|
|
49,575 |
|
|
|
1/5 per year |
|
|
|
128,300 |
|
|
|
1/5 per year |
|
|
Restricted units
|
|
|
1,440 |
|
|
|
1/5 per year |
|
|
|
2,680 |
|
|
|
1/5 per year |
|
|
|
31,800 |
|
|
|
1/5 per year |
|
As of December 31, 2004 and 2005 and March 31, 2006,
Valero GP Holdings had accrued $4,419,000, $2,293,000 and
$1,557,000, 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-24
VALERO L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENT
Introduction
The following unaudited pro forma condensed 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 condensed 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 condensed 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 condensed 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 condensed combined balance sheet as of
March 31, 2006 and an unaudited pro forma condensed
combined statement of income for the three months ended
March 31, 2006 are not presented because the transactions
discussed above are reflected in Valero L.P.s historical
financial statements as of and for the three months ended
March 31, 2006.
The unaudited pro forma condensed 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
condensed 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 condensed combined
financial statements, are based upon available information and
certain assumptions that Valero L.P.s management believes
are reasonable.
The unaudited pro forma condensed 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-25
VALERO L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED 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 product 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 expenses, 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 Condensed Combined Financial
Statement.
F-26
VALERO L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED 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 expenses, 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-27
VALERO L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED 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-28
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, 2004 and 2005, 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,
2004 and 2005, 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-29
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-30
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
16,147 |
|
|
$ |
36,054 |
|
|
$ |
105,433 |
|
|
Receivable from Valero Energy
|
|
|
19,195 |
|
|
|
21,873 |
|
|
|
19,780 |
|
|
Accounts receivable, net of allowance for doubtful accounts of
$0 and $1,976 as of December 31, 2004 and 2005,
respectively, and $1,809 as of March 31, 2006
|
|
|
3,395 |
|
|
|
110,066 |
|
|
|
80,771 |
|
|
Inventories
|
|
|
|
|
|
|
17,473 |
|
|
|
14,607 |
|
|
Other current assets
|
|
|
1,242 |
|
|
|
30,138 |
|
|
|
30,638 |
|
|
Assets of businesses held for sale
|
|
|
|
|
|
|
79,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
39,979 |
|
|
|
295,411 |
|
|
|
251,229 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
981,360 |
|
|
|
2,417,529 |
|
|
|
2,436,299 |
|
Accumulated depreciation and amortization
|
|
|
(196,361 |
) |
|
|
(257,316 |
) |
|
|
(279,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
784,999 |
|
|
|
2,160,213 |
|
|
|
2,156,552 |
|
Intangible assets, net
|
|
|
4,695 |
|
|
|
59,159 |
|
|
|
58,427 |
|
Goodwill
|
|
|
4,715 |
|
|
|
767,587 |
|
|
|
771,486 |
|
Investment in joint ventures
|
|
|
15,674 |
|
|
|
73,986 |
|
|
|
73,794 |
|
Deferred charges and other assets, net
|
|
|
7,445 |
|
|
|
10,636 |
|
|
|
11,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
990 |
|
|
$ |
1,046 |
|
|
$ |
566 |
|
|
Payable to Valero Energy
|
|
|
4,166 |
|
|
|
12,800 |
|
|
|
9,223 |
|
|
Accounts payable
|
|
|
10,909 |
|
|
|
104,320 |
|
|
|
73,367 |
|
|
Accrued interest payable
|
|
|
7,693 |
|
|
|
16,391 |
|
|
|
9,712 |
|
|
Accrued liabilities
|
|
|
5,146 |
|
|
|
46,917 |
|
|
|
39,567 |
|
|
Taxes other than income taxes
|
|
|
4,705 |
|
|
|
9,013 |
|
|
|
8,383 |
|
|
Income taxes payable
|
|
|
|
|
|
|
4,001 |
|
|
|
3,923 |
|
|
Liabilities of businesses held for sale
|
|
|
|
|
|
|
11,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,609 |
|
|
|
205,588 |
|
|
|
144,741 |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
384,171 |
|
|
|
1,169,659 |
|
|
|
1,187,662 |
|
Long-term payable to Valero Energy
|
|
|
|
|
|
|
5,507 |
|
|
|
5,851 |
|
Deferred income taxes
|
|
|
|
|
|
|
13,576 |
|
|
|
9,477 |
|
Other long-term liabilities
|
|
|
1,416 |
|
|
|
71,883 |
|
|
|
76,969 |
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (13,442,072 outstanding as of December 31,
2004 and 37,210,427 outstanding as of December 31, 2005 and
March 31, 2006)
|
|
|
310,537 |
|
|
|
1,749,007 |
|
|
|
1,745,214 |
|
|
Subordinated units (9,599,322 outstanding as of
December 31, 2004 and 2005 and March 31, 2006)
|
|
|
117,968 |
|
|
|
114,127 |
|
|
|
113,149 |
|
|
General partners equity
|
|
|
9,836 |
|
|
|
38,913 |
|
|
|
39,184 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
(30 |
) |
|
|
(1,268 |
) |
|
|
933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners equity
|
|
|
438,311 |
|
|
|
1,900,779 |
|
|
|
1,898,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-31
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars, except unit and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
$ |
2,845 |
|
|
$ |
3,184 |
|
|
$ |
174,576 |
|
|
$ |
1,294 |
|
|
$ |
87,258 |
|
|
Valero Energy
|
|
|
178,605 |
|
|
|
217,608 |
|
|
|
232,618 |
|
|
|
55,341 |
|
|
|
60,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services revenues
|
|
|
181,450 |
|
|
|
220,792 |
|
|
|
407,194 |
|
|
|
56,635 |
|
|
|
147,929 |
|
Product sales
|
|
|
|
|
|
|
|
|
|
|
252,363 |
|
|
|
|
|
|
|
126,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
181,450 |
|
|
|
220,792 |
|
|
|
659,557 |
|
|
|
56,635 |
|
|
|
274,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
|
|
|
|
|
|
|
|
229,806 |
|
|
|
|
|
|
|
114,218 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
40,413 |
|
|
|
46,338 |
|
|
|
125,538 |
|
|
|
11,644 |
|
|
|
50,613 |
|
|
Valero Energy
|
|
|
24,196 |
|
|
|
31,960 |
|
|
|
59,071 |
|
|
|
8,041 |
|
|
|
20,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
64,609 |
|
|
|
78,298 |
|
|
|
184,609 |
|
|
|
19,685 |
|
|
|
71,070 |
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
1,427 |
|
|
|
782 |
|
|
|
7,197 |
|
|
|
746 |
|
|
|
2,860 |
|
|
Valero Energy
|
|
|
6,110 |
|
|
|
10,539 |
|
|
|
19,356 |
|
|
|
2,757 |
|
|
|
5,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
3,503 |
|
|
|
8,560 |
|
Depreciation and amortization
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
64,895 |
|
|
|
8,732 |
|
|
|
24,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
98,413 |
|
|
|
122,768 |
|
|
|
505,863 |
|
|
|
31,920 |
|
|
|
218,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
83,037 |
|
|
|
98,024 |
|
|
|
153,694 |
|
|
|
24,715 |
|
|
|
55,967 |
|
|
Equity earnings in joint ventures
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,319 |
|
|
|
378 |
|
|
|
1,206 |
|
|
Interest and other expenses, net
|
|
|
(15,860 |
) |
|
|
(20,950 |
) |
|
|
(43,625 |
) |
|
|
(5,829 |
) |
|
|
(15,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
expense
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
112,388 |
|
|
|
19,264 |
|
|
|
41,708 |
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
4,713 |
|
|
|
|
|
|
|
2,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
107,675 |
|
|
|
19,264 |
|
|
|
39,589 |
|
Income (loss) from discontinued operations, net of income
tax
|
|
|
|
|
|
|
|
|
|
|
3,398 |
|
|
|
|
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
69,593 |
|
|
|
78,418 |
|
|
|
111,073 |
|
|
|
19,264 |
|
|
|
39,451 |
|
Less general partners interest and incentive distributions
|
|
|
(3,959 |
) |
|
|
(5,927 |
) |
|
|
(10,758 |
) |
|
|
(1,476 |
) |
|
|
(4,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners interest in net income
|
|
$ |
65,634 |
|
|
$ |
72,491 |
|
|
$ |
100,315 |
|
|
$ |
17,788 |
|
|
$ |
35,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.76 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3.02 |
|
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
$ |
0.77 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic and diluted units outstanding
|
|
|
21,706,164 |
|
|
|
23,041,394 |
|
|
|
35,023,250 |
|
|
|
23,041,394 |
|
|
|
46,809,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-32
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
69,593 |
|
|
$ |
78,418 |
|
|
$ |
111,073 |
|
|
$ |
19,264 |
|
|
$ |
39,451 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,267 |
|
|
|
33,149 |
|
|
|
66,667 |
|
|
|
8,732 |
|
|
|
24,189 |
|
|
Provision for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
4,283 |
|
|
|
|
|
|
|
|
|
|
Equity income from joint ventures
|
|
|
(2,416 |
) |
|
|
(1,344 |
) |
|
|
(2,499 |
) |
|
|
(378 |
) |
|
|
(1,293 |
) |
|
Distributions from joint ventures
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,499 |
|
|
|
|
|
|
|
1,278 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivable from Valero Energy
|
|
|
(7,299 |
) |
|
|
(3,414 |
) |
|
|
(2,678 |
) |
|
|
250 |
|
|
|
2,093 |
|
|
|
(Increase) decrease in accounts receivable
|
|
|
(3,831 |
) |
|
|
1,938 |
|
|
|
(39,397 |
) |
|
|
1,280 |
|
|
|
31,738 |
|
|
|
(Increase) decrease in inventories
|
|
|
|
|
|
|
|
|
|
|
(6,042 |
) |
|
|
|
|
|
|
2,870 |
|
|
|
Increase in other current assets
|
|
|
(1,098 |
) |
|
|
(260 |
) |
|
|
(11,475 |
) |
|
|
(872 |
) |
|
|
(3,412 |
) |
|
|
Increase (decrease) in payable to Valero Energy
|
|
|
9,849 |
|
|
|
(5,683 |
) |
|
|
8,634 |
|
|
|
(828 |
) |
|
|
(3,577 |
) |
|
|
(Decrease) increase in accrued interest payable
|
|
|
4,441 |
|
|
|
47 |
|
|
|
(259 |
) |
|
|
(5,485 |
) |
|
|
(6,679 |
) |
|
|
(Decrease) increase in accounts payable and other accrued
liabilities
|
|
|
4,091 |
|
|
|
3,339 |
|
|
|
54,604 |
|
|
|
(4,385 |
) |
|
|
(27,314 |
) |
|
|
(Decrease) increase in taxes other than income taxes
|
|
|
644 |
|
|
|
264 |
|
|
|
(3,323 |
) |
|
|
(2,393 |
) |
|
|
(295 |
) |
|
Other, net
|
|
|
3,451 |
|
|
|
705 |
|
|
|
4,343 |
|
|
|
115 |
|
|
|
(1,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
106,108 |
|
|
|
108,503 |
|
|
|
186,430 |
|
|
|
15,300 |
|
|
|
57,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reliability capital expenditures
|
|
|
(10,353 |
) |
|
|
(9,701 |
) |
|
|
(23,707 |
) |
|
|
(1,425 |
) |
|
|
(6,164 |
) |
Expansion capital expenditures
|
|
|
(21,208 |
) |
|
|
(19,702 |
) |
|
|
(44,379 |
) |
|
|
(2,860 |
) |
|
|
(9,428 |
) |
Kaneb acquisition, net of cash acquired
|
|
|
|
|
|
|
(1,098 |
) |
|
|
(500,973 |
) |
|
|
(1,954 |
) |
|
|
|
|
Other acquisitions
|
|
|
(411,176 |
) |
|
|
(28,085 |
) |
|
|
|
|
|
|
|
|
|
|
(12,827 |
) |
Investment in other noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
(3,319 |
) |
|
|
|
|
|
|
(1,512 |
) |
Proceeds from sale of Held Separate Businesses, net
|
|
|
|
|
|
|
|
|
|
|
454,109 |
|
|
|
|
|
|
|
|
|
Proceeds from dispositions of other assets
|
|
|
|
|
|
|
46 |
|
|
|
26,836 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of Australia and New Zealand subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,628 |
|
Distributions in excess of equity earnings in joint ventures
|
|
|
387 |
|
|
|
29 |
|
|
|
2,433 |
|
|
|
|
|
|
|
246 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(442,350 |
) |
|
|
(58,511 |
) |
|
|
(89,000 |
) |
|
|
(6,239 |
) |
|
|
39,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from 6.05% senior note offering, net of discount
and issuance costs
|
|
|
247,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term borrowings
|
|
|
25,000 |
|
|
|
43,000 |
|
|
|
746,472 |
|
|
|
4,000 |
|
|
|
34,000 |
|
Long-term debt repayments
|
|
|
(25,298 |
) |
|
|
(15,468 |
) |
|
|
(735,064 |
) |
|
|
(466 |
) |
|
|
(11,480 |
) |
Distributions to unitholders and general partner
|
|
|
(65,916 |
) |
|
|
(78,240 |
) |
|
|
(127,789 |
) |
|
|
(19,944 |
) |
|
|
(43,950 |
) |
Redemption of common units held by UDS Logistics, LLC
|
|
|
(134,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner contributions, net of redemption
|
|
|
2,930 |
|
|
|
|
|
|
|
29,197 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of common units to the public, net of
issuance costs
|
|
|
269,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash book overdrafts
|
|
|
(520 |
) |
|
|
1,118 |
|
|
|
10,006 |
|
|
|
|
|
|
|
(4,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
318,454 |
|
|
|
(49,590 |
) |
|
|
(77,178 |
) |
|
|
(16,410 |
) |
|
|
(25,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
(345 |
) |
|
|
|
|
|
|
(1,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(17,788 |
) |
|
|
402 |
|
|
|
19,907 |
|
|
|
(7,349 |
) |
|
|
69,379 |
|
Cash and cash equivalents as of the beginning of period
|
|
|
33,533 |
|
|
|
15,745 |
|
|
|
16,147 |
|
|
|
16,147 |
|
|
|
36,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of the end of period
|
|
$ |
15,745 |
|
|
$ |
16,147 |
|
|
$ |
36,054 |
|
|
$ |
8,798 |
|
|
$ |
105,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
15,701 |
|
|
$ |
24,120 |
|
|
$ |
53,162 |
|
|
$ |
11,546 |
|
|
$ |
25,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,663 |
|
|
$ |
|
|
|
$ |
1,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-33
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS EQUITY
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common | |
|
Subordinated | |
|
|
|
Other | |
|
Total | |
|
|
| |
|
| |
|
General | |
|
Comprehensive | |
|
Partners | |
|
|
Units | |
|
Amount | |
|
Units | |
|
Amount | |
|
Partner | |
|
Income (Loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of January 1, 2003
|
|
|
9,654,572 |
|
|
$ |
170,655 |
|
|
|
9,599,322 |
|
|
$ |
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
|
|
|
7,567,250 |
|
|
|
269,026 |
|
|
|
|
|
|
|
|
|
|
|
5,787 |
|
|
|
|
|
|
|
274,813 |
|
|
Redemption of 3,809,750 common units held by UDS Logistics, LLC
and related general partner interest redemption
|
|
|
(3,809,750 |
) |
|
|
(134,065 |
) |
|
|
|
|
|
|
|
|
|
|
(2,857 |
) |
|
|
|
|
|
|
(136,922 |
) |
|
Other
|
|
|
30,000 |
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
13,442,072 |
|
|
|
310,589 |
|
|
|
9,599,322 |
|
|
|
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
|
|
|
13,442,072 |
|
|
|
310,537 |
|
|
|
9,599,322 |
|
|
|
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
|
|
|
23,768,355 |
|
|
|
1,451,225 |
|
|
|
|
|
|
|
|
|
|
|
29,197 |
|
|
|
|
|
|
|
1,480,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
37,210,427 |
|
|
|
1,749,007 |
|
|
|
9,599,322 |
|
|
|
114,127 |
|
|
|
38,913 |
|
|
|
(1,268 |
) |
|
|
1,900,779 |
|
|
Net income
|
|
|
|
|
|
|
28,023 |
|
|
|
|
|
|
|
7,229 |
|
|
|
4,199 |
|
|
|
|
|
|
|
39,451 |
|
|
Other comprehensive income foreign currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,201 |
|
|
|
2,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
28,023 |
|
|
|
|
|
|
|
7,229 |
|
|
|
4,199 |
|
|
|
2,201 |
|
|
|
41,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions to partners
|
|
|
|
|
|
|
(31,816 |
) |
|
|
|
|
|
|
(8,207 |
) |
|
|
(3,928 |
) |
|
|
|
|
|
|
(43,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006 (unaudited)
|
|
|
37,210,427 |
|
|
$ |
1,745,214 |
|
|
|
9,599,322 |
|
|
$ |
113,149 |
|
|
$ |
39,184 |
|
|
$ |
933 |
|
|
$ |
1,898,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-34
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
ORGANIZATION AND OPERATIONS |
Valero L.P. is a publicly traded Delaware limited partnership
formed in 1999 that completed its initial public offering of
common units on 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.
On January 15, 2006, UDS Logistics, LLC, an indirect,
wholly owned subsidiary of Valero Energy, changed its name to
Valero GP Holdings, LLC. On January 25, 2006, Valero GP
Holdings, LLC formed Riverwalk Holdings, LLC, a Delaware limited
liability company and a direct, wholly owned subsidiary, and
contributed its 21.4% limited partnership interest (both common
and subordinated units) in Valero L.P. and its 99.9% limited
partnership interest in Riverwalk Logistics, L.P. to the newly
formed subsidiary.
On June 30, 2006, Valero GP Holdings, LLC filed an amended
registration statement on
Form S-1 with the
Securities and Exchange Commission for an initial public
offering of approximately 41% of its units representing limited
liability company interests. All units will be sold by
subsidiaries of Valero Energy, which initially will retain an
approximate 59% ownership interest in Valero GP Holdings, LLC,
the principal owner of our general partner interest and the
general partner incentive distribution rights and the owner of a
21.4% limited partner interest in us. In the registration
statement, Valero Energy states its intention to further reduce
and ultimately sell all of its interest in Valero GP Holdings,
LLC, pending market conditions.
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 March 31,
2006, our assets included:
|
|
|
|
|
67 refined product terminal facilities providing approximately
58.2 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; |
|
|
|
854 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. |
F-35
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have terminals in the United States, the Netherlands
Antilles, Canada, Mexico, the Netherlands and the United
Kingdom. We sold eight terminals located in Australia and New
Zealand on March 30, 2006. 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 March 31, 2006 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.
|
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
All information as of March 31, 2006 and for the
three-month periods ended March 31, 2005 and 2006 is
unaudited. The unaudited consolidated financial statements as of
March 31, 2006 and for the three months ended
March 31, 2005 and 2006 have been prepared in accordance
with United States generally accepted accounting principles
(GAAP) for interim financial information and with the
instructions to
Form 10-Q and
Article 10 of
Regulation S-X of
the Securities Exchange Act of 1934. Accordingly, they do not
include all of the information and notes required by GAAP for
complete consolidated financial statements as of March 31,
2006 and for the three months ended March 31, 2005 and
2006. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such
adjustments are of a normal recurring nature unless disclosed
otherwise. Financial information for the three months ended
March 31, 2005 and 2006 included in these Notes to
Consolidated Financial Statements is derived from our unaudited
consolidated financial statements. Operating results for the
three months ended March 31, 2006 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2006.
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 GAAP 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-
F-36
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
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,
2003, 2004 and 2005, 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 NIC Holding.
We account for this investment under the equity method of
accounting.
F-37
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 and
March 31, 2006 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 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 an extended and indeterminate
period of time as long as they are properly maintained and/or
upgraded. It is our
F-38
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the time period that restoration, remediation
or cleanup activities are expected to occur, not to exceed
20 years. Estimated costs assume the use of currently
available technology and the application of 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 prices. Product imbalance
liabilities are included in accrued liabilities on the
consolidated balance sheet. Included in other current assets is
$20.0 million and $22.2 million of product imbalance
assets as of December 31, 2005 and March 31, 2006,
respectively. 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.
F-39
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2003, 2004 and 2005 and for the three
months ended March 31, 2005 and 2006 was $2.6 million,
$4.4 million, $8.7 million, $1.1 million and
$3.5 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.
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
F-40
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
FASB Statement No. 155. In February 2006, the FASB
issued Statement No. 155, Accounting for Certain
Hybrid Financial Instruments, which amends Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities, and Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This statement
improves the financial reporting of certain hybrid financial
instruments and simplifies the accounting for these instruments.
In particular, Statement No. 155:
|
|
|
|
|
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, |
|
|
|
clarifies which interest-only and principal-only strips are not
subject to the requirements of Statement No. 133, |
|
|
|
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, |
|
|
|
clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, and |
|
|
|
amends Statement No. 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. |
Statement No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entitys fiscal year that begins after September 15,
2006, and is not expected to affect our financial position or
results of operations.
FASB Statement No. 156. In March 2006, the FASB
issued Statement No. 156, Accounting for Servicing of
Financial Assets, which amends Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. Statement No. 156
requires the initial recognition at fair value of a servicing
asset or servicing liability when an obligation to service a
financial asset is undertaken by entering into a servicing
contract. Statement No. 156 is effective for fiscal years
beginning after September 15, 2006, with early adoption
permitted. The adoption of Statement No. 156 is not
expected to affect our financial position or results of
operations.
F-41
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain previously reported amounts in the 2003, 2004 and 2005
consolidated financial statements have been reclassified to
conform to the 2006 presentation.
COMPLETED DURING THREE MONTHS ENDED MARCH 31, 2006
We purchased a 23.77% interest in Capwood pipeline from Valero
Energy for approximately $13.0 million, which was paid from
borrowings under our existing revolving credit agreement. The
Capwood pipeline is a
57-mile crude oil
pipeline that extends from Patoka, Illinois to Wood River,
Illinois. Plains All American Pipeline L.P., the operator of the
Capwood pipeline, owns the remaining 76.23% interest. Our
financial statements include the results of operations of our
interest in the Capwood pipeline in the crude oil pipelines
segment for the three months ended March 31, 2006.
The purchase price of the Capwood pipeline was primarily
allocated to property and equipment. The pro forma financial
information for the three months ended March 31, 2005 that
give effect to the acquisition of the Capwood pipeline on
January 1, 2005 has not been disclosed as the effect is not
significant.
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 $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.
F-42
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 common 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 Martin Oil LLC (a marketing
subsidiary of KSL), our Australian and New Zealand subsidiaries,
and certain assets we divested in conjunction with the Kaneb
Acquisition (Held Separate Businesses) are reported as
discontinued operations. |
The consolidated statements of income include the results of
operations of the Kaneb Acquisition commencing on July 1,
2005. As a result, information for the three months ended
March 31, 2006 presented below represents actual results of
operations.
F-43
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 (in
thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
787,475 |
|
|
$ |
1,005,662 |
|
|
$ |
219,032 |
|
|
$ |
274,004 |
|
Operating income
|
|
|
179,936 |
|
|
|
130,347 |
|
|
|
45,925 |
|
|
|
55,967 |
|
Income from continuing operations
|
|
$ |
132,374 |
|
|
$ |
83,084 |
|
|
|
32,393 |
|
|
|
39,589 |
|
Income (loss) from discontinued operations
|
|
|
13,985 |
|
|
|
9,853 |
|
|
|
3,788 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
146,359 |
|
|
$ |
92,937 |
|
|
$ |
36,181 |
|
|
$ |
39,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per unit applicable to limited partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.52 |
|
|
$ |
1.48 |
|
|
$ |
0.61 |
|
|
$ |
0.75 |
|
|
Discontinued operations
|
|
|
0.29 |
|
|
|
0.21 |
|
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2.81 |
|
|
$ |
1.69 |
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2003 and 2004 that give effect
to the acquisition of Royal Trading as of January 1, 2003
and 2004 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-44
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-45
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property | |
|
|
|
|
|
|
and | |
|
Intangible | |
|
|
|
|
Equipment | |
|
Assets | |
|
Total | |
|
|
| |
|
| |
|
| |
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-46
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Assets and Liabilities of Businesses Held for Sale |
On March 30, 2006, we sold our subsidiaries located in
Australia and New Zealand (the Australia and New Zealand
Subsidiaries) to ANZ Terminals Pty. Ltd., for total proceeds of
$65.0 million plus working capital. The proceeds will be
used for working capital purposes and to pay down outstanding
debt. This transaction included the sale of eight terminals with
an aggregate storage capacity of 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 and $5.0 million and
$0.6 million, respectively, for the three months ended
March 31, 2006. Income tax expense associated with the
Australia and New Zealand Subsidiaries totaled $0.1 million
and $0.3 million for the year ended December 31, 2005
and the three months ended March 31, 2006, respectively.
Additionally, the income from discontinued operations includes
interest expense of approximately $1.5 million and
$0.8 million allocated to the Australia and New Zealand
Subsidiaries for the year ended December 31, 2005 and the
three months ended March 31, 2006, respectively, 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 (in thousands):
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
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 (in thousands):
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2005 | |
|
|
| |
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-47
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6. |
PROPERTY AND EQUIPMENT |
Property and equipment, at cost, consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
Estimated Useful | |
|
| |
|
|
Lives | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
Land
|
|
|
|
|
|
$ |
8,526 |
|
|
$ |
92,741 |
|
Land and leasehold improvements
|
|
|
15 35 years |
|
|
|
3,942 |
|
|
|
63,465 |
|
Buildings
|
|
|
25 40 years |
|
|
|
10,464 |
|
|
|
26,282 |
|
Pipeline and equipment
|
|
|
20 35 years |
|
|
|
876,905 |
|
|
|
2,096,415 |
|
Rights of way
|
|
|
20 35 years |
|
|
|
68,446 |
|
|
|
96,554 |
|
Construction in progress
|
|
|
|
|
|
|
13,077 |
|
|
|
42,072 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
981,360 |
|
|
|
2,417,529 |
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(196,361 |
) |
|
|
(257,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$ |
784,999 |
|
|
$ |
2,160,213 |
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest costs included in property and equipment
were $0.1 million, $0.2 million and $1.0 million
for the years ended December 31, 2003, 2004 and 2005,
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
expenses, net in the accompanying consolidated statement
of income.
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
|
|
Accumulated | |
|
|
|
Accumulated | |
|
|
Cost | |
|
Amortization | |
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$ |
|
|
|
$ |
|
|
|
$ |
58,000 |
|
|
$ |
(2,900 |
) |
|
Non-compete agreements
|
|
|
1,765 |
|
|
|
(348 |
) |
|
|
1,765 |
|
|
|
(701 |
) |
|
Consulting agreements
|
|
|
1,150 |
|
|
|
(192 |
) |
|
|
1,150 |
|
|
|
(422 |
) |
|
Other
|
|
|
2,359 |
|
|
|
(39 |
) |
|
|
2,359 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,274 |
|
|
$ |
(579 |
) |
|
$ |
63,274 |
|
|
$ |
(4,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our intangible assets are subject to amortization.
Amortization expense for intangible assets was
$0.1 million, $0.6 million and $3.5 million for
the years ended December 31, 2003, 2004 and 2005,
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-48
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, 2004 and 2005 and for the years ended
December 31, 2003, 2004 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
2,928 |
|
|
$ |
9,138 |
|
Property, plant and equipment, net
|
|
|
45,235 |
|
|
|
71,066 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
48,163 |
|
|
$ |
80,204 |
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
378 |
|
|
$ |
3,686 |
|
Other long-term liabilities
|
|
|
|
|
|
|
1,076 |
|
Members equity
|
|
|
47,785 |
|
|
|
75,442 |
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
48,163 |
|
|
$ |
80,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005(a) | |
|
|
| |
|
| |
|
| |
Statement of Income Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
11,613 |
|
|
$ |
9,355 |
|
|
$ |
27,525 |
|
Net income
|
|
|
4,062 |
|
|
|
1,916 |
|
|
|
10,715 |
|
Our share of net income(b)
|
|
|
2,416 |
|
|
|
1,344 |
|
|
|
2,499 |
|
Our share of distributions
|
|
|
2,803 |
|
|
|
1,373 |
|
|
|
4,932 |
|
|
|
(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 $8.2 million as of December 31,
2004 and $7.8 million as of December 31, 2005, 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 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.
F-49
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Employee wage and benefit costs
|
|
$ |
3,941 |
|
|
$ |
9,819 |
|
Unearned income
|
|
|
48 |
|
|
|
9,525 |
|
Environmental costs
|
|
|
265 |
|
|
|
2,404 |
|
Product imbalances
|
|
|
|
|
|
|
17,547 |
|
Other
|
|
|
892 |
|
|
|
7,622 |
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$ |
5,146 |
|
|
$ |
46,917 |
|
|
|
|
|
|
|
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
6.05% senior notes due 2013, net of unamortized discount of
$577 in 2004 and $507 in 2005 and a fair value adjustment of
$441 in 2004 and $2,197 in 2005
|
|
$ |
248,982 |
|
|
$ |
247,296 |
|
6.875% senior notes due 2012, net of unamortized discount
of $237 in 2004 and $205 in 2005 and a fair value adjustment of
$776 in 2004 and $1,805 in 2005
|
|
|
98,987 |
|
|
|
97,990 |
|
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
|
|
|
9,192 |
|
|
|
8,681 |
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
385,161 |
|
|
|
1,170,705 |
|
Less current portion
|
|
|
(990 |
) |
|
|
(1,046 |
) |
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$ |
384,171 |
|
|
$ |
1,169,659 |
|
|
|
|
|
|
|
|
F-50
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 $15.7 million, $24.1 million
and $53.2 million for the years ended December 31,
2003, 2004 and 2005, 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.
|
|
|
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.
F-51
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Million 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%.
During the three months ended March 31, 2006, we borrowed
$34.0 million under the $400 Million Revolving Credit
Agreement to fund the purchase of the Capwood pipeline and our
capital expenditures. We repaid $11.0 million during the
three months ended March 31, 2006. The $400 Million
Revolving Credit Agreement bears interest based on either an
alternative base rate or LIBOR, which was 5.5% as of
March 31, 2006. As of March 31, 2006, we had
$372.1 million available for borrowing under our
$400 Million Revolving Credit Agreement.
F-52
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.
|
|
|
Credit Agreement Provisions |
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.
On June 6, 2006, Valero L.P. completed certain amendments
to its $525 Million Term Loan Agreement and its
$400 Million Revolving Credit Agreement. Both agreements
were amended to (i) eliminate the provision that the
failure of Valero Energy to own or control the general partner
of Valero L.P. constitutes a change of control;
(ii) extend the maturities of the agreements to 2011;
(iii) include certain material construction projects in the
definition of Consolidated EBITDA; and
(iv) eliminate the requirement that Valero L.P. maintain a
minimum consolidated interest coverage ratio. Additionally, the
amendments reduced the applicable margin on LIBOR loans to vary
from 0.40% to 0.95% for the $525 Million Term Loan Agreement and
0.27% to 0.70% for the $400 Million Revolving Credit Agreement,
depending upon Valero L.P.s credit rating. Additionally,
the UK Term Loan was amended to (i) extend the
maturity to 2011; (ii) include certain material
construction projects in the definition of Consolidated
EBITDA; and (iii) eliminate the requirement that
Valero L.P. maintain a minimum consolidated interest
coverage ratio.
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.
F-53
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2004 and 2005 and March 31, 2006,
the weighted average effective interest rate for the interest
rate swaps was 4.7%, 6.6% and 7.1%, respectively. As of
December 31, 2004 and 2005 and March 31, 2006, 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, $4.0 million and
$7.9 million, respectively.
|
|
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.
F-54
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the likelihood of such a situation is
remote.
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.
The balance of and changes in the accruals for environmental
matters were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Balance as of beginning of year
|
|
$ |
125 |
|
|
$ |
343 |
|
|
Fair value of amounts acquired in the Kaneb Acquisition
|
|
|
|
|
|
|
22,234 |
|
|
Additions to accrual
|
|
|
271 |
|
|
|
1,157 |
|
|
Amounts related to Held Separate Businesses
|
|
|
|
|
|
|
(3,137 |
) |
|
Payments
|
|
|
(53 |
) |
|
|
(3,097 |
) |
|
Foreign currency translation
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$ |
343 |
|
|
$ |
17,509 |
|
|
|
|
|
|
|
|
Accruals for environmental matters are included in the
consolidated balance sheet as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
Accrued liabilities
|
|
$ |
265 |
|
|
$ |
2,404 |
|
Liabilities of businesses held for sale
|
|
|
|
|
|
|
3,051 |
|
Other long-term liabilities
|
|
|
78 |
|
|
|
12,054 |
|
|
|
|
|
|
|
|
|
Accruals for environmental matters
|
|
$ |
343 |
|
|
$ |
17,509 |
|
|
|
|
|
|
|
|
|
|
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 and March 31, 2006, we have recorded
accruals for contingent losses, including settled matters,
totaling $59.1 million and $51.9 million,
respectively. The actual payment of any amounts accrued and the
timing of any 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.
F-55
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 AFB 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.
The Otis AFB 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 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 us on this matter and Valero L.P. has not made
any payments toward costs incurred by the Department of Justice.
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 groundwater
contamination by the terminals previous owner and
operator. In April 2006, the Washington Department of Ecology
commented on our remedial action plan and asserted that the
groundwater contamination under the terminal was commingled with
a groundwater contamination plume under other property owned by
the Port of Vancouver. We dispute this assertion. No lawsuits
have been filed against us in this matter, and our liability for
any portion of total future remediation costs of the commingled
plume is not reasonably estimable at this time. Factors that
could affect estimated remediation costs include whether Kaneb
will have ultimate responsibility for some portion of the
commingled plume, the Port of Vancouvers contribution to
the remediation effort and the amount the Port of Vancouver
actually receives from other potentially responsible parties.
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.
F-56
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 guilders
(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
guilders (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 in the 2005 Tax and Maritime Agreement), we can
carryforward that excess to offset future tax liabilities. If
the minimum annual profit tax is less than 2% of taxable profit,
we agreed to pay that difference.
We are also a party to additional claims and legal proceedings
arising in the ordinary course of business. We believe the
possibility is remote 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
$0.9 million, $1.2 million and $8.9 million for
the years ended December 31, 2003, 2004 and 2005,
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.
On April 13, 2006, we entered into an agreement to purchase
three 30,000 barrel and two 52,000 barrel tank barges
over the next two years. The contract price is
$34.1 million, which is subject to adjustment based on the
actual cost incurred for the steel.
F-57
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
RISK MANAGEMENT ACTIVITIES |
The estimated fair value of our fixed-rate debt as of
December 31, 2004 and 2005 was $389.9 million and
$954.0 million, respectively, as compared to the carrying
amount of $357.2 million and $941.7 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.
|
|
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, 2004 and 2005 and March 31, 2006 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005(a) | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
178,605 |
|
|
$ |
217,608 |
|
|
$ |
234,485 |
|
|
$ |
55,341 |
|
|
$ |
60,671 |
|
Operating expenses
|
|
|
24,196 |
|
|
|
31,960 |
|
|
|
60,921 |
|
|
|
8,041 |
|
|
|
20,457 |
|
General and administrative expenses
|
|
|
6,110 |
|
|
|
10,539 |
|
|
|
19,356 |
|
|
|
2,757 |
|
|
|
5,700 |
|
|
|
(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 and March
31, 2006, we have entered into a number of operating agreements
with Valero Energy, which govern
F-58
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
For the three months ended March 31, 2005, Valero Energy charged
us $0.3 million for administrative services. 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. For
the year ended December 31, 2005, Valero Energy charged
Valero L.P. $6.6 million for these administrative services.
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 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
$0.5 million, $0.7 million and $0.6 million for
the years ended December 31, 2003, 2004 and 2005,
respectively.
On March 31, 2006, we entered into an amended and restated
omnibus agreement (the New Omnibus Agreement) with Valero
Energy, Valero GP, LLC, Riverwalk Logistics, L.P., and Valero
Logistics. The New Omnibus Agreement supersedes the Omnibus
Agreement among the parties dated effective April 16, 2001. The
New Omnibus Agreement governs potential competition between
Valero Energy and the Partnership. Under the New 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 us or our general partner, not to engage in
the business of
F-59
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 our 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 we have 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 New 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. |
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.
F-60
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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 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; |
F-61
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 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.
On January 26, 2006, the board of directors of
Valero GP, LLC approved the terms of an Office Rental
Agreement (the Rental Agreement) between Valero Logistics and
Valero Corporate Services Company, a wholly owned subsidiary of
Valero Energy, whereby Valero Logistics agreed to lease
approximately 65,000 square feet of office space at an annual
cost of approximately $1.6 million per year. Base rent is
fixed for the first five years of the lease term and will be
adjusted thereafter based on changes to the Consumer Price Index
as well as local rental market factors. Rental payments will
commence upon completion of a new office facility presently
F-62
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
being constructed by Valero Energy. The completion of this
facility is expected to be in the second half of 2007. In the
event of a change of control of Valero L.P. or certain of
its affiliates, Valero Corporate Services Company may declare a
default by Valero Logistics and may evict Valero Logistics with
six months notice.
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 $4.8 million, $11.2 million and
$20.4 million for the years ended December 31, 2003,
2004 and 2005, respectively, and $2.9 million and
$7.8 million for the three months ended March 31, 2005
and 2006, respectively. These employee benefit plan expenses are
included in operating expenses and general and administrative
expenses.
|
|
|
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
$0.9 million, $0.7 million and $1.5 million,
respectively, for the years ended December 31, 2003, 2004
and 2005 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.
F-63
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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).
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 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.
F-64
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 |
% |
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 (in thousands,
except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Years Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
General partner interest
|
|
$ |
1,404 |
|
|
$ |
1,595 |
|
|
$ |
2,589 |
|
|
$ |
399 |
|
|
$ |
916 |
|
General partner incentive distribution
|
|
|
2,620 |
|
|
|
4,449 |
|
|
|
8,711 |
|
|
|
1,112 |
|
|
|
3,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general partner distribution
|
|
|
4,024 |
|
|
|
6,044 |
|
|
|
11,300 |
|
|
|
1,511 |
|
|
|
4,396 |
|
Limited partners distribution
|
|
|
66,179 |
|
|
|
73,733 |
|
|
|
118,178 |
|
|
|
18,433 |
|
|
|
41,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash distributions
|
|
$ |
70,203 |
|
|
$ |
79,777 |
|
|
$ |
129,478 |
|
|
$ |
19,944 |
|
|
$ |
45,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit applicable to limited partners
|
|
$ |
2.950 |
|
|
$ |
3.200 |
|
|
$ |
3.365 |
|
|
$ |
0.800 |
|
|
$ |
0.885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. On April 18, 2006, we declared a
quarterly cash distribution of $0.885 per unit to be paid on
May 12, 2006 to unitholders of record on May 5, 2006,
which totaled $45.8 million.
We satisfied all the conditions included in our partnership
agreement for the subordination period to end. Accordingly, the
subordination period ended on April 1, 2006 and all
9,599,322 subordinated units automatically converted into common
units on a one-for-one basis on May 8, 2006, the first
business day after the record date for the distribution related
to the first quarter of 2006. Riverwalk Holdings, LLC held the
9,599,322 subordinated units at time of conversion.
F-65
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of income tax expense related to certain of our
operations conducted through separate taxable wholly owned
corporate subsidiaries were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, 2005 | |
|
|
| |
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 |
|
|
|
|
|
The tax effects of significant temporary differences
representing deferred income tax assets and liabilities were as
follows (in thousands):
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
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.
F-66
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Results of operations for the reportable segments were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
31,269 |
|
|
$ |
39,984 |
|
|
$ |
411,332 |
|
|
$ |
9,937 |
|
|
$ |
196,148 |
|
|
Refined product pipelines
|
|
|
72,276 |
|
|
|
86,418 |
|
|
|
149,853 |
|
|
|
22,182 |
|
|
|
52,046 |
|
|
Crude oil pipelines
|
|
|
50,741 |
|
|
|
52,462 |
|
|
|
51,429 |
|
|
|
13,185 |
|
|
|
14,049 |
|
|
Crude oil storage tanks
|
|
|
27,164 |
|
|
|
41,928 |
|
|
|
46,943 |
|
|
|
11,331 |
|
|
|
11,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
$ |
56,635 |
|
|
$ |
274,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
3,508 |
|
|
$ |
6,471 |
|
|
$ |
25,008 |
|
|
|
|
|
|
|
|
|
|
Refined product pipelines
|
|
|
12,380 |
|
|
|
14,715 |
|
|
|
27,778 |
|
|
|
|
|
|
|
|
|
|
Crude oil pipelines
|
|
|
5,379 |
|
|
|
4,499 |
|
|
|
4,612 |
|
|
|
|
|
|
|
|
|
|
Crude oil storage tanks
|
|
|
5,000 |
|
|
|
7,464 |
|
|
|
7,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$ |
26,267 |
|
|
$ |
33,149 |
|
|
$ |
64,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
12,314 |
|
|
$ |
15,148 |
|
|
$ |
61,911 |
|
|
$ |
3,581 |
|
|
$ |
27,045 |
|
|
Refined product pipelines
|
|
|
30,982 |
|
|
|
34,371 |
|
|
|
57,404 |
|
|
|
9,022 |
|
|
|
22,105 |
|
|
Crude oil pipelines
|
|
|
30,166 |
|
|
|
32,495 |
|
|
|
30,439 |
|
|
|
8,216 |
|
|
|
9,103 |
|
|
Crude oil storage tanks
|
|
|
17,112 |
|
|
|
27,331 |
|
|
|
30,493 |
|
|
|
7,399 |
|
|
|
6,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
90,574 |
|
|
|
109,345 |
|
|
|
180,247 |
|
|
|
28,218 |
|
|
|
64,527 |
|
|
General and administrative expenses
|
|
|
7,537 |
|
|
|
11,321 |
|
|
|
26,553 |
|
|
|
3,503 |
|
|
|
8,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
83,037 |
|
|
$ |
98,024 |
|
|
$ |
153,694 |
|
|
$ |
24,715 |
|
|
$ |
55,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues by geographic area are shown in the table below (in
thousands). The geographic area is based on the location of our
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
347,765 |
|
Netherlands Antilles
|
|
|
|
|
|
|
|
|
|
|
255,893 |
|
Canada
|
|
|
|
|
|
|
|
|
|
|
35,639 |
|
Other countries
|
|
|
|
|
|
|
|
|
|
|
20,260 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$ |
181,450 |
|
|
$ |
220,792 |
|
|
$ |
659,557 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2003, 2004, and 2005,
Valero Energy accounted for 98%, 99%, and 34% of our
consolidated revenues, respectively. No other single customer
accounted for more than 10% of our consolidated revenues.
Revenues from Valero Energy by operating segment were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005(a) | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined product terminals
|
|
$ |
30,790 |
|
|
$ |
39,306 |
|
|
$ |
46,382 |
|
|
$ |
9,790 |
|
|
$ |
11,019 |
|
|
Refined product pipelines
|
|
|
69,910 |
|
|
|
83,912 |
|
|
|
89,731 |
|
|
|
21,035 |
|
|
|
24,356 |
|
|
Crude oil pipelines
|
|
|
50,741 |
|
|
|
52,462 |
|
|
|
51,429 |
|
|
|
13,185 |
|
|
|
13,535 |
|
|
Crude oil storage tanks
|
|
|
27,164 |
|
|
|
41,928 |
|
|
|
46,943 |
|
|
|
11,331 |
|
|
|
11,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
178,605 |
|
|
$ |
217,608 |
|
|
$ |
234,485 |
|
|
$ |
55,341 |
|
|
$ |
60,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The amounts reflected in the table include revenues of $1,867
which are included in income from discontinued operations in the
consolidated statement of income. |
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
United States
|
|
$ |
800,491 |
|
|
$ |
1,904,154 |
|
Netherlands Antilles
|
|
|
|
|
|
|
210,756 |
|
Canada
|
|
|
|
|
|
|
83,916 |
|
Other countries
|
|
|
12,322 |
|
|
|
105,168 |
|
|
|
|
|
|
|
|
|
Consolidated long-lived assets
|
|
$ |
812,813 |
|
|
$ |
2,303,994 |
|
|
|
|
|
|
|
|
F-68
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total assets by reportable segment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Refined product terminals(a)
|
|
$ |
145,966 |
|
|
$ |
1,701,782 |
|
|
$ |
1,587,257 |
|
Refined product pipelines
|
|
|
347,008 |
|
|
|
1,286,571 |
|
|
|
1,293,179 |
|
Crude oil pipelines
|
|
|
127,668 |
|
|
|
123,698 |
|
|
|
123,320 |
|
Crude oil storage tanks
|
|
|
209,919 |
|
|
|
204,580 |
|
|
|
202,991 |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
830,561 |
|
|
|
3,316,631 |
|
|
|
3,206,747 |
|
Other partnership assets (including current assets and
other noncurrent assets)
|
|
|
26,946 |
|
|
|
50,361 |
|
|
|
116,433 |
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$ |
857,507 |
|
|
$ |
3,366,992 |
|
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Changes in the carrying amount of goodwill were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product | |
|
Refined Product | |
|
Crude Oil | |
|
|
|
|
Terminals | |
|
Pipelines | |
|
Pipelines | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
Refined product terminals
|
|
$ |
62,927 |
|
|
$ |
41,148 |
|
|
$ |
761,099 |
|
Refined product pipelines
|
|
|
176,956 |
|
|
|
12,009 |
|
|
|
748,392 |
|
Crude oil pipelines
|
|
|
2,656 |
|
|
|
3,275 |
|
|
|
561 |
|
Crude oil storage tanks
|
|
|
200,198 |
|
|
|
1,056 |
|
|
|
1,860 |
|
Other partnership assets
|
|
|
|
|
|
|
|
|
|
|
2,781 |
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
442,737 |
|
|
$ |
57,488 |
|
|
$ |
1,514,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
19. |
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
We have no operations and our assets consist mainly of our
investments in Valero Logistics, KSL and KPP. KPP is the
majority owner of KPOP. Valero Logistics and KPOP are 100%
indirectly owned by us. 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 us. In connection with the Kaneb
Acquisition, effective July 1, 2005, we 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. All guarantors are
jointly and severally liable for performance under the terms of
the guarantees.
F-69
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 years ended December 31, 2003 and 2004
and for the three months ended March 31, 2005 are not
presented as we did not own Kaneb.
Condensed Consolidating Balance Sheet
December 31, 2005
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
|
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Valero Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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 |
) |
|
|
|
|
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
|
|
$ |
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. |
F-70
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed Consolidating Balance Sheet
March 31, 2006
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
|
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Valero Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Assets |
Current assets
|
|
$ |
43 |
|
|
$ |
165,827 |
|
|
$ |
629,927 |
|
|
$ |
131,330 |
|
|
$ |
(675,898 |
) |
|
$ |
251,229 |
|
Property and equipment, net
|
|
|
|
|
|
|
784,678 |
|
|
|
684,804 |
|
|
|
687,070 |
|
|
|
|
|
|
|
2,156,552 |
|
Goodwill
|
|
|
|
|
|
|
4,715 |
|
|
|
194,509 |
|
|
|
572,262 |
|
|
|
|
|
|
|
771,486 |
|
Investment in wholly owned subsidiaries
|
|
|
2,399,920 |
|
|
|
31,691 |
|
|
|
622,813 |
|
|
|
1,293,346 |
|
|
|
(4,347,770 |
) |
|
|
|
|
Equity investments
|
|
|
|
|
|
|
15,102 |
|
|
|
|
|
|
|
58,692 |
|
|
|
|
|
|
|
73,794 |
|
Other noncurrent assets, net
|
|
|
228 |
|
|
|
9,202 |
|
|
|
722 |
|
|
|
59,967 |
|
|
|
|
|
|
|
70,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,400,191 |
|
|
$ |
1,011,215 |
|
|
$ |
2,132,775 |
|
|
$ |
2,802,667 |
|
|
$ |
(5,023,668 |
) |
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners Equity |
Current liabilities
|
|
$ |
502,644 |
|
|
$ |
36,687 |
|
|
$ |
37,634 |
|
|
$ |
243,674 |
|
|
$ |
(675,898 |
) |
|
$ |
144,741 |
|
Long-term debt, less current portion
|
|
|
|
|
|
|
601,039 |
|
|
|
550,154 |
|
|
|
36,469 |
|
|
|
|
|
|
|
1,187,662 |
|
Long-term payable to Valero Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,851 |
|
|
|
|
|
|
|
5,851 |
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,477 |
|
|
|
|
|
|
|
9,477 |
|
Other long-term liabilities
|
|
|
|
|
|
|
8,652 |
|
|
|
4,549 |
|
|
|
63,768 |
|
|
|
|
|
|
|
76,969 |
|
Total partners equity
|
|
|
1,897,547 |
|
|
|
364,837 |
|
|
|
1,540,438 |
|
|
|
2,443,428 |
|
|
|
(4,347,770 |
) |
|
|
1,898,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity
|
|
$ |
2,400,191 |
|
|
$ |
1,011,215 |
|
|
$ |
2,132,775 |
|
|
$ |
2,802,667 |
|
|
$ |
(5,023,668 |
) |
|
$ |
3,323,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
F-71
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed Consolidating Statements of Income
For the Year Ended December 31, 2005
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
Valero | |
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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. |
Condensed Consolidating Statements of Income
For the Three Months Ended March 31, 2006
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
|
|
|
$ |
60,683 |
|
|
$ |
27,200 |
|
|
$ |
186,371 |
|
|
$ |
(250 |
) |
|
$ |
274,004 |
|
Costs and expenses
|
|
|
450 |
|
|
|
33,398 |
|
|
|
19,729 |
|
|
|
164,710 |
|
|
|
(250 |
) |
|
|
218,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(450 |
) |
|
|
27,285 |
|
|
|
7,471 |
|
|
|
21,661 |
|
|
|
|
|
|
|
55,967 |
|
Equity earnings
|
|
|
39,901 |
|
|
|
301 |
|
|
|
19,339 |
|
|
|
21,213 |
|
|
|
(79,548 |
) |
|
|
1,206 |
|
Interest and other expense, net
|
|
|
|
|
|
|
(7,630 |
) |
|
|
(7,014 |
) |
|
|
(821 |
) |
|
|
|
|
|
|
(15,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense
|
|
|
39,451 |
|
|
|
19,956 |
|
|
|
19,796 |
|
|
|
42,053 |
|
|
|
(79,548 |
) |
|
|
41,708 |
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,119 |
|
|
|
|
|
|
|
2,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
39,451 |
|
|
|
19,956 |
|
|
|
19,796 |
|
|
|
39,934 |
|
|
|
(79,548 |
) |
|
|
39,589 |
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
(436 |
) |
|
|
|
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
39,451 |
|
|
$ |
19,956 |
|
|
$ |
20,094 |
|
|
$ |
39,498 |
|
|
$ |
(79,548 |
) |
|
$ |
39,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
F-72
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2005
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
|
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
Valero L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(47,568 |
) |
|
|
(3,492 |
) |
|
|
(17,026 |
) |
|
|
|
|
|
|
(68,086 |
) |
|
Kaneb Acquisition
|
|
|
(522,456 |
) |
|
|
|
|
|
|
850 |
|
|
|
20,633 |
|
|
|
|
|
|
|
(500,973 |
) |
|
Proceeds from sale of assets
|
|
|
|
|
|
|
|
|
|
|
85,466 |
|
|
|
395,479 |
|
|
|
|
|
|
|
480,945 |
|
|
Other
|
|
|
|
|
|
|
(3,377 |
) |
|
|
|
|
|
|
(1,472 |
) |
|
|
3,963 |
|
|
|
(886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities
|
|
|
(522,456 |
) |
|
|
(50,945 |
) |
|
|
82,824 |
|
|
|
397,614 |
|
|
|
3,963 |
|
|
|
(89,000 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(127,789 |
) |
|
|
(127,789 |
) |
|
|
|
|
|
|
|
|
|
|
127,789 |
|
|
|
(127,789 |
) |
|
Long-term borrowings
|
|
|
|
|
|
|
746,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
746,472 |
|
|
Long-term debt repayments
|
|
|
|
|
|
|
(548,010 |
) |
|
|
(123,668 |
) |
|
|
(63,386 |
) |
|
|
|
|
|
|
(735,064 |
) |
|
General partner contributions
|
|
|
29,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,197 |
|
|
Net intercompany borrowings (repayment)
|
|
|
491,737 |
|
|
|
(163,529 |
) |
|
|
23,317 |
|
|
|
(351,525 |
) |
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
8,346 |
|
|
|
|
|
|
|
5,623 |
|
|
|
(3,963 |
) |
|
|
10,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) 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-73
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2006
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kaneb | |
|
|
|
|
|
|
|
|
|
|
Valero | |
|
Pipe Line | |
|
|
|
|
|
|
|
|
|
|
Logistics | |
|
Operating | |
|
Non- | |
|
|
|
|
|
|
Valero | |
|
Operations, | |
|
Partnership | |
|
Guarantor | |
|
|
|
Valero L.P. | |
|
|
L.P. | |
|
L.P. | |
|
L.P. | |
|
Subsidiaries(a) | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
39,451 |
|
|
$ |
19,956 |
|
|
$ |
20,094 |
|
|
$ |
39,498 |
|
|
$ |
(79,548 |
) |
|
$ |
39,451 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
8,938 |
|
|
|
6,045 |
|
|
|
9,206 |
|
|
|
|
|
|
|
24,189 |
|
|
|
Equity income, net of distributions
|
|
|
4,049 |
|
|
|
(286 |
) |
|
|
(19,339 |
) |
|
|
(20,017 |
) |
|
|
35,593 |
|
|
|
|
|
|
|
Changes in operating assets and liabilities and other
|
|
|
(2,521 |
) |
|
|
(10,292 |
) |
|
|
(7,156 |
) |
|
|
13,381 |
|
|
|
|
|
|
|
(6,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
40,979 |
|
|
|
18,316 |
|
|
|
(356 |
) |
|
|
42,068 |
|
|
|
(43,955 |
) |
|
|
57,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(9,516 |
) |
|
|
(611 |
) |
|
|
(5,465 |
) |
|
|
|
|
|
|
(15,592 |
) |
|
Other acquisition
|
|
|
|
|
|
|
(12,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,827 |
) |
|
Proceeds from sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,628 |
|
|
|
|
|
|
|
68,628 |
|
|
Other
|
|
|
(77 |
) |
|
|
(1,654 |
) |
|
|
4,211 |
|
|
|
(4,413 |
) |
|
|
1,659 |
|
|
|
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities
|
|
|
(77 |
) |
|
|
(23,997 |
) |
|
|
3,600 |
|
|
|
58,750 |
|
|
|
1,659 |
|
|
|
39,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(43,950 |
) |
|
|
(43,950 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
43,955 |
|
|
|
(43,950 |
) |
|
Long-term borrowings
|
|
|
|
|
|
|
34,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,000 |
|
|
Long-term debt repayments
|
|
|
|
|
|
|
(11,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,480 |
) |
|
Net intercompany borrowings (repayments)
|
|
|
3,048 |
|
|
|
91,657 |
|
|
|
(3,031 |
) |
|
|
(91,674 |
) |
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(3,060 |
) |
|
|
(221 |
) |
|
|
667 |
|
|
|
(1,659 |
) |
|
|
(4,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities
|
|
|
(40,902 |
) |
|
|
67,167 |
|
|
|
(3,252 |
) |
|
|
(91,012 |
) |
|
|
42,296 |
|
|
|
(25,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,905 |
) |
|
|
|
|
|
|
(1,905 |
) |
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
61,486 |
|
|
|
(8 |
) |
|
|
7,901 |
|
|
|
|
|
|
|
69,379 |
|
Cash and cash equivalents at the beginning of the period
|
|
|
10 |
|
|
|
1,590 |
|
|
|
114 |
|
|
|
34,340 |
|
|
|
|
|
|
|
36,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
10 |
|
|
$ |
63,076 |
|
|
$ |
106 |
|
|
$ |
42,241 |
|
|
$ |
|
|
|
$ |
105,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Non-guarantor subsidiaries are wholly owned by Valero L.P.,
Valero Logistics or KPOP. |
F-74
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) | |
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 |
|
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 |
|
|
|
|
(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-75
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, 2003 and 2004, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2004. 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, 2003 and 2004,
and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2004,
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-76
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Year Ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
288,669 |
|
|
$ |
354,591 |
|
|
$ |
379,155 |
|
|
$ |
184,756 |
|
|
$ |
201,405 |
|
|
Products
|
|
|
381,159 |
|
|
|
511,200 |
|
|
|
676,093 |
|
|
|
302,625 |
|
|
|
424,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
669,828 |
|
|
|
865,791 |
|
|
|
1,055,248 |
|
|
|
487,381 |
|
|
|
626,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
367,870 |
|
|
|
486,310 |
|
|
|
647,733 |
|
|
|
289,795 |
|
|
|
405,165 |
|
|
Operating costs
|
|
|
132,269 |
|
|
|
169,380 |
|
|
|
177,829 |
|
|
|
86,795 |
|
|
|
104,731 |
|
|
Depreciation and amortization
|
|
|
39,471 |
|
|
|
53,195 |
|
|
|
56,676 |
|
|
|
27,645 |
|
|
|
29,501 |
|
|
Gain on sale of assets
|
|
|
(609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
24,468 |
|
|
|
28,402 |
|
|
|
36,231 |
|
|
|
13,697 |
|
|
|
40,897 |
|
|
Provision for loss contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
563,469 |
|
|
|
737,287 |
|
|
|
918,469 |
|
|
|
417,932 |
|
|
|
622,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
106,359 |
|
|
|
128,504 |
|
|
|
136,779 |
|
|
|
69,449 |
|
|
|
3,927 |
|
Interest and other income
|
|
|
3,664 |
|
|
|
365 |
|
|
|
336 |
|
|
|
93 |
|
|
|
313 |
|
Interest expense
|
|
|
(29,171 |
) |
|
|
(39,576 |
) |
|
|
(43,579 |
) |
|
|
(21,349 |
) |
|
|
(23,984 |
) |
Loss on debt extinguishment
|
|
|
(3,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain on issuance of units by KPP, income
taxes, interest of outside non-controlling partners in
KPPs net (income) loss and cumulative effect of change in
accounting principle
|
|
|
77,570 |
|
|
|
89,293 |
|
|
|
93,536 |
|
|
|
48,193 |
|
|
|
(19,744 |
) |
Gain on issuance of units by KPP
|
|
|
24,882 |
|
|
|
10,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(2,585 |
) |
|
|
(4,887 |
) |
|
|
(3,251 |
) |
|
|
(1,769 |
) |
|
|
12,778 |
|
Interest of outside non-controlling partners in KPPs net
(income) loss
|
|
|
(52,639 |
) |
|
|
(61,908 |
) |
|
|
(65,933 |
) |
|
|
(33,034 |
) |
|
|
2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
47,228 |
|
|
|
33,396 |
|
|
|
24,352 |
|
|
|
13,390 |
|
|
|
(4,808 |
) |
Cumulative effect of change in accounting principle
adoption of new accounting standard for asset retirement
obligations
|
|
|
|
|
|
|
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
47,228 |
|
|
$ |
33,083 |
|
|
$ |
24,352 |
|
|
$ |
13,390 |
|
|
$ |
(4,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$ |
4.13 |
|
|
$ |
2.89 |
|
|
$ |
2.07 |
|
|
$ |
1.15 |
|
|
$ |
(.41 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.13 |
|
|
$ |
2.86 |
|
|
$ |
2.07 |
|
|
$ |
1.15 |
|
|
$ |
(.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$ |
4.02 |
|
|
$ |
2.84 |
|
|
$ |
2.03 |
|
|
$ |
1.12 |
|
|
$ |
(.41 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.02 |
|
|
$ |
2.81 |
|
|
$ |
2.03 |
|
|
$ |
1.12 |
|
|
$ |
(.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-77
KANEB SERVICES LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
| |
|
June 30, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
43,457 |
|
|
$ |
38,415 |
|
|
$ |
17,291 |
|
|
Accounts receivable (net of allowance for doubtful accounts of
$3,777 in 2003, $2,255 in 2004 and $2,264 in 2005)
|
|
|
60,684 |
|
|
|
85,976 |
|
|
|
88,090 |
|
|
Inventories
|
|
|
18,637 |
|
|
|
25,448 |
|
|
|
26,318 |
|
|
Prepaid expenses and other
|
|
|
9,650 |
|
|
|
12,614 |
|
|
|
20,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
132,428 |
|
|
|
162,453 |
|
|
|
152,258 |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
1,360,523 |
|
|
|
1,451,176 |
|
|
|
1,468,873 |
|
Less accumulated depreciation
|
|
|
247,503 |
|
|
|
302,564 |
|
|
|
329,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
1,113,020 |
|
|
|
1,148,612 |
|
|
|
1,139,521 |
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliates
|
|
|
25,456 |
|
|
|
25,939 |
|
|
|
26,828 |
|
Excess of cost over fair value of net assets of acquired
businesses and other assets
|
|
|
20,663 |
|
|
|
19,884 |
|
|
|
18,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,291,567 |
|
|
$ |
1,356,888 |
|
|
$ |
1,336,920 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
195,984 |
|
|
Accounts payable
|
|
|
36,916 |
|
|
|
54,280 |
|
|
|
45,145 |
|
|
Accrued expenses
|
|
|
39,307 |
|
|
|
38,142 |
|
|
|
40,156 |
|
|
Accrued interest payable
|
|
|
9,303 |
|
|
|
9,374 |
|
|
|
8,928 |
|
|
Accrued distributions payable to shareholders
|
|
|
5,567 |
|
|
|
5,801 |
|
|
|
|
|
|
Accrued distributions payable to outside non-controlling
partners in KPPs net income
|
|
|
19,507 |
|
|
|
19,863 |
|
|
|
|
|
|
Deferred terminalling fees
|
|
|
7,061 |
|
|
|
8,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
117,661 |
|
|
|
136,311 |
|
|
|
290,213 |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
636,308 |
|
|
|
688,985 |
|
|
|
528,723 |
|
Other liabilities and deferred taxes
|
|
|
52,242 |
|
|
|
53,520 |
|
|
|
76,086 |
|
Interest of outside non-controlling partners in KPP
|
|
|
407,635 |
|
|
|
397,717 |
|
|
|
373,333 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders investment
|
|
|
75,291 |
|
|
|
77,136 |
|
|
|
65,924 |
|
|
Accumulated other comprehensive income
|
|
|
2,430 |
|
|
|
3,219 |
|
|
|
2,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
77,721 |
|
|
|
80,355 |
|
|
|
68,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
1,291,567 |
|
|
$ |
1,356,888 |
|
|
$ |
1,336,920 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-78
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
Year Ended December 31, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(unaudited) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
47,228 |
|
|
$ |
33,083 |
|
|
$ |
24,352 |
|
|
$ |
13,390 |
|
|
$ |
(4,808 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,471 |
|
|
|
53,195 |
|
|
|
56,676 |
|
|
|
27,645 |
|
|
|
29,501 |
|
|
|
Provision for loss contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,000 |
|
|
|
Equity in earnings of affiliates, net of distributions
|
|
|
(3,164 |
) |
|
|
148 |
|
|
|
(483 |
) |
|
|
(497 |
) |
|
|
(889 |
) |
|
|
Interest of outside non-controlling partners in KPPs net
income
|
|
|
52,639 |
|
|
|
61,908 |
|
|
|
65,933 |
|
|
|
33,034 |
|
|
|
(2,158 |
) |
|
|
Gain on issuance of units by KPP
|
|
|
(24,882 |
) |
|
|
(10,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
(609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
3,105 |
|
|
|
1,683 |
|
|
|
(671 |
) |
|
|
(230 |
) |
|
|
(14,449 |
) |
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(559 |
) |
|
|
1,468 |
|
|
|
(1,191 |
) |
|
|
(792 |
) |
|
|
1,334 |
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(16,403 |
) |
|
|
1,151 |
|
|
|
(25,292 |
) |
|
|
(14,107 |
) |
|
|
(2,114 |
) |
|
|
|
Inventories, prepaid expenses and other
|
|
|
(7,643 |
) |
|
|
(4,766 |
) |
|
|
(9,775 |
) |
|
|
(8,780 |
) |
|
|
(7,620 |
) |
|
|
|
Accounts payable and accrued expenses
|
|
|
(165 |
) |
|
|
7,639 |
|
|
|
17,135 |
|
|
|
15,270 |
|
|
|
(18,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
89,018 |
|
|
|
144,924 |
|
|
|
126,684 |
|
|
|
64,933 |
|
|
|
21,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(468,477 |
) |
|
|
(1,644 |
) |
|
|
(41,853 |
) |
|
|
(12,478 |
) |
|
|
(10,034 |
) |
|
Capital expenditures
|
|
|
(31,101 |
) |
|
|
(44,747 |
) |
|
|
(42,214 |
) |
|
|
(17,340 |
) |
|
|
(22,030 |
) |
|
Proceeds from sale of assets
|
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
361 |
|
|
|
(1,388 |
) |
|
|
2,684 |
|
|
|
(722 |
) |
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(498,110 |
) |
|
|
(47,779 |
) |
|
|
(81,383 |
) |
|
|
(30,540 |
) |
|
|
(31,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt
|
|
|
756,087 |
|
|
|
291,377 |
|
|
|
52,001 |
|
|
|
17,923 |
|
|
|
39,690 |
|
|
Payments of debt
|
|
|
(427,493 |
) |
|
|
(388,051 |
) |
|
|
(2,500 |
) |
|
|
(2,000 |
) |
|
|
|
|
|
Distributions to shareholders
|
|
|
(18,351 |
) |
|
|
(20,473 |
) |
|
|
(22,860 |
) |
|
|
(11,134 |
) |
|
|
(11,724 |
) |
|
Distributions to outside non-controlling partners in KPP
|
|
|
(52,827 |
) |
|
|
(73,004 |
) |
|
|
(78,732 |
) |
|
|
(39,014 |
) |
|
|
(39,727 |
) |
|
Changes in long-term payables and other liabilities
|
|
|
(10,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of units by KPP
|
|
|
175,527 |
|
|
|
109,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
648 |
|
|
|
164 |
|
|
|
111 |
|
|
|
87 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
423,565 |
|
|
|
(80,931 |
) |
|
|
(51,980 |
) |
|
|
(34,138 |
) |
|
|
(11,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
2,766 |
|
|
|
1,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
14,473 |
|
|
|
18,980 |
|
|
|
(5,042 |
) |
|
|
255 |
|
|
|
(21,124 |
) |
Cash and cash equivalents at beginning of period
|
|
|
10,004 |
|
|
|
24,477 |
|
|
|
43,457 |
|
|
|
43,457 |
|
|
|
38,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
24,477 |
|
|
$ |
43,457 |
|
|
$ |
38,415 |
|
|
$ |
43,712 |
|
|
$ |
17,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information cash paid for
interest
|
|
$ |
27,070 |
|
|
$ |
35,712 |
|
|
$ |
42,122 |
|
|
$ |
20,899 |
|
|
$ |
22,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-79
KANEB SERVICES LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Shareholders | |
|
Comprehensive | |
|
|
|
Comprehensive | |
|
|
Investment | |
|
Income | |
|
Total | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
Balance at January 1, 2002
|
|
$ |
34,428 |
|
|
$ |
(496 |
) |
|
$ |
33,932 |
|
|
|
|
|
|
Net income for the year
|
|
|
47,228 |
|
|
|
|
|
|
|
47,228 |
|
|
$ |
47,228 |
|
|
Distributions declared
|
|
|
(18,954 |
) |
|
|
|
|
|
|
(18,954 |
) |
|
|
|
|
|
Issuance of common shares and other
|
|
|
648 |
|
|
|
|
|
|
|
648 |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
800 |
|
|
|
800 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
63,350 |
|
|
|
304 |
|
|
|
63,654 |
|
|
|
|
|
|
Net income for the year
|
|
|
33,083 |
|
|
|
|
|
|
|
33,083 |
|
|
$ |
33,083 |
|
|
Distributions declared
|
|
|
(21,306 |
) |
|
|
|
|
|
|
(21,306 |
) |
|
|
|
|
|
Issuance of common shares and other
|
|
|
164 |
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
2,457 |
|
|
|
2,457 |
|
|
|
2,457 |
|
|
Interest rate hedging transaction
|
|
|
|
|
|
|
(331 |
) |
|
|
(331 |
) |
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
75,291 |
|
|
|
2,430 |
|
|
|
77,721 |
|
|
|
|
|
|
Net income for the year
|
|
|
24,352 |
|
|
|
|
|
|
|
24,352 |
|
|
$ |
24,352 |
|
|
Distributions declared
|
|
|
(23,094 |
) |
|
|
|
|
|
|
(23,094 |
) |
|
|
|
|
|
Issuance of common shares and other
|
|
|
587 |
|
|
|
|
|
|
|
587 |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
753 |
|
|
|
753 |
|
|
|
753 |
|
|
Interest rate hedging transaction
|
|
|
|
|
|
|
36 |
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
77,136 |
|
|
|
3,219 |
|
|
|
80,355 |
|
|
|
|
|
|
Net loss for the six months
|
|
|
(4,808 |
) |
|
|
|
|
|
|
(4,808 |
) |
|
$ |
(4,808 |
) |
|
Distributions declared
|
|
|
(5,923 |
) |
|
|
|
|
|
|
(5,923 |
) |
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(596 |
) |
|
|
(596 |
) |
|
|
(596 |
) |
|
Interest rate hedging transaction
|
|
|
|
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
Other
|
|
|
(481 |
) |
|
|
|
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the six months (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 (unaudited)
|
|
$ |
65,924 |
|
|
$ |
2,641 |
|
|
$ |
68,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-80
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% 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 consolidated financial statements reflect the results of
operations of the Company, its wholly owned subsidiaries and
KPP. The Company controls the operations of KPP through its 2%
general partner interest and
F-81
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
18% limited partner interest in KPP as of June 30, 2005.
All significant intercompany transactions and balances have been
eliminated.
All information as of June 30, 2005 and for the six-month
periods ended June 30, 2004 and 2005 is unaudited. The
unaudited condensed consolidated financial statements of the
Company for the six-month periods ended June 30, 2004 and
2005, have been prepared in accordance with accounting
principles generally accepted in the United States of America.
In the opinion of the Companys management, the
accompanying interim 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 six-months ended June 30,
2004 and 2005.
The following significant accounting policies are followed by
the Company in the preparation of the consolidated financial
statements.
|
|
|
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
F-82
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
F-83
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2002, 2003 and
2004. In 2003 and 2004, accretion expense of $0.4 million
and $0.2 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 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 $6.3 million, $18.9 million and
$18.4 million for the years ended December 31, 2002,
2003 and 2004, respectively. The income tax expense for
KPPs taxable subsidiaries for the years ended
December 31, 2002, 2003, and 2004 was $4.1 million,
$5.2 million and $3.3 million, respectively. KPP has
recorded a net deferred tax liability of $20.6 million and
$21.5 million at December 2003 and 2004, 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, which was acquired with Statia on February 28, 2002
(see Note 5), 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.
Prior to the acquisition by Valero L.P., as discussed in
Note 2, the Company made 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 consisted 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 was used to reduce working capital borrowings.
Distributions of $1.65, $1.825 and $1.96 per share were
declared and paid to shareholders with respect to the years
ended December 31, 2002, 2003 and 2004, respectively.
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
F-84
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
Earnings (Loss) Per Share |
Earnings (loss) 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, 2002,
2003 and 2004, basic weighted average shares outstanding were
11,448,000, 11,554,000 and 11,746,000 and diluted weighted
average shares outstanding were 11,755,000, 11,792,000 and
11,981,000, respectively. For the six-month periods ended
June 30, 2004 and 2005, basic weighted average shares
outstanding were 11,680,000 and 11,871,000 and diluted weighted
average shares outstanding were 11,907,000 and 11,871,000,
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 7). In connection with the offering, on May 8,
2003, KPP entered into a treasury lock contract for the 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, 2003 and 2004, $0.1 million and
$0.2 million, respectively, of amortization is included in
interest expense.
In September of 2002, KPP entered into a treasury lock contract,
maturing on November 4, 2002, for the purpose of locking in
the U.S. Treasury interest rate component on
$150 million of anticipated thirty-year public debt
offerings. The treasury lock contract originally qualified as a
cash flow hedging instrument under SFAS No. 133. In October
of 2002, KPP, due to various market factors, elected to defer
issuance of the public debt securities, effectively eliminating
the cash flow hedging designation for the treasury lock
contract. On October 29, 2002, the contract was settled
resulting in a net realized gain of $3.0 million, before
interest of outside non-controlling partners in KPPs net
income, which was recognized as a component of interest and
other income.
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.
F-85
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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%.
The following illustrates the effect on net income and basic and
diluted earnings per share if the fair value based method had
been applied (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Reported net income
|
|
$ |
47,228 |
|
|
$ |
33,083 |
|
|
$ |
24,352 |
|
Share-based employee compensation expense determined under the
fair value based method
|
|
|
(49 |
) |
|
|
(85 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
47,179 |
|
|
$ |
32,998 |
|
|
$ |
24,174 |
|
|
|
|
|
|
|
|
|
|
|
Earning per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
4.13 |
|
|
$ |
2.86 |
|
|
$ |
2.07 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
4.03 |
|
|
$ |
2.86 |
|
|
$ |
2.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
4.02 |
|
|
$ |
2.81 |
|
|
$ |
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
3.92 |
|
|
$ |
2.80 |
|
|
$ |
2.02 |
|
|
|
|
|
|
|
|
|
|
|
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.
F-86
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
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.
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.
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.
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
F-87
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
4. |
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 6). 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.
In November of 2002, KPP issued 2,095,000 limited partnership
units in a public offering at $33.36 per unit, generating
approximately $66.7 million in net proceeds. The offering
proceeds were used to reduce KPP bank borrowings for the
November 2002 fertilizer pipeline acquisition (see Notes 4
and 6). As a result of KPP issuing additional units to unrelated
parties, the Companys share of net assets of KPP increased
by $7.5 million. Accordingly, the Company recognized a
$7.5 million gain in 2002.
In May of 2002, KPP issued 1,565,000 limited partnership units
in a public offering at a price of $39.60 per unit, generating
approximately $59.1 million in net proceeds. A portion of
the offering proceeds were used to fund KPPs September
2002 acquisition of the Australia and New Zealand terminals (see
Note 5). As a result of KPP issuing additional units to
unrelated parties, the Companys share of net assets of KPP
increased by $8.8 million. Accordingly, the Company
recognized an $8.8 million gain in 2002.
In January of 2002, KPP issued 1,250,000 limited partnership
units in a public offering at $41.65 per unit, generating
approximately $49.7 million in net proceeds. The proceeds
were used to reduce borrowings under KPPs revolving credit
agreement (see Note 7). As a result of KPP issuing
additional units to unrelated parties, the Companys share
of net assets of KPP increased by $8.6 million.
Accordingly, the Company recognized an $8.6 million gain in
2002.
5. ACQUISITIONS
On December 24, 2002, KPP acquired a 400-mile petroleum
products pipeline and four terminals in North Dakota and
Minnesota from Tesoro Refining and Marketing Company for
approximately $100 million in cash, subject to normal
post-closing adjustments. The acquisition was initially funded
with KPP bank debt (see Note 7). The results of operations
and cash flows of the acquired business are included in the
consolidated financial statements of the Company since the date
of acquisition. Based on the evaluations performed, no amounts
were assigned to goodwill or to other intangible assets in the
purchase price allocation.
On November 1, 2002, KPP acquired an approximately
2,000-mile anhydrous ammonia pipeline system from Koch Pipeline
Company, L.P. for approximately $139 million in cash. This
fertilizer pipeline system originates in southern Louisiana,
proceeds north through Arkansas and Missouri, and then branches
east into Illinois and Indiana and north and west into Iowa and
Nebraska. The acquisition was initially funded with KPP bank
debt (see Note 7). The results of operations and cash flows
of the acquired business are included in the
F-88
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated financial statements of the Company since the date
of acquisition. Based on the evaluations performed, no amounts
were assigned to goodwill or to other intangible assets in the
purchase price allocation.
On September 18, 2002, KPP acquired eight bulk liquid
storage terminals in Australia and New Zealand from Burns Philp
& Co. Ltd. for approximately $47 million in cash. The
results of operations and cash flows of the acquired business
are included in the consolidated financial statements of the
Company since the date of acquisition. Based on the evaluations
performed, no amounts were assigned to goodwill or to other
intangible assets in the purchase price allocation.
On February 28, 2002, KPP acquired all of the liquids
terminalling subsidiaries of Statia Terminals Group NV
(Statia) for approximately $178 million in cash
(net of acquired cash). The acquired Statia subsidiaries had
approximately $107 million in outstanding debt, including
$101 million of 11.75% notes due in November 2003. The cash
portion of the purchase price was initially funded by KPPs
revolving credit agreement and proceeds from KPPs February
2002 public debt offering (see Note 7). In April of 2002,
KPP redeemed all of Statias 11.75% notes at 102.938% of
the principal amount, plus accrued interest. The redemption was
funded by KPPs revolving credit facility (see
Note 7). Under the provisions of the 11.75% notes, the
Company incurred a $3.0 million prepayment penalty, of
which $2.0 million, before interest of outside
non-controlling partners in KPPs net income, was
recognized as loss on debt extinguishment in 2002.
The results of operations and cash flows of Statia are included
in the consolidated financial statements of the Company since
the date of acquisition. Based on the valuations performed, no
amounts were assigned to goodwill or to other tangible assets. A
summary of the allocation of the Statia purchase price, net of
cash acquired, is as follows (in thousands):
|
|
|
|
|
|
Current assets
|
|
$ |
10,898 |
|
Property and equipment
|
|
|
320,008 |
|
Other assets
|
|
|
53 |
|
Current liabilities
|
|
|
(39,052 |
) |
Long-term debt
|
|
|
(107,746 |
) |
Other liabilities
|
|
|
(5,957 |
) |
|
|
|
|
|
Purchase price
|
|
$ |
178,204 |
|
|
|
|
|
|
|
6. |
PROPERTY AND EQUIPMENT |
The cost of property and equipment is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
December 31, | |
|
|
useful | |
|
| |
|
|
life (years) | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Land
|
|
|
|
|
|
$ |
75,912 |
|
|
$ |
84,893 |
|
Buildings
|
|
|
25 35 |
|
|
|
36,244 |
|
|
|
39,077 |
|
Pipeline and terminalling equipment
|
|
|
15 40 |
|
|
|
1,115,458 |
|
|
|
1,187,323 |
|
Marine equipment
|
|
|
15 30 |
|
|
|
87,204 |
|
|
|
87,937 |
|
Furniture and fixtures
|
|
|
5 15 |
|
|
|
11,577 |
|
|
|
15,390 |
|
Transportation equipment
|
|
|
3 6 |
|
|
|
7,360 |
|
|
|
7,790 |
|
Construction and work-in-progress
|
|
|
|
|
|
|
26,768 |
|
|
|
28,766 |
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
|
1,360,523 |
|
|
|
1,451,176 |
|
Less accumulated depreciation
|
|
|
|
|
|
|
247,503 |
|
|
|
302,564 |
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
|
|
|
$ |
1,113,020 |
|
|
$ |
1,148,612 |
|
|
|
|
|
|
|
|
|
|
|
F-89
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term debt is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2004 | |
|
|
| |
|
| |
Revolving credit facility, due in July of 2008
|
|
$ |
16,500 |
|
|
$ |
14,000 |
|
Revolving credit facility of subsidiary, due in April of 2007
|
|
|
2,112 |
|
|
|
3,033 |
|
KPP $400 million revolving credit facility, due in April of
2006
|
|
|
54,169 |
|
|
|
95,669 |
|
KPP $250 million 5.875% senior unsecured notes, due in
June of 2013
|
|
|
250,000 |
|
|
|
250,000 |
|
KPP $250 million 7.75% senior unsecured notes, due in
February of 2012
|
|
|
250,000 |
|
|
|
250,000 |
|
KPP term loans, due in April of 2006
|
|
|
29,243 |
|
|
|
40,770 |
|
KPP Australian bank facility, due in April of 2006
|
|
|
34,284 |
|
|
|
35,513 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
636,308 |
|
|
$ |
688,985 |
|
|
|
|
|
|
|
|
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 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.
F-90
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $1.2 million,
$1.6 million and $1.6 million for 2002, 2003 and 2004,
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 |
|
Common shares issued
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
|
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-91
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, 2002, options on 701,286 shares at prices
ranging from $3.27 to $19.73 were outstanding, of which 412,836
were exercisable at prices ranging from $3.27 to $14.33. 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. 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.
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-92
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 $0.2 million in 2002,
$0.1 million in 2003 and $0.5 million in 2004.
|
|
10. |
COMMITMENTS AND CONTINGENCIES |
Total rent expense under operating leases amounted to
$9.5 million, $14.6 million and $13.5 million for
the years ended December 31, 2002, 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 (in thousands):
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2005
|
|
$ |
9,822 |
|
|
2006
|
|
|
8,593 |
|
|
2007
|
|
|
6,238 |
|
|
2008
|
|
|
5,338 |
|
|
2009
|
|
|
4,058 |
|
|
Thereafter
|
|
|
18,140 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
52,189 |
|
|
|
|
|
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 2002, 2003 and 2004, respectively, KPP
incurred $2.4 million, $2.1 million and
$6.7 million of costs related to such acquisition reserves
and reduced the liability accordingly.
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. KPP
records accruals for loss contingencies when losses are
considered probable and can be reasonably estimated. Subsequent
to the acquisition of the Company by Valero L.P., new management
of the Company conducted its own assessment of the matters
discussed below, including the procedural postures of various
litigation matters. Based upon such informed and comprehensive
analysis of available information, management concluded that
certain loss contingencies were probable rather than reasonably
possible, as prior management had concluded. Therefore, pursuant
to Statement of Financial Accounting Standards No. 5,
Accounting for Loss Contingencies, 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. 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
F-93
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
F-94
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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
F-95
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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
F-96
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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.
F-97
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
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.
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.
|
|
11. |
BUSINESS SEGMENT DATA |
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Business segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
82,698 |
|
|
$ |
119,633 |
|
|
$ |
119,803 |
|
|
$ |
58,513 |
|
|
$ |
62,798 |
|
|
Terminalling operations
|
|
|
205,971 |
|
|
|
234,958 |
|
|
|
259,352 |
|
|
|
126,243 |
|
|
|
138,607 |
|
|
Product marketing operations
|
|
|
381,159 |
|
|
|
511,200 |
|
|
|
676,093 |
|
|
|
302,625 |
|
|
|
424,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
669,828 |
|
|
$ |
865,791 |
|
|
$ |
1,055,248 |
|
|
$ |
487,381 |
|
|
$ |
626,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
38,623 |
|
|
$ |
51,860 |
|
|
$ |
48,853 |
|
|
$ |
23,234 |
|
|
$ |
18,969 |
|
|
Terminalling operations
|
|
|
65,040 |
|
|
|
66,532 |
|
|
|
74,663 |
|
|
|
39,360 |
|
|
|
(17,533 |
) |
|
Product marketing operations
|
|
|
4,692 |
|
|
|
12,233 |
|
|
|
17,262 |
|
|
|
7,910 |
|
|
|
11,370 |
|
|
General corporate
|
|
|
(1,996 |
) |
|
|
(2,121 |
) |
|
|
(3,999 |
) |
|
|
(1,055 |
) |
|
|
(8,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
106,359 |
|
|
|
128,504 |
|
|
|
136,779 |
|
|
|
69,449 |
|
|
|
3,927 |
|
|
Interest and other income
|
|
|
3,664 |
|
|
|
365 |
|
|
|
336 |
|
|
|
93 |
|
|
|
313 |
|
F-98
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
Interest expense
|
|
|
(29,171 |
) |
|
|
(39,576 |
) |
|
|
(43,579 |
) |
|
|
(21,349 |
) |
|
|
(23,984 |
) |
|
Loss on debt extinguishment
|
|
|
(3,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain on issuance of units by KPP, income
taxes, interest of outside non-controlling partners in
KPPs net income (loss) and cumulative effect of change in
accounting principle
|
|
$ |
77,570 |
|
|
$ |
89,293 |
|
|
$ |
93,536 |
|
|
$ |
48,193 |
|
|
$ |
(19,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
6,408 |
|
|
$ |
14,117 |
|
|
$ |
14,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Terminalling operations
|
|
|
32,368 |
|
|
|
38,089 |
|
|
|
41,232 |
|
|
|
|
|
|
|
|
|
Product marketing operations
|
|
|
695 |
|
|
|
989 |
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,471 |
|
|
$ |
53,195 |
|
|
$ |
56,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
Capital expenditures (excluding acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
9,469 |
|
|
$ |
9,584 |
|
|
$ |
10,334 |
|
|
|
|
|
|
|
|
|
|
Terminalling operations
|
|
|
20,953 |
|
|
|
34,572 |
|
|
|
29,511 |
|
|
|
|
|
|
|
|
|
|
Product marketing operations
|
|
|
679 |
|
|
|
591 |
|
|
|
2,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,101 |
|
|
$ |
44,747 |
|
|
$ |
42,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
June 30, | |
|
|
|
|
| |
|
| |
|
|
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline operations
|
|
$ |
352,657 |
|
|
$ |
352,901 |
|
|
$ |
351,195 |
|
|
$ |
346,580 |
|
|
|
|
|
|
Terminalling operations
|
|
|
844,321 |
|
|
|
874,185 |
|
|
|
917,966 |
|
|
|
886,805 |
|
|
|
|
|
|
Product marketing operations
|
|
|
41,297 |
|
|
|
58,161 |
|
|
|
83,404 |
|
|
|
100,092 |
|
|
|
|
|
|
General corporate
|
|
|
5,826 |
|
|
|
6,320 |
|
|
|
4,323 |
|
|
|
3,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,244,101 |
|
|
$ |
1,291,567 |
|
|
$ |
1,356,888 |
|
|
$ |
1,336,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The business segment profit (loss) of the terminalling
operations segment includes the $42 million provision for
loss contingencies (see Note 10) and a $4 million loss
due to an impairment of a terminal in the U.K. during the six
months ended June 30, 2005.
F-99
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 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Geographical area revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
485,322 |
|
|
$ |
535,895 |
|
|
$ |
658,814 |
|
|
United Kingdom
|
|
|
23,937 |
|
|
|
26,392 |
|
|
|
29,540 |
|
|
Netherlands Antilles
|
|
|
132,387 |
|
|
|
241,693 |
|
|
|
298,273 |
|
|
Canada
|
|
|
23,207 |
|
|
|
41,689 |
|
|
|
43,671 |
|
|
Australia and New Zealand
|
|
|
4,975 |
|
|
|
20,122 |
|
|
|
24,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
669,828 |
|
|
$ |
865,791 |
|
|
$ |
1,055,248 |
|
|
|
|
|
|
|
|
|
|
|
Geographical area operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
83,544 |
|
|
$ |
87,965 |
|
|
$ |
93,954 |
|
|
United Kingdom
|
|
|
7,318 |
|
|
|
8,583 |
|
|
|
7,704 |
|
|
Netherlands Antilles
|
|
|
9,616 |
|
|
|
19,223 |
|
|
|
22,629 |
|
|
Canada
|
|
|
4,398 |
|
|
|
6,777 |
|
|
|
5,248 |
|
|
Australia and New Zealand
|
|
|
1,483 |
|
|
|
5,956 |
|
|
|
7,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
106,359 |
|
|
$ |
128,504 |
|
|
$ |
136,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Geographical area net property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
690,262 |
|
|
$ |
693,345 |
|
|
$ |
718,257 |
|
|
United Kingdom
|
|
|
46,543 |
|
|
|
51,392 |
|
|
|
63,968 |
|
|
Netherlands Antilles
|
|
|
224,810 |
|
|
|
217,143 |
|
|
|
211,382 |
|
|
Canada
|
|
|
78,789 |
|
|
|
74,995 |
|
|
|
71,374 |
|
|
Australia and New Zealand
|
|
|
51,872 |
|
|
|
76,145 |
|
|
|
83,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,092,276 |
|
|
$ |
1,113,020 |
|
|
$ |
1,148,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12. |
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF
CREDIT RISK |
The estimated fair value of all debt as of December 31,
2003 and 2004 was approximately $654 million and
$745 million, as compared to the carrying value of
$636 million and $689 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 and
June 30, 2005. No customer constituted 10% of the
Companys consolidated revenues in 2002, 2003 or 2004.
F-100
KANEB SERVICES LLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
QUARTERLY FINANCIAL DATA (unaudited) |
Quarterly operating results for 2003 and 2004 are summarized as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
218,469 |
|
|
$ |
218,654 |
|
|
$ |
214,592 |
|
|
$ |
214,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
33,724 |
|
|
$ |
32,705 |
|
|
$ |
32,251 |
|
|
$ |
29,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,559 |
(a)(b) |
|
$ |
5,488 |
|
|
$ |
5,862 |
|
|
$ |
5,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.44 |
|
|
$ |
0.48 |
|
|
$ |
0.50 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.41 |
|
|
$ |
0.47 |
|
|
$ |
0.49 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
233,179 |
|
|
$ |
254,202 |
|
|
$ |
272,242 |
|
|
$ |
295,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
32,915 |
|
|
$ |
36,534 |
|
|
$ |
34,927 |
|
|
$ |
32,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,995 |
|
|
$ |
7,395 |
|
|
$ |
6,811 |
|
|
$ |
4,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.51 |
|
|
$ |
0.63 |
|
|
$ |
0.58 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.50 |
|
|
$ |
0.62 |
|
|
$ |
0.57 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 4 regarding gains on issuance of units by KPP. |
F-101
APPENDIX A
FORM OF
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
VALERO GP HOLDINGS, LLC
TABLE OF CONTENTS
|
|
|
|
|
|
ARTICLE I Definitions
|
|
A-1 |
|
Section 1.1
|
|
Definitions |
|
A-1 |
|
Section 1.2
|
|
Construction |
|
A-9 |
|
ARTICLE II Organization
|
|
A-9 |
|
Section 2.1
|
|
Formation |
|
A-9 |
|
Section 2.2
|
|
Name |
|
A-9 |
|
Section 2.3
|
|
Registered Office; Registered Agent; Principal Office; Other
Offices |
|
A-9 |
|
Section 2.4
|
|
Purposes and Business |
|
A-9 |
|
Section 2.5
|
|
Powers |
|
A-10 |
|
Section 2.6
|
|
Power of Attorney |
|
A-10 |
|
Section 2.7
|
|
Term |
|
A-11 |
|
Section 2.8
|
|
Title to Company Assets |
|
A-11 |
|
Section 2.9
|
|
Certain Undertakings Relating to the Separateness of the Company |
|
A-11 |
|
ARTICLE III Rights
of Members
|
|
A-12 |
|
Section 3.1
|
|
Members |
|
A-12 |
|
Section 3.2
|
|
Management of Business |
|
A-13 |
|
Section 3.3
|
|
Outside Activities of the Members |
|
A-13 |
|
Section 3.4
|
|
Rights of Members |
|
A-13 |
|
ARTICLE IV Certificates;
Record Holders; Transfer of Interests; Redemption of Interests
|
|
A-13
|
|
Section 4.1
|
|
Certificates |
|
A-13 |
|
Section 4.2
|
|
Mutilated, Destroyed, Lost or Stolen Certificates |
|
A-14 |
|
Section 4.3
|
|
Record Holders |
|
A-14 |
|
Section 4.4
|
|
Transfer Generally |
|
A-14 |
|
Section 4.5
|
|
Registration and Transfer of Interests |
|
A-15 |
|
Section 4.6
|
|
Restrictions on Transfers |
|
A-15 |
|
Section 4.7
|
|
Citizenship Certificates; Non-citizen Assignees |
|
A-15 |
|
Section 4.8
|
|
Redemption of Interests of Non-citizen Assignees |
|
A-16 |
|
ARTICLE V Capital
Contributions and Issuance of Interests
|
|
A-17 |
|
Section 5.1
|
|
Unit Split |
|
A-17 |
|
Section 5.2
|
|
Contributions by Initial Members |
|
A-17 |
|
Section 5.3
|
|
Interest and Withdrawal |
|
A-17 |
|
Section 5.4
|
|
Capital Accounts |
|
A-17 |
|
Section 5.5
|
|
Issuances of Additional Company Securities |
|
A-19 |
|
Section 5.6
|
|
Limitations on Issuance of Additional Company Securities |
|
A-20 |
|
Section 5.7
|
|
No Preemptive Rights |
|
A-20 |
|
Section 5.8
|
|
Splits and Combinations |
|
A-20 |
|
Section 5.9
|
|
Fully Paid and Non-Assessable Nature of Interests |
|
A-20 |
|
ARTICLE VI Allocations
and Distributions
|
|
A-20 |
|
Section 6.1
|
|
Allocations for Capital Account Purposes |
|
A-20 |
|
Section 6.2
|
|
Allocations for Tax Purposes |
|
A-23 |
|
Section 6.3
|
|
Requirement of Distributions; Distributions to Record Holders |
|
A-25 |
A-i
|
|
|
|
|
|
|
ARTICLE VII Management
and Operation of Business
|
|
A-25
|
|
Section 7.1
|
|
Board of Directors |
|
A-25 |
|
Section 7.2
|
|
Certificate of Formation |
|
A-29 |
|
Section 7.3
|
|
Restrictions on the Board of Directors Authority |
|
A-29 |
|
Section 7.4
|
|
Officers |
|
A-29 |
|
Section 7.5
|
|
Outside Activities |
|
A-31 |
|
Section 7.6
|
|
Loans or Contributions from the Company or Group Members |
|
A-31 |
|
Section 7.7
|
|
Indemnification |
|
A-31 |
|
Section 7.8
|
|
Exculpation of Liability of Indemnitees |
|
A-32 |
|
Section 7.9
|
|
Resolution of Conflicts of Interest; Standards of Conduct and
Modification of Duties |
|
A-33 |
|
Section 7.10
|
|
Duties of Officers and Directors |
|
A-33 |
|
Section 7.11
|
|
Purchase or Sale of Company Securities |
|
A-34 |
|
Section 7.12
|
|
Registration Rights of the Initial Members and their Affiliates |
|
A-34 |
|
Section 7.13
|
|
Reliance by Third Parties |
|
A-36 |
|
ARTICLE VIII Books,
Records, Accounting and Reports
|
|
A-37 |
|
Section 8.1
|
|
Records and Accounting |
|
A-37 |
|
Section 8.2
|
|
Fiscal Year |
|
A-37 |
|
Section 8.3
|
|
Reports |
|
A-37 |
|
ARTICLE IX Tax
Matters
|
|
A-37 |
|
Section 9.1
|
|
Tax Returns and Information |
|
A-37 |
|
Section 9.2
|
|
Tax Elections |
|
A-37 |
|
Section 9.3
|
|
Tax Controversies |
|
A-38 |
|
Section 9.4
|
|
Withholding |
|
A-38 |
|
ARTICLE X Dissolution
and Liquidation
|
|
A-38
|
|
Section 10.1
|
|
Dissolution |
|
A-38 |
|
Section 10.2
|
|
Liquidator |
|
A-38 |
|
Section 10.3
|
|
Liquidation |
|
A-39 |
|
Section 10.4
|
|
Cancellation of Certificate of Formation |
|
A-39 |
|
Section 10.5
|
|
Return of Contributions |
|
A-39 |
|
Section 10.6
|
|
Waiver of Partition |
|
A-39 |
|
Section 10.7
|
|
Capital Account Restoration |
|
A-39 |
|
Section 10.8
|
|
Certain Prohibited Acts |
|
A-39 |
|
ARTICLE XI Amendment
of Agreement; Meetings of Members; Record Date
|
|
A-40 |
|
Section 11.1
|
|
Amendment of Limited Liability Company Agreement |
|
A-40 |
|
Section 11.2
|
|
Amendment Requirements |
|
A-41 |
|
Section 11.3
|
|
Unitholder Meetings |
|
A-42 |
|
Section 11.4
|
|
Notice of Meetings of Members |
|
A-42 |
|
Section 11.5
|
|
Record Date |
|
A-43 |
|
Section 11.6
|
|
Adjournment |
|
A-43 |
|
Section 11.7
|
|
Waiver of Notice; Approval of Meeting |
|
A-43 |
|
Section 11.8
|
|
Quorum; Required Vote for Member Action; Voting for Directors |
|
A-43 |
|
Section 11.9
|
|
Conduct of a Meeting; Member Lists |
|
A-44 |
|
Section 11.10
|
|
Action Without a Meeting |
|
A-44 |
A-ii
|
|
|
|
|
|
|
Section 11.11
|
|
Voting and Other Rights |
|
A-44 |
|
Section 11.12
|
|
Proxies and Voting |
|
A-44 |
|
Section 11.13
|
|
Notice of Member Business and Nominations |
|
A-45 |
|
ARTICLE XII Merger,
Consolidation or Conversion
|
|
A-47 |
|
Section 12.1
|
|
Authority |
|
A-47 |
|
Section 12.2
|
|
Procedure for Merger, Consolidation or Conversion |
|
A-47 |
|
Section 12.3
|
|
Approval by Members of Merger, Consolidation or Conversion |
|
A-48 |
|
Section 12.4
|
|
Certificate of Merger or Conversion |
|
A-48 |
|
Section 12.5
|
|
Effect of Merger |
|
A-49 |
|
Section 12.6
|
|
Business Combination Limitations |
|
A-49 |
|
ARTICLE XIII Right
to Acquire Interests
|
|
A-49 |
|
Section 13.1
|
|
Right to Acquire Interests |
|
A-49 |
|
ARTICLE XIV General
Provisions
|
|
A-50 |
|
Section 14.1
|
|
Addresses and Notices |
|
A-50 |
|
Section 14.2
|
|
Further Action |
|
A-51 |
|
Section 14.3
|
|
Binding Effect |
|
A-51 |
|
Section 14.4
|
|
Integration |
|
A-51 |
|
Section 14.5
|
|
Creditors |
|
A-51 |
|
Section 14.6
|
|
Waiver |
|
A-51 |
|
Section 14.7
|
|
Counterparts |
|
A-51 |
|
Section 14.8
|
|
Applicable Law |
|
A-51 |
|
Section 14.9
|
|
Invalidity of Provisions |
|
A-51 |
|
Section 14.10
|
|
Consent of Members |
|
A-51 |
|
Section 14.11
|
|
Facsimile Signatures |
|
A-51 |
A-iii
SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY
AGREEMENT OF VALERO GP HOLDINGS, LLC
This SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY
AGREEMENT OF VALERO GP HOLDINGS, LLC, dated as of
,
2006 is entered into by Diamond Shamrock Refining and Marketing
Company, Sigmor Corporation, The Shamrock Pipe Line Corporation,
Diamond Shamrock Refining Company, L.P., Valero
Refining New Orleans, L.L.C., Valero Refining
Company California, Valero Refining
Texas, L.P. and together with any other Persons who hereafter
become Members in Valero GP Holdings, LLC or parties hereto as
provided herein. In consideration of the covenants, conditions
and agreements contained herein, the parties hereto hereby agree
as follows:
ARTICLE I
Definitions
Section 1.1 Definitions.
The following definitions shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
Additional Member means a Member admitted as
a Member of the Company pursuant to Section 5.5 and who is
shown as such on the books and records of the Company.
Adjusted Capital Account means the Capital
Account maintained for each Member as of the end of each fiscal
year of the Company, (a) increased by any amounts that such
Member is obligated to restore under the standards set by
Treasury
Regulation Section 1.704-1(b)(2)(ii)(c)
(or is deemed obligated to restore under Treasury
Regulation Sections 1.704-2(g)
and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and
deductions that, as of the end of such fiscal year, are
reasonably expected to be allocated to such Member in subsequent
years under Sections 704(e)(2) and 706(d) of the Code and
Treasury
Regulation Section 1.751-1(b)(2)(ii),
and (ii) the amount of all distributions that, as of the
end of such fiscal year, are reasonably expected to be made to
such Member in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting
increases to such Members Capital Account that are
reasonably expected to occur during (or prior to) the year in
which such distributions are reasonably expected to be made
(other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(d)(i) or Section 6.1(d)(ii)).
The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The
Adjusted Capital Account of a Member in respect of a
Unit or any other Interest shall be the amount that such
Adjusted Capital Account would be if such Unit or other Interest
were the only interest in the Company held by such Member from
and after the date on which such Unit or other Interest was
first issued.
Adjusted Property means any property the
Carrying Value of which has been adjusted pursuant to
Section 5.4(d)(i) or Section 5.4(d)(ii).
Administration Agreement means the
Administration Agreement between the Company and Valero GP, LLC
dated as of the Closing Date.
Affiliate means, with respect to any Person,
any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with the Person in question. As used herein, the term
control means the possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
Agreed Allocation means any allocation, other
than a Required Allocation, of an item of income, gain, loss or
deduction pursuant to the provisions of Section 6.1,
including, without limitation, a Curative Allocation (if
appropriate to the context in which the term Agreed
Allocation is used).
Agreed Value of any Contributed Property
means the fair market value of such property or other
consideration at the time of contribution as determined by the
Board of Directors. The Board of Directors shall
A-1
use such method as it determines to be appropriate to allocate
the aggregate Agreed Value of Contributed Properties contributed
to the Company in a single or integrated transaction among each
separate property on a basis proportional to the fair market
value of each Contributed Property.
Agreement means this Second Amended and
Restated Limited Liability Company Agreement of Valero GP
Holdings, LLC, as it may be amended, supplemented or restated
from time to time.
Amended and Restated Limited Liability Company
Agreement means the Amended and Restated Limited
Liability Company Agreement of UDS Logistics, LLC, dated as of
April 16, 2001, as amended through the date of this
Agreement.
Anniversary has the meaning assigned to such
term in Section 11.13(b).
Associate means, when used to indicate a
relationship with any Person, (a) any corporation or
organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more
of any class of voting stock or other voting interest;
(b) any trust or other estate in which such Person has at
least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and
(c) any relative or spouse of such Person, or any relative
of such spouse, who has the same principal residence as such
Person.
Available Cash means, with respect to any
Quarter ending prior to the Liquidation Date:
|
|
|
(a) the sum of all cash and cash equivalents of the Company
Group on hand on the date of determination of Available Cash
with respect to such Quarter, |
|
|
(b) less the amount of any cash reserves established by the
Board of Directors to: |
|
|
|
(i) permit Riverwalk Logistics, L.P. to make capital
contributions to the MLP to maintain its 2% general partner
interest upon the issuance of additional partnership securities
by the MLP; |
|
|
(ii) comply with applicable law or any loan agreement,
security agreement, mortgage, debt instrument or other agreement
or obligation to which any Group Member is a party or by which
it is bound or its assets are subject; |
|
|
(iii) provide funds for distributions under
Section 6.3 and Section 6.4 with respect to any one or
more of the next four Quarters; and |
|
|
(iv) otherwise provide for the proper conduct of the
business of the Company Group (including reserves for future
capital expenditures and for anticipated future credit needs of
the Company Group); |
|
|
|
provided that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such
Quarter but on or before the date of determination of Available
Cash with respect to such Quarter shall be deemed to have been
made, established, increased or reduced, for purposes of
determining Available Cash, within such Quarter if the Board of
Directors so determines. |
Notwithstanding the foregoing, Available Cash
with respect to the Quarter in which the Liquidation Date occurs
and any subsequent Quarter shall equal zero.
Board of Directors has the meaning assigned
to such term in Section 7.1(a).
Book-Tax Disparity means, with respect to any
item of Contributed Property or Adjusted Property, as of the
date of any determination, the difference between the Carrying
Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of
such date. A Members share of the Companys Book-Tax
Disparities in all of its Contributed Property and Adjusted
Property will be reflected by the difference between such
Members Capital Account balance as maintained pursuant to
Section 5.4 and the hypothetical balance of such
Members Capital Account computed as if it had been
maintained strictly in accordance with federal income tax
accounting principles.
Business Day means Monday through Friday of
each week, except that a legal holiday recognized as such by the
government of the United States of America or the State of Texas
shall not be regarded as a Business Day.
A-2
Capital Account means the capital account
maintained for a Member pursuant to Section 5.4. The
Capital Account of a Member in respect of a Unit or
any other Interest shall be the amount that such Capital Account
would be if such Unit or other Interest were the only interest
in the Company held by such Member from and after the date on
which such Unit or other Interest was first issued.
Capital Contribution means any cash, cash
equivalents or the Net Agreed Value of Contributed Property that
a Member contributes to the Company pursuant to this Agreement.
Carrying Value means (a) with respect to
a Contributed Property, the Agreed Value of such property
reduced (but not below zero) by all depreciation, amortization
and cost recovery deductions charged to the Members
Capital Accounts in respect of such Contributed Property, and
(b) with respect to any other Company property, the
adjusted basis of such property for federal income tax purposes,
all as of the time of determination. The Carrying Value of any
property shall be adjusted from time to time in accordance with
Section 5.4(d)(i) and Section 5.4(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying
Value for dispositions and acquisitions of Company properties,
as deemed appropriate by the Board of Directors.
Certificate means a certificate
(i) substantially in the form of Exhibit A to this
Agreement, (ii) issued in global form in accordance with
the rules and regulations of the Depositary or (iii) in
such other form as may be adopted by the Board of Directors,
issued by the Company evidencing ownership of one or more Units
or a certificate, in such form as may be adopted by the Board of
Directors, issued by the Company evidencing ownership of one or
more other Company Securities.
Certificate of Formation means the
Certificate of Formation of the Company filed with the Secretary
of State of the State of Delaware as referenced in
Section 7.2, as such Certificate of Formation may be
amended, supplemented or restated from time to time.
Chairman of the Board has the meaning
assigned to such term in Section 7.1.
Citizenship Certification means a properly
completed certificate in such form as may be specified by the
Board of Directors by which a Member certifies that he (and if
he is a nominee holding for the account of another Person, that
to the best of his knowledge such other Person) is an Eligible
Citizen.
Closing Date means the first date on which
Units are sold by the Company to the Underwriters pursuant to
the provisions of the Underwriting Agreement.
Closing Price has the meaning assigned to
such term in Section 13.1(a).
Code means the Internal Revenue Code of 1986,
as amended and in effect from time to time. Any reference herein
to a specific section or sections of the Code shall be deemed to
include a reference to any corresponding provision of any
successor law.
Commission means the United States Securities
and Exchange Commission.
Company means Valero GP Holdings, LLC, a
Delaware limited liability company, and any successors thereto.
Company Group means the Company and any
Subsidiary of the Company, treated as a single consolidated
entity, but excluding the MLP Group.
Company Minimum Gain means that amount
determined in accordance with the principles of Treasury
Regulation Section 1.704-2(d).
Company Security means any class or series of
equity interest in the Company (but excluding any options,
rights, warrants and appreciation rights relating to an equity
interest in the Company), including without limitation, Units.
Conflicts Committee means a committee of the
Board of Directors composed entirely of two or more Independent
Directors who are not (a) officers or employees of the
Company or any Subsidiary of the Company, (b) directors,
officers or employees of any Affiliate of the Company or its
Subsidiaries or (c) holders of any ownership interest in
the Company Group or the MLP Group other than Units or MLP
Common Units.
A-3
Contributed Property means each property or
other asset, in such form as may be permitted by the Delaware
Act, but excluding cash, contributed to the Company. Once the
Carrying Value of a Contributed Property is adjusted pursuant to
Section 5.4(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
Curative Allocation means any allocation of
an item of income, gain, deduction, loss or credit pursuant to
the provisions of Section 6.1(d)(x).
Current Market Price has the meaning assigned
to such term in Section 13.1(a).
Delaware Act means the Delaware Limited
Liability Company Act, 6 Del. C. Section 18-101, et seq.,
as amended, supplemented or restated from time to time, and any
successor to such statute.
Depositary means, with respect to any Units
issued in global form, The Depository Trust Company and its
successors and permitted assigns.
DGCL means the General Corporation Law of the
State of Delaware, 8 Del. C. Section 101, et seq., as
amended, supplemented or restated from time to time, and any
successor to such statute.
Director means a member of the Board of
Directors of the Company.
Economic Risk of Loss has the meaning set
forth in Treasury Regulation Section 1.752-2(a).
Eligible Citizen means a Person qualified to
own interests in real property in jurisdictions in which any
Group Member does business or proposes to do business from time
to time, and whose status as a Member does not or would not
subject such Group Member to a significant risk of cancellation
or forfeiture of any of its properties or any interest therein.
Exchange Act means the Securities Exchange
Act of 1934, as amended, supplemented or restated from time to
time and any successor to such statute.
Group means a Person that with or through any
of its Affiliates or Associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting
(except voting pursuant to a revocable proxy or consent given to
such Person in response to a proxy or consent solicitation made
to ten or more Persons), exercising investment power or
disposing of any Interests with any other Person that
beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Interests.
Group Member means a member of the Company
Group.
Group Member Agreement means the partnership
agreement of any Group Member that is a limited or general
partnership, the limited liability company agreement of any
Group Member, other than the Company, that is a limited
liability company, the certificate of incorporation and bylaws
or similar organizational documents of any Group Member that is
a corporation, the joint venture agreement or similar governing
document of any Group Member that is a joint venture and the
governing or organizational or similar documents of any other
Group Member that is a Person other than a limited or general
partnership, limited liability company, corporation or joint
venture, as such may be amended, supplemented or restated from
time to time.
Holder has the meaning assigned to such term
in Section 7.12(a).
Indemnified Persons has the meaning assigned
to such term in Section 7.12(d).
Indemnitee means (a) any Person who is
or was a member, partner, officer, director, tax matters
partner, fiduciary or trustee of any Group Member, (b) any
Person who is or was serving at the request of the Company as an
officer, director, member, partner, tax matters partner,
fiduciary or trustee of another Person; provided, that a
Person shall not be an Indemnitee by reason of providing, on a
fee-for-services basis, trustee, fiduciary or custodial services
and (c) any Person the Company designates as an
Indemnitee for purposes of this Agreement.
Independent Director means a Director who
meets the then current independence and other standards required
of audit committee members established by the Exchange Act and
the rules and regulations of the Commission thereunder and by
the National Securities Exchange on which the Units are listed
for trading.
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Initial Members means the Members listed on
Exhibit B hereto.
Initial Offering means the initial offering
and sale of Units to the public, as described in the
Registration Statement.
Initial Units means the Units sold in the
Initial Offering.
Interest means the ownership interest of a
Member in the Company, which may be evidenced by Units or other
Company Securities or a combination thereof or interest therein,
and includes any and all benefits to which such Member is
entitled as provided in this Agreement, together with all
obligations of such Member to comply with the terms and
provisions of this Agreement.
Interest Designation has the meaning assigned
to such term in Section 5.5(b).
Issue Price means the price at which a Unit
is purchased from the Company, after taking into account any
sales commission or underwriting discount charged to the Company.
Liquidation Date means the date on which an
event giving rise to the dissolution of the Company occurs.
Liquidator means one or more Persons selected
by the Board of Directors to perform the functions described in
Section 10.2 as liquidating trustee of the Company within
the meaning of the Delaware Act.
Member means, unless the context otherwise
requires, each Initial Member, each Substituted Member, and each
Additional Member.
Member Nonrecourse Debt has the meaning set
forth in Treasury Regulation Section 1.704-2(b)(4).
Member Nonrecourse Debt Minimum Gain has the
meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
Member Nonrecourse Deductions means any and
all items of loss, deduction or expenditure (including, without
limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with
the principles of Treasury
Regulation Section 1.704-2(i), are attributable to a
Member Nonrecourse Debt.
Merger Agreement has the meaning assigned to
such term in Section 12.1.
MLP means Valero L.P., a Delaware limited
partnership, and any successors thereto.
MLP Agreement means the Third Amended and
Restated Agreement of Limited Partnership of the MLP, dated as
of March 18, 2003, as amended through the date of this
Agreement.
MLP Common Units has the meaning assigned to
the term Common Unit in the MLP Agreement.
MLP Group means the MLP and any Subsidiary of
the MLP, treated as a single consolidated entity.
MLP Member means a member of the MLP Group.
National Securities Exchange means an
exchange registered with the Commission under Section 6(a)
of the Securities Exchange Act of 1934, as amended, supplemented
or restated from time to time, and any successor to such
statute, or the Nasdaq National Market or any successor thereto.
Net Agreed Value means, (a) in the case
of any Contributed Property, the Agreed Value of such property
reduced by any liabilities either assumed by the Company upon
such contribution or to which such property is subject when
contributed, and (b) in the case of any property
distributed to a Member by the Company, the Companys
Carrying Value of such property (as adjusted pursuant to
Section 5.4(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such
Member upon such distribution or to which such property is
subject at the time of distribution, in either case, as
determined under Section 752 of the Code.
Net Income means, for any taxable year, the
excess, if any, of the Companys items of income and gain
(other than those items taken into account in the computation of
Net Termination Gain or Net Termination Loss) for such taxable
year over the Companys items of loss and deduction (other
than those items taken into account in the computation of Net
Termination Gain or Net Termination Loss) for such taxable year.
The items included
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in the calculation of Net Income shall be determined in
accordance with Section 5.4(b) and shall not include any
items specially allocated under Section 6.1(d).
Net Loss means, for any taxable year, the
excess, if any, of the Companys items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Companys items of income and
gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net
Loss shall be determined in accordance with Section 5.4(b)
and shall not include any items specially allocated under
Section 6.1(d).
Net Termination Gain means, for any taxable
year, the sum, if positive, of all items of income, gain, loss
or deduction recognized by the Company after the Liquidation
Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with Section 5.4(b)
and shall not include any items of income, gain or loss
specially allocated under Section 6.1(d).
Net Termination Loss means, for any taxable
year, the sum, if negative, of all items of income, gain, loss
or deduction recognized by the Company after the Liquidation
Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with Section 5.4(b)
and shall not include any items of income, gain or loss
specially allocated under Section 6.1(d).
Non-citizen Assignee means a Person whom the
Board of Directors has determined does not constitute an
Eligible Citizen pursuant to Section 4.7.
Non-Compete Agreement means that certain
Non-Compete Agreement, dated as of the Closing Date, among the
Company, Riverwalk Logistics, L.P., Valero GP, LLC and the MLP.
Nonrecourse Built-in Gain means with respect
to any Contributed Properties or Adjusted Properties that are
subject to a mortgage or pledge securing a Nonrecourse
Liability, the amount of any taxable gain that would be
allocated to the Members pursuant to Section 6.2(b)(i)(A),
Section 6.2(b)(ii)(A) and Section 6.2(b)(iii) if such
properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
Nonrecourse Deductions means any and all
items of loss, deduction, or expenditure (including, without
limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with
the principles of Treasury
Regulation Section 1.704-2(b), are attributable to a
Nonrecourse Liability.
Nonrecourse Liability has the meaning set
forth in Treasury Regulation Section 1.752-1(a)(2).
Notice of Election to Purchase has the
meaning assigned to such term in Section 13.1(b).
Officers has the meaning assigned to such
term in Section 7.4(a).
OLP means Valero Logistics Operations, L.P.,
a Delaware limited partnership, and any successors thereto.
Omnibus Agreement means that Amended and
Restated Omnibus Agreement, effective as of March 10, 2006,
among Valero Energy Corporation, Riverwalk Logistics, L.P.,
Valero GP, LLC, the MLP and the OLP.
Opinion of Counsel means a written opinion of
counsel (who may be regular counsel to the Company or any of its
Affiliates) acceptable to the Board of Directors.
Option Closing Date means the date or dates
on which any Units are sold by the Company to the Underwriters
upon exercise of the Over-Allotment Option.
Outstanding means, with respect to Company
Securities, all Company Securities that are issued by the
Company and reflected as outstanding on the Companys books
and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than
the Companys Affiliates) beneficially owns 20% or more of
any Outstanding Company Securities of any class then
Outstanding, all Company Securities owned by such Person or
Group shall not be voted on any matter and shall not be
considered
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Outstanding when sending notices of a meeting of Members to vote
on any matter (unless otherwise required by law), calculating
required votes, determining the presence of a quorum or for
similar purposes under this Agreement; provided, further,
that the foregoing limitation shall not apply to:
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(i) any Person or Group who acquired 20% or more of any
Outstanding Company Securities of any class then Outstanding
directly from the Company or its Affiliates; |
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(ii) any Person or Group who acquired 20% or more of any
Outstanding Company Securities of any class then Outstanding
directly or indirectly from a Person or Group described in
clause (i) provided that the Board of Directors shall have
notified such Person or Group in writing that such limitation
shall not apply; or |
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(iii) any Person or Group who acquired 20% or more of any
Company Securities issued by the Company with the prior approval
of the Board of Directors. |
Over-Allotment Option means the
over-allotment option granted to the Underwriters by the Company
pursuant to the Underwriting Agreement.
Percentage Interest means, as of any date of
determination (a) as to any Unitholder holding Units, the
product obtained by multiplying (i) 100% less the
percentage applicable to paragraph (b) by
(ii) the quotient obtained by dividing (A) the number
of Units held by such Unitholder by (B) the total number of
all Outstanding Units, and (b) as to the holders of other
Company Securities issued by the Company in accordance with
Section 5.5, the percentage established as a part of such
issuance.
Person means an individual or a corporation,
limited liability company, partnership, joint venture, trust,
unincorporated organization or other enterprise (including an
employee benefit plan), association, government agency or
political subdivision thereof or other entity.
Plan of Conversion has the meaning assigned
to such term in Section 12.1.
Prime Rate means the prime rate of interest
as quoted from time to time by The Wall Street Journal or
another source reasonably selected by the Company.
Pro Rata means (a) when modifying Units
or any class thereof, apportioned equally among all designated
Units in accordance with their relative Percentage Interests,
and (b) when modifying Members or Record Holders,
apportioned among all Members or Record Holders, as the case may
be, in accordance with their relative Percentage Interests.
Purchase Date means the date determined by
the Board of Directors as the date for purchase of all
Outstanding Units of a certain class pursuant to
Article XIII.
Quarter means, unless the context requires
otherwise, a fiscal quarter, or, with respect to the first
fiscal quarter after the Closing Date, the portion of such
fiscal quarter after the Closing Date, of the Company.
Recapture Income means any gain recognized by
the Company (computed without regard to any adjustment required
by Section 734 or Section 743 of the Code) upon the
disposition of any property or asset of the Company, which gain
is characterized as ordinary income because it represents the
recapture of deductions previously taken with respect to such
property or asset.
Record Date means the date established by the
Company for determining (a) the identity of the Record
Holders entitled to notice of, or to vote at, any meeting of
Members or entitled to exercise rights in respect of any lawful
action of Members or (b) the identity of Record Holders
entitled to receive any report or distribution or to participate
in any offer.
Record Holder means the Person in whose name
a Unit is registered on the books of the Transfer Agent as of
the opening of business on a particular Business Day, or with
respect to other Company Securities, the Person in whose name
any such other Company Security is registered on the books that
the Company has caused to be kept as of the opening of business
on such Business Day.
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Redeemable Interests means any Interests for
which a redemption notice has been given, and has not been
withdrawn, pursuant to Section 4.8.
Registration Statement means the Registration
Statement on
Form S-1
(Registration
No. 333-132917) as
it has been or as it may be amended or supplemented from time to
time, filed by the Company with the Commission under the
Securities Act to register the offering and sale of the Units in
the Initial Offering.
Required Allocations means (a) any
limitation imposed on any allocation of Net Losses or Net
Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or
deduction pursuant to Section 6.1(d)(i), 6.1(d)(ii),
6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(ix).
Residual Gain or Residual
Loss means any item of gain or loss, as the case may
be, of the Company recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a
Contributed Property or Adjusted Property, to the extent such
item of gain or loss is not allocated pursuant to
Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to
eliminate Book-Tax Disparities.
Securities Act means the Securities Act of
1933, as amended, supplemented or restated from time to time and
any successor to such statute.
Solicitation Notice has the meaning assigned
to such term in Section 11.13(c).
Special Approval means approval by a majority
of the members of the Conflicts Committee acting in good faith.
Subsidiary means, with respect to any Person,
(a) a corporation of which more than 50% of the voting
power of shares entitled (without regard to the occurrence of
any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or
indirectly, at the date of determination, by such Person, by one
or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership,
but only if more than 50% of the partnership interests of such
partnership (considering all of the partnership interests of the
partnership as a single class) is owned, directly or indirectly,
at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or
(c) any other Person (other than a corporation or a
partnership) in which such Person, one or more Subsidiaries of
such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority
ownership interest or (ii) the power to elect or direct the
election of a majority of the directors or other governing body
of such Person.
Substituted Member means a Person who is
admitted as a member of the Company pursuant to Section 4.5
in place of and with all rights of a Member and who is shown as
a Member on the books and records of the Company.
Surviving Business Entity has the meaning
assigned to such term in Section 12.2(b).
Tax Matters Partner means the tax
matters partner as defined in the Code.
Trading Day has the meaning assigned to such
term in Section 13.1(a).
Transfer has the meaning assigned to such
term in Section 4.4.
Transfer Agent means such bank, trust company
or other Person (including the Company or one of its Affiliates)
as shall be appointed from time to time by the Company to act as
registrar and transfer agent for the Units; provided that if no
Transfer Agent is specifically designated for any other Company
Securities, the Company shall act in such capacity.
Underwriter means each Person named as an
underwriter in the Underwriting Agreement who purchases Units
pursuant thereto.
Underwriting Agreement means that certain
Underwriting Agreement,
dated ,
2006, among the Underwriters, the Company and certain other
parties, providing for the purchase of Units by the Underwriters.
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Unit means a Company Security representing a
fractional part of the Interests of all Members, and having the
rights and obligations specified with respect to Units in this
Agreement.
Unit Majority means at least a majority of
the Outstanding Units.
Unitholders means the holders of Units.
Unrealized Gain attributable to any item of
Company property means, as of any date of determination, the
excess, if any, of (a) the fair market value of such
property as of such date (as determined under
Section 5.4(d)) over (b) the Carrying Value of such
property as of such date (prior to any adjustment to be made
pursuant to Section 5.4(d) as of such date).
Unrealized Loss attributable to any item of
Company property means, as of any date of determination, the
excess, if any, of (a) the Carrying Value of such property
as of such date (prior to any adjustment to be made pursuant to
Section 5.4(d) as of such date) over (b) the fair
market value of such property as of such date (as determined
under Section 5.4(d)).
U.S. GAAP means United States generally
accepted accounting principles consistently applied.
Section 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used
in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns,
pronouns and verbs shall include the plural and vice versa;
(b) references to Articles and Sections refer to Articles
and Sections of this Agreement; and (c) the term
include or includes means includes,
without limitation, and including means including,
without limitation.
ARTICLE II
Organization
Section 2.1 Formation.
The Members have previously formed the Company as a limited
liability company pursuant to the provisions of the Delaware Act
and hereby amend and restate the Amended and Restated Limited
Liability Company Agreement in its entirety. This amendment and
restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this
Agreement, the rights, duties (including fiduciary duties),
liabilities and obligations of the Members and the
administration, dissolution and termination of the Company shall
be governed by the Delaware Act. All Interests shall constitute
personal property of the owner thereof for all purposes and a
Member has no interest in specific Company property.
Section 2.2 Name.
The name of the Company shall be Valero GP Holdings, LLC. The
Companys business may be conducted under any other name or
names, as determined by the Board of Directors. The words
Limited Liability Company, LLC,
or similar words or letters shall be included in the
Companys name where necessary for the purpose of complying
with the laws of any jurisdiction that so requires. The Board of
Directors may change the name of the Company at any time and
from time to time and shall notify the Members of such change in
the next regular communication to the Members.
Section 2.3 Registered
Office; Registered Agent; Principal Office; Other
Offices. Unless and until changed by the Board of
Directors, the registered office of the Company in the State of
Delaware shall be located at 1209 Orange Street,
Wilmington, Delaware 19801, and the registered agent for service
of process on the Company in the State of Delaware at such
registered office shall be The Corporation Trust Company. The
principal office of the Company shall be located at One Valero
Way, San Antonio, Texas 78249 or such other place as the
Board of Directors may from time to time designate by notice to
the Members. The Company may maintain offices at such other
place or places within or outside the State of Delaware as the
Board of Directors determines to be necessary or appropriate.
Section 2.4 Purposes
and Business. The purpose and nature of the business to
be conducted by the Company shall be to (a) serve as a
member of (i) Valero GP, LLC, a Delaware limited liability
company and (ii) Riverwalk Holdings, LLC, a Delaware
limited liability company, and, in connection therewith, to
exercise all
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the rights and powers conferred upon the Company as a member of
such entities, (b) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in,
any business activity that any Group Member or the MLP is
permitted to engage in or that their subsidiaries are permitted
to engage in by their organizational documents or agreements
and, in connection therewith, to exercise all of the rights and
powers conferred upon the Company pursuant to the agreements
relating to such business activity, (c) engage directly in,
or enter into or form any corporation, partnership, joint
venture, limited liability company or other arrangement to
engage indirectly in, any business activity that is approved by
the Board of Directors and that lawfully may be conducted by a
limited liability company organized pursuant to the Delaware Act
and, in connection therewith, to exercise all of the rights and
powers conferred upon the Company pursuant to the agreements
relating to such business activity; and (d) do anything
necessary or appropriate to the foregoing, including the making
of capital contributions or loans to a Group Member;
provided, however, that the Company shall not engage,
directly or indirectly, in any business activity that the Board
of Directors determines would cause the Company to be treated as
an association taxable as a corporation or otherwise taxable as
an entity for federal income tax purposes. The Board of
Directors has no obligation or duty to the Company or the
Members to propose or approve, and may decline to propose or
approve, the conduct by the Company of any business.
Section 2.5 Powers.
The Company shall be empowered to do any and all acts and things
necessary and appropriate for the furtherance and accomplishment
of the purposes and business described in Section 2.4 and
for the protection and benefit of the Company.
Section 2.6 Power
of Attorney. Each Member hereby constitutes and appoints
each of the Chief Executive Officer, the President and the
Secretary and, if a Liquidator shall have been selected pursuant
to Section 10.2, the Liquidator (and any successor to the
Liquidator by merger, transfer, assignment, election or
otherwise) and each of their authorized officers and
attorneys-in-fact, as the case may be, with full power of
substitution, as his true and lawful agent and attorney-in-fact,
with full power and authority in his name, place and stead, to:
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(a) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices: |
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(i) all certificates, documents and other instruments
(including this Agreement and the Certificate of Formation and
all amendments or restatements hereof or thereof) that the Chief
Executive Officer, President or Secretary, or the Liquidator,
determines to be necessary or appropriate to form, qualify or
continue the existence or qualification of the Company as a
limited liability company in the State of Delaware and in all
other jurisdictions in which the Company may conduct business or
own property; |
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(ii) all certificates, documents and other instruments that
the Chief Executive Officer, President or Secretary, or the
Liquidator, determines to be necessary or appropriate to
reflect, in accordance with its terms, any amendment, change,
modification or restatement of this Agreement; |
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(iii) all certificates, documents and other instruments
(including conveyances and a certificate of cancellation) that
the Board of Directors or the Liquidator determines to be
necessary or appropriate to reflect the dissolution and
liquidation of the Company pursuant to the terms of this
Agreement; |
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(iv) all certificates, documents and other instruments
relating to the admission, withdrawal, removal or substitution
of any Member pursuant to, or other events described in,
Articles IV or X; |
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(v) all certificates, documents and other instruments
relating to the determination of the rights, preferences and
privileges of any class or series of Company Securities issued
pursuant to Section 5.5; and |
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(vi) all certificates, documents and other instruments
(including agreements and a certificate of merger) relating to a
merger, consolidation or conversion of the Company pursuant to
Article XII. |
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(b) execute, swear to, acknowledge, deliver, file and
record all ballots, consents, approvals, waivers, certificates,
documents and other instruments that the Board of Directors or
the Liquidator determines to be necessary or appropriate to
(i) make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action that is made or
given by the Members hereunder or is consistent with the terms of |
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this Agreement or (ii) effectuate the terms or intent of
this Agreement; provided, that when required by
Section 11.2 or any other provision of this Agreement that
establishes a percentage of the Members or of the Members of any
class or series required to take any action, the Chief Executive
Officer, President or Secretary, or the Liquidator, may exercise
the power of attorney made in this Section 2.6(b) only
after the necessary vote, consent or approval of the Members or
of the Members of such class or series, as applicable. |
Nothing contained in this Section 2.6 shall be construed as
authorizing the Chief Executive Officer, President or Secretary,
or the Liquidator, to amend this Agreement except in accordance
with Article XI or as may be otherwise expressly provided
for in this Agreement.
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(c) The foregoing power of attorney is hereby declared to
be irrevocable and a power coupled with an interest, and it
shall survive and, to the maximum extent permitted by law, not
be affected by the subsequent death, incompetency, disability,
incapacity, dissolution, bankruptcy or termination of any Member
and the transfer of all or any portion of such Members
Interest and shall extend to such Members heirs,
successors, assigns and personal representatives. Each such
Member hereby agrees to be bound by any representation made by
the Chief Executive Officer, President or Secretary, or the
Liquidator, acting in good faith pursuant to such power of
attorney; and each such Member, to the maximum extent permitted
by law, hereby waives any and all defenses that may be available
to contest, negate or disaffirm the action of the Chief
Executive Officer, President or Secretary, or the Liquidator,
taken in good faith under such power of attorney. Each Member
shall execute and deliver to the Chief Executive Officer,
President or Secretary, or the Liquidator, within 15 days
after receipt of the request therefor, such further designation,
powers of attorney and other instruments as any of such Officers
or the Liquidator, determines to be necessary or appropriate to
effectuate this Agreement and the purposes of the Company. |
Section 2.7 Term.
The Companys existence shall be perpetual, unless and
until it is dissolved in accordance with the provisions of
Article X. The existence of the Company as a separate legal
entity shall continue until the cancellation of the Certificate
of Formation as provided in the Delaware Act.
Section 2.8 Title
to Company Assets. Title to Company assets, whether
real, personal or mixed and whether tangible or intangible,
shall be deemed to be owned by the Company as an entity, and no
Member, Director or Officer, individually or collectively, shall
have any ownership interest in such Company assets or any
portion thereof. Title to any or all of the Company assets may
be held in the name of the Company or one or more nominees, as
the Board of Directors may determine. The Company hereby
declares and warrants that any Company assets for which record
title is held in the name of one or more of its Affiliates or
one or more nominees shall be held by such Affiliates or
nominees for the use and benefit of the Company in accordance
with the provisions of this Agreement; provided, however,
that the Board of Directors shall use reasonable efforts to
cause record title to such assets (other than those assets in
respect of which the Board of Directors determines that the
expense and difficulty of conveyancing makes transfer of record
title to the Company impracticable) to be vested in the Company
as soon as reasonably practicable. All Company assets shall be
recorded as the property of the Company in its books and
records, irrespective of the name in which record title to such
Company assets is held.
Section 2.9 Certain
Undertakings Relating to the Separateness of the Company.
(a) Separateness Generally. The Company shall
conduct its business and operations separate and apart from
those of any other Person in accordance with this
Section 2.9.
(b) Separate Records. The Company shall maintain
(i) its books and records, (ii) its accounts and
(iii) its financial statements, separate from those of any
other Person, except its consolidated Subsidiaries.
(c) Separate Assets. The Company shall not commingle
or pool its funds or other assets with those of any other
Person, except its consolidated Subsidiaries, and shall maintain
its assets in a manner that is not costly or difficult to
segregate, ascertain or otherwise identify as separate from
those of any other Person.
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(d) Separate Name. The Company shall
(i) conduct its business in its own name, (ii) use
separate stationary, invoices, and checks, (iii) correct
any known misunderstanding regarding its separate identity, and
(iv) generally hold itself out as a separate entity.
(e) Separate Credit. The Company shall not
(i) pay its own liabilities from a source other than its
own funds, (ii) guarantee or become obligated for the debts
of any other Person, except its Subsidiaries, (iii) hold
out its credit as being available to satisfy the obligations of
any other Person, except its Subsidiaries, (iv) acquire
obligations or debt securities of its Affiliates (other than its
Subsidiaries) or (v) pledge its assets for the benefit of
any Person or make loans or advances to any Person, except its
Subsidiaries; provided that the Company may engage in any
transaction described in
clauses (ii) - (v) of this
Section 2.9(e) if prior Special Approval has been obtained
for such transaction and either (A) the Conflicts Committee
has determined, or has obtained reasonable written assurance
from a nationally recognized firm of independent accountants or
a nationally recognized investment banking or valuation firm,
that the borrower or recipient of the credit extension is not
then insolvent and will not be rendered insolvent as a result of
such transaction or (B) in the case of transactions
described in clause (iv), such transaction is completed
through a public auction or a National Securities Exchange.
(f) Separate Formalities. The Company shall
(i) observe all corporate formalities and other formalities
required by its organizational documents, the laws of the
jurisdiction of its formation, or other laws, rules, regulations
and orders of governmental authorities exercising jurisdiction
over it, (ii) engage in transactions with its Affiliates
(other than another Group Member) in conformity with the
requirements of Section 7.9 and (iii) promptly pay,
from its own funds, and on a current basis, its allocable share
of general and administrative expenses, capital expenditures and
costs for shared services performed by its Affiliates (other
than another Group Member), unless otherwise provided by the
Administration Agreement. Each material contract between the
Company or another Group Member, on the one hand, and the
Affiliates of the Company (other than a Group Member), on the
other hand, shall be in writing.
(g) No Effect. Failure by the Company to comply with
any of the obligations set forth above shall not affect the
status of the Company as a separate legal entity, with its
separate assets and separate liabilities.
ARTICLE III
Rights of
Members
Section 3.1 Members.
(a) A Person shall be admitted as a Member and shall become
bound by the terms of this Agreement if such Person purchases or
otherwise lawfully acquires any Interest and becomes the Record
Holder of such Interests in accordance with the provisions of
Article IV hereof. A Person may become a Record Holder
without the consent or approval of any of the Members. A Person
may not become a Member without acquiring an Interest. The
rights and obligations of a Person who is a Non-citizen Assignee
shall be determined in accordance with Section 4.7 hereof.
(b) The name and mailing address of each Member shall be
listed on the books and records of the Company maintained for
such purpose by the Company or the Transfer Agent. The Secretary
of the Company shall update the books and records of the Company
from time to time as necessary to reflect accurately the
information therein (or shall cause the Transfer Agent to do so,
as applicable). A Members Interest shall be represented by
a Certificate, as provided in Section 4.1 hereof.
(c) As provided in Section 18-303 of the Delaware Act,
the debts, obligations and liabilities of the Company, whether
arising in contract, tort or otherwise, shall be solely the
debts, obligations and liabilities of the Company. The Members
shall have no liability under this Agreement, or for any such
debt, obligation or liability of the Company, in their capacity
as a Member, except as expressly provided in this Agreement or
the Delaware Act.
(d) Members may not be expelled from or removed as Members
of the Company. Members shall not have any right to withdraw
from the Company; provided, that when a transferee of a
Members Interest becomes a
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Record Holder of such Interest, such transferring Member shall
cease to be a Member with respect to the Interest so transferred.
Section 3.2 Management
of Business. No Member, in its capacity as such, shall
participate in the operation or management of the Companys
business, transact any business in the Companys name or
have the power to sign documents for or otherwise bind the
Company by reason of being a Member.
Section 3.3 Outside
Activities of the Members. Subject to the provisions of
Section 7.5, the Omnibus Agreement and the Non-Compete
Agreement, any Member shall be entitled to and may have business
interests and engage in business activities in addition to those
relating to the Company, including business interests and
activities in direct competition with the Company Group or the
MLP Group. Neither the Company nor any of the other Members
shall have any rights by virtue of this Agreement in any
business ventures of any Member.
Section 3.4 Rights
of Members.
(a) In addition to other rights provided by this Agreement
or by applicable law, and except as limited by
Section 3.4(b), each Member shall have the right, for a
lawful purpose reasonably related to such Members Interest
as a Member in the Company, upon reasonable written demand
containing a concise statement of such purposes and at such
Members own expense:
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(i) to obtain true and full information regarding the
status of the business and financial condition of the Company; |
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(ii) promptly after becoming available, to obtain a copy of
the Companys federal, state and local income tax returns
for each year; |
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(iii) to have furnished to him a current list of the name
and last known business, residence or mailing address of each
Member; |
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(iv) to have furnished to him a copy of this Agreement and
the Certificate of Formation and all amendments thereto,
together with copies of the executed copies of all powers of
attorney pursuant to which this Agreement, the Certificate of
Formation and all amendments thereto have been executed; |
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(v) to obtain true and full information regarding the
amount of cash and a description and statement of the Net Agreed
Value of any other Capital Contribution by each Member and that
each Member has agreed to contribute in the future, and the date
on which each became a Member; and |
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(vi) to obtain such other information regarding the affairs
of the Company as is just and reasonable and consistent with the
stated purposes of the written demand. |
(b) The Board of Directors may keep confidential from the
Members, for such period of time as the Board of Directors
determines, (i) any information that the Board of Directors
determines to be in the nature of trade secrets or
(ii) other information the disclosure of which the Board of
Directors determines (A) is not in the best interests of
the Company Group, (B) could damage the Company Group or
(C) that any Group Member is required by law, by the rules
of any National Securities Exchange on which any Company
Security is listed for trading, or by agreement with any third
party to keep confidential (other than agreements with
Affiliates of the Company the primary purpose of which is to
circumvent the obligations set forth in this Section 3.4).
ARTICLE IV
Certificates; Record
Holders;
Transfer of Interests;
Redemption of Interests
Section 4.1 Certificates.
Upon the Companys issuance of Units to any Person, the
Company may issue one or more Certificates in the name of such
Person evidencing the number of such Units being so issued. In
addition, upon the request of any Person owning any other
Company Securities other than Units, the Company shall issue to
such Person one or more Certificates evidencing such other
Company Securities. Certificates shall be executed on behalf of
the Company by the Chairman of the Board, President or any Vice
President and the Secretary or any Assistant Secretary. No Unit
Certificate shall be valid for any purpose until it has been
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countersigned by the Transfer Agent; provided, however,
that if the Board of Directors elects to issue Units in global
form, the Unit Certificates shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the Units
have been duly registered in accordance with the directions of
the Company. Any or all of the signatures required on the
Certificate may be by facsimile. If any Officer or Transfer
Agent who shall have signed or whose facsimile signature shall
have been placed upon any such Certificate shall have ceased to
be such Officer or Transfer Agent before such Certificate is
issued by the Company, such Certificate may nevertheless be
issued by the Company with the same effect as if such Person
were such Officer or Transfer Agent at the date of issue.
Certificates shall be consecutively numbered and shall be
entered on the books and records of the Company as they are
issued and shall exhibit the holders name and number of
Units.
Section 4.2 Mutilated,
Destroyed, Lost or Stolen Certificates. If any mutilated
Certificate is surrendered to the Transfer Agent, the
appropriate Officers on behalf of the Company shall execute, and
the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type
of Company Securities as the Certificate so surrendered.
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(a) The appropriate Officers on behalf of the Company shall
execute and deliver, and the Transfer Agent shall countersign a
new Certificate in place of any Certificate previously issued if
the Record Holder of the Certificate: |
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(i) makes proof by affidavit, in form and substance
satisfactory to the Company, that a previously issued
Certificate has been lost, destroyed or stolen; |
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(ii) requests the issuance of a new Certificate before the
Company has notice that the Certificate has been acquired by a
purchaser for value in good faith and without notice of an
adverse claim; |
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(iii) if requested by the Company, delivers to the Company
a bond, in form and substance satisfactory to the Company, with
a surety or sureties and with fixed or open penalty as the
Company may direct to indemnify the Company and the Transfer
Agent against any claim that may be made on account of the
alleged loss, destruction or theft of the Certificate; and |
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(iv) satisfies any other reasonable requirements imposed by
the Company. |
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If a Member fails to notify the Company within a reasonable time
after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Interests represented by the
Certificate is registered before the Company or the Transfer
Agent receives such notification, the Member shall be precluded
from making any claim against the Company or the Transfer Agent
for such transfer or for a new Certificate. |
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(b) As a condition to the issuance of any new Certificate
under this Section 4.2, the Company may require the payment
of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith. |
Section 4.3 Record
Holders. The Company shall be entitled to recognize the
Record Holder as the owner of an Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to
or interest in such Interest on the part of any other Person,
regardless of whether the Company shall have actual or other
notice thereof, except as otherwise provided by law or any
applicable rule, regulation, guideline or requirement of any
National Securities Exchange on which such Interests are listed
for trading. Without limiting the foregoing, when a Person (such
as a broker, dealer, bank, trust company or clearing corporation
or an agent of any of the foregoing) is acting as nominee, agent
or in some other representative capacity for another Person in
acquiring and/or holding Interests, as between the Company on
the one hand, and such other Persons on the other, such
representative Person shall be the Record Holder of such
Interest.
Section 4.4 Transfer
Generally. The term transfer, when used in
this Agreement with respect to an Interest, shall be deemed to
refer to a transaction by which the holder of an Interest
assigns such Interest to another Person who is or becomes a
Member, and includes a sale, assignment, gift, exchange or any
other disposition by law or otherwise, including any transfer
upon foreclosure of any pledge, encumbrance, hypothecation or
mortgage. No Interest shall be transferred, in whole or in part,
except in accordance with the
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terms and conditions set forth in this Article IV. Any
transfer or purported transfer of an Interest not made in
accordance with this Article IV shall be null and void.
Section 4.5 Registration
and Transfer of Interests.
(a) The Company shall keep or cause to be kept on behalf of
the Company a register that, subject to such reasonable
regulations as it may prescribe and subject to the provisions of
Section 4.5(b), will provide for the registration and
transfer of Interests. The Transfer Agent is hereby appointed
registrar and transfer agent for the purpose of registering
Units and transfers of such Units as herein provided. The
Company shall not recognize transfers of Certificates evidencing
Interests unless such transfers are effected in the manner
described in this Section 4.5. Upon surrender of a
Certificate for registration of transfer of any Interests
evidenced by a Certificate, and subject to the provisions of
Section 4.5(b), the appropriate Officers of the Company
shall execute and deliver, and in the case of Units, the
Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required
pursuant to the Record Holders instructions, one or more
new Certificates evidencing the same aggregate number and type
of Interests as were evidenced by the Certificate so surrendered.
(b) Except as provided in Section 4.7, the Company
shall not recognize any transfer of Interests until the
Certificates evidencing such Interests are surrendered for
registration of transfer. No charge shall be imposed by the
Company for such transfer; provided, that as a condition to the
issuance of any new Certificate under this Section 4.5(b),
the Company may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed with
respect thereto.
(c) By acceptance of the transfer of any Interest in
accordance with this Section 4.5 and except as provided in
Section 4.7, each transferee of an Interest (including any
nominee holder or an agent or representative acquiring such
Interests for the account of another Person) (i) shall be
admitted to the Company as a Member with respect to the
Interests so transferred to such Person when any such transfer
or admission is reflected in the books and records of the
Company, with or without execution of this Agreement,
(ii) shall be deemed to agree to be bound by the terms of,
and shall be deemed to have executed, this Agreement,
(iii) shall become the Record Holder of the Interests so
transferred, (iv) represents that the transferee has the
capacity, power and authority to enter into this Agreement,
(v) grants powers of attorney to the Officers of the
Company and any Liquidator of the Company and (vi) makes
the consents and waivers contained in this Agreement. The
transfer of any Interests and the admission of any new Member
shall not constitute an amendment to this Agreement.
(d) Subject to (i) the foregoing provisions of this
Section 4.5, (ii) Section 4.3,
(iii) Section 4.6, (iv) with respect to any
series of Interests, the provisions of any statement of
designations establishing such series, (v) any contractual
provision binding on any Member and (vi) provisions of
applicable law including the Securities Act, Interests shall be
freely transferable to any Person.
Section 4.6 Restrictions
on Transfers.
(a) The Company may impose restrictions on the transfer of
Interests if it receives an Opinion of Counsel providing that
such restrictions are necessary to avoid a significant risk of
any Group Member becoming taxable as a corporation or otherwise
becoming taxable as an entity for federal income tax purposes.
The Board of Directors may impose such restrictions by amending
this Agreement in accordance with Article XI; provided,
however, that any amendment that would result in the delisting
or suspension of trading of any class of Interests on the
principal National Securities Exchange on which such class of
Interests is then traded must be approved, prior to such
amendment being effected, by the holders of at least a majority
of the Outstanding Interests of such class. Notwithstanding
Section 11.10, such approval may be obtained through a
written consent of such holders.
(b) Nothing contained in this Article IV, or elsewhere
in this Agreement, shall preclude the settlement of any
transactions involving Interests entered into through the
facilities of any National Securities Exchange on which such
Interests are listed for trading.
Section 4.7 Citizenship
Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any
federal, state or local law or regulation that the Board of
Directors determines would create a substantial risk of
cancellation or forfeiture of any property in which the
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Group Member has an interest based on the nationality,
citizenship or other related status of a Member, the Board of
Directors may request any Member to furnish to the Company,
within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning
his nationality, citizenship or other related status (or, if the
Member is a nominee holding for the account of another Person,
the nationality, citizenship or other related status of such
Person) as the Company may request. If a Member fails to furnish
to the Company, within the aforementioned
30-day period, such
Citizenship Certification or other requested information or if
upon receipt of such Citizenship Certification or other
requested information the Board of Directors determines that a
Member is not an Eligible Citizen, the Interests owned by such
Member shall be subject to redemption in accordance with the
provisions of Section 4.8. In addition, the Board of
Directors may require that the status of any such Member be
changed to that of a Non-citizen Assignee and thereupon, such
Member shall cease to be a member of the Company and shall have
no voting rights, whether arising hereunder, under the Delaware
Act, at law, in equity or otherwise, in respect of its Interests.
(b) Upon dissolution of the Company, a Non-citizen Assignee
shall have no right to receive a distribution in kind pursuant
to Section 10.3, but shall be entitled to the cash
equivalent thereof, and the Company shall provide cash in
exchange for an assignment of the Non-citizen Assignees
share of any distribution in kind. Such payment and assignment
shall be treated for Company purposes as a purchase by the
Company from the Non-citizen Assignee of his economic interests
in the Company (representing his right to receive his share of
such distribution in kind).
(c) At any time after he can and does certify that he has
become an Eligible Citizen, a Non-citizen Assignee may, upon
application to the Board of Directors, request that, with
respect to any Interests of such Non-citizen Assignee not
redeemed pursuant to Section 4.8, such Non-citizen Assignee
be admitted as a Member, and upon approval of the Board of
Directors, such Non-citizen Assignee shall be admitted as a
Member and shall no longer constitute a Non-citizen Assignee and
shall reacquire all voting rights in respect of his Interests.
Section 4.8 Redemption
of Interests of Non-citizen Assignees.
(a) If at any time a Member fails to furnish a Citizenship
Certification or other information requested within the
30-day period specified
in Section 4.7(a), or, if upon receipt of such Citizenship
Certification or other information the Board of Directors
determines, with the advice of counsel, that a Member is not an
Eligible Citizen, the Company may, unless the Member establishes
to the satisfaction of the Board of Directors that such Member
is an Eligible Citizen or has transferred his Interests to a
Person who is an Eligible Citizen and who furnishes a
Citizenship Certification to the Board of Directors prior to the
date fixed for redemption as provided below, redeem the Interest
of such Member as follows:
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(i) The Board of Directors shall, not later than the
30th day before the date fixed for redemption, give notice
of redemption to the Member, at his last address designated on
the records of the Company or the Transfer Agent, by registered
or certified mail, postage prepaid. The notice shall be deemed
to have been given when so mailed. The notice shall specify the
Redeemable Interests, the date fixed for redemption, the place
of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no
further allocations or distributions to which the Member would
otherwise be entitled in respect of the Redeemable Interests
will accrue or be made. |
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(ii) The aggregate redemption price for Redeemable
Interests shall be an amount equal to the Current Market Price
(the date of determination of which shall be the date fixed for
redemption) of Interests of the class to be so redeemed
multiplied by the number of Interests of each such class
included among the Redeemable Interests. The redemption price
shall be paid, as determined by the Board of Directors, in cash
or by delivery of a promissory note of the Company in the
principal amount of the redemption price, bearing interest at
the Prime Rate annually and payable in three equal annual
installments of principal together with accrued interest,
commencing one year after the redemption date. |
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(iii) Upon surrender by or on behalf of the Member, at the
place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or
accompanied by an |
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assignment duly executed in blank, the Member or his duly
authorized representative shall be entitled to receive the
payment therefor. |
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(iv) After the redemption date, Redeemable Interests shall
no longer constitute issued and Outstanding Interests. |
(b) The provisions of this Section 4.8 shall also be
applicable to Interests held by a Member as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.8 shall prevent the
recipient of a notice of redemption from transferring his
Interest before the redemption date if such transfer is
otherwise permitted under this Agreement. Upon receipt of notice
of such a transfer, the Board of Directors shall withdraw the
notice of redemption, provided the transferee of such Interest
certifies to the satisfaction of the Board of Directors in a
Citizenship Certification that he is an Eligible Citizen. If the
transferee fails to make such certification, such redemption
shall be effected from the transferee on the original redemption
date.
ARTICLE V
Capital Contributions
and Issuance of Interests
Section 5.1 Unit
Split. Immediately prior to the Initial Offering, the
Units representing Interests of the Initial Members as set forth
on Exhibit B hereto shall be subdivided at a ratio of 4.25
to 1, resulting in the issuance of 4.25 Units for
every Unit then held by the Initial Members.
Section 5.2 Contributions
by Initial Members. No Interests will be issued or
issuable as of or at the Closing Date and no Units will be
issued or issuable as of or at the Closing Date other than as
set forth in Section 5.1.
Section 5.3 Interest
and Withdrawal. No interest shall be paid by the Company
on Capital Contributions. No Member shall be entitled to the
withdrawal or return of its Capital Contribution, except to the
extent, if any, that distributions made pursuant to this
Agreement or upon termination of the Company may be considered
as such by law and then only to the extent provided for in this
Agreement. Except to the extent expressly provided in this
Agreement, no Member shall have priority over any other Member
either as to the return of Capital Contributions or as to
profits, losses or distributions.
Section 5.4 Capital
Accounts.
(a) The Company shall maintain for each Member (or a
beneficial owner of Interests held by a nominee in any case in
which the nominee has furnished the identity of such owner to
the Company in accordance with Section 6031(c) of the Code
or any other method acceptable to the Company) owning an
Interest a separate Capital Account with respect to such
Interest in accordance with the rules of Treasury
Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount
of all Capital Contributions made to the Company with respect to
such Interest pursuant to this Agreement and (ii) all items
of Company income and gain (including, without limitation,
income and gain exempt from tax) computed in accordance with
Section 5.4(b) and allocated with respect to such Interest
pursuant to Section 6.1, and decreased by (x) the
amount of cash or Net Agreed Value of all actual and deemed
distributions of cash or property made with respect to such
Interest pursuant to this Agreement and (y) all items of
Company deduction and loss computed in accordance with
Section 5.4(b) and allocated with respect to such Interest
pursuant to Section 6.1.
(b) For purposes of computing the amount of any item of
income, gain, loss or deduction, which is to be allocated
pursuant to Article VI and is to be reflected in the
Members Capital Accounts, the determination, recognition
and classification of any such item shall be the same as its
determination, recognition and classification for federal income
tax purposes (including, without limitation, any method of
depreciation, cost recovery or amortization used for that
purpose), provided, that:
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(i) Solely for purposes of this Section 5.4, the
Company shall be treated as owning directly its proportionate
share (as determined by the Board of Directors based upon the
provisions of the applicable Group Member Agreement or
governing, organizational or similar documents) of all property
owned by |
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(x) any other Group Member that is classified as a
partnership for federal income tax purposes and (y) any
other partnership, limited liability company, unincorporated
business or other entity or arrangement that is classified as a
partnership for federal income tax purposes, of which a Group
Member is, directly or indirectly, a partner. |
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(ii) All fees and other expenses incurred by the Company to
promote the sale of (or to sell) an Interest that can neither be
deducted nor amortized under Section 709 of the Code, if
any, shall, for purposes of Capital Account maintenance, be
treated as an item of deduction at the time such fees and other
expenses are incurred and shall be allocated among the Members
pursuant to Section 6.1. |
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(iii) Except as otherwise provided in Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
the computation of all items of income, gain, loss and deduction
shall be made without regard to any election under
Section 754 of the Code which may be made by the Company
and, as to those items described in Section 705(a)(1)(B) or
705(a)(2)(B) of the Code, without regard to the fact that such
items are not includable in gross income or are neither
currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis
of any Company asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment in the Capital Accounts shall be
treated as an item of gain or loss. |
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(iv) Any income, gain or loss attributable to the taxable
disposition of any Company property shall be determined as if
the adjusted basis of such property as of such date of
disposition were equal in amount to the Companys Carrying
Value with respect to such property as of such date. |
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(v) In accordance with the requirements of
Section 704(b) of the Code, any deductions for
depreciation, cost recovery or amortization attributable to any
Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the
Company were equal to the Agreed Value of such property. Upon an
adjustment pursuant to Section 5.4(d) to the Carrying Value
of any Company property subject to depreciation, cost recovery
or amortization, any further deductions for such depreciation,
cost recovery or amortization attributable to such property
shall be determined (A) as if the adjusted basis of such
property were equal to the Carrying Value of such property
immediately following such adjustment and (B) using a rate
of depreciation, cost recovery or amortization derived from the
same method and useful life (or, if applicable, the remaining
useful life) as is applied for federal income tax purposes;
provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any method
that the Board of Directors may adopt. |
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(vi) If the Companys adjusted basis in a depreciable
or cost recovery property is reduced for federal income tax
purposes pursuant to Section 48(q)(1) or 48(q)(3) of the
Code, the amount of such reduction shall, solely for purposes
hereof, be deemed to be an additional depreciation or cost
recovery deduction in the year such property is placed in
service and shall be allocated among the Members pursuant to
Section 6.1. Any restoration of such basis pursuant to
Section 48(q)(2) of the Code shall, to the extent possible,
be allocated in the same manner to the Members to whom such
deemed deduction was allocated. |
(c) A transferee of an Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the
Interest so transferred.
(d) (i) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Interests for cash or Contributed
Property and the issuance of Interests as consideration for the
provision of services, the Capital Account of all Members and
the Carrying Value of each Company property immediately prior to
such issuance shall be adjusted upward or downward to reflect
any Unrealized Gain or Unrealized Loss attributable to such
Company property, as if such Unrealized Gain or Unrealized Loss
had been recognized on an actual sale of each such property
immediately prior to such issuance and had been allocated to the
Members at such time pursuant to Section 6.1 in the same
manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such
Unrealized Gain or Unrealized Loss, the aggregate cash amount
and fair market value of all Company assets (including, without
limitation, cash or cash
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equivalents) immediately prior to the issuance of additional
Interests shall be determined by the Board of Directors using
such method of valuation as it may adopt; provided, however,
that the Board of Directors, in arriving at such valuation, must
take fully into account the fair market value of the Interests
of all Members at such time. The Board of Directors shall
allocate such aggregate value among the assets of the Company
(in such manner as it determines) to arrive at a fair market
value for individual properties.
(ii) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a
Member of any Company property (other than a distribution of
cash that is not in redemption or retirement of an Interest),
the Capital Accounts of all Members and the Carrying Value of
all Company property shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to
such Company property, as if such Unrealized Gain or Unrealized
Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair
market value, and had been allocated to the Members, at such
time, pursuant to Section 6.1 in the same manner as any
item of gain or loss actually recognized during such period
would have been allocated. In determining such Unrealized Gain
or Unrealized Loss the aggregate cash amount and fair market
value of all Company assets (including, without limitation, cash
or cash equivalents) immediately prior to a distribution shall
(A) in the case of an actual distribution that is not made
pursuant to Section 10.3 or in the case of a deemed
distribution, be determined and allocated in the same manner as
that provided in Section 5.4(d)(i) or (B) in the case
of a liquidating distribution pursuant to Section 10.3, be
determined and allocated by the Liquidator using such method of
valuation as it may adopt.
Section 5.5 Issuances
of Additional Company Securities.
(a) Subject to Section 5.6, the Company may issue
additional Company Securities, and options, rights, warrants and
appreciation rights relating to the Company Securities for any
Company purpose at any time and from time to time to such
Persons for such consideration and on such terms and conditions
as the Board of Directors shall determine, all without the
approval of any Members.
(b) Each additional Company Security authorized to be
issued by the Company pursuant to Section 5.5(a) may be
issued in one or more classes, or one or more series of any such
classes, with such designations, preferences, rights, powers and
duties (which may be senior to existing classes and series of
Company Securities), as shall be fixed by the Board of Directors
and reflected in a written action or actions approved by the
Board of Directors in compliance with Section 7.1(g) (each,
an Interest Designation), including (i) the
right to share Company profits and losses or items thereof;
(ii) the right to share in Company distributions;
(iii) the rights upon dissolution and liquidation of the
Company; (iv) whether, and the terms and conditions upon
which, the Company may redeem the Company Security;
(v) whether such Company Security is issued with the
privilege of conversion or exchange and, if so, the terms and
conditions of such conversion or exchange; (vi) the terms
and conditions upon which each Company Security will be issued,
evidenced by certificates and assigned or transferred;
(vii) the method for determining the Percentage Interest as
to such Company Security; and (viii) the right, if any, of
each such Company Security to vote on Company matters, including
matters relating to the relative rights, preferences and
privileges of such Company Security. An Interest Designation (or
any resolution of the Board of Directors amending any Interest
Designation) shall be effective when duly executed and attested
original of the same is delivered to the Secretary of the
Company for inclusion among the permanent records of the Company.
(c) The Board of Directors shall take all actions that it
determines to be necessary or appropriate in connection with
(i) each issuance of Company Securities and options,
rights, warrants and appreciation rights relating to Company
Securities pursuant to this Section 5.5, (ii) the
admission of Additional Members and (iii) all additional
issuances of Company Securities. The Board of Directors shall
determine the relative designations, preferences, rights, powers
and duties of the holders of the Units or other Company
Securities being so issued. The Board of Directors shall do all
things necessary to comply with the Delaware Act and is
authorized and directed to do all things that it determines to
be necessary or appropriate in connection with any future
issuance of Company Securities pursuant to the terms of this
Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which
the Units or other Company Securities are listed for trading.
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Section 5.6 Limitations
on Issuance of Additional Company Securities. The
issuance of Company Securities pursuant to Section 5.5
shall be subject to the following restrictions and limitations:
No fractional Units shall be issued by the Company.
Section 5.7 No
Preemptive Rights. No Person shall have any preemptive,
preferential or other similar right with respect to the issuance
of any Company Security, whether unissued, held in the treasury
or hereafter created.
Section 5.8 Splits
and Combinations.
(a) Subject to Section 5.8(d), the Company may make a
Pro Rata distribution of Company Securities to all Record
Holders or may effect a subdivision or combination of Company
Securities so long as, after any such event, each Member shall
have the same Percentage Interest in the Company as before such
event, and any amounts calculated on a per Unit basis or stated
as a number of Units are proportionately adjusted retroactive to
the date of formation of the Company.
(b) Whenever such a distribution, subdivision or
combination of Company Securities is declared, the Board of
Directors shall select a Record Date as of which the
distribution, subdivision or combination shall be effective and
shall send notice thereof at least 20 days prior to such
Record Date to each Record Holder as of a date not less than
10 days prior to the date of such notice. The Board of
Directors also may cause a firm of independent public
accountants selected by it to calculate the number of Company
Securities to be held by each Record Holder after giving effect
to such distribution, subdivision or combination. The Board of
Directors shall be entitled to rely on any certificate provided
by such firm as conclusive evidence of the accuracy of such
calculation.
(c) Promptly following any such distribution, subdivision
or combination, the Company may issue Certificates to the Record
Holders of Company Securities as of the applicable Record Date
representing the new number of Company Securities held by such
Record Holders, or the Board of Directors may adopt such other
procedures that it determines to be necessary or appropriate to
reflect such changes. If any such combination results in a
smaller total number of Company Securities Outstanding, the
Company shall require, as a condition to the delivery to a
Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such
Record Date.
(d) The Company shall not issue fractional Units upon any
distribution, subdivision or combination of Units. If a
distribution, subdivision or combination of Units would result
in the issuance of fractional Units but for the provisions of
Section 5.6 and this Section 5.8(d), each fractional
Unit shall be rounded to the nearest whole Unit (and a
0.5 Unit shall be rounded to the next higher Unit).
Section 5.9 Fully
Paid and Non-Assessable Nature of Interests. All
Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be validly issued,
fully paid and non-assessable Interests in the Company, except
as such non-assessability may be affected by
Sections 18-607 or
18-804 of the Delaware
Act and except to the extent otherwise provided in this
Agreement.
ARTICLE VI
Allocations and
Distributions
Section 6.1 Allocations
for Capital Account Purposes. For purposes of
maintaining the Capital Accounts and in determining the rights
of the Members among themselves, the Companys items of
income, gain, loss and deduction (computed in accordance with
Section 5.4(b)) shall be allocated among the Members in
each taxable year (or portion thereof) as provided herein below.
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(a) Net Income. After giving effect to the special
allocations set forth in Section 6.1(d), Net Income for
each taxable year and all items of income, gain, loss and
deduction taken into account in computing Net Income for such
taxable year shall be allocated to the Unitholders in accordance
with their respective Percentage Interests. |
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(b) Net Losses. After giving effect to the special
allocations set forth in Section 6.1(d), Net Losses for
each taxable period and all items of income, gain, loss and
deduction taken into account in computing Net Losses for such
taxable period shall be allocated to the Unitholders in
accordance with their respective Percentage Interests; provided
that Net Losses shall not be allocated pursuant to this
Section 6.1(b) to the extent that such allocation would
cause any Unitholder to have a deficit balance in its Adjusted
Capital Account at the end of such taxable year (or increase any
existing deficit balance in its Adjusted Capital Account). |
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(c) Net Termination Gains and Losses. After giving
effect to the special allocations set forth in
Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain
or Net Termination Loss for such taxable period shall be
allocated in the same manner as such Net Termination Gain or Net
Termination Loss is allocated hereunder. All allocations under
this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided
under this Section 6.1 and after all distributions of
Available Cash provided under Section 6.4 have been made;
provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for
distributions made pursuant to Section 10.3. |
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(i) If a Net Termination Gain is recognized (or deemed
recognized pursuant to Section 5.4(d)), such Net
Termination Gain shall be allocated among the Members in the
following manner (and the Capital Accounts of the Members shall
be increased by the amount so allocated in each of the following
subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause): |
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(A) First, to each Member having a deficit balance in its
Capital Account, in the proportion that such deficit balance
bears to the total deficit balances in the Capital Accounts of
all Members, until each such Member has been allocated Net
Termination Gain equal to any such deficit balance in its
Capital Account; and |
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(B) Second, 100% to all Unitholders in accordance with
their respective Percentage Interests. |
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(ii) If a Net Termination Loss is recognized (or deemed
recognized pursuant to Section 5.4(d)), such Net
Termination Loss shall be allocated among the Members in the
following manner: |
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(A) First, to the Unitholders, Pro Rata, until the Capital
Account in respect of each Unit then Outstanding has been
reduced to zero; and |
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(B) Second, the balance, if any, 100% to all Unitholders in
accordance with their respective Percentage Interests. |
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(d) Special Allocations. Notwithstanding any other
provision of this Section 6.1, the following special
allocations shall be made for such taxable period: |
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(i) Company Minimum Gain Chargeback. Notwithstanding
any other provision of this Section 6.1, if there is a net
decrease in Company Minimum Gain during any Company taxable
period, each Member shall be allocated items of Company income
and gain for such period (and, if necessary, subsequent periods)
in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(f)(6),
1.704-2(g)(2) and
1.704-2(j)(2)(i), or
any successor provision. For purposes of this
Section 6.1(d), each Members Adjusted Capital Account
balance shall be determined, and the allocation of income and
gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this
Section 6.1(d) with respect to such taxable period (other
than an allocation pursuant to Section 6.1(d)(vi) and
6.1(d)(vii)). This Section 6.1(d)(i) is intended to comply
with the Company Minimum Gain chargeback requirement in Treasury
Regulation
Section 1.704-2(f)
and shall be interpreted consistently therewith. |
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(ii) Chargeback of Member Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this
Section 6.1 (other than Section 6.1(d)(i)), except as
provided in Treasury
Regulation Section 1.704-2(i)(4),
if there is a net decrease in Member Nonrecourse Debt Minimum
Gain during any Company taxable period, any Member with a share
of Member Nonrecourse Debt Minimum |
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Gain at the beginning of such taxable period shall be allocated
items of Company income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts
provided in Treasury
Regulation Sections 1.704-2(i)(4)
and 1.704-2(j)(2)(ii),
or any successor provisions. For purposes of this
Section 6.1(d), each Members Adjusted Capital Account
balance shall be determined, and the allocation of income and
gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this
Section 6.1(d), other than Section 6.1(d)(i) and other
than an allocation pursuant to Section 6.1(d)(vi) and
6.1(d)(vii), with respect to such taxable period. This
Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury
Regulation Section 1.704-2(i)(4) and shall be
interpreted consistently therewith. |
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(iii) Intentionally left blank. |
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(iv) Qualified Income Offset. In the event any
Member unexpectedly receives any adjustments, allocations or
distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5),
or
1.704-1(b)(2)(ii)(d)(6),
items of Company income and gain shall be specially allocated to
such Member in an amount and manner sufficient to eliminate, to
the extent required by the Treasury Regulations promulgated
under Section 704(b) of the Code, the deficit balance, if
any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible
unless such deficit balance is otherwise eliminated pursuant to
Section 6.1(d)(i) or (ii). |
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(v) Gross Income Allocations. In the event any
Member has a deficit balance in its Capital Account at the end
of any Company taxable period in excess of the sum of
(A) the amount such Member is required to restore pursuant
to the provisions of this Agreement and (B) the amount such
Member is deemed obligated to restore pursuant to Treasury
Regulation
Sections 1.704-2(g)
and 1.704-2(i)(5), such
Member shall be specially allocated items of Company gross
income and gain in the amount of such excess as quickly as
possible; provided, that an allocation pursuant to this
Section 6.1(d)(v) shall be made only if and to the extent
that such Member would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if this
Section 6.1(d)(v) were not in this Agreement. |
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(vi) Nonrecourse Deductions. Nonrecourse Deductions
for any taxable period shall be allocated to the Members in
accordance with their respective Percentage Interests. If the
Board of Directors determines that the Companys
Nonrecourse Deductions should be allocated in a different ratio
to satisfy the safe harbor requirements of the Treasury
Regulations promulgated under Section 704(b) of the Code,
the Board of Directors is authorized, upon notice to the other
Members, to revise the prescribed ratio to the numerically
closest ratio that does satisfy such requirements. |
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(vii) Member Nonrecourse Deductions. Member
Nonrecourse Deductions for any taxable period shall be allocated
100% to the Member that bears the Economic Risk of Loss with
respect to the Member Nonrecourse Debt to which such Member
Nonrecourse Deductions are attributable in accordance with
Treasury
Regulation Section 1.704-2(i).
If more than one Member bears the Economic Risk of Loss with
respect to a Member Nonrecourse Debt, such Member Nonrecourse
Deductions attributable thereto shall be allocated between or
among such Members in accordance with the ratios in which they
share such Economic Risk of Loss. |
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(viii) Nonrecourse Liabilities. For purposes of
Treasury Regulation
Section 1.752-3(a)(3),
the Members agree that Nonrecourse Liabilities of the Company in
excess of the sum of (A) the amount of Company Minimum Gain
and (B) the total amount of Nonrecourse Built-in Gain shall
be allocated among the Members in accordance with their
respective Percentage Interests. |
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(ix) Code Section 754 Adjustments. To the
extent an adjustment to the adjusted tax basis of any Company
asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such
basis), and such item of gain or loss shall be specially
allocated to the Members in a manner consistent with the manner |
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in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations. |
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(x) Curative Allocation. |
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(A) Notwithstanding any other provision of this
Section 6.1, other than the Required Allocations, the
Required Allocations shall be taken into account in making the
Agreed Allocations so that, to the extent possible, the net
amount of items of income, gain, loss or deduction allocated to
each Member pursuant to the Required Allocations and the Agreed
Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Member under
the Agreed Allocations had the Required Allocations and the
related Curative Allocation not otherwise been provided in this
Section 6.1. Notwithstanding the preceding sentence,
Required Allocations relating to (1) Nonrecourse Deductions
shall not be taken into account except to the extent that there
has been a decrease in Company Minimum Gain and (2) Member
Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Member Nonrecourse
Debt Minimum Gain. Allocations pursuant to this
Section 6.1(d)(x)(A) shall only be made with respect to
Required Allocations to the extent the Board of Directors
reasonably determines that such allocations will otherwise be
inconsistent with the economic agreement among the Members.
Further, allocations pursuant to this Section 6.1(d)(x)(A)
shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the Board of
Directors determines that such allocations are likely to be
offset by subsequent Required Allocations. |
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(B) The Board of Directors shall, with respect to each
taxable period, (1) apply the provisions of
Section 6.1(d)(x)(A) in whatever order is most likely to
minimize the economic distortions that might otherwise result
from the Required Allocations, and (2) divide all
allocations pursuant to Section 6.1(d)(x)(A) among the
Members in a manner that is likely to minimize such economic
distortions. |
Section 6.2 Allocations
for Tax Purposes.
(a) Except as otherwise provided herein, for federal income
tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Members in the same manner as its
correlative item of book income, gain, loss or
deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities
attributable to a Contributed Property or Adjusted Property,
items of income, gain, loss, depreciation, amortization and cost
recovery deductions shall be allocated for federal income tax
purposes among the Members as follows:
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(i) (A) In the case of a Contributed Property, such
items attributable thereto shall be allocated among the Members
in the manner provided under Section 704(c) of the Code
that takes into account the variation between the Agreed Value
of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual
Loss attributable to a Contributed Property shall be allocated
among the Members in the same manner as its correlative item of
book gain or loss is allocated pursuant to
Section 6.1. |
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(ii) (A) In the case of an Adjusted Property, such
items shall (1) first, be allocated among the Members in a
manner consistent with the principles of Section 704(c) of
the Code to take into account the Unrealized Gain or Unrealized
Loss attributable to such property and the allocations thereof
pursuant to Section 5.4(d)(i) or 5.4(d)(ii), and
(2) second, in the event such property was originally a
Contributed Property, be allocated among the Members in a manner
consistent with Section 6.2(b)(i)(A); and (B) any item
of Residual Gain or Residual Loss attributable to an Adjusted
Property shall be allocated among the Members in the same manner
as its correlative item of book gain or loss is
allocated pursuant to Section 6.1. |
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(iii) The Board of Directors shall apply the principles of
Treasury
Regulation Section 1.704-3(d)
to eliminate Book-Tax Disparities. |
A-23
(c) For the proper administration of the Company and for
the preservation of uniformity of the Units (or any class or
classes thereof), the Board of Directors shall (i) adopt
such conventions as it deems appropriate in determining the
amount of depreciation, amortization and cost recovery
deductions; (ii) make special allocations for federal
income tax purposes of income (including, without limitation,
gross income) or deductions; and (iii) amend the provisions
of this Agreement as appropriate (x) to reflect the
proposal or promulgation of Treasury Regulations under
Section 704(b) or Section 704(c) of the Code or
(y) otherwise to preserve or achieve uniformity of the
Units (or any class or classes thereof). The Board of Directors
may adopt such conventions, make such allocations and make such
amendments to this Agreement as provided in this
Section 6.2(c) only if such conventions, allocations or
amendments would not have a material adverse effect on the
Members, the holders of any class or classes of Units issued and
Outstanding or the Company, and if such allocations are
consistent with the principles of Section 704 of the Code.
(d) The Board of Directors may determine to depreciate or
amortize the portion of an adjustment under Section 743(b)
of the Code attributable to unrealized appreciation in any
Adjusted Property (to the extent of the unamortized Book-Tax
Disparity) using a predetermined rate derived from the
depreciation or amortization method and useful life applied to
the Companys common basis of such property, despite any
inconsistency of such approach with Treasury
Regulation Section 1.167(c)-l(a)(6)
or any successor regulations thereto. If the Board of Directors
determines that such reporting position cannot be taken, the
Board of Directors may adopt depreciation and amortization
conventions under which all purchasers acquiring Units in the
same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had
purchased a direct interest in the Companys property. If
the Board of Directors chooses not to utilize such aggregate
method, the Board of Directors may use any other depreciation
and amortization conventions to preserve the uniformity of the
intrinsic tax characteristics of any Interests, so long as such
conventions would not have a material adverse effect on the
Members or the Record Holders of any class or classes of Units.
(e) Any gain allocated to the Members upon the sale or
other taxable disposition of any Company asset shall, to the
extent possible, after taking into account other required
allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to
the same extent as such Members (or their predecessors in
interest) have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit
recognized by the Company for federal income tax purposes and
allocated to the Members in accordance with the provisions
hereof shall be determined without regard to any election under
Section 754 of the Code that may be made by the Company;
provided, however, that such allocations, once made, shall be
adjusted (in the manner determined by the Board of Directors) to
take into account those adjustments permitted or required by
Sections 734 and 743 of the Code.
(g) Each item of Company income, gain, loss and deduction
shall, for federal income tax purposes, be determined on an
annual basis and prorated on a monthly basis and shall be
allocated to the Members as of the opening of the New York Stock
Exchange on the first Business Day of each month; provided,
however, such items for the period beginning on the Closing Date
and ending on the last day of the month in which the Option
Closing Date or the expiration of the Over-Allotment Option
occurs shall be allocated to the Members as of the opening of
the New York Stock Exchange on the first Business Day of the
next succeeding month; and provided, further, that gain or loss
on a sale or other disposition of any assets of the Company or
any other extraordinary item of income or loss realized and
recognized other than in the ordinary course of business, as
determined by the Board of Directors, shall be allocated to the
Members as of the opening of the New York Stock Exchange on the
first Business Day of the month in which such gain or loss is
recognized for federal income tax purposes. The Board of
Directors may revise, alter or otherwise modify such methods of
allocation to the extent permitted or required by
Section 706 of the Code and the regulations or rulings
promulgated thereunder.
(h) Allocations that would otherwise be made to a Member
under the provisions of this Article VI shall instead be
made to the beneficial owner of Units held by a nominee in any
case in which the nominee has furnished the identity of such
owner to the Company in accordance with Section 6031(c) of
the Code or any other method determined by the Board of
Directors.
A-24
Section 6.3 Requirement
of Distributions; Distributions to Record Holders.
(a) Except as provided in Section 6.3(b), within
50 days following the end of each Quarter commencing with
the Quarter ending on [June 30, 2006], an amount equal to
100% of Available Cash with respect to such Quarter shall,
subject to
Section 18-607 of
the Delaware Act and except as otherwise required by
Section 5.5(b) in respect of other Company Securities
issued pursuant thereto, be distributed in accordance with this
Article VI by the Company to the Members in accordance with
their respective Percentage Interests as of the Record Date
selected by the Board of Directors. All distributions required
to be made under this Agreement shall be made subject to
Sections 18-607
and 18-804 of the
Delaware Act.
(b) With respect to the distribution for the Quarter ending
on [September 30, 2006], the amount of Available Cash
distributed to the Members in accordance with
Section 6.3(a) shall equal 100% of Available Cash with
respect to such Quarter multiplied by a fraction of which the
numerator is the number of days in the period commencing on the
Closing Date and ending on [September 30, 2006] and of
which the denominator is 92. Of the remaining Available Cash
with respect to such Quarter, such amount shall be distributed
to the Initial Members in accordance with their respective
Percentage Interests immediately prior to the Closing.
(c) Notwithstanding Section 6.3(a), in the event of
the dissolution and liquidation of the Company, all receipts
received during or after the Quarter in which the Liquidation
Date occurs shall be applied and distributed solely in
accordance with, and subject to the terms and conditions of,
Section 10.3(a).
(d) The Board of Directors may treat taxes paid by the
Company on behalf of, or amounts withheld with respect to, all
or less than all of the Members, as a distribution of Available
Cash to such Members.
(e) Each distribution in respect of an Interest shall be
paid by the Company, directly or through the Transfer Agent or
through any other Person or agent, only to the Record Holder of
such Interest as of the Record Date set for such distribution.
Such payment shall constitute full payment and satisfaction of
the Companys liability in respect of such payment,
regardless of any claim of any Person who may have an interest
in such payment by reason of an assignment or otherwise.
ARTICLE VII
Management and
Operation of Business
Section 7.1 Board
of Directors.
(a) Except as otherwise expressly provided in this
Agreement, the business and affairs of the Company shall be
managed by or under the direction of a Board of Directors (the
Board of Directors). As provided in
Section 7.4, the Board of Directors shall have the power
and authority to appoint Officers of the Company. The Directors
and Officers shall constitute managers within the
meaning of the Delaware Act. No Member, by virtue of its status
as such, shall have any management power over the business and
affairs of the Company or actual or apparent authority to enter
into, execute or deliver contracts on behalf of, or to otherwise
bind, the Company. Except as otherwise specifically provided in
this Agreement, the authority and functions of the Board of
Directors, on the one hand, and of the Officers, on the other,
shall be identical to the authority and functions of the board
of directors and officers, respectively, of a corporation
organized under the DGCL. In addition to the powers that now or
hereafter can be granted to managers under the Delaware Act and
to all other powers granted under any other provision of this
Agreement subject to Section 7.3, the Board of Directors
shall have full power and authority to do, and to direct the
Officers to do, all things and on such terms as it determines to
be necessary or appropriate to conduct the business of the
Company, to exercise all powers set forth in Section 2.5
and to effectuate the purposes set forth in Section 2.4,
including the following:
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(i) the making of any expenditures, the lending or
borrowing of money, the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the
issuance of evidences of indebtedness, including indebtedness
that is convertible into Company Securities, and the incurring
of any other obligations; |
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(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Company; |
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(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Company or the merger or other combination of the
Company with or into another Person (the matters described in
this clause (iii) being subject, however, to any prior
approval that may be required by Section 7.3 and
Article XII); |
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(iv) the use of the assets of the Company (including cash
on hand) for any purpose consistent with the terms of this
Agreement, including the financing of the conduct of the
operations of the Company, its Subsidiaries and the MLP; subject
to Section 7.6(a), the lending of funds to other Persons
(including other Group Members); the repayment of obligations of
the Company, its Subsidiaries and the MLP and the making of
capital contributions to any member of the Company, its
Subsidiaries and the MLP; |
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(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including
instruments that limit the liability of the Company under
contractual arrangements to all or particular assets of the
Company); |
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(vi) the distribution of Company cash; |
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(vii) the selection and dismissal of officers, employees,
agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and
other terms of employment or hiring, the creation and operation
of employee benefit plans, employee programs and employee
practices; |
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(viii) the maintenance of insurance for the benefit of the
Company Group, the Members and the Indemnitees; |
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(ix) the formation of, or acquisition of an interest in,
and the contribution of property and the making of loans to, any
limited or general partnerships, joint ventures, corporations,
limited liability companies or other relationships (including
the acquisition of interests in, and the contributions of
property to, any Group Member, the MLP and its Subsidiaries from
time to time) subject to the restrictions set forth in
Section 2.4; |
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(x) the control of any matters affecting the rights and
obligations of the Company, including the bringing and defending
of actions at law or in equity and otherwise engaging in the
conduct of litigation, arbitration or remediation, and the
incurring of legal expense and the settlement of claims and
litigation; |
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(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law; |
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(xii) the entering into of listing agreements with any
National Securities Exchange and the delisting of some or all of
the Interests from, or requesting that trading be suspended on,
any such exchange (subject to any prior approval that may be
required under Section 4.6); |
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(xiii) unless restricted or prohibited by Section 5.6,
the purchase, sale or other acquisition or disposition of
Company Securities, or the issuance of additional options,
rights, warrants and appreciation rights relating to Company
Securities; |
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(xiv) the undertaking of any action in connection with the
Companys participation in any Group Member; |
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(xv) the registering for resale under the Securities Act
and applicable state securities laws, the Company Securities
held by the Initial Members or any Affiliate of the Initial
Members; provided, however, that such registration for
resale of any Company Security shall be subject to certain
restrictions and limitations, including but not limited to,
those under the provisions hereof or the Securities Act or
applicable state securities laws; |
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(xvi) the approval and authorization of any action taken by
the general partner of the MLP to limit or modify the incentive
distribution rights in the MLP held by the general partner, if
the Board of Directors determines that such limitation or
modification does not adversely affect the Members (including
any particular class of Interests as compared to other classes
of Interests) in any material respect; and |
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(xvii) the entering into of agreements with any of its
Affiliates to render services to a Group Member. |
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(b) The Board of Directors shall consist of not fewer than
three nor more than 12 natural Persons; provided,
however, that upon closing of the Initial Offering, there
shall only be two directors (including one Independent
Director), with the Board of Directors appointing two additional
Independent Directors within 90 days of the listing of the
Units on the New York Stock Exchange, Inc. (or such other
National Securities Exchange on which the Units are listed for
trading). Each Director shall be elected as provided in
Section 7.1(c) and shall serve in such capacity until his
successor has been duly elected and qualified or until such
Director dies, resigns or is removed. A Director may resign at
any time upon written notice to the Company. The Board of
Directors may from time to time determine the number of
Directors then constituting the whole Board of Directors, but
the Board of Directors shall not decrease the number of Persons
that constitute the whole Board of Directors if such decrease
would shorten the term of any Director.
(c) The Board of Directors shall be divided into two
classes, Class I and Class II. The number of Directors
in each class shall be the whole number contained in the
quotient arrived at by dividing the authorized number of
Directors by two, and if a fraction is also contained in such
quotient then the extra Director shall be a member of
Class I. Each Director shall serve for a term ending on the
date of the second annual meeting following the annual meeting
at which such Director was elected; provided, however, that the
Directors initially appointed to Class I shall serve for a
term ending on the date of the first annual meeting next
following December 31, 2006 and the Directors initially
appointed to Class II shall serve for a term ending on the
date of the second annual meeting next following
December 31, 2006. However, if the number of Directors
serving on the Board of Directors increases to five or more, the
Board of Directors may be divided into three classes,
Class I, Class II and Class III, in accordance
with the listing standards of the New York Stock Exchange or
such other national exchange on which the Units are then listed,
by an affirmative vote of a majority of the Board of Directors.
In the event the Board of Directors is divided into three
classes, each Director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at
which such Director was elected. One class of the Directors
shall be elected at each annual meeting of the Members. If any
such annual meeting is not held or the Directors are not elected
thereat, the Directors may be elected at any special meeting of
Members held for that purpose. The nomination of Persons to
serve as Directors and the election of the Board of Directors
shall be in accordance with Article XI hereof.
(d) Subject to applicable law and the rights of the holders
of any series of Interests, in the case of any increase in the
number of Directors, the newly created directorships resulting
from such increase shall be apportioned by the Board of
Directors to such class or classes as shall, so far as possible,
bring the number of Directors in the respective classes into
conformity with the formula in Section 7.1(c) as applied to
the new authorized number of Directors, and vacancies existing
on the Board of Directors (including a vacancy created by virtue
of an increase in the size of the Board of Directors) may be
filled only by the affirmative vote of a majority of the
Directors then serving, even if less than a quorum. Any Director
chosen to fill a vacancy shall hold office for the remaining
term of the directorship to which appointed and shall service
for the unexpired term of office or until his successor has been
duly elected and qualified or until such Directors earlier
resignation or removal. Subject to the rights of the holders of
any series of Interests, any Director, and the entire Board of
Directors, may be removed from office at any time by the
affirmative vote of Members holding a majority of the Percentage
Interest of all Members entitled to vote.
In the event of any decrease in the authorized number of
Directors, (i) each Director then serving as such shall
nevertheless continue as a Director of the class of which he is
a member until the expiration of his current term, or his prior
death, resignation or removal, and (ii) the newly
eliminated directorships resulting from such decrease shall be
apportioned by the Board of Directors to such class or classes
as shall, so far as possible, bring the number of Directors in
the respective classes into conformity with the formula in
Section 7.1(c) as applied to the new authorized number of
Directors.
(e) Directors need not be Members. The Board of Directors
may, from time to time and by the adoption of resolutions,
establish qualifications for Directors.
(f) Unless otherwise required by the Delaware Act, other
law or the provisions hereof,
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(i) each member of the Board of Directors shall have one
vote; |
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(ii) the presence at a meeting of the Board of Directors of
a majority of the members of the Board of Directors shall
constitute a quorum at any such meeting for the transaction of
business; and |
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(iii) the act of a majority of the members of the Board of
Directors present at a meeting of the Board of Directors at
which a quorum is present shall be deemed to constitute the act
of the Board of Directors. |
(g) Regular meetings of the Board of Directors and any
committee thereof shall be held at such times and places as
shall be designated from time to time by resolution of the Board
of Directors or such committee. Notice of such regular meetings
shall not be required. Special meetings of the Board of
Directors or meetings of any committee thereof may be called by
the Chairman of the Board or the chairman of such committee, as
the case may be, or on the written request of any three
Directors or a majority of the committee members, as applicable,
to the Secretary, in each case on at least twenty-four hours
personal, written, facsimile, electronic, telegraphic, cable or
wireless notice to each Director or committee member, which
notice may be waived by any Director. Any such notice, or waiver
thereof, need not state the purpose of such meeting except as
may otherwise be required by law. Attendance of a Director at a
meeting (including pursuant to the last sentence of this
Section 7.1(g)) shall constitute a waiver of notice of such
meeting, except where such Director attends the meeting for the
express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or
convened. Any action required or permitted to be taken at a
meeting of the Board of Directors, or any committee thereof, may
be taken without a meeting, without prior notice and without a
vote if a consent or consents in writing, setting forth the
action so taken, are signed by all members of the Board of
Directors or committee. Members of the Board of Directors or any
committee thereof may participate in and hold a meeting by means
of conference telephone, video conference or similar
communications equipment by means of which all Persons
participating in the meeting can hear each other, and
participation in such meetings shall constitute presence in
Person at the meeting.
(h) The Board of Directors may, by resolution of a majority
of the full Board of Directors, designate one or more
committees, each committee to consist of one or more of the
Directors. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace
any absent or disqualified Director at any meeting of such
committee. Any such committee, to the extent provided in the
resolution of the Board of Directors or in this Agreement, shall
have and may exercise all powers and authority of the Board of
Directors in the management of the business and affairs of the
Company; but no such committee shall have the power or authority
in reference to the following matters: approving or adopting, or
recommending to the Members, any action or matter expressly
required by this Agreement or the Delaware Act to be submitted
to the Members for approval or adopting, amending or repealing
any provision of this Agreement. Unless specified by resolution
of the Board of Directors, any committee designated pursuant to
this Section 7.1(h) shall choose its own chairman, shall
keep regular minutes of its proceedings and report the same to
the Board of Directors when requested, and, subject to
Section 7.1(g), shall fix its own rules or procedures and
shall meet at such times and at such place or places as may be
provided by such rules. At every meeting of any such committee,
the presence of a majority of all the members thereof shall
constitute a quorum and the affirmative vote of a majority of
the members present at a meeting of which a quorum is present
shall be necessary for the adoption by the committee of any
resolution.
(i) The Board of Directors may elect one of its members as
Chairman of the Board (the Chairman of the Board).
The Chairman of the Board, if any, and if present and acting,
shall preside at all meetings of the Board of Directors and of
Members, unless otherwise directed by the Board of Directors. If
the Board of Directors does not elect a Chairman or if the
Chairman is absent from the meeting, the Chief Executive Offer,
if present and a Director, or any other Director chosen by the
Board of Directors, shall preside. In the absence of a
Secretary, the chairman of the meeting may appoint any Person to
serve as Secretary of the meeting.
(j) Unless otherwise restricted by law, the Board of
Directors shall have the authority to fix the compensation of
the Directors. The Directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may
be paid a fixed sum for attendance at each meeting of the Board
of Directors or paid a stated salary or paid other compensation
as Director. No such payment shall preclude any Director from
serving the Company in any other capacity and receiving
compensation therefor. Members of special or standing
A-28
committees may also be paid their expenses, if any, of and
allowed compensation for attending committee meetings.
(k) Notwithstanding any other provision of this Agreement,
any Group Member Agreement, the Delaware Act or any applicable
law, rule or regulation, each of the Members and each other
Person who may acquire an interest in Company Securities hereby
(i) approves, ratifies and confirms the execution, delivery
and performance by the parties thereto of this Agreement and the
Group Member Agreement of each other Group Member, the
Underwriting Agreement and the other agreements described in or
filed as exhibits to the Registration Statement that are related
to the transactions contemplated by the Registration Statement;
(ii) agrees that the Board of Directors (on its own or
through any Officer of the Company) is authorized to execute,
deliver and perform the agreements referred to in
clause (i) of this sentence and the other agreements, acts,
transactions and matters described in or contemplated by the
Registration Statement on behalf of the Company without any
further act, approval or vote of the Members or the other
Persons who may acquire an interest in Company Securities; and
(iii) agrees that the execution, delivery or performance by
the Company, any Group Member or any Affiliate of any of them of
this Agreement or any agreement authorized or permitted under
this Agreement (including the exercise by any Affiliate of the
Company of the rights accorded pursuant to Article XIII)
shall not constitute a breach by the Board of Directors or any
Officer of any duty that the Board of Directors or any Officer
may owe the Company or the Members or any other Persons under
this Agreement (or any other agreements) or of any duty stated
or implied by law or equity.
Section 7.2 Certificate
of Formation. The Certificate of Formation has been
filed with the Secretary of State of the State of Delaware as
required by the Delaware Act. The Board of Directors shall use
all reasonable efforts to cause to be filed such other
certificates or documents that it determines to be necessary or
appropriate for the formation, continuation, qualification and
operation of a limited liability company in the State of
Delaware or any other state in which the Company may elect to do
business or own property. To the extent that the Board of
Directors determines such action to be necessary or appropriate,
the Board of Directors shall direct the appropriate Officers of
the Company to file amendments to and restatements of the
Certificate of Formation and do all things to maintain the
Company as a limited liability company under the laws of the
State of Delaware or of any other state in which the Company may
elect to do business or own property. Subject to the terms of
Section 3.4(a), the Company shall not be required, before
or after filing, to deliver or mail a copy of the Certificate of
Formation, any qualification document or any amendment thereto
to any Member.
Section 7.3 Restrictions
on the Board of Directors Authority.
(a) Except as otherwise provided in this Agreement, the
Board of Directors may not, without written approval of the
specific act by holders of all of the Outstanding Interests or
by other written instrument executed and delivered by holders of
all of the Outstanding Interests subsequent to the date of this
Agreement, take any action in contravention of this Agreement.
(b) Except as provided in Articles X and XII, the
Board of Directors may not sell, exchange or otherwise dispose
of all or substantially all of the assets of the Company Group,
taken as a whole, in a single transaction or a series of related
transactions (including by way of merger, consolidation or other
combination) or approve on behalf of the Company or its
Subsidiaries the sale, exchange or other dispose of all or
substantially all of the assets of the MLP Group, without the
approval of holders of a Unit Majority; provided, however, that
this provision shall not preclude or limit the Board of
Directors ability to mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the
assets of the Company Group and shall not apply to any forced
sale of any or all of the assets of the Company Group pursuant
to the foreclosure of, or other realization upon, any such
encumbrance.
Section 7.4 Officers.
(a) The Board of Directors shall have the power and
authority to appoint such officers with such titles, authority
and duties as determined by the Board of Directors. Such Persons
so designated by the Board of Directors shall be referred to as
Officers. Unless provided otherwise by resolution of
the Board of Directors, the Officers shall have the titles,
power, authority and duties described below in this
Section 7.4.
A-29
(b) The Officers of the Company shall include a Chairman of
the Board, a Chief Executive Officer, a President, and a
Secretary, and may also include a Vice Chairman, Chief Operating
Officer, Treasurer, one or more Vice Presidents (who may be
further classified by such descriptions as
executive, senior, assistant
or otherwise, as the Board of Directors shall determine), one or
more Assistant Secretaries and one or more Assistant Treasurers.
Officers shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual
meeting of Members and as necessary to fill vacancies. Each
Officer shall hold office until his or her successor is elected
and qualified or until his or her earlier death, resignation or
removal. Any number of offices may be held by the same Person.
The compensation of Officers elected by the Board of Directors
shall be fixed from time to time by the Board of Directors or by
such Officers as may be designated by resolution of the Board of
Directors.
(c) Any Officer may resign at any time upon written notice
to the Company. Any Officer, agent or employee of the Company
may be removed by the Board of Directors with or without cause
at any time. The Board of Directors may delegate the power of
removal as to Officers, agents and employees who have not been
appointed by the Board of Directors. Such removal shall be
without prejudice to a Persons contract rights, if any,
but the appointment of any Person as an Officer, agent or
employee of the Company shall not of itself create contract
rights.
(d) The President shall be the Chief Executive Officer of
the Company unless the Board of Directors designates the
Chairman of the Board as Chief Executive Officer. Subject to the
control of the Board of Directors and the executive committee
(if any), the Chief Executive Officer shall have general
executive charge, management and control of the properties,
business and operations of the Company with all such powers as
may be reasonably incident to such responsibilities; he may
employ and discharge employees and agents of the Company except
such as shall be appointed by the Board of Directors, and he may
delegate these powers; he may agree upon and execute all leases,
contracts, evidences of indebtedness and other obligations in
the name of the Company, and shall have such other powers and
duties as designated in accordance with this Agreement and as
from time to time may be assigned to him by the Board of
Directors.
(e) If elected, the Chairman of the Board shall preside at
all meetings of the Members and of the Board of Directors; and
shall have such other powers and duties as designated in this
Agreement and as from time to time may be assigned to him by the
Board of Directors.
(f) Unless the Board of Directors otherwise determines, the
President shall have the authority to agree upon and execute all
leases, contracts, evidences of indebtedness and other
obligations in the name of the Company; and, unless the Board of
Directors otherwise determines, shall, in the absence of the
Chairman of the Board or if there be no Chairman of the Board,
preside at all meetings of the Members and (should he be a
Director) of the Board of Directors; and he shall have such
other powers and duties as designated in accordance with this
Agreement and as from time to time may be assigned to him by the
Board of Directors.
(g) In the absence of the President, or in the event of his
inability or refusal to act, a Vice President designated by the
Board of Directors shall perform the duties of the President,
and when so acting shall have all the powers of and be subject
to all the restrictions upon the President. In the absence of a
designation by the Board of Directors of a Vice President to
perform the duties of the President, or in the event of his
absence or inability or refusal to act, the Vice President who
is present and who is senior in terms of uninterrupted time as a
Vice President of the Company shall so act. The Vice President
shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe. Unless
otherwise provided by the Board of Directors, each Vice
President will have authority to act within his or her
respective areas and to sign contracts relating thereto.
(h) The Treasurer shall have responsibility for the custody
and control of all the funds and securities of the Company and
shall have such other powers and duties as designated in this
Agreement and as from time to time may be assigned to the
Treasurer by the Board of Directors. The Treasurer shall perform
all acts incident to the position of Treasurer, subject to the
control of the Chief Executive Officer and the Board of
Directors. Each Assistant Treasurer shall have the usual powers
and duties pertaining to his office, together with such other
powers and duties as designated in this Agreement and as from
time to time may be assigned to him by the Chief Executive
Officer or the Board of Directors. The Assistant Treasurers
shall exercise the powers of the Treasurer
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during that Officers absence or inability or refusal to
act. An Assistant Treasurer shall also perform such other duties
as the Treasurer or the Board of Directors may assign to him.
(i) The Secretary shall issue all authorized notices for,
and shall keep minutes of, all meetings of the Members and the
Board of Directors. The Secretary shall have charge of the
corporate books and shall perform such other duties as the Board
of Directors may from time to time prescribe. In the absence or
inability to act of the Secretary, any Assistant Secretary may
perform all the duties and exercise all the powers of the
Secretary. The performance of any such duty shall, in respect of
any other Person dealing with the Company, be conclusive
evidence of his power to act. An Assistant Secretary shall also
perform such other duties as the Secretary or the Board of
Directors may assign to him.
(j) The Board of Directors may from time to time delegate
the powers or duties of any Officer to any other Officers or
agents, notwithstanding any provision hereof.
(k) Unless otherwise directed by the Board of Directors,
the Chief Executive Officer, the President or any Officer of the
Company authorized by the Chief Executive Officer shall have
power to vote and otherwise act on behalf of the Company, in
person or by proxy, at any meeting of Members of or with respect
to any action of equity holders of any other entity in which the
Company may hold securities and otherwise to exercise any and
all rights and powers which the Company may possess by reason of
its ownership of securities in such other entities.
Section 7.5 Outside
Activities. Except as otherwise provided for in the
Omnibus Agreement or the Non-Compete Agreement, as applicable,
(a) it shall be deemed not to be a breach of any duty
(including any fiduciary duty) or any other obligation of any
type whatsoever of any Director for Affiliates of such Director
to engage in outside business interests and activities in
preference to or to the exclusion of the Company or in direct
competition with the Company; provided such Affiliate does not
engage in such business or activity as a result of or using
confidential information provided by or on behalf of the Company
to such Director and (b) Directors shall have no obligation
hereunder or as a result of any duty expressed or implied by law
to present business opportunities to the Company that may become
available to Affiliates of such Director. None of any Group
Member, any Member or any other Person shall have any rights by
virtue of a Directors duties as a Director, this Agreement
or any Group Member Agreement in any business ventures of any
Director.
Section 7.6 Loans
or Contributions from the Company or Group Members.
(a) The Company may lend or contribute to any Group Member,
and any Group Member may borrow from the Company, funds on terms
and conditions determined by the Board of Directors.
(b) No borrowing by any Group Member or the approval
thereof by the Board of Directors shall be deemed to constitute
a breach of any duty (including any fiduciary duty), expressed
or implied, of the Board of Directors to the Company or the
Members by reason of the fact that the purpose or effect of such
borrowing is directly or indirectly to enable distributions to
the Members.
Section 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement, all
Indemnitees shall be indemnified and held harmless by the
Company from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including legal fees
and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee; provided,
that the Indemnitee shall not be indemnified and held harmless
if there has been a final and non-appealable judgment entered by
a court of competent jurisdiction determining that, in respect
of the matter for which the Indemnitee is seeking
indemnification pursuant to this Section 7.7, the
Indemnitee acted in bad faith or engaged in fraud, willful
misconduct, or in the case of a criminal matter, acted with
knowledge that the Indemnitees conduct was unlawful;
provided, further, no indemnification pursuant to this
Section 7.7 shall be available to the Initial Members or
their Affiliates with respect to their obligations incurred
pursuant to the Underwriting Agreement (other than obligations
incurred by the Initial Members on behalf of the Company).
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(b) To the fullest extent permitted by law, expenses
(including legal fees and expenses) incurred by an Indemnitee
who is indemnified pursuant to Section 7.7(a) in defending
any claim, demand, action, suit or proceeding shall, from time
to time, be advanced by the Company prior to a determination
that the Indemnitee is not entitled to be indemnified upon
receipt by the Company of any undertaking by or on behalf of the
Indemnitee to repay such amount if it shall be determined that
the Indemnitee is not entitled to be indemnified as authorized
in this Section 7.7.
(c) The indemnification, advancement of expenses and other
provisions of this Section 7.7 shall be in addition to any
other rights to which an Indemnitee may be entitled under any
agreement, pursuant to any vote of the holders of Outstanding
Interests entitled to vote on such matter, as a matter of law or
otherwise, both as to actions in the Indemnitees capacity
as an Indemnitee and as to actions in any other capacity
(including any capacity under the Underwriting Agreement), and
shall continue as to an Indemnitee who has ceased to serve in
such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Company may purchase and maintain insurance, on
behalf of its Directors and Officers, and such other Persons as
the Board of Directors shall determine, against any liability
that may be asserted against or expense that may be incurred by
such Person in connection with the Companys activities or
such Persons activities on behalf of the Company,
regardless of whether the Company would have the power to
indemnify such Person against such liability under the
provisions of this Agreement.
(e) For purposes of the definition of Indemnitee in this
Section 7.7, the Company shall be deemed to have requested
an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by such Indemnitee of his duties to the
Company also imposes duties on, or otherwise involves services
by, such Indemnitee to the plan or participants or beneficiaries
of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall
constitute fines within the meaning of
Section 7.7(a); and action taken or omitted by such
Indemnitee with respect to any employee benefit plan in the
performance of such Indemnitees duties for a purpose
reasonably believed by him to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be
for a purpose that is in, or not opposed to, the best interests
of the Company.
(f) Any indemnification pursuant to this Section 7.7
shall be made only out of the assets of the Company, it being
agreed that the Members shall not be personally liable for such
indemnification and shall have no obligation to contribute or
loan any monies or property to the Company to enable it to
effectuate such indemnification.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to
which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The indemnification, advancement of expenses and other
provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators
and shall not be deemed to create any rights for the benefit of
any other Persons.
(i) No amendment, modification or repeal of this
Section 7.7 or any provision hereof shall in any manner
terminate, reduce or impair the right of any past, present or
future Indemnitee to be indemnified by the Company, nor the
obligations of the Company to indemnify any such Indemnitee
under and in accordance with the provisions of this
Section 7.7 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
Section 7.8 Exculpation
of Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in
this Agreement, no Indemnitee shall be liable for monetary
damages to the Company or the Members for losses sustained or
liabilities incurred as a result of any act or omission of an
Indemnitee unless there has been a final, non-appealable
judgment entered by a court of competent jurisdiction
determining that, in respect of the matter in question, the
Indemnitee acted in bad faith or
A-32
engaged in fraud, willful misconduct or, in the case of a
criminal matter, acted with knowledge that the Indemnitees
conduct was unlawful.
(b) Subject to its obligations and duties as Board of
Directors set forth in this Article VII, the Board of
Directors may exercise any of the powers granted to it by this
Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents, and the
Board of Directors shall not be responsible for any misconduct
or negligence on the part of any such agent appointed by the
Board of Directors in good faith.
(c) To the extent that, at law or in equity, an Indemnitee
has duties (including fiduciary duties) and liabilities relating
thereto to the Company or to the Members, the Directors and any
other Indemnitee acting in connection with the Companys
business or affairs shall not be liable to the Company or to any
Member for their good faith reliance on the provisions of this
Agreement. The provisions of this Agreement, to the extent that
they restrict or eliminate or otherwise modify the duties
(including fiduciary duties) and liabilities of an Indemnitee
otherwise existing at law or in equity, are agreed by the
Members to replace such other duties and liabilities of such
Indemnitee.
(d) Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective
only and shall not in any way affect the limitations on the
liability of any Indemnitee under this Section 7.8 as in
effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise
or be asserted and provided such Person became an Indemnitee
hereunder prior to such amendment, modification or repeal.
Section 7.9 Resolution
of Conflicts of Interest; Standards of Conduct and Modification
of Duties.
(a) Unless otherwise expressly provided in this Agreement,
whenever a potential conflict of interest exists or arises
between any of the Initial Members, any of the MLP Group, one or
more Directors or their respective Affiliates, on the one hand,
and the Company, or any Group Member or any Member, on the
other, any resolution or course of action by the Board of
Directors or its Affiliates in respect of such conflict of
interest shall be permitted and deemed approved by all Members,
and shall not constitute a breach of this Agreement, of any
agreement contemplated herein, or of any duty stated or implied
by law or equity, including any fiduciary duty, if the
resolution or course of action in respect of such conflict of
interest is (i) approved by Special Approval,
(ii) approved by the vote of a majority of the Outstanding
Units held by disinterested parties, (iii) on terms no less
favorable to the Company than those generally being provided to
or available from unrelated third parties or (iv) fair and
reasonable to the Company, taking into account the totality of
the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous
to the Company). The Board of Directors shall be authorized but
not required in connection with its resolution of such conflict
of interest to seek Special Approval of such resolution, and the
Board of Directors may also adopt a resolution or course of
action that has not received Special Approval. If Special
Approval is not sought and the Board of Directors determines
that the resolution or course of action taken with respect to a
conflict of interest satisfies either of the standards set forth
in clauses (iii) and (iv) above, then it shall be
presumed that, in making its decision, the Board of Directors
acted in good faith, and in any proceeding brought by any Member
or by or on behalf of such Member or any other Member or the
Company challenging such approval, the Person bringing or
prosecuting such proceeding shall have the burden of overcoming
such presumption. Notwithstanding anything to the contrary in
this Agreement, the existence of the conflicts of interest
described in the Registration Statement are hereby approved by
all Members and shall not constitute a breach of this Agreement
or of any duty otherwise existing at law, in equity or otherwise.
(b) The Members hereby authorize the Board of Directors, on
behalf of the Company as a partner or member of a Group Member,
to approve of actions by the Board of Directors or managing
member of such Group Member similar to those actions permitted
to be taken by the Board of Directors pursuant to this
Section 7.9.
Section 7.10 Duties
of Officers and Directors.
(a) Except as otherwise expressly provided in
Sections 7.5, 7.6, 7.7, 7.8 and 7.9 or elsewhere in this
Agreement or required by the Delaware Act, the duties and
obligations owed to the Company and to the Members
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by the Officers and Directors, shall be the same as the
respective duties and obligations owed to a corporation
organized under DGCL by its officers and directors, respectively.
(b) A Director shall, in the performance of his duties, be
fully protected in relying in good faith upon the records of the
Company and on such information, opinions, reports or statements
presented to the Company by any of the Companys Officers
or employees, or committees of the Board of Directors, or by any
other Person as to matters the Director reasonably believes are
within such other Persons professional or expert
competence.
(c) The Board of Directors shall have the right, in respect
of any of its powers or obligations hereunder, to act through a
duly appointed attorney or
attorneys-in-fact or
the duly authorized Officers of the Company.
Section 7.11 Purchase
or Sale of Company Securities. The Board of Directors
may cause the Company to purchase or otherwise acquire Company
Securities.
Section 7.12 Registration
Rights of the Initial Members and their Affiliates.
(a) If (i) the Initial Members or any Affiliate of the
Initial Members (including for purposes of this
Section 7.12, any Person that is an Affiliate of the
Initial Members at the date hereof notwithstanding that it may
later cease to be an Affiliate of the Initial Members) holds
Company Securities (the Holder) that it desires to
sell and (ii) Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such
Holder of Company Securities to dispose of the number of Company
Securities it desires to sell at the time it desires to do so
without registration under the Securities Act, then at the
option and upon the request of the Holder, the Company shall
file with the Commission as promptly as practicable after
receiving such request, and use all commercially reasonable
efforts to cause to become effective and remain effective for a
period of not less than six months following its effective date
or such shorter period as shall terminate when all Company
Securities covered by such registration statement have been
sold, a registration statement under the Securities Act
registering the offering and sale of the number of Company
Securities specified by the Holder; provided, however, that the
Company shall not be required to effect more than three
registrations pursuant to this Section 7.12(a) and
Section 7.12(b); and provided further, however, that if the
Conflicts Committee determines in good faith that the requested
registration would be materially detrimental to the Company and
its Members because such registration would (x) materially
interfere with a public offering or a significant acquisition,
reorganization or other similar transaction involving the
Company or the MLP, (y) require premature disclosure of
material information that the Company has a bona fide business
purpose for preserving as confidential or (z) render the
Company unable to comply with requirements under applicable
securities laws, then the Company shall have the right to
postpone such requested registration for a period of not more
than three months after receipt of the Holders request,
such right pursuant to this Section 7.12(a) or
Section 7.12(b) not to be utilized more than twice in any
twelve-month period. Except as provided in the preceding
sentence, the Company shall be deemed not to have used all
commercially reasonable efforts to keep the registration
statement effective during the applicable period if it
voluntarily takes any action that would result in Holders of
Company Securities covered thereby not being able to offer and
sell such Company Securities at any time during such period,
unless such action is required by applicable law. In connection
with any registration pursuant to the first sentence of this
Section 7.12(a), the Company shall (i) promptly
prepare and file (A) such documents as may be necessary to
register or qualify the securities subject to such registration
under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a
result thereof, the Company would become subject to general
service of process or to taxation or qualification to do
business as a foreign corporation doing business in such
jurisdiction solely as a result of such registration, and
(B) such documents as may be necessary to apply for listing
or to list the Company Securities subject to such registration
on such National Securities Exchange as the Holder shall
reasonably request, and (ii) do any and all other
reasonable acts and things that may be necessary or appropriate
to enable the Holder to consummate a public sale of such Company
Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Company, without
reimbursement by the Holder.
(b) If any Holder holds Company Securities that it desires
to sell and Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such
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Holder to dispose of the number of Company Securities it desires
to sell at the time it desires to do so without registration
under the Securities Act, then at the option and upon the
request of the Holder, the Company shall file with the
Commission as promptly as practicable after receiving such
request, and use all commercially reasonable efforts to cause to
become effective and remain effective for a period of not less
than six months following its effective date or such shorter
period as shall terminate when all Company Securities covered by
such shelf registration statement have been sold, a
shelf registration statement covering the Company
Securities specified by the Holder on an appropriate form under
Rule 415 of the Securities Act, or any similar rule that
may be adopted by the Commission; provided, however, that the
Company shall not be required to effect more than three
registrations pursuant to Section 7.12(a) and this
Section 7.12(b); and provided further, however, that if the
Conflicts Committee determines in good faith that any offering
under, or the use of any prospectus forming a part of, the shelf
registration statement would be materially detrimental to the
Company and its Members because such offering or use would
(x) materially interfere with a public offering or a
significant acquisition, reorganization or other similar
transaction involving the Company or the MLP, (y) require
premature disclosure of material information that the Company
has a bona fide business purpose for preserving as confidential
or (z) render the Company unable to comply with
requirements under applicable securities laws, then the Company
shall have the right to postpone such requested registration for
a period of not more than three months after receipt of the
Holders request, such right pursuant to
Section 7.12(a) or this Section 7.12(b) not to be
utilized more than twice in any twelve-month period. Except as
provided in the preceding sentence, the Company shall be deemed
not to have used all commercially reasonable efforts to keep the
shelf registration statement effective during the applicable
period if it voluntarily takes any action that would result in
Holders of Company Securities covered thereby not being able to
offer and sell such Company Securities at any time during such
period, unless such action is required by applicable law. In
connection with any shelf registration pursuant to this
Section 7.12(b), the Company shall (i) promptly
prepare and file (A) such documents as may be necessary to
register or qualify the securities subject to such shelf
registration under the securities laws of such states as the
Holder shall reasonably request; provided, however, that no such
qualification shall be required in any jurisdiction where, as a
result thereof, the Company would become subject to general
service of process or to taxation or qualification to do
business as a foreign corporation doing business in such
jurisdiction solely as a result of such shelf registration, and
(B) such documents as may be necessary to apply for listing
or to list the Company Securities subject to such shelf
registration on such National Securities Exchange as the Holder
shall reasonably request, and (ii) do any and all other
reasonable acts and things that may be necessary or appropriate
to enable the Holder to consummate a public sale of such Company
Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such shelf
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Company, without
reimbursement by the Holder.
(c) If the Company shall at any time propose to file a
registration statement under the Securities Act for an offering
of equity securities of the Company for cash (other than an
offering relating solely to an employee benefit plan), the
Company shall use all reasonable efforts to include such number
or amount of securities held by the Holder in such registration
statement as the Holder shall request; provided, that the
Company is not required to make any effort or take any action to
so include the securities of the Holder once the registration
statement is declared effective by the Commission, including any
registration statement providing for the offering from time to
time of securities pursuant to Rule 415 of the Securities
Act. If the proposed offering pursuant to this
Section 7.12(c) shall be an underwritten offering, then, in
the event that the managing underwriter or managing underwriters
of such offering advise the Company and the Holder in writing
that in their opinion the inclusion of all or some of the
Holders Company Securities could adversely and materially
affect the success of the offering, the Company shall include in
such offering only that number or amount, if any, of securities
held by the Holder that, in the opinion of the managing
underwriter or managing underwriters, will not so adversely and
materially affect the offering. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Company, without
reimbursement by the Holder.
(d) If underwriters are engaged in connection with any
registration referred to in this Section 7.12, the Company
shall provide indemnification, representations, covenants,
opinions and other assurance to the underwriters in form and
substance reasonably satisfactory to such underwriters. Further,
in addition to and not in limitation of the Companys
obligation under Section 7.7, the Company shall, to the
fullest extent permitted by
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law, indemnify and hold harmless the Holder, its officers,
directors and each Person who controls the Holder (within the
meaning of the Securities Act) and any agent thereof
(collectively, Indemnified Persons) against any
losses, claims, demands, actions, causes of action, assessments,
damages, liabilities (joint or several), costs and expenses
(including interest, penalties and reasonable attorneys
fees and disbursements), resulting to, imposed upon, or incurred
by the Indemnified Persons, directly or indirectly, under the
Securities Act or otherwise (hereinafter referred to in this
Section 7.12(d) as a claim and in the plural as
claims) based upon, arising out of or resulting from
any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which any
Company Securities were registered under the Securities Act or
any state securities or Blue Sky laws, in any preliminary
prospectus (if used prior to the effective date of such
registration statement), or in any summary or final prospectus
or in any amendment or supplement thereto (if used during the
period the Company is required to keep the registration
statement current), or arising out of, based upon or resulting
from the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements made therein not misleading; provided, however,
that the Company shall not be liable to any Indemnified Person
to the extent that any such claim arises out of, is based upon
or results from an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration
statement, such preliminary, summary or final prospectus or such
amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or on behalf of
such Indemnified Person specifically for use in the preparation
thereof.
(e) The provisions of Section 7.12(a),
Section 7.12(b) and Section 7.12(c) shall continue to
be applicable with respect to any of the Initial Members
Affiliates after such Initial Member ceases to be a Member of
the Company, during a period of two years subsequent to the
effective date of such cessation and for so long thereafter as
is required for the Holder to sell all of the Company Securities
with respect to which it has requested during such two-year
period inclusion in a registration statement otherwise filed or
that a registration statement be filed; provided, however, that
the Company shall not be required to file successive
registration statements covering the same Company Securities for
which registration was demanded during such two-year period. The
provisions of Section 7.12(d) shall continue in effect
thereafter.
(f) The rights to cause the Company to register Company
Securities pursuant to this Section 7.12 may be assigned
(but only with all related obligations) by a Holder to a
transferee or assignee of such Company Securities, provided
(i) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address
of such transferee or assignee and the Company Securities with
respect to which such registration rights are being assigned;
and (ii) such transferee or assignee agrees in writing to
be bound by and subject to the terms set forth in this
Section 7.12.
(g) Any request to register Company Securities pursuant to
this Section 7.12 shall (i) specify the Company
Securities intended to be offered and sold by the Person making
the request, (ii) express such Persons present intent
to offer such Company Securities for distribution,
(iii) describe the nature or method of the proposed offer
and sale of Company Securities, and (iv) contain the
undertaking of such Person to provide all such information and
materials and take all action as may be required in order to
permit the Company to comply with all applicable requirements in
connection with the registration of such Company Securities.
Section 7.13 Reliance
by Third Parties. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Company
shall be entitled to assume that the Board of Directors and any
Officer authorized by the Board of Directors to act on behalf of
and in the name of the Company has full power and authority to
encumber, sell or otherwise use in any manner any and all assets
of the Company and to enter into any authorized contracts on
behalf of the Company, and such Person shall be entitled to deal
with the Board of Directors or any Officer as if it were the
Companys sole party in interest, both legally and
beneficially. Each Member hereby waives any and all defenses or
other remedies that may be available against such Person to
contest, negate or disaffirm any action of the Board of
Directors or any Officer in connection with any such dealing. In
no event shall any Person dealing with the Board of Directors or
any Officer or its representatives be obligated to ascertain
that the terms of this Agreement have been complied with or to
inquire into the necessity or expedience of any act or action of
the Board of Directors or any Officer or its representatives.
Each and every certificate, document or other instrument
executed on behalf of the Company by the Board of Directors or
any Officer or its representatives shall be conclusive evidence
in favor of any and every Person relying thereon or
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claiming thereunder that (a) at the time of the execution
and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on
behalf of the Company and (c) such certificate, document or
instrument was duly executed and delivered in accordance with
the terms and provisions of this Agreement and is binding upon
the Company.
ARTICLE VIII
Books, Records,
Accounting and Reports
Section 8.1 Records
and Accounting. The Board of Directors shall keep or
cause to be kept at the principal office of the Company
appropriate books and records with respect to the Companys
business, including all books and records necessary to provide
to the Members any information required to be provided pursuant
to this Agreement. Any books and records maintained by or on
behalf of the Company in the regular course of its business,
including the record of the Record Holders of Units or other
Company Securities, books of account and records of Company
proceedings, may be kept on, or be in the form of, computer
disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device; provided,
that the books and records so maintained are convertible into
clearly legible written form within a reasonable period of time.
The books of the Company shall be maintained, for financial
reporting purposes, on an accrual basis in accordance with
U.S. GAAP.
Section 8.2 Fiscal
Year. The fiscal year of the Company shall be a fiscal
year ending December 31.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than
120 days after the close of each fiscal year of the
Company, the Board of Directors shall cause to be mailed or made
available to each Record Holder of a Unit as of a date selected
by the Board of Directors, an annual report containing financial
statements of the Company for such fiscal year of the Company,
presented in accordance with U.S. GAAP, including a balance
sheet and statements of operations, equity and cash flows, such
statements to be audited by a registered public accounting firm
selected by the Board of Directors.
(b) As soon as practicable, but in no event later than
90 days after the close of each Quarter except the last
Quarter of each fiscal year, the Board of Directors shall cause
to be mailed or made available to each Record Holder of a Unit,
as of a date selected by the Board of Directors, a report
containing unaudited financial statements of the Company and
such other information as may be required by applicable law,
regulation or rule of any National Securities Exchange on which
the Units are listed for trading, or as the Board of Directors
determines to be necessary or appropriate.
ARTICLE IX
Tax Matters
Section 9.1 Tax
Returns and Information. The Company shall timely file
all returns of the Company that are required for federal, state
and local income tax purposes on the basis of the accrual method
and a taxable year ending on December 31. The tax
information reasonably required by Record Holders for federal
and state income tax reporting purposes with respect to a
taxable year shall be furnished to them within 90 days of
the close of the calendar year in which the Companys
taxable year ends. The classification, realization and
recognition of income, gain, losses and deductions and other
items shall be on the accrual method of accounting for federal
income tax purposes.
Section 9.2 Tax
Elections.
(a) The Company shall make the election under
Section 754 of the Code in accordance with applicable
regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the Board of
Directors determination that such revocation is in the
best interests of the Members. Notwithstanding any other
provision herein contained, for the purposes of computing the
adjustments under Section 743(b) of the
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Code, the Board of Directors shall be authorized (but not
required) to adopt a convention whereby the price paid by a
transferee of a Interest will be deemed to be the lowest quoted
closing price of the Interests on any National Securities
Exchange on which such Interests are traded during the calendar
month in which such transfer is deemed to occur pursuant to
Section 6.2(g) without regard to the actual price paid by
such transferee.
(b) Except as otherwise provided herein, the Board of
Directors shall determine whether the Company should make any
other elections permitted by the Code.
Section 9.3 Tax
Controversies. Subject to the provisions hereof, the
Board of Directors shall designate one Member as the Tax Matters
Partner (as defined in the Code). The Tax Matters Partner is
authorized and required to represent the Company (at the
Companys expense) in connection with all examinations of
the Companys affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend
Company funds for professional services and costs associated
therewith. Each Member agrees to cooperate with the Tax Matters
Partner and to do or refrain from doing any or all things
reasonably required by the Tax Matters Partner to conduct such
proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the Board
of Directors is authorized to take any action that may be
required to cause the Company and other Group Members to comply
with any withholding requirements established under the Code or
any other federal, state or local law including, without
limitation, pursuant to Sections 1441, 1442, 1445 and 1446
of the Code. To the extent that the Company is required or
elects to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income
to any Member (including, without limitation, by reason of
Section 1446 of the Code), the Board of Directors may treat
the amount withheld as a distribution of cash pursuant to
Section 6.3 in the amount of such withholding from such
Member.
ARTICLE X
Dissolution and
Liquidation
Section 10.1 Dissolution.
The Company shall not be dissolved by the admission of
Substituted Members or Additional Members. The Company shall
dissolve, and its affairs shall be wound up, upon:
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(a) an election to dissolve the Company by the Board of
Directors that is approved by the holders of a Unit Majority; |
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(b) the sale, exchange or other disposition of all or
substantially all of the assets and properties of the Company
and the Companys Subsidiaries; or |
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(c) the entry of a decree of judicial dissolution of the
Company pursuant to the provisions of the Delaware Act. |
Section 10.2 Liquidator.
Upon dissolution of the Company, the Board of Directors shall
select one or more Persons to act as Liquidator. The Liquidator
(if other than the Board of Directors) shall be entitled to
receive such compensation for its services as may be approved by
holders of a Unit Majority. The Liquidator (if other than the
Board of Directors) shall agree not to resign at any time
without 15 days prior notice and may be removed at
any time, with or without cause, by notice of removal approved
by holders of a Unit Majority. Upon dissolution, removal or
resignation of the Liquidator, a successor and substitute
Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of a Unit Majority. The right
to approve a successor or substitute Liquidator in the manner
provided herein shall be deemed to refer also to any such
successor or substitute Liquidator approved in the manner herein
provided. Except as expressly provided in this Article X,
the Liquidator approved in the manner provided herein shall have
and may exercise, without further authorization or consent of
any of the parties hereto, all of the powers conferred upon the
Board of Directors under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the
limitation on sale set forth in Section 7.3(b)) necessary
or appropriate to carry out the duties and functions of the
Liquidator hereunder for and during the period of time required
to complete the winding up and liquidation of the Company as
provided for herein.
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Section 10.3 Liquidation.
The Liquidator shall proceed to dispose of the assets of the
Company, discharge its liabilities, and otherwise wind up its
affairs in such manner and over such period as determined by the
Liquidator, subject to
Section 18-804 of
the Delaware Act and the following:
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(a) The assets may be disposed of by public or private sale
or by distribution in kind to one or more Members on such terms
as the Liquidator and such Member or Members may agree. If any
property is distributed in kind, the Member receiving the
property shall be deemed for purposes of Section 10.3(c) to
have received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must
be made to the other Members. Notwithstanding anything to the
contrary contained in this Agreement, the Members understand and
acknowledge that a Member may be compelled to accept a
distribution of any asset in kind from the Company despite the
fact that the percentage of the asset distributed to such Member
exceeds the percentage of that asset which is equal to the
percentage in which such Member shares in distributions from the
Company. The Liquidator may defer liquidation or distribution of
the Companys assets for a reasonable time if it determines
that an immediate sale or distribution of all or some of the
Companys assets would be impractical or would cause undue
loss to the Members. The Liquidator may distribute the
Companys assets, in whole or in part, in kind if it
determines that a sale would be impractical or would cause undue
loss to the Members. |
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(b) Liabilities of the Company include amounts owed to the
Liquidator as compensation for serving in such capacity (subject
to the terms of Section 10.2) and amounts to Members
otherwise than in respect of their distribution rights under
Article VI. With respect to any liability that is
contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for
such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be applied to other
liabilities or distributed as additional liquidation proceeds. |
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(c) All property and all cash in excess of that required to
discharge liabilities as provided in Section 10.3(b) shall
be distributed to the Members in accordance with, and to the
extent of, the positive balances in their respective Capital
Accounts, as determined after taking into account all Capital
Account adjustments (other than those made by reason of
distributions pursuant to this Section 10.3(c)) for the
taxable year of the Company during which the liquidation of the
Company occurs (with such date of occurrence being determined
pursuant to Treasury
Regulation Section 1.704-1(b)(2)(ii)(g)),
and such distribution shall be made by the end of such taxable
year (or, if later, within 90 days after said date of such
occurrence). |
Section 10.4 Cancellation
of Certificate of Formation. Upon the completion of the
distribution of Company cash and property as provided in
Section 10.3 in connection with the liquidation of the
Company, the Certificate of Formation and all qualifications of
the Company as a foreign limited liability company in
jurisdictions other than the State of Delaware shall be canceled
and such other actions as may be necessary to terminate the
Company shall be taken.
Section 10.5 Return
of Contributions. None of any member of the Board of
Directors or any Officer of the Company will be personally
liable for, or have any obligation to contribute or loan any
monies or property to the Company to enable it to effectuate,
the return of the Capital Contributions of the Members or
Unitholders, or any portion thereof, it being expressly
understood that any such return shall be made solely from
Company assets.
Section 10.6 Waiver
of Partition. To the maximum extent permitted by law,
each Member hereby waives any right to partition of the Company
property.
Section 10.7 Capital
Account Restoration. No Member shall have any obligation
to restore any negative balance in its Capital Account upon
liquidation of the Company.
Section 10.8 Certain
Prohibited Acts. Without obtaining Special Approval, the
Board of Directors shall not take any action to cause the
Company or MLP to (i) make or consent to a general
assignment for the benefit of the MLPs creditors;
(ii) file or consent to the filing of any bankruptcy,
insolvency or reorganization petition for relief under the
United States Bankruptcy Code naming the MLP or otherwise seek,
with respect to the MLP,
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relief from debts or protection from creditors generally;
(iii) file or consent to the filing of a petition or answer
seeking for the MLP a liquidation, dissolution, arrangement, or
similar relief under any law; (iv) file an answer or other
pleading admitting or failing to contest the material
allegations of a petition filed against the MLP in a proceeding
of the type described in clauses (i) (iii) of
this Section 10.8; (v) seek, consent to or acquiesce
in the appointment of a receiver, liquidator, conservator,
assignee, trustee, sequestrator, custodian or any similar
official for the MLP or for all or any substantial portion of
its properties; (vi) sell all or substantially all of its
assets, except in accordance with Section 7.3;
(vii) dissolve or liquidate, except in accordance with this
Article X; or (viii) merge or consolidate, except in
accordance with Article XII.
ARTICLE XI
Amendment of Agreement;
Meetings of Members; Record Date
Section 11.1 Amendment
of Limited Liability Company Agreement.
(a) General Amendments. Except as provided in
Section 11.1(b) and Section 11.1(c), the Board of
Directors may amend any of the terms of this Agreement but only
in compliance with the terms, conditions and procedures set
forth in this Section 11.1(a). If the Board of Directors
desires to amend any provision of this Agreement other than
pursuant to Section 11.1(c), then it shall first adopt a
resolution setting forth the amendment proposed, declaring its
advisability, and either calling a special meeting of the
Members entitled to vote in respect thereof for the
consideration of such amendment or directing that the amendment
proposed be considered at the next annual meeting of the
Members. Amendments to this Agreement may be proposed only by or
with the consent of the Board of Directors. Such special or
annual meeting shall be called and held upon notice in
accordance with Section 11.2 and Section 11.3 of this
Agreement. The notice shall set forth such amendment in full or
a brief summary of the changes to be effected thereby, as the
Board of Directors shall deem advisable. At the meeting, a vote
of Members entitled to vote thereon shall be taken for and
against the proposed amendment. A proposed amendment shall be
effective upon its approval by a Unit Majority, unless a greater
percentage is required under this Agreement or by Delaware law.
(b) Super-Majority Amendments. Notwithstanding
Section 11.1(a) but subject to Section 11.1(c), the
affirmative vote of the holders of at least 75% of all
Outstanding Units, voting together as a single class, shall be
required to alter, amend, adopt any provision inconsistent with
or repeal subsection (d) of Section 7.1, this
subsection (b) of Section 11.1,
Section 11.2, subsection (d) of
Section 11.3, subsections (b) or (c) of
Section 11.8, Section 11.10 or Section 11.13.
(c) Amendments to be Adopted Solely by the Board of
Directors. Notwithstanding Section 11.1(a) and
Section 11.1(b), the Board of Directors, without the
approval of any Member, may amend any provision of this
Agreement, and execute, swear to, acknowledge, deliver, file and
record whatever documents may be required in connection
therewith, to reflect:
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(i) a change in the name of the Company, the location of
the principal place of business of the Company, the registered
agent of the Company or the registered office of the Company; |
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(ii) the admission, substitution, withdrawal or removal of
Members in accordance with this Agreement; |
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(iii) a change that the Board of Directors determines to be
necessary or appropriate to qualify or continue the
qualification of the Company as a limited liability company
under the laws of any state or to ensure that the Group Members
will not be treated as associations taxable as corporations or
otherwise taxed as entities for federal income tax purposes; |
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(iv) a change that the Board of Directors determines
(A) does not adversely affect the Members (including any
particular class of Interests as compared to other classes of
Interests) in any material respect, (B) to be necessary or
appropriate to (1) 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 (including the
Delaware Act) or (2) facilitate the trading of the Units
(including the division of any class or classes of Outstanding
Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any
rule, regulation, guideline |
A-40
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or requirement of any National Securities Exchange on which the
Units are or will be listed for trading, compliance with any of
which the Board of Directors deems to be in the best interests
of the Company and the Members, (C) to be necessary or
appropriate in connection with action taken by the Board of
Directors pursuant to Section 5.8 or (D) is required
to effect the intent expressed in the Registration Statement or
the intent of the provisions of this Agreement or is otherwise
contemplated by this Agreement; |
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(v) a change in the fiscal year or taxable year of the
Company and any other changes that the Board of Directors
determines to be necessary or appropriate as a result of a
change in the fiscal year or taxable year of the Company
including, if the Board of Directors shall so determine, a
change in the definition of Quarter and the dates on
which distributions are to be made by the Company; |
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(vi) an amendment that is necessary, in the Opinion of
Counsel, to prevent the Company or its Directors, Officers,
trustees or agents from in any manner being subjected to the
provisions of the Investment Company Act of 1940, as amended,
the Investment Advisers Act of 1940, as amended, or plan
asset regulations adopted under the Employee Retirement
Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations
currently applied or proposed by the United States Department of
Labor; |
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(vii) subject to the terms of Section 5.6, an
amendment that the Board of Directors determines to be necessary
or appropriate in connection with the authorization of issuance
of any class or series of Company Securities pursuant to
Section 5.5; |
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(viii) an amendment that the Board of Directors, in its
sole discretion, determines to be necessary or appropriate to
implement a defensive Unitholder rights plan similar to a
shareholder rights plan, or poison pill, for
corporations, including the issuance of a dividend of rights to
each Unitholder that would become exercisable if any Person or
Group acquires ownership in excess of a specified percentage of
the Units or initiated a tender offer for in excess of that
specified percentage percent of the Units. Each right will
entitle Unitholders to purchase a fractional share of a new
class of preferred units, which would convert into the right for
Unitholders other than such Person or Group to purchase Units
[at half of the then Current Market Price of the Units]. The
rights issued pursuant to any such Unitholder rights plan must
be redeemable by the Company for not more than $0.01 per
right; |
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(ix) any amendment expressly permitted in this Agreement to
be made by the Board of Directors acting alone; |
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(x) an amendment effected, necessitated or contemplated by
a Merger Agreement approved in accordance with Section 12.3; |
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(xi) an amendment that the Board of Directors determines to
be necessary or appropriate to reflect and account for the
formation by the Company of, or investment by the Company in,
any corporation, partnership, joint venture, limited liability
company or other entity, in connection with the conduct by the
Company of activities permitted by the terms of Section 2.4; |
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(xii) a merger or conveyance pursuant to
Section 12.3(d); or |
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(xiii) any other amendments substantially similar to the
foregoing. |
Section 11.2 Amendment
Requirements.
(a) Notwithstanding the provisions of Section 11.1, no
provision of this Agreement that establishes a percentage of
Outstanding Units required to take any action shall be amended,
altered, changed, repealed or rescinded in any respect that
would have the effect of reducing such voting percentage unless
such amendment is approved by the affirmative vote of holders of
Outstanding Units whose aggregate Outstanding Units constitute
not less than the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Section 11.1, no
amendment to this Agreement may (i) enlarge the obligations
of any Member without its consent, unless such shall be deemed
to have occurred as a result of an amendment approved pursuant
to Section 11.2(c), (ii) change Section 10.1(a),
(iii) change the term of the Company or, (iv) except
as set forth in Section 10.1(a), give any Person the right
to dissolve the Company.
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(c) Except as provided in Section 12.3, and without
limitation of the Board of Directors authority to adopt
amendments to this Agreement without the approval of any Members
as contemplated in Section 11.1, any amendment that would
have a material adverse effect on the rights or preferences of
any class of Interests in relation to other classes of Interests
must be approved by the holders of not less than a majority of
the Outstanding Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 11.1 and except
as otherwise provided by Section 12.3(b), no amendments
shall become effective without the approval of the holders of at
least 90% of the Outstanding Units voting as a single class
unless the Company obtains an Opinion of Counsel to the effect
that such amendment will not affect the limited liability of any
Member under applicable law.
Section 11.3 Unitholder
Meetings.
(a) All acts of Members to be taken hereunder shall be
taken in the manner provided in this Article XI. An annual
meeting of the Members for the election of Directors and for the
transaction of such other business as may properly come before
the meeting shall be held at such time and place as the Board of
Directors shall specify, which date shall be within
13 months of the last annual meeting of Members. If
authorized by the Board of Directors, and subject to such
guidelines and procedures as the Board of Directors may adopt,
Members and proxyholders not physically present at a meeting of
Members, may by means of remote communication participate in
such meeting, and be deemed present in person and vote at such
meeting provided that the Company shall implement reasonable
measures to verify that each Person deemed present and permitted
to vote at the meeting by means of remote communication is a
Member or proxyholder, to provide such Members or proxyholders a
reasonable opportunity to participate in the meeting and to
record the votes or other action made by such Members or
proxyholders.
(b) A failure to hold the annual meeting of the Members at
the designated time or to elect a sufficient number of Directors
to conduct the business of the Company shall not affect
otherwise valid acts of the Company or work a forfeiture or
dissolution of the Company. If the annual meeting for election
of Directors is not held on the date designated therefor, the
Directors shall cause the meeting to be held as soon as is
convenient. If there is a failure to hold the annual meeting for
a period of 30 days after the date designated for the
annual meeting, or if no date has been designated, for a period
of 13 months after the latest to occur of the date of this
Agreement or its last annual meeting, the Delaware Court of
Chancery may summarily order a meeting to be held upon the
application of any Member or Director. The Outstanding Units
present at such meeting, either in person or by proxy, and
entitled to vote thereat, shall constitute a quorum for the
purpose of such meeting, notwithstanding any provision of this
Agreement to the contrary. The Delaware Court of Chancery may
issue such orders as may be appropriate, including orders
designating the time and place of such meeting, the record date
for determination of Unitholders entitled to vote, and the form
of notice of such meeting.
(c) All elections of Directors will be by written ballots;
if authorized by the Board of Directors, such requirement of a
written ballot shall be satisfied by a ballot submitted by
electronic transmission, provided that any such electronic
transmission must either set forth or be submitted with
information from which it can be reasonably determined that the
electronic transmission was authorized by the Member or
proxyholder.
(d) Special meetings of the Members may be called only by a
majority of the Board of Directors. No Members or group of
Members, acting in its or their capacity as Members, shall have
the right to call a special meeting of the Members.
Section 11.4 Notice
of Meetings of Members.
(a) Notice, stating the place, day and hour of any annual
or special meeting of the Members, as determined by the Board of
Directors, and (i) in the case of a special meeting of the
Members, the purpose or purposes for which the meeting is
called, as determined by the Board of Directors or (ii) in
the case of an annual meeting, those matters that the Board of
Directors, at the time of giving the notice, intends to present
for action by the Members, shall be delivered by the Company not
less than 10 calendar days nor more than 60 calendar days before
the date of the meeting, in a manner and otherwise in accordance
with Section 14.1 to each Record Holder who is entitled to
vote at such meeting. Such further notice shall be given as may
be required by Delaware law.
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The notice of any meeting of the Members 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. Only such business shall be conducted
at a special meeting of Members as shall have been brought
before the meeting pursuant to the Companys notice of
meeting. Any previously scheduled meeting of the Members may be
postponed, and any special meeting of the Members may be
canceled, by resolution of the Board of Directors upon public
notice given prior to the date previously scheduled for such
meeting of the Members.
(b) The Board of Directors shall designate the place of
meeting for any annual meeting or for any special meeting of the
Members. If no designation is made, the place of meeting shall
be the principal office of the Company.
Section 11.5 Record
Date. For purposes of determining the Members entitled
to notice of or to vote at a meeting of the Members, the Board
of Directors may set a Record Date, which shall not be less than
10 nor more than 60 days before the date of the meeting
(unless such requirement conflicts with any rule, regulation,
guideline or requirement of any National Securities Exchange on
which the Units are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall
govern). If no Record Date is fixed by the Board of Directors,
the Record Date for determining Members entitled to notice of or
to vote at a meeting of Members shall be at the close of
business on the day next preceding the day on which notice is
given. A determination of Members of record entitled to notice
of or to vote at a meeting of Members shall apply to any
adjournment or postponement of the meeting; provided, however,
that the Board of Directors may fix a new Record Date for the
adjourned or postponed meeting.
Section 11.6 Adjournment.
When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting and a new Record Date
need not be fixed, if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless such
adjournment shall be for more than 30 days. At the
adjourned meeting, the Company may transact any business which
might have been transacted at the original meeting. If the
adjournment is for more than 30 days or if a new Record
Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this
Article XI.
Section 11.7 Waiver
of Notice; Approval of Meeting. Whenever notice to the
Members is required to be given under this Agreement, a written
waiver, signed by the Person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a Person at any such meeting of the
Members shall constitute a waiver of notice of such meeting,
except when the Person attends a meeting for the express purpose
of objecting at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Members need
be specified in any written waiver of notice unless so required
by resolution of the Board of Directors. All waivers and
approvals shall be filed with the Company records or made part
of the minutes of the meeting.
Section 11.8 Quorum;
Required Vote for Member Action; Voting for Directors.
(a) At any meeting of the Members, 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 of such class or classes unless
any such action by the Members requires approval by holders of a
greater percentage of Outstanding Units, in which case the
quorum shall be such greater percentage. The submission of
matters to Members for approval and the election of Directors
shall occur only at a meeting of the Members duly called and
held in accordance with this Agreement at which a quorum is
present; provided, however, that the Members present at a duly
called or held meeting at which a quorum is present may continue
to transact business until adjournment, notwithstanding the
withdrawal of enough Members to leave less than a quorum, if any
action taken (other than adjournment) is approved by the
required percentage of Interests specified in this Agreement.
Any meeting of Members may be adjourned from time to time by the
chairman of the meeting to another place or time, without regard
to the presence of a quorum.
(b) Each Outstanding Unit shall be entitled to one vote per
Unit on all matters submitted to Members for approval and in the
election of Directors.
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(c) All matters (other than the election of Directors)
submitted to Members for approval shall be determined by a
majority of the votes cast affirmatively or negatively by
Members holding Outstanding Units unless a greater percentage is
required with respect to such matter under the Delaware Act,
under the rules of any National Securities Exchange on which the
Units are listed for trading, or under the provisions of this
Agreement, in which case the approval of Members holding
Outstanding Units that in the aggregate represent at least such
greater percentage shall be required.
(d) Directors will be elected by a plurality of the votes
cast for a particular position.
Section 11.9 Conduct
of a Meeting; Member Lists.
(a) The Board of Directors shall have full power and
authority concerning the manner of conducting any meeting of the
Members, including the determination of Persons entitled to
vote, the existence of a quorum, the satisfaction of the
requirements of this Article XI, the conduct of voting, the
validity and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or
during the meeting or voting. The Board of Directors shall
designate a Person to serve as chairman of any meeting and shall
further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Company
maintained by the Board of Directors. The Board of Directors may
make such other regulations consistent with applicable law and
this Agreement as it may deem advisable concerning the conduct
of any meeting of the Members, including regulations in regard
to the appointment of proxies, the appointment and duties of
inspectors of votes, the submission and examination of proxies
and other evidence of the right to vote.
(b) A complete list of Members entitled to vote at any
meeting of Members, arranged in alphabetical order for each
class of Interests and showing the address of each such Member
and the number of Outstanding Units registered in the name of
such Member, shall be open to the examination of any Member, for
any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days before the meeting,
at the principal place of business of the Company. The Member
list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected
by any Member who is present.
Section 11.10 Action
Without a Meeting. No action permitted or required to be
taken at a meeting of Members may be taken by written consent or
by any other means or manner than a meeting of Members called
and conducted in accordance with this Agreement.
Section 11.11 Voting
and Other Rights.
(a) Only those Record Holders of Outstanding Units on the
Record Date set pursuant to Section 11.5 shall be entitled
to notice of, and to vote at, a meeting of Members or to act
with respect to matters as to which the holders of the
Outstanding Units have the right to vote or to act. All
references in this Agreement to votes of, or other acts that may
be taken by, the Outstanding Units shall be deemed to be
references to the votes or acts of the Record Holders of such
Outstanding Units.
(b) With respect to Outstanding Units that are held for a
Persons account by another Person (such as a broker,
dealer, bank, trust company or clearing corporation, or an agent
of any of the foregoing), in whose name such Outstanding Units
are registered, such other Person shall, in exercising the
voting rights in respect of such Outstanding Units on any
matter, and unless the arrangement between such Persons provides
otherwise, vote such Outstanding Units in favor of, and at the
direction of, the Person who is the beneficial owner, and the
Company shall be entitled to assume it is so acting without
further inquiry. The provisions of this Section 11.11(b)
(as well as all other provisions of this Agreement) are subject
to the provisions of Section 4.3.
Section 11.12 Proxies
and Voting.
(a) At any meeting of the Members, every holder of an
Outstanding Unit entitled to vote may vote in person or by proxy
authorized by an instrument in writing or by a transmission
permitted by law filed in accordance with the procedure
established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing
or transmission created pursuant to this paragraph may be
substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a
complete reproduction of the entire original writing or
transmission.
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(b) The Company may, and to the extent required by law,
shall, in advance of any meeting of Members, appoint one or more
inspectors to act at the meeting and make a written report
thereof. The Company may designate one or more alternate
inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of Members,
the Person presiding at the meeting may, and to the extent
required by law, shall, appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge
of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and
according to the best of his or her ability. Every vote taken by
ballots shall be counted by a duly appointed inspector or
inspectors.
(c) With respect to the use of proxies at any meeting of
Members, the Company shall be governed by paragraphs (b),
(c), (d) and (e) of Section 212 of the DGCL and
other applicable provisions of the DGCL, as though the Company
were a Delaware corporation and as though the Members were
shareholders of a Delaware corporation.
Section 11.13 Notice
of Member Business and Nominations.
(a) Subject to Section 7.1(d) of this Agreement,
nominations of Persons for election to the Board of Directors of
the Company and the proposal of business to be considered by the
Members may be made at an annual meeting of Members
(i) pursuant to the Companys notice of meeting
delivered pursuant to Section 11.4 of this Agreement,
(ii) by or at the direction of the Board of Directors,
(iii) for nominations to the Board of Directors only, by
any holder of Outstanding Units who is entitled to vote at the
meeting, who complied with the notice procedures set forth in
paragraph (b) or (d) of this Section 11.13
and who was a Record Holder of a sufficient number of
Outstanding Units as of the Record Date for such meeting to
elect one or more members to the Board of Directors assuming
that such holder cast all of the votes it is entitled to cast in
such election in favor of a single candidate and such candidate
received no other votes from any other holder of Outstanding
Units, or (iv) by any holder of Outstanding Units who is
entitled to vote at the meeting, who complied with the notice
procedures set forth in paragraphs (c) or (d) of
this Section 11.13 and who is a Record Holder of
Outstanding Units at the time such notice is delivered to the
Secretary of the Company.
(b) For nominations to be properly brought before an annual
meeting by a Unitholder pursuant to Section 11.13(a)(iii),
the Unitholder must have given timely notice thereof in writing
to the Secretary of the Company. To be timely, a
Unitholders notice shall be delivered to the Secretary at
the principal executive offices of the Company not less than 90
or more than 120 days prior to the first anniversary (the
Anniversary) of the date on which the Company first
mailed its proxy materials for the preceding years annual
meeting of Members; provided, however, that if the date of the
annual meeting is advanced more than 30 days prior to or
delayed by more than thirty (30) days after the anniversary
of the preceding years annual meeting, notice by the
Unitholder to be timely must be so delivered not later than the
close of business on the later of (x) the ninetieth day
prior to such annual meeting or (y) the tenth day following
the day on which public announcement of the date of such meeting
is first made. Such Unitholders notice shall set forth:
(A) as to each Person whom the Unitholder proposes to
nominate for election or reelection as a Director all
information relating to such Person that is required to be
disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act, including such
Persons written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected
and (B) as to the Unitholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or
proposal is made the name and address of such Unitholder, as
they appear on the Companys books, and of such beneficial
owner, the class and number of Units of the Company which are
owned beneficially and of record by such Unitholder and such
beneficial owner. Such holder shall be entitled to nominate as
many candidates for election to the Board of Directors as would
be elected assuming such holder cast the precise number of votes
necessary to elect each candidate and no more votes were cast by
such holder or any other holder for such candidates.
(c) For nominations or other business to be properly
brought before an annual meeting by a Unitholder pursuant to
Section 11.13(a)(iv), (i) the Unitholder must have
given timely notice thereof in writing to the Secretary of the
Company, (ii) such business must be a proper matter for
Member action under this Agreement and the Delaware Act,
(iii) if the Unitholder, or the beneficial owner on whose
behalf any such proposal or nomination is made, has provided the
Company with a Solicitation Notice, such Unitholder or
beneficial owner
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must, in the case of a proposal, have delivered a proxy
statement and form of proxy to holders of at least the
percentage of the Companys Outstanding Units required
under this Agreement or Delaware law to carry any such proposal,
or, in the case of a nomination or nominations, have delivered a
proxy statement and form of proxy to holders of a percentage of
the Companys Outstanding Units reasonably believed by such
Unitholder or beneficial holder to be sufficient to elect the
nominee or nominees proposed to be nominated by such Unitholder,
and must, in either case, have included in such materials the
Solicitation Notice and (iv) if no Solicitation Notice
relating thereto has been timely provided pursuant to this
Section 11.13, the Unitholder or beneficial owner proposing
such business or nomination must not have solicited a number of
proxies sufficient to have required the delivery of such a
Solicitation Notice. To be timely, a Unitholders notice
shall be delivered to the Secretary at the principal executive
offices of the Company not less than 90 or more than
120 days prior to the first Anniversary; provided, however,
that in the event that the date of the annual meeting is
advanced more than thirty (30) days prior to or delayed by
more than thirty (30) days after the anniversary of the
preceding years annual meeting, notice by the Unitholder
to be timely must be so delivered not later than the close of
business on the later of (x) the ninetieth day prior to
such annual meeting or (y) the tenth day following the day
on which public announcement of the date of such meeting is
first made. Such Unitholders notice shall set forth:
(A) as to each Person whom the Unitholder proposes to
nominate for election or reelection as a Director all
information relating to such Person that is required to be
disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act, including such
Persons written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected;
(B) as to any other business that the Unitholder proposes
to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material
interest in such business of such Unitholder and the beneficial
owner, if any, on whose behalf the proposal is made; and
(C) as to the Unitholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or
proposal is made the name and address of such Unitholder, as
they appear on the Companys books, and of such beneficial
owner, the class and number of Units of the Company which are
owned beneficially and of record by such Unitholder and such
beneficial owner, and whether either such Unitholder or
beneficial owner intends to deliver a proxy statement and form
of proxy to holders of, in the case of a proposal, at least the
percentage of the Companys Outstanding Units required
under this Agreement or Delaware law to carry the proposal or,
in the case of a nomination or nominations, a sufficient number
of holders of the Companys Outstanding Units to elect such
nominee or nominees (an affirmative statement of such intent, a
Solicitation Notice).
(d) Notwithstanding anything in the second sentence of
Section 11.13(b) or the second sentence of
Section 11.13(c) to the contrary, if the number of
Directors to be elected to the Board of Directors is increased
and there is no public announcement naming all of the nominees
for Director or specifying the size of the increased Board of
Directors made by the Company at least 90 days prior to the
Anniversary, then a Unitholders notice required by this
Section 11.13 shall also be considered timely, but only
with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the
principal executive offices of the Company not later than the
close of business on the tenth day following the day on which
such public announcement is first made by the Company.
(e) Only such business shall be conducted at a special
meeting of Members as shall have been brought before the meeting
pursuant to the Companys notice of meeting pursuant to
Section 11.4 of this Agreement. Subject to
Section 7.1(d) of this Agreement, nominations of Persons
for election to the Board of Directors may be made at a special
meeting of Members at which Directors are to be elected pursuant
to the Companys notice of meeting (i) by or at the
direction of the Board of Directors, (ii) by any holder of
Outstanding Units who is entitled to vote at the meeting, who
complied with the notice procedures set forth in
paragraph (b) or (d) of this Section 11.13
and who was a Record Holder of a sufficient number of
Outstanding Units as of the Record Date for such meeting to
elect one or more members to the Board of Directors assuming
that such holder cast all of the votes it is entitled to cast in
such election in favor of a single candidate and such candidate
received no other votes from any other holder of Outstanding
Units, or (iii) by any holder of Outstanding Units who is
entitled to vote at the meeting, who complies with the notice
procedures set forth in this Section 11.13 and who is a
Record Holder of Outstanding Units at the time such notice is
delivered to the Secretary of the Company. Nominations by
Unitholders of Persons for election to the Board of Directors
may be made at such a special meeting of
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Members if the Unitholders notice as required by
Section 11.13(b) or Section 11.13(c) shall be
delivered to the Secretary of the Company not earlier than the
ninetieth day prior to such special meeting and not later than
the close of business on the later of the seventieth day prior
to such special meeting or the tenth day following the day on
which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. Holders of Outstanding
Units making nominations pursuant to Section 11.13(d)(ii)
shall be entitled to nominate the number of candidates for
election at such special meeting as provided in
Section 11.13(b) for an annual meeting.
(f) Except to the extent otherwise provided in
Section 7.1(d) with respect to vacancies, only Persons who
are nominated in accordance with the procedures set forth in
this Section 11.13 shall be eligible to serve as Directors
and only such business shall be conducted at a meeting of
Members as shall have been brought before the meeting in
accordance with the procedures set forth in this
Section 11.13. Except as otherwise provided herein or
required by law, the chairman of the meeting shall have the
power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made in accordance
with the procedures set forth in this Section 11.13 and, if
any proposed nomination or business is not in compliance with
this Section 11.13, to declare that such defective proposal
or nomination shall be disregarded.
(g) Notwithstanding the foregoing provisions of this
Section 11.13, a Member shall also comply with all
applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in
this Section 11.13. Nothing in this Section 11.13
shall be deemed to affect any rights of Members to request
inclusion of proposals in the Companys proxy statement
pursuant to
Rule 14a-8 under
the Exchange Act.
ARTICLE XII
Merger, Consolidation
or Conversion
Section 12.1 Authority.
The Company may merge or consolidate with one or more limited
liability companies or other business entities as
defined in Section 18-209 of the Delaware Act, or convert
into any such entity, whether such entity is formed under the
laws of the State of Delaware or any other state of the United
States of America, pursuant to a written agreement of merger or
consolidation (Merger Agreement) or a written plan
of conversion (Plan of Conversion), as the case may
be, in accordance with this Article XII.
Section 12.2 Procedure
for Merger, Consolidation or Conversion. Merger,
consolidation or conversion of the Company pursuant to this
Article XII requires the prior approval of the Board of
Directors.
(a) If the Board of Directors shall determine to consent to
the merger or consolidation, the Board of Directors shall
approve the Merger Agreement, which shall set forth:
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(i) the names and jurisdictions of formation or
organization of each of the business entities proposing to merge
or consolidate; |
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(ii) the name and jurisdiction of formation or organization
of the business entity that is to survive the proposed merger or
consolidation (the Surviving Business Entity); |
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(iii) the terms and conditions of the proposed merger or
consolidation; |
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(iv) the manner and basis of exchanging or converting the
rights or securities of, or interests in, each constituent
business entity for, or into, cash, property, rights, or
securities of or interests in, the Surviving Business Entity;
and if any rights or securities of, or interests in, any
constituent business entity are not to be exchanged or converted
solely for, or into, cash, property, rights, or securities of or
interests in, the Surviving Business Entity, the cash, property,
rights, or securities of or interests in, any limited liability
company or other business entity which the holders of such
rights, securities or interests are to receive; |
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|
(v) a statement of any changes in the constituent documents
or the adoption of new constituent documents (the certificate of
formation or limited liability company agreement, articles or
certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership or other |
A-47
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similar charter or governing document) of the Surviving Business
Entity to be effected by such merger or consolidation; |
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|
(vi) the effective time of the merger, which may be the
date of the filing of the certificate of merger pursuant to
Section 12.4 or a later date specified in or determinable
in accordance with the Merger Agreement (provided, that if the
effective time of the merger is to be later than the date of the
filing of the certificate of merger, the effective time shall be
fixed no later than the time of the filing of the certificate of
merger and stated therein); and |
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(vii) such other provisions with respect to the proposed
merger or consolidation that the Board of Directors determines
to be necessary or appropriate. |
(b) If the Board of Directors shall determine to consent to
the conversion, the Board of Directors may approve and adopt a
Plan of Conversion containing such terms and conditions that the
Board of Directors determines to be necessary or appropriate.
Section 12.3 Approval
by Members of Merger, Consolidation or Conversion.
(a) Except as provided in Section 12.3(d), the Board
of Directors, upon its approval of the Merger Agreement or Plan
of Conversion, as the case may be, shall direct that the Merger
Agreement or Plan of Conversion, as applicable, be submitted to
a vote of Members, whether at an annual meeting or a special
meeting, in either case in accordance with the requirements of
Article XI. A copy or a summary of the Merger Agreement or
Plan of Conversion, as applicable, shall be included in or
enclosed with the notice of meeting.
(b) Except as provided in Section 12.3(d), the Merger
Agreement or Plan of Conversion, as applicable, shall be
approved upon receiving the affirmative vote or consent of the
holders of a Unit Majority unless the Merger Agreement or Plan
of Conversion, as applicable, contains any provision that, if
contained in an amendment to this Agreement, the provisions of
this Agreement or the Delaware Act would require for its
approval the vote or consent of a greater percentage of the
Outstanding Units or of any class of Members, in which case such
greater percentage vote or consent shall be required for
approval of the Merger Agreement or Plan of Conversion, as
applicable.
(c) Except as provided in Section 12.3(d), after such
approval by vote or consent of the Members, and at any time
prior to the filing of the certificate of merger or a
certificate of conversion pursuant to Section 12.4, the
merger, consolidation or conversion may be abandoned pursuant to
provisions therefor, if any, set forth in the Merger Agreement
or the Plan of Conversion, as the case may be.
(d) Notwithstanding anything else contained in this
Article XII or in this Agreement, the Board of Directors is
permitted without Member approval, to convert the Company or any
Group Member into a new limited liability entity, to merge the
Company or any Group Member into, or convey all of the
Companys assets to, another limited liability entity which
shall be newly formed and shall have no assets, liabilities or
operations at the time of such conversion, merger or conveyance
other than those it receives from the Company or other Group
Member if (i) the Board of Directors has received an
Opinion of Counsel that the conversion, merger or conveyance, as
the case may be, would not result in the loss of the limited
liability of any Member or any Group Member or cause the Company
or any Group Member to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously treated as
such), (ii) the sole purpose of such conversion, merger or
conveyance is to effect a mere change in the legal form of the
Company into another limited liability entity and (iii) the
governing instruments of the new entity provide the Members and
the Board of Directors with the same rights and obligations as
are herein contained.
(e) Members are not entitled to dissenters rights of
appraisal in the event of a merger, consolidation or conversion
pursuant to Section 12.1, a sale of all or substantially
all of the assets of the Company or the Companys
Subsidiaries, or any other transaction or event.
Section 12.4 Certificate
of Merger or Conversion. Upon the required approval by
the Board of Directors and the Unitholders of a Merger Agreement
or a Plan of Conversion, as the case may be, a certificate of
merger or certificate of conversion, as applicable, shall be
executed and filed with the Secretary of State of the State of
Delaware in conformity with the requirements of the Delaware Act.
A-48
Section 12.5 Effect
of Merger.
(a) At the effective time of the certificate of merger:
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(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of
those business entities shall be vested in the Surviving
Business Entity and after the merger or consolidation shall be
the property of the Surviving Business Entity and all other
things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity to
the extent they were of each constituent business entity; |
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(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the merger
or consolidation; |
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(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business
entities shall be preserved unimpaired; and |
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(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity
and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contracted by
it. |
(b) A merger or consolidation effected pursuant to this
Article XII shall not be deemed to result in a transfer or
assignment of assets or liabilities from one entity to another.
Section 12.6 Business
Combination Limitations. Notwithstanding any other
provision of this Agreement, with respect to any Business
Combination (as such term is defined in Section 203
of the DGCL), the provisions of Section 203 of the DGCL
shall be applied with respect to the Company as though the
Company were a Delaware corporation.
ARTICLE XIII
Right to Acquire
Interests
Section 13.1 Right
to Acquire Interests.
(a) Notwithstanding any other provision of this Agreement,
if at any time less than 20% of the total Interests of any class
then Outstanding is held by Persons other than Affiliates of the
Company, any Affiliate of the Company shall then have the right,
which right it may assign and transfer in whole or in part to
any of its Affiliates (including the Company), exercisable at
its option, to purchase all, but not less than all, of such
Interests of such class then Outstanding held by other holders,
at the greater of (x) the Current Market Price as of the
date three days prior to the date that the notice described in
Section 13.1(b) is mailed and (y) the highest price
paid by Affiliates of the Company for any such Interest of such
class purchased during the
90-day period preceding
the date that the notice described in Section 13.1(b) is
mailed. As used in this Agreement, (i) Current Market
Price as of any date of any class of Interests listed or
admitted to trading on any National Securities Exchange means
the average of the daily Closing Prices (as hereinafter defined)
per Interest of such class for the 20 consecutive Trading Days
(as hereinafter defined) immediately prior to such date;
(ii) Closing Price for any day means the
average of the high bid and low asked prices on such day,
regular way, or in the case no such sale takes place on such
day, the average of the closing bid and asked prices on such
day, regular way, in either case as reported in the principal
consolidated transaction reporting system for securities listed
or admitted for trading on the principal National Securities
Exchange on which the units of that class are listed or admitted
to trading, or if the units of that class are not listed or
admitted for trading on any National Securities Exchange, the
last quoted price on that day, or if no quoted price exists, the
average of the high bid low asked price on that day in the
over-the-counter
market, as reported by the Nasdaq National Market or such other
system then in use, or, if on any such day such Interests of
such class are not quoted by any such organization of that type,
the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such
Interests of such class selected by the Board of Directors, or
if on any such day no market maker is making a market in such
Interests of such class, the fair value of such Interests on
such day
A-49
as determined by the Board of Directors; and
(iii) Trading Day means a day on which the
principal National Securities Exchange on which such Interests
of any class are listed or admitted to trading is open for the
transaction of business or, if Interests of a class are not
listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City
generally are open.
(b) If any Affiliate of the Company or the Company elects
to exercise the right to purchase Interests granted
pursuant to Section 13.1(a), the Board of Directors shall
deliver to the Transfer Agent notice of such election to
purchase (the Notice of Election to Purchase) and
shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Interests of such
class (as of a Record Date selected by the Board of Directors)
at least 10, but not more than 60, days prior to the
Purchase Date. Such Notice of Election to Purchase shall also be
published for a period of at least three consecutive days in at
least two daily newspapers of general circulation printed in the
English language and published in the Borough of Manhattan, New
York. The Notice of Election to Purchase shall specify the
Purchase Date and the price (determined in accordance with
Section 13.1(a)) at which Interests will be purchased and
state that the Affiliate of the Company or the Company, as the
case may be, elects to purchase such Interests, upon surrender
of Certificates representing such Interests in exchange for
payment, at such office or offices of the Transfer Agent as the
Transfer Agent may specify, or as may be required by any
National Securities Exchange on which such Interests are listed
or admitted to trading. Any such Notice of Election to Purchase
mailed to a Record Holder of Interests at his address as
reflected in the records of the Transfer Agent shall be
conclusively presumed to have been given regardless of whether
the owner receives such notice. On or prior to the Purchase
Date, the Affiliate of the Company or the Company, as the case
may be, shall deposit with the Transfer Agent cash in an amount
sufficient to pay the aggregate purchase price of all of such
Interests to be purchased in accordance with this
Section 13.1. If the Notice of Election to Purchase shall
have been duly given as aforesaid at least 10 days prior to
the Purchase Date, and if on or prior to the Purchase Date the
deposit described in the preceding sentence has been made for
the benefit of the holders of Interests subject to purchase as
provided herein, then from and after the Purchase Date,
notwithstanding that any Certificate shall not have been
surrendered for purchase, all rights of the holders of such
Interests (including any rights pursuant to
Articles IV, V, VI, and X) shall thereupon cease,
except the right to receive the purchase price (determined in
accordance with Section 13.1(a)) for Interests therefor,
without interest, upon surrender to the Transfer Agent of the
Certificates representing such Interests, and such Interests
shall thereupon be deemed to be transferred to the Affiliate of
the Company or the Company, as the case may be, on the record
books of the Transfer Agent and the Company, and the Affiliate
of the Company or the Company, as the case may be, shall be
deemed to be the owner of all such Interests from and after the
Purchase Date and shall have all rights as the owner of such
Interests (including all rights as owner of such Interests
pursuant to Articles IV, V, VI and X).
(c) At any time from and after the Purchase Date, a holder
of an Outstanding Interest subject to purchase as provided in
this Section 13.1 may surrender his Certificate evidencing
such Interest to the Transfer Agent in exchange for payment of
the amount described in Section 13.1(a), therefor, without
interest thereon.
(d) Upon the exercise by the Affiliate of the Company or
the Company, as the case may be, of the right to
purchase Interests granted pursuant to
Section 13.1(a), no Member shall be entitled to
dissenters rights of appraisal.
ARTICLE XIV
General
Provisions
Section 14.1 Addresses
and Notices. Any notice, demand, request, report or
proxy materials required or permitted to be given or made to a
Member under this Agreement shall be in writing and shall be
deemed given or made when delivered in person or when sent by
first class United States mail or by other means of written
communication to the Member at the address described below. Any
notice, payment or report to be given or made to a Member
hereunder shall be deemed conclusively to have been given or
made, and the obligation to give such notice or report or to
make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report
to the Record Holder of such Company Securities at his address
as shown on the records of the Transfer Agent or as otherwise
shown on the records of the Company, regardless of
A-50
any claim of any Person who may have an interest in such Company
Securities by reason of any assignment or otherwise. An
affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this
Section 14.1 executed by the Company, the Transfer Agent or
the mailing organization shall be prima facie evidence of the
giving or making of such notice, payment or report. If any
notice, payment or report addressed to a Record Holder at the
address of such Record Holder appearing on the books and records
of the Transfer Agent or the Company is returned by the United
States Postal Service marked to indicate that the United States
Postal Service is unable to deliver it, such notice, payment or
report and any subsequent notices, payments and reports shall be
deemed to have been duly given or made without further mailing
(until such time as such Record Holder or another Person
notifies the Transfer Agent or the Company of a change in his
address) if they are available for the Member at the principal
office of the Company for a period of one year from the date of
the giving or making of such notice, payment or report to the
other Members. Any notice to the Company shall be deemed given
if received by the Secretary at the principal office of the
Company designated pursuant to Section 2.3. The Board of
Directors and the Officers may rely and shall be protected in
relying on any notice or other document from a Member or other
Person if believed by it to be genuine.
Section 14.2 Further
Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from
taking action as may be necessary or appropriate to achieve the
purposes of this Agreement.
Section 14.3 Binding
Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted
assigns.
Section 14.4 Integration.
This Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining
thereto.
Section 14.5 Creditors.
None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the
Company.
Section 14.6 Waiver.
No failure by any party to insist upon the strict performance of
any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach of any other
covenant, duty, agreement or condition.
Section 14.7 Counterparts.
This Agreement may be executed in counterparts, all of which
together shall constitute an agreement binding on all the
parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party
shall become bound by this Agreement immediately upon affixing
its signature hereto or, in the case of a Person acquiring a
Unit, upon accepting the Certificate evidencing such Unit.
Section 14.8 Applicable
Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of Delaware, without
regard to principles of conflict of laws.
Section 14.9 Invalidity
of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby.
Section 14.10 Consent
of Members. Each Member hereby expressly consents and
agrees that, whenever in this Agreement it is specified that an
action may be taken upon the affirmative vote or consent of less
than all of the Members, such action may be so taken upon the
concurrence of less than all of the Members and each Member
shall be bound by the results of such action.
Section 14.11 Facsimile
Signatures
The use of facsimile signatures affixed in the name and on
behalf of the transfer agent and registrar of the Company on
certificates representing Units is expressly permitted by this
Agreement.
Remainder of page intentionally left blank.
A-51
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
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DIAMOND SHAMROCK REFINING AND |
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MARKETING COMPANY |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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SIGMOR CORPORATION |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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THE SHAMROCK PIPE LINE CORPORATION |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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DIAMOND SHAMROCK REFINING COMPANY, L.P. |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
Signature Page to Second Amended and Restated
Limited Liability Company Agreement
A-52
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VALERO REFINING NEW ORLEANS, L.L.C. |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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VALERO REFINING COMPANY CALIFORNIA |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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VALERO REFINING TEXAS, L.P. |
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By: |
Valero Corporate Services Company,
its general partner |
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By: _______________________________________ |
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Name: _______________________________________ |
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Title: _______________________________________ |
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MEMBERS: |
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All Members now and hereafter admitted as |
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Members of the Company, pursuant to powers |
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of attorney now and hereafter executed in |
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favor of, and granted and delivered to, the |
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Board of Directors. |
Signature Page to Second Amended and Restated
Limited Liability Company Agreement
A-53
EXHIBIT A
to the Second Amended and
Restated Agreement of Limited Liability Company of
Valero GP Holdings, LLC
Certificate Evidencing Units
Representing Interests in
Valero GP Holdings, LLC
In accordance with Section 4.1 of the Second Amended and
Restated Limited Liability Company Agreement of Valero GP
Holdings, LLC, as amended, supplemented or restated from time to
time (the Company Agreement), Valero
GP Holdings, LLC, a Delaware limited liability company (the
Company), hereby certifies that
[ ]
(the Holder) is the registered owner of
[ ] Units
representing Interests in the Company (the
Units) transferable on the books of the
Company, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed. The rights,
preferences and limitations of the Units are set forth in, and
this Certificate and the Units represented hereby are issued and
shall in all respects be subject to the terms and provisions of,
the Company Agreement. Copies of the Company Agreement are on
file at, and will be furnished without charge on delivery of
written request to the Company at, the principal office of the
Company located at One Valero Way, San Antonio, Texas
78249 or such other address as may be specified by notice under
the Company Agreement. Capitalized terms used herein but not
defined shall have the meanings given them in the Company
Agreement.
The Holder, by accepting this Certificate, is deemed to have
(i) requested admission as, and agreed to become, a Member
and to have agreed to comply with and be bound by and to have
executed the Company Agreement, (ii) represented and
warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the
Company Agreement, (iii) granted the powers of attorney
provided for in the Company Agreement and (iv) made the
waivers and given the consents and approvals contained in the
Company Agreement.
This Certificate shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without
regard to principles of conflict of laws thereof.
This Certificate shall not be valid for any purpose unless it
has been countersigned and registered by the Transfer Agent and
Registrar.
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Dated: |
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Countersigned and Registered by: |
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Valero GP Holdings, LLC |
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as Transfer Agent and Registrar |
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By: |
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Name: |
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Title: |
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EXHIBIT A-1
Reverse of Certificate
ABBREVIATIONS
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as follows
according to applicable laws or regulations:
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TEN COM
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as tenants in common |
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UNIF GIFT/TRANSFERS MIN ACT |
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TEN ENT
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as tenants by the entireties |
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_________ Custodian _________________ |
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(Cust) (Minor) |
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JT TEN
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as joint tenants with right of survivorship and not as tenants
in common |
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under Uniform Gifts/Transfers to CD
Minors Act ____________________ (State) |
Additional abbreviations, though not in the above list, may also
be used.
EXHIBIT A-2
ASSIGNMENT OF UNITS
in
VALERO GP HOLDINGS, LLC
FOR VALUE RECEIVED,
hereby assigns, conveys, sells and transfers unto
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(Please print or typewrite name and address of Assignee) |
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(Please insert Social Security or other identifying number of
Assignee) |
Units representing Interests evidenced by this Certificate,
subject to the Company Agreement, and does hereby irrevocably
constitute and appoint
as its attorney-in-fact
with full power of substitution to transfer the same on the
books of Valero GP Holdings, LLC.
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Date: |
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NOTE: The signature to any endorsement hereon must
correspond with the name as written upon the face of this
Certificate in every particular, without alteration, enlargement
or change. |
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SIGNATURE(S) MUST BE GUARANTEED BY A MEMBER FIRM OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A
COMMERCIAL BANK OR TRUST COMPANY SIGNATURE(S) GUARANTEED |
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(Signature) |
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(Signature) |
No transfer of the Units evidenced hereby will be registered on
the books of the Company, unless the Certificate evidencing the
Units to be transferred is surrendered for registration of
transfer.
EXHIBIT A-3
EXHIBIT B
to the Second Amended and
Restated Agreement of Limited Liability Company of
Valero GP Holdings, LLC
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Membership | |
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Pre-Split | |
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Post-Split | |
Initial Members |
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Interest | |
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Units | |
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Units | |
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| |
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| |
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| |
Diamond Shamrock Refining and Marketing Company
|
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51.592085 |
% |
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5,159,209 |
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21,926,636 |
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Sigmor Corporation
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29.466530 |
% |
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2,946,653 |
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12,523,275 |
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The Shamrock Pipe Line Corporation
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13.529489 |
% |
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1,352,948 |
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5,750,032 |
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Diamond Shamrock Refining Company, L.P.
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5.408899 |
% |
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540,890 |
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2,298,782 |
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Valero Refining New Orleans, L.L.C.
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0.000999 |
% |
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100 |
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425 |
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Valero Refining Company California
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0.000999 |
% |
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100 |
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425 |
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Valero Refining Texas, L.P.
|
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0.000999 |
% |
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100 |
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425 |
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100.000000 |
% |
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10,000,000 |
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42,500,000 |
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EXHIBIT B-1
17,250,000 Units
Representing Limited Liability Company Interests
PROSPECTUS
,
2006
Lehman
Brothers
Citigroup
Goldman, Sachs &
Co.
Morgan
Stanley
RBC Capital
Markets
UBS Investment
Bank
A.G. Edwards
Wachovia
Securities
Credit Suisse
Deutsche Bank
Securities
JPMorgan
KeyBanc Capital
Markets
Raymond James
Oppenheimer &
Co.
Petrie Parkman &
Co.
Sanders Morris
Harris
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
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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.
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Commission registration fee
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$ |
50,943 |
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NASD filing fee
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47,938 |
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NYSE listing fee
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150,000 |
|
Printing and engraving expenses
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800,000 |
|
Fees and expenses of legal counsel
|
|
|
700,000 |
|
Accounting fees and expenses
|
|
|
450,000 |
|
Transfer agent and registrar fees
|
|
|
3,000 |
|
Miscellaneous
|
|
|
48,119 |
|
|
|
|
|
|
Total
|
|
$ |
2,250,000 |
|
|
|
|
|
|
|
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 10 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. |
Effective as of June 1, 2006, we issued an additional
member interest in us representing 0.051103% of all of our
member interests to Diamond Shamrock Refining and Marketing
Company in exchange for a capital contribution to us of all of
its 100% membership interest in Valero GP, LLC. The issuance was
exempt from registration under Section 4(2) of the
Securities Act of 1933 because the transaction did not involve a
public offering.
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 UDS Logistics, LLC |
|
|
|
3 |
.02** |
|
Form of Second Amended and Restated Limited Liability Company
Agreement of Valero GP Holdings, LLC (included as Appendix A to
the Prospectus) |
|
|
|
3 |
.03*** |
|
Certificate of Amendment of Certificate of Formation of
UDS Logistics, LLC |
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File
No. 001-16417), 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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 |
II-2
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417), 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 (File No. 001-16417), 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 (File No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), Exhibit 4.05 |
II-3
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), Exhibit 4.08 |
|
4 |
.26** |
|
Specimen certificate representing units of Valero GP Holdings,
LLC (included in Form of Second Amended and Restated Limited
Liability Company Agreement of Valero GP Holdings, LLC included
as Appendix A to the Prospectus) |
|
|
|
4 |
.27*** |
|
Form of Rights Agreement between Valero GP Holdings, LLC and
Computershare Investor Services, 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*** |
|
Term Sheet 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 (File No. 001-16417),
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 (File
No. 001-16417), 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 (File
No. 001-16417), Exhibit 10.02 |
II-4
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 10.04 |
|
10 |
.07 |
|
Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Current Report on Form 8-K filed on
January 27, 2006 (File No. 001-16417),
Exhibit 10.01 |
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 10.13 |
II-5
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417), 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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 10.9 |
II-6
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 |
|
|
|
10 |
.34*** |
|
Valero GP Holdings, LLC Long-Term Incentive Plan |
|
|
|
10 |
.35*** |
|
Second Amendment to 5-Year Revolving Credit Agreement among
Valero Logistics Operations, L.P., Valero L.P., JPMorgan Chase
Bank, N.A. and the Lenders party thereto, dated as of
May 15, 2006 |
|
|
|
10 |
.36*** |
|
First Amendment to 5-Year Term Credit Agreement among Valero
Logistics Operations, L.P., Valero L.P., JPMorgan Chase Bank,
N.A. and the Lenders party thereto, dated as of May 15, 2006 |
|
|
|
10 |
.37*** |
|
Second Amendment to 5-Year Term Credit Agreement among Valero
Logistics Operations, L.P., Valero L.P., JPMorgan Chase Bank,
N.A. and the Lenders party thereto, dated as of May 31, 2006 |
|
|
|
10 |
.38*** |
|
Third Amendment to 5-Year Revolving Credit Agreement among
Valero Logistics Operations, L.P., Valero L.P., JPMorgan Chase
Bank, N.A. and the Lenders party thereto, dated as of
May 31, 2006 |
|
|
|
10 |
.39*** |
|
Contribution Agreement by and among Diamond Shamrock Refining
and Marketing Company and Valero GP Holdings, LLC, dated
effective as of June 1, 2006 |
|
|
|
21 |
.01*** |
|
List of Subsidiaries of Valero GP Holdings, LLC |
|
|
|
23 |
.01** |
|
Consent of KPMG LLP, dated June 28, 2006 |
|
|
|
23 |
.02*** |
|
Consent of Andrews Kurth LLP (contained in Exhibit 5.01 and
Exhibit 8.01) |
|
|
|
23 |
.03** |
|
Consent of Ernst & Young LLP, dated June 28, 2006 |
|
|
II-7
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
24 |
.01*** |
|
Powers of Attorney |
|
|
|
99 |
.01*** |
|
Consent of Stan McLelland |
|
|
|
|
|
|
* |
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-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Amendment
No. 4 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of San Antonio, State of Texas, on June 30, 2006.
|
|
|
|
By: |
/s/ Curtis V. Anastasio |
|
|
|
|
|
Curtis V. Anastasio |
|
President and Chief Executive Officer |
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 |
|
|
|
|
|
|
*
William
E. Greehey |
|
Chairman of the Board |
|
June 30, 2006 |
|
*
Curtis
V. Anastasio |
|
President and Chief Executive Officer |
|
June 30, 2006 |
|
*
Steven
A. Blank |
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
June 30, 2006 |
|
*
Thomas
R. Shoaf |
|
Vice President and Controller |
|
June 30, 2006 |
|
*By: |
|
/s/ Bradley C. Barron
Bradley
C. Barron
Attorney-in-Fact |
|
|
|
|
II-9
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
1 |
.01*** |
|
Form of Underwriting Agreement |
|
|
|
3 |
.01*** |
|
Certificate of Formation of UDS Logistics, LLC |
|
|
|
3 |
.02** |
|
Form of Second Amended and Restated Limited Liability Company
Agreement of Valero GP Holdings, LLC (included as Appendix A to
the Prospectus) |
|
|
|
3 |
.03*** |
|
Certificate of Amendment of Certificate of Formation of
UDS Logistics, LLC |
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File
No. 001-16417), 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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 3.15 |
|
|
|
|
|
|
|
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 (File No. 001-16417), 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 (File No. 001-16417), 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 (File No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File
No. 001-16417), Exhibit 4.06 |
|
|
|
|
|
|
|
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 (File
No. 001-16417), 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 (File
No. 001-16417), Exhibit 4.08 |
|
4 |
.26** |
|
Specimen certificate representing units of Valero GP Holdings,
LLC (included in Form of Second Amended and Restated Limited
Liability Company Agreement of Valero GP Holdings, LLC included
as Appendix A to the Prospectus) |
|
|
|
4 |
.27*** |
|
Form of Rights Agreement between Valero GP Holdings, LLC and
Computershare Investor Services, 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*** |
|
Term Sheet 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 (File No. 001-16417),
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 (File
No. 001-16417), 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 (File
No. 001-16417), 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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 10.04 |
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
10 |
.07 |
|
Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan |
|
Valero L.P.s Current Report on Form 8-K filed on
January 27, 2006 (File No. 001-16417),
Exhibit 10.01 |
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
Exhibit 10.15 |
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 (File No. 001-16417),
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 |
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Incorporated by Reference to the Following Document |
|
|
|
|
|
|
10 |
.34*** |
|
Valero GP Holdings, LLC Long-Term Incentive Plan |
|
|
|
10 |
.35*** |
|
Second Amendment to 5-Year Revolving Credit Agreement among
Valero Logistics Operations, L.P., Valero L.P., JPMorgan Chase
Bank, N.A. and the Lenders party thereto, dated as of
May 15, 2006 |
|
|
|
10 |
.36*** |
|
First Amendment to 5-Year Term Credit Agreement among Valero
Logistics Operations, L.P., Valero L.P., JPMorgan Chase Bank,
N.A. and the Lenders party thereto, dated as of May 15, 2006 |
|
|
|
10 |
.37*** |
|
Second Amendment to 5-Year Term Credit Agreement among Valero
Logistics Operations, L.P., Valero L.P., JPMorgan Chase Bank,
N.A. and the Lenders party thereto, dated as of May 31, 2006 |
|
|
|
10 |
.38*** |
|
Third Amendment to 5-Year Revolving Credit Agreement among
Valero Logistics Operations, L.P., Valero L.P., JPMorgan Chase
Bank, N.A. and the Lenders party thereto, dated as of
May 31, 2006 |
|
|
|
10 |
.39*** |
|
Contribution Agreement by and among Diamond Shamrock Refining
and Marketing Company and Valero GP Holdings, LLC, dated
effective as of June 1, 2006 |
|
|
|
21 |
.01*** |
|
List of Subsidiaries of Valero GP Holdings, LLC |
|
|
|
23 |
.01** |
|
Consent of KPMG LLP, dated June 28, 2006 |
|
|
|
23 |
.02*** |
|
Consent of Andrews Kurth LLP (contained in Exhibit 5.01 and
Exhibit 8.01) |
|
|
|
23 |
.03** |
|
Consent of Ernst & Young LLP, dated June 28, 2006 |
|
|
|
24 |
.01*** |
|
Powers of Attorney |
|
|
|
99 |
.01*** |
|
Consent of Stan McLelland |
|
|
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* |
To be filed by amendment. |