UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number 1-36232

VALERO ENERGY PARTNERS LP

(Exact name of registrant as specified in its charter)



Delaware	90-1006559
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

One Valero Way

San Antonio, Texas

(Address of principal executive offices)

78249

(Zip Code)

(210) 345-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The registrant had ~~69,256,172~~69,262,070 common units representing limited partner interests and ~~1,413,391~~1,413,511 general partner units outstanding as of ~~November 1, 2017.~~October 31, 2018.

VALERO ENERGY PARTNERS LP

TABLE OF CONTENTS




	Page
PART I – FINANCIAL INFORMATION
~~Item~~ITEM 1. ~~Financial Statements~~FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017	1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	2
Consolidated Statements of Partners’ Capital for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	45
Condensed Notes to Consolidated Financial Statements	56
~~Item~~ITEM 2. ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2523
~~Item~~ITEM 3. ~~Quantitative and Qualitative Disclosures About Market Risk~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4138
~~Item~~ITEM 4. ~~Controls and Procedures~~CONTROLS AND PROCEDURES	4239
PART II – OTHER INFORMATION
~~Item~~ITEM 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS	4339
~~Item~~ITEM 1A. ~~Risk Factors~~RISK FACTORS	4339
~~Item~~ITEM 6. ~~Exhibits~~EXHIBITS	4441
SIGNATURE	4542

Table of Contents

PART I – FINANCIAL INFORMATION

~~Item~~ITEM 1. ~~Financial Statements~~FINANCIAL STATEMENTS

VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(in thousands)


		September 30, 2017			December 31, 2016				September 30, 2018				December 31, 2017
									September 30, 2018				December 31, 2017
ASSETS	ASSETS	September 30, 2017	(unaudited)		December 31, 2016					ASSETS		(unaudited)
Current assets:	Current assets:							Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	115,755		$	71,491		Cash and cash equivalents	$	128,199			$	42,052
Receivables – related party	Receivables – related party	35,995			36,889			Receivables – related party	46,434				46,496
Receivables	Receivables	225			1,682			Receivables	873				781
Prepaid expenses and other	Prepaid expenses and other	485			997			Prepaid expenses and other	659				720
Total current assets	Total current assets	152,460			111,059			Total current assets	176,165				90,049
Property and equipment, at cost	Property and equipment, at cost	1,340,906			1,216,288			Property and equipment, at cost	2,014,049				1,969,233
Accumulated depreciation	Accumulated depreciation	(385,959		)	(351,208		)	Accumulated depreciation	(599,611		)		(552,817		)
Property and equipment, net	Property and equipment, net	954,947			865,080			Property and equipment, net	1,414,438				1,416,416
Deferred charges and other assets, net	Deferred charges and other assets, net	2,743			3,118			Deferred charges and other assets, net	9,678				10,887
Total assets	Total assets	$	1,110,150		$	979,257		Total assets	$	1,600,281			$	1,517,352
LIABILITIES AND PARTNERS’ CAPITAL	LIABILITIES AND PARTNERS’ CAPITAL							LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:	Current liabilities:							Current liabilities:
Accounts payable	Accounts payable	$	14,488		$	10,652		Accounts payable	$	18,400			$	18,633
Accounts payable – related party	Accounts payable – related party	8,781			7,348			Accounts payable – related party	8,190				3,944
Accrued liabilities	Accrued liabilities	738			870			Accrued liabilities	801				1,007
Accrued liabilities – related party	Accrued liabilities – related party	93			192			Accrued liabilities – related party	304				1,128
Accrued interest payable	Accrued interest payable	6,453			1,280			Accrued interest payable	7,326				2,558
Accrued interest payable – related party	Accrued interest payable – related party	844			47			Accrued interest payable – related party	770				911
Taxes other than income taxes payable	Taxes other than income taxes payable	3,975			2,457			Taxes other than income taxes payable	7,283				5,141
Deferred revenue – related party		432			3,525
Total current liabilities	Total current liabilities	35,804			26,371			Total current liabilities	43,074				33,322
Debt	Debt	525,177			525,355			Debt	989,694				905,283
Notes payable – related party	Notes payable – related party	370,000			370,000			Notes payable – related party	285,000				370,000
Other long-term liabilities	Other long-term liabilities	1,985			1,707			Other long-term liabilities	3,382				2,950
Commitments and contingencies	Commitments and contingencies							Commitments and contingencies
Partners’ capital:	Partners’ capital:							Partners’ capital:
Common unitholders – public (22,487,586 and 21,738,692 units outstanding)		583,436			548,619
Common unitholder – Valero (45,687,271 and 45,687,271 units outstanding)		(399,718		)	(482,197		)
General partner – Valero (1,391,323 and 1,375,721 units outstanding)		(6,534		)	(10,598		)
Limited partners:								Limited partners:
Common unitholders – public (22,493,484 and 22,487,586 units outstanding)								Common unitholders – public (22,493,484 and 22,487,586 units outstanding)	612,202				596,047
Common unitholder – Valero (46,768,586 and 46,768,586 units outstanding)								Common unitholder – Valero (46,768,586 and 46,768,586 units outstanding)	(328,500		)		(382,652		)
General partner – Valero (1,413,511 and 1,413,391 units outstanding)								General partner – Valero (1,413,511 and 1,413,391 units outstanding)	(4,571		)		(7,598		)
Total partners’ capital	Total partners’ capital	177,184			55,824			Total partners’ capital	279,131				205,797
Total liabilities and partners’ capital	Total liabilities and partners’ capital	$	1,110,150		$	979,257		Total liabilities and partners’ capital	$	1,600,281			$	1,517,352

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per unit amounts)

(unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Operating revenues – related party $ 109,340
$ 92,040
$ 325,701
$ 258,471
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below) (a) 26,478
24,089
77,078
72,461
Depreciation expense 12,113
11,319
36,393
34,652
Other operating expenses 537
—
537
—
General and administrative expenses (b) 3,865
4,094
11,558
12,174
Total costs and expenses 42,993
39,502
125,566
119,287
Operating income 66,347
52,538
200,135
139,184
Other income, net 300
76
546
210
Interest and debt expense, net of capitalized interest (c) (8,747 ) (3,672 ) (25,587 ) (9,582 )
Income before income taxes 57,900

48,942

175,094

129,812
Income tax expense 311
235
925
780
Net income 57,589

48,707

174,169

129,032
Less: Net loss attributable to Predecessor —
(3,002 ) —
(15,422 )
Net income attributable to partners 57,589

51,709

174,169

144,454
Less: General partner’s interest in net income 13,037
6,634
33,923
15,351
Limited partners’ interest in net income $ 44,552

$ 45,075

$ 140,246

$ 129,103

Net income per limited partner unit – basic and diluted:
Common units $ 0.65
$ 0.77
$ 2.06
$ 2.08
Subordinated units $ —
$ 0.29
$ —
$ 1.73

Weighted-average limited partner units outstanding:
Common units – basic and diluted 68,163
53,899
67,997
42,597
Subordinated units – basic and diluted —
12,517
—
23,326

Cash distribution declared per unit $ 0.4800
$ 0.3850
$ 1.3625
$ 1.0900

Supplemental information – each income statement line item reflected below includes expenses incurred for services or financing provided by related party as follows:
(a)    Cost of revenues (excluding depreciation expense) – related party $ 16,474
$ 15,554
$ 48,242
$ 45,822
(b)    General and administrative expenses – related party $ 3,186
$ 3,156
$ 9,557
$ 9,353
(c)    Interest and debt expense – related party $ 2,579
$ 1,649
$ 7,029
$ 4,799



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues – related party:
Revenues from lease contracts	$	112,078		$	85,811		$	325,655		$	251,580
Revenues from contracts with customer	28,512			23,529			81,504			74,121
Total revenues – related party	140,590			109,340			407,159			325,701
Costs and expenses:
Cost of revenues from lease contracts (excluding depreciation expense reflected below) (a)	26,753			20,202			77,867			59,570
Cost of revenues from contracts with customer (excluding depreciation expense reflected below) (b)	6,176			6,276			19,717			17,508
Depreciation expense associated with lease contracts	15,946			9,288			47,384			27,768
Depreciation expense associated with contracts with customer	3,120			2,825			9,087			8,625
Other operating expenses	—			537			—			537
General and administrative expenses (c)	4,082			3,865			12,352			11,558
Total costs and expenses	56,077			42,993			166,407			125,566
Operating income	84,513			66,347			240,752			200,135
Other income, net	610			300			1,403			546
Interest and debt expense, net of capitalized interest (d)	(14,348		)	(8,747		)	(40,527		)	(25,587		)
Income before income tax expense	70,775			57,900			201,628			175,094
Income tax expense	426			311			1,181			925
Net income	70,349			57,589			200,447			174,169
Less: General partner’s interest in net income	18,203			13,037			52,835			33,923
Limited partners’ interest in net income	$	52,146		$	44,552		$	147,612		$	140,246

Net income per limited partner common unit – basic and diluted	$	0.75		$	0.65		$	2.13		$	2.06
Weighted-average limited partner common units outstanding – basic and diluted	69,251			68,163			69,250			67,997

Supplemental information – each income statement line item reflected below includes costs of revenues, expenses, or financing activities provided by related party as follows:
(a) Cost of revenues from lease contracts (excluding depreciation expense) – related party	$	17,810		$	14,469		$	52,820		$	43,184
(b) Cost of revenues from contracts with customer (excluding depreciation expense) – related party	$	2,104		$	2,005		$	6,243		$	5,058
(c) General and administrative expenses – related party	$	3,361		$	3,186		$	10,083		$	9,557
(d) Interest and debt expense – related party	$	2,615		$	2,579		$	7,925		$	7,029

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in ~~thousands)~~thousands, except per unit amounts)

(unaudited)

Partnership

Common
Unitholders
Public

Common
Unitholder
Valero

Subordinated
Unitholder
Valero

General
Partner
Valero

Net
Investment
Total
Balance as of December 31, 2015 $ 581,489
$ 28,430
$ (313,961 ) $ (5,805 ) $ 103,999
$ 394,152
Net income (loss):
Attributable to Predecessor —
—
—
—
(15,422 ) (15,422 )
Attributable to partners 42,096
41,685
45,322
15,351
—
144,454
Net transfers from Valero Energy Corporation —
—
—
—
15,030
15,030
Allocation of Valero Energy Corporation’s net investment in acquisitions —
67,800
32,758
3,049
(103,607 ) —
Consideration paid to Valero Energy Corporation for acquisitions —
(397,859 ) (153,067 ) (14,074 ) —
(565,000 )
Units issued to Valero Energy Corporation in connection with acquisitions —
83,300
—
1,700
—
85,000
Conversion of subordinated units —
(406,374 ) 406,374
—
—
—
Unit issuance 6,096
—
—
58
—
6,154
Transfers to (from) partners (73,075 ) 75,765
—
(2,690 ) —
—
Noncash capital contributions from Valero Energy Corporation —
11,057
12,084
679
—
23,820
Cash distributions to unitholders and distribution equivalent right payments (22,052 ) (15,908 ) (29,510 ) (9,761 ) —
(77,231 )
Unit-based compensation 134
—
—
—
—
134
Balance as of September 30, 2016 $ 534,688
$ (512,104 ) $ —
$ (11,493 ) $ —
$ 11,091

Balance as of December 31, 2016 $ 548,619
$ (482,197 ) $ —
$ (10,598 ) $ —
$ 55,824
Net income attributable to partners 46,001
94,245
—
33,923
—
174,169
Unit issuance 33,429
—
—
748
—
34,177
Transfers to (from) partners (16,097 ) 19,816
—
(3,719 ) —
—
Noncash capital contributions from Valero Energy Corporation —
27,308
—
558
—
27,866
Cash distributions to unitholders and distribution equivalent right payments (28,713 ) (58,890 ) —
(27,446 ) —
(115,049 )
Unit-based compensation 197
—
—
—
—
197
Balance as of September 30, 2017 $ 583,436
$ (399,718 ) $ —
$ (6,534 ) $ —
$ 177,184



	Three Months Ended September 30, 2018
	Limited Partners						General Partner Valero			Total
	Common Unitholders Public			Common Unitholder Valero			General Partner Valero			Total
Balance as of June 30, 2018	$	607,611		$	(347,174	)	$	(5,045	)	$	255,392
Net income	16,929			35,217			18,203			70,349
Noncash capital contributions from Valero Energy Corporation	—			9,226			189			9,415
Cash distributions to unitholders and distribution equivalent right payments ($0.5510 per unit)	(12,394		)	(25,769		)	(17,918		)	(56,081		)
Unit-based compensation	56			—			—			56
Balance as of September 30, 2018	$	612,202		$	(328,500	)	$	(4,571	)	$	279,131

	Three Months Ended September 30, 2017
	Limited Partners						General Partner Valero			Total
	Common Unitholders Public			Common Unitholder Valero			General Partner Valero			Total
Balance as of June 30, 2017	$	579,002		$	(417,210	)	$	(8,651	)	$	153,141
Net income	14,690			29,862			13,037			57,589
Noncash capital contributions from Valero Energy Corporation	—			8,418			172			8,590
Cash distributions to unitholders and distribution equivalent right payments ($0.4550 per unit)	(10,231		)	(20,788		)	(11,092		)	(42,111		)
Unit-based compensation	51			—			—			51
Other	(76		)	—			—			(76		)
Balance as of September 30, 2017	$	583,436		$	(399,718	)	$	(6,534	)	$	177,184

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in thousands, except per unit amounts)

(unaudited)



	Nine Months Ended September 30, 2018
	Limited Partners						General Partner Valero			Total
	Common Unitholders Public			Common Unitholder Valero			General Partner Valero			Total
Balance as of December 31, 2017	$	596,047		$	(382,652	)	$	(7,598	)	$	205,797
Net income	47,921			99,691			52,835			200,447
Unit issuance	—			—			5			5
Transfers to (from) partners	3,730			(2,396		)	(1,334		)	—
Noncash capital contributions from Valero Energy Corporation	—			31,098			634			31,732
Cash distributions to unitholders and distribution equivalent right payments ($1.586 per unit)	(35,675		)	(74,175		)	(49,112		)	(158,962		)
Unit-based compensation	179			—			—			179
Other	—			(66		)	(1		)	(67		)
Balance as of September 30, 2018	$	612,202		$	(328,500	)	$	(4,571	)	$	279,131

	Nine Months Ended September 30, 2017
	Limited Partners						General Partner Valero			Total
	Common Unitholders Public			Common Unitholder Valero			General Partner Valero			Total
Balance as of December 31, 2016	$	548,619		$	(482,197	)	$	(10,598	)	$	55,824
Net income	46,001			94,245			33,923			174,169
Unit issuance	33,429			—			748			34,177
Transfers to (from) partners	(16,097		)	19,816			(3,719		)	—
Noncash capital contributions from Valero Energy Corporation	—			27,308			558			27,866
Cash distributions to unitholders and distribution equivalent right payments ($1.289 per unit)	(28,713		)	(58,890		)	(27,446		)	(115,049		)
Unit-based compensation	197			—			—			197
Balance as of September 30, 2017	$	583,436		$	(399,718	)	$	(6,534	)	$	177,184

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2017			2016				2018			2017
Cash flows from operating activities:	Cash flows from operating activities:							Cash flows from operating activities:
Net income	Net income	$	174,169		$	129,032		Net income	$	200,447		$	174,169
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	Depreciation expense	36,393			34,652			Depreciation expense	56,471			36,393
Changes in current assets and current liabilities	Changes in current assets and current liabilities	7,988			(2,179		)	Changes in current assets and current liabilities	4,862			7,988
Changes in deferred charges and credits and other operating activities, net	Changes in deferred charges and credits and other operating activities, net	1,269			707			Changes in deferred charges and credits and other operating activities, net	2,448			1,269
Net cash provided by operating activities	Net cash provided by operating activities	219,819			162,212			Net cash provided by operating activities	264,228			219,819
Cash flows from investing activities:	Cash flows from investing activities:							Cash flows from investing activities:
Capital expenditures	Capital expenditures	(24,297		)	(15,911		)	Capital expenditures	(17,968		)	(24,297		)
Acquisition of undivided interest in Red River crude system	Acquisition of undivided interest in Red River crude system	(71,793		)	—			Acquisition of undivided interest in Red River crude system	—			(71,793		)
Acquisitions from Valero Energy Corporation		—			(103,607		)
Other investing activities, net	Other investing activities, net	142			29			Other investing activities, net	8			142
Net cash used in investing activities	Net cash used in investing activities	(95,948		)	(119,489		)	Net cash used in investing activities	(17,960		)	(95,948		)
Cash flows from financing activities:	Cash flows from financing activities:							Cash flows from financing activities:
Proceeds from debt borrowings		—			349,000
Repayment of debt and capital lease obligations		—			(868		)
Proceeds from issuance of senior notes								Proceeds from issuance of senior notes	498,300			—
Repayment of debt and note payable – related party								Repayment of debt and note payable – related party	(495,000		)	—
Payment of debt issuance costs	Payment of debt issuance costs	(492		)	—			Payment of debt issuance costs	(4,464		)	(492		)
Proceeds from issuance of common units	Proceeds from issuance of common units	35,728			2,853			Proceeds from issuance of common units	—			35,728
Proceeds from issuance of general partner units	Proceeds from issuance of general partner units	748			58			Proceeds from issuance of general partner units	5			748
Payment of offering costs	Payment of offering costs	(542		)	(412		)	Payment of offering costs	—			(542		)
Excess purchase price paid to Valero Energy Corporation over the carrying value of acquired assets		—			(376,393		)
Cash distributions to unitholders and distribution equivalent right payments	Cash distributions to unitholders and distribution equivalent right payments	(115,049		)	(77,231		)	Cash distributions to unitholders and distribution equivalent right payments	(158,962		)	(115,049		)
Net transfers from Valero Energy Corporation		—			14,886
Net cash used in financing activities	Net cash used in financing activities	(79,607		)	(88,107		)	Net cash used in financing activities	(160,121		)	(79,607		)
Net increase (decrease) in cash and cash equivalents		44,264			(45,384		)
Net increase in cash and cash equivalents								Net increase in cash and cash equivalents	86,147			44,264
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	71,491			80,783			Cash and cash equivalents at beginning of period	42,052			71,491
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	115,755		$	35,399		Cash and cash equivalents at end of period	$	128,199		$	115,755

See Condensed Notes to Consolidated Financial Statements.

Table of Contents

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Valero Energy Partners LP (the Partnership) is a fee-based, master limited partnership formed by Valero (defined below) in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets.

~~References~~As used in this report, tothe terms “Partnership,” “we,” ~~“us,~~“our,” or ~~“our”~~“us” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. ~~References in this report to “Valero” refer collectively~~Our “general partner” refers to Valero Energy Partners GP LLC, an indirect wholly owned subsidiary of Valero Energy Corporation (VLO), and “Valero” refers collectively to VLO and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general ~~partner,~~partner.

We are a master limited partnership formed by Valero in July 2013 to own, operate, develop, and acquire crude oil and refined petroleum products pipelines, terminals, and other ~~than Diamond Green Diesel Holdings, LLC (DGD), a joint venture consolidated by Valero.~~

We acquired from Valero the McKee Terminal Services Business on April 1, 2016, the Meraux and Three Rivers Terminal Services Business on September 1, 2016, and Parkway Pipeline LLC (Parkway Pipeline) and the Port Arthur terminal (defined in Note 2) on November 1, 2017. We acquired the Red River crude system (defined in Note 2) from Plains All American Pipeline L.P. (Plains) on January 18, 2017. See Note 2 for further discussion of these acquisitions.

logistics assets. Our assets consist of crude oil and refined petroleum products pipeline and terminal systems in the United States (U.S.) Gulf Coast and U.S. Mid-Continent regions that are integral to the operations of ten of Valero’s refineries.

We generate ~~operating~~ revenues ~~by providing~~from fee-based transportation and terminaling ~~services.~~activities.

Pending Merger with Valero

On October 18, 2018, we entered into a definitive Agreement and Plan of Merger (the Merger Agreement) (the Merger Agreement and the transactions contemplated thereby are referred to herein as the “Merger Transaction”) with VLO, Forest Merger Sub, LLC, a wholly owned subsidiary of Valero (Merger Sub), and our general partner pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero. Under the Merger Agreement, the holders of such publicly traded common units will receive $42.25 in cash for each common unit without any interest thereon and all such publicly traded common units will automatically be canceled and cease to exist. Our incentive distribution rights and general partner interest, and our common units that are owned by Valero, will be unaffected by the Merger Transaction and will remain issued and outstanding with no consideration being delivered in respect thereof.

A wholly owned subsidiary of Valero which owns more than a majority of our common units has agreed to deliver, or cause to be delivered, a written consent approving the Merger Transaction. This written consent will constitute the requisite vote of our common units to approve the Merger Transaction and, as a result, we have not solicited and are not soliciting approval of the Merger Transaction by our common unitholders.

The Merger Agreement has been unanimously approved by the board of directors of our general partner, the conflicts committee of the board of directors of our general partner, and a special committee consisting of VLO directors who do not own any of our common units, which was given full power, authority and responsibility to review, evaluate, negotiate and approve the Merger Transaction, for and on behalf of the VLO board and VLO. The Merger Transaction will close as soon as possible following the satisfaction of certain customary closing conditions and upon the closing we will be a wholly owned subsidiary of Valero and will cease to be a publicly held partnership.

We will file with the Securities and Exchange Commission (the SEC) an information statement that will provide additional important information concerning the proposed Merger Transaction. Since the proposed Merger Transaction is a “going private” transaction under SEC rule 13e-3, we will also file with the SEC a transaction statement on Schedule 13E-3. After the information statement is cleared by the SEC, we will mail a definitive information statement to our common unitholders.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Basis of Presentation

General

These unaudited financial statements have been prepared in accordance with U.S. 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 U.S. GAAP for complete 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 and nine months ended September 30, ~~2017~~2018 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2018.

The balance sheet as of December 31, ~~2016~~2017 has been derived from our audited financial statements as of that date. For further information, refer to our financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, ~~2016.~~2017.

Acquisitions from Valero

The acquisitions of the Parkway pipeline and the Port Arthur terminal (both defined in Note 2) from Valero ~~in 2016 noted above~~on November 1, 2017 were accounted for as transfers of ~~businesses~~assets between entities under the common control of Valero. Accordingly, we recorded these asset acquisitions on our balance sheet at Valero’s carrying value as of the ~~beginning of the period of transfer,~~acquisition date, and ~~we retrospectively adjusted prior period financial statements and financial information to furnish comparative information. We refer to~~

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~~the historical results of the transferred assets from Valero prior to their transfer to us as those of our “Predecessor.”~~

The combined financial statements of our Predecessor were derived from the consolidated financial statements and accounting records of Valero and reflect the combined historical financial position, results of operations, and cash flows of our Predecessor as if the acquisitions from Valero had been combined for periods prior to the effective dates of each acquisition.

There were no transactions between the operations of our Predecessor; therefore, there were no intercompany transactions or accounts to be eliminated in connection with the combination of those operations. In addition, our Predecessor’s statements of income include direct charges for the management and operation of our assets and certain expenses allocated by Valero for general corporate services, such as treasury, accounting, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Prior to the acquisitions from Valero, our Predecessor transferred cash to Valero daily and Valero funded our Predecessor’s operating and investing activities as needed. Therefore, transfers of cash to and from Valero’s cash management system are reflected as a component of net investment and are reflected as a financing activity in our statements of cash flows. In addition, interest expense was not included on the net cash transfers from Valero.

~~The acquisitions of Parkway Pipeline and the Port Arthur terminal on November 1, 2017 will be accounted for as acquisitions of assets and as such,~~ our prior period financial statements and financial information ~~will~~were not be retrospectively ~~adjusted. However, because~~adjusted for these ~~assets were transferred between entities under the common control of Valero, we will record these assets on our balance sheet at Valero’s carrying value as of November 1, 2017.~~acquisitions.

The financial information presented for the periods after the effective dates of each acquisition represents the consolidated financial position, results of operations, and cash flows of the Partnership.

Reclassifications

~~Certain~~In connection with our adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers,” (Topic 606) on January1, 2018, which is more fully described below, we have separately reflected (i)revenues from lease contracts and (ii)revenues from contracts with our customer. Because of this presentation of our revenues, we have also separately reflected cost of revenues and depreciation expense associated with lease contracts and contracts with our customer and have reclassified prior period amounts to conform to the 2018 presentation.

In addition, certain amounts reported ~~as of December 31, 2016 and~~ for the nine months ended September 30, ~~2016~~2017 and as of December 31, 2017 have been reclassified to conform to the ~~2017~~2018 presentation.

Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

~~Accounting Pronouncement Adopted During the Period~~

~~ASU No. 2017-01~~

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The provisions of this ASU provide a more robust framework to use in determining when a set of assets and activities is a business by clarifying the requirements related to inputs, processes, and outputs. These provisions are to be applied prospectively and are effective for annual reporting periods beginning after December 15, 2017,

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Revenue Recognition

General

We generate revenues from fee-based transportation and terminaling activities to transport and store crude oil and refined petroleum products using our pipelines and terminals under commercial agreements with ~~early adoption permitted. Our early~~Valero. Certain schedules under these agreements are classified as operating leases under existing lease accounting standards, with such revenues reflected as revenues from lease contracts on our statements of income. The remaining schedules under these agreements are service arrangements accounted for as revenues from contracts with our customer, and are reflected as revenues from contracts with customer on our statements of income.

Revenue from Lease Contracts

Lease revenues are recognized on a straight-line basis over the lease term. Contingent lease revenues are recognized for volumes in excess of minimum throughput commitments.

Revenue from Contracts with Customer

We adopted the provisions of Topic 606 on January 1, 2018, as described below in “Accounting Pronouncements Adopted on January 1, 2018.” Accordingly, our revenue recognition accounting policy has been revised to reflect the adoption of this ~~ASU effective~~standard.

At contract inception, we assess the services promised in our contracts and identify a performance obligation for each promise to transfer to our customer a service (or bundle of services) that is distinct. Revenue from contracts with our customer is recognized over time at the amount of consideration we expect to receive as our performance obligation is satisfied.

Our service primarily includes the delivery of crude oil and refined petroleum products that are ratably lifted by or delivered to our customer for its future use or future sale to its end customers. Under our transportation service agreements, the service provided is the delivery of crude oil and refined petroleum products to various points in our pipeline system. Although the products are delivered on a batch basis, we deliver a series of similar goods consecutively over time, therefore, the service is treated as a single performance obligation. Under our terminaling service agreement, the services provided for each terminal are the receipt, storage, and delivery of crude oil and refined petroleum products. These services are treated as a single performance obligation as we perform the service with the same pattern of transfer to our customer over time for which progress towards satisfying the performance obligation can be measured uniformly. The above performance obligations under the transportation service agreements and the terminaling service agreement are satisfied over time because (i) our customer simultaneously receives and consumes the benefits provided by our performance and (ii) another entity would not need to substantially reperform the work that we have completed to date.

Our transaction price is based on a contractual rate, which may vary depending on volumes transported on a quarterly basis within each quarterly period. Some schedules contain a quarterly tier-pricing structure, whereby one rate is charged for volumes up to a certain number of average barrels per day and a reduced rate is charged for excess average barrels per day. For schedules that include such variable consideration, we estimate the factors driving the variable consideration to determine the transaction price. Our schedule with our customer states the final terms of the sale, including the description, quantity, and price of each service delivered. We invoice our customer the contractual rate based on the greater of throughput volumes

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

or minimum throughput commitments. Payment is typically due in full within 10 days of receipt of billing, which occurs monthly. In the normal course of business, we do not have obligations for returns or refunds.

Accounting Pronouncements Adopted on January1, 2018

Topic 606

As previously noted, we adopted the provisions of Topic606 on January 1, 2017 did not have an effect on our financial position or results of operations. However, our acquisitions of Parkway Pipeline and the Port Arthur terminal on November 1, 2017 will be, and more of our future acquisitions may be, accounted for as acquisitions of assets in accordance with this ASU.

~~Accounting Pronouncements Not Yet Adopted~~

~~ASU No. 2014-09~~

~~In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify~~2018. Topic 606 clarifies the principles for recognizing revenue. This new standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We have completed our evaluation of the provisions of this standardrevenue and concluded that our adoption will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. We will adopt this new standard effective January 1, 2018, and we will usesupersedes previous revenue recognition requirements under “Revenue Recognition (Topic605),” using the modified retrospective method of adoption as permitted by the standard. Under ~~that~~this method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of partners’ capital, and revenues reported in the periods prior to the date of adoption are not changed. We doelected to apply the transition guidance for Topic606 to individual contracts with our customer that were not ~~however, expect~~completed as of the date of adoption. There was no material impact to ~~make such an~~our financial position as a result of adopting Topic 606; therefore, there was no cumulative-effect adjustment to partners’ ~~capital. We are currently developing~~capital as of January1, 2018. Additionally, there was no material impact to our ~~revenue disclosures~~financial position or results of operations as of and ~~enhancing~~for the three and nine months ended September 30, 2018. See “Revenue Recognition” above for a discussion of our accounting ~~systems to enable the preparation of such disclosures as well as the implementation of~~policy affected by our ~~internal controls.~~

~~Certain of our commercial agreements are considered operating leases under U.S. GAAP. The scope~~adoption of Topic ~~606 does not extend to revenues generated by lease arrangements; therefore, lease revenues generated by us will continue to be accounted~~606. Also see Note 5 for ~~under existing lease accounting standards and will be reflected in a separate revenue line item~~further information on our ~~statements of income.~~revenues.

ASU No. 2016-01

In January 2016, the FASB issued ~~ASU~~Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),: Recognition and Measurement of Financial Assets and Financial Liabilities,” (ASU No. 2016-01) to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. ~~The~~We adopted the provisions of ~~this~~ ASU ~~are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual periods. This ASU is to be applied~~No. 2016-01 on January1, 2018 using athe cumulative-effect ~~adjustment to~~method of adoption as required by the ~~balance sheet as of the beginning of the fiscal year of adoption.~~ASU. The adoption of this ASU ~~effective January 1, 2018 will~~did not affect our financial position or our results of operations as of or for the three and nine months ended September 30, 2018, but ~~will result~~it resulted in ~~revised disclosures.~~reduced disclosures as it eliminated the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments.

~~ASU No. 2016-02~~Accounting Pronouncements Not Yet Adopted

Topic 842

In February 2016, the FASB issued ~~ASU No. 2016-02,~~ “Leases (Topic 842),” (Topic 842) to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods, with early adoption permitted. We will adopt this new standard on January 1, 2019, and we expect to use the ~~modified retrospective~~optional transition method, which allows us to recognize a cumulative-effect adjustment to the opening balance of partners’ capital at the date of adoption and apply the new disclosure requirements beginning in the period of adoption.

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The new standard provides a number of optional practical expedients and we expect to elect the following:

Transition Elections. We expect to elect the package of practical expedients that permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs, as ~~permitted by~~well as the practical expedient that permits us to not assess existing land easements under the new standard.

Lessee Accounting Policy Elections. We expect to elect the short-term lease recognition exemption whereby right-of-use (ROU) assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year, and the practical expedient to not separate lease and non-lease components for all classes of underlying assets other than the real estate asset class.

Lessor Accounting Policy Election. We expect to elect the practical expedient to account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets.

We are ~~developing enhanced~~enhancing our contracting and lease evaluation systems and related processes, and ~~information systems~~we are developing a new lease accounting system to ~~support such processes, as well as new and enhanced accounting systems to account for~~capture our leases and support the required disclosures. We have monitored and will continue to ~~evaluate~~monitor the ~~effect that adopting~~adoption process to ensure compliance with accounting and disclosure requirements. We also continue the integration of our lease accounting system with our general ledger, including the modifications to our related procurement and payment processes during the fourth quarter of 2018.

We anticipate this standard will have a material impact on (i) the recognition of ROU assets and lease liabilities on our ~~financial statements~~balance sheet for our operating leases and ~~related disclosures.~~(ii) the presentation of new disclosures about our leasing activities. However, we do not expect adoption to have a material impact on our results of operations or liquidity. We expect our accounting for leases in which we are the lessor to remain substantially unchanged.

ASU No. 2016-13

In June 2016, the FASB issued “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (ASU No. 2016-13) to improve financial reporting by requiring the immediate recognition of credit losses on financial instruments held by a reporting entity. This ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It also requires enhanced disclosures including qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual reporting periods, with early adoption permitted for annual periods beginning after December 15, 2018. The provisions of this ASU should be applied through a cumulative-effect adjustment to partners’ capital as of the beginning of the first reporting period in which this ASU is effective (i.e., the modified-retrospective approach). We expect to adopt ASU No. 2016-13 effective January 1, 2020 and we do not expect such adoption to affect our financial position or our results of operations.

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2.	ACQUISITIONS

~~Acquisitions in 2016~~In connection with the following acquisitions, we entered into various agreements with Valero, including additional schedules to our commercial agreements, an omnibus agreement, a services and secondment agreement, and lease agreements for the use of land on which our assets are located.

~~McKee Terminal Services Business~~

Effective April 1, 2016, we acquired from Valero a subsidiary that owns and operates a crude oil, intermediates, and refined petroleum products terminal supporting Valero’s McKee Refinery for total consideration of $240.0 million, which consisted of (i) a cash distribution of $204.0 million and (ii) the issuance of 728,775 common units and 14,873 general partner units to Valero having an aggregate value of $36.0 million. We funded the cash distribution with $65.0 million of our cash on hand and $139.0 million of borrowings under our revolving credit facility. See Note 5 for further discussion of the borrowings under our revolving credit facility. This acquisition was accounted for as an acquisition of a business. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

~~Meraux and Three Rivers Terminal Services Business~~

Effective September 1, 2016, we acquired from Valero two subsidiaries that own and operate crude oil, intermediates, and refined petroleum products terminals supporting Valero’s Meraux and Three Rivers Refineries for total consideration of $325.0 million, which consisted of (i) a cash distribution of $276.0 million and (ii) the issuance of 1,149,905 common units and 23,467 general partner units to Valero having an aggregate value of $49.0 million. We funded the cash distribution with $66.0 million of our cash on hand and $210.0 million of borrowings under our revolving credit facility. See Note 5 for further discussion of the borrowings under our revolving credit facility. This acquisition was accounted for as an acquisition of a business. See Note 1 for a further discussion about the accounting and basis of presentation of this acquisition.

~~Acquisitions in 2017~~

Red River Crude System

~~Effective~~On January 18, 2017, we acquired a 40 percent undivided interest in (i) the ~~newly constructed~~ Hewitt segment of ~~Plains’~~Plains All American Pipeline, L.P.’s (Plains) Red River pipeline (the Hewitt segment), (ii) two 150,000 shell barrel capacity tanks located at Hewitt Station in Hewitt, Oklahoma (the Hewitt Storage Tanks), and (iii) a pipeline connection from Hewitt Station to Wasson Station (the Wasson Interconnect) (collectively, the Red River crude system) for total cash consideration of $71.8 ~~million. We~~million, which we funded ~~this acquisition~~ with ~~available~~our cash on hand. This acquisition was accounted for as an acquisition of assets.

The Hewitt segment consists of aan approximately 138-mile, 16-inch crude oil pipeline with 150,000 barrels per day of throughput capacity that originates at Plains Marketing L.P.’s Cushing, Oklahoma terminal and ends at Hewitt Station. The pipeline supports Valero’s Ardmore Refinery and began supplying crude oil to Valero in January 2017. We retain a right to participate in any future expansions of the pipeline.

~~This acquisition was accounted for as an acquisition of assets. See Note 3 for a further discussion of the commercial agreement we entered into with Valero concurrent with this acquisition.~~

We also entered into a Joint Ownership Agreement (JOA) and an Operating and Administrative Services Agreement with Plains concurrent with this acquisition. The JOA provides us with access to the remaining 60 percent of the capacity of the Hewitt Storage Tanks and the Wasson Interconnect and continues until terminated by mutual agreement. This access arrangement is accounted for as an operating lease. The administrative agreement facilitates the day-to-day operations and management functions of the pipeline for an initial five-year term and automatically renews for successive five-year terms.

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Parkway Pipeline ~~and Port Arthur Terminal~~

~~Effective~~On November 1, 2017, we acquired Parkway Pipeline ,LLC, a subsidiary of Valero, that owns and operates ~~a 141-mile,~~an approximately 140-mile, 16-inch refined petroleum products pipeline (Parkway pipeline) with 110,000 barrels per day of capacity that transports refined petroleum products from Valero’s St. Charles Refinery, located in Norco, Louisiana, to Collins, Mississippi for supply into the Plantation and Colonial pipeline ~~systems, for~~systems. We paid to Valero cash consideration of $200.0 million. We funded the cash distribution with $82.0 million of our cash on hand and $118.0 million of borrowings under ~~our revolving credit facility. We also~~the Revolver (defined in Note 4). This acquisition was accounted for as a transfer of assets between entities under the common control of Valero.

Port Arthur Terminal

On November 1, 2017, we acquired Valero Partners Port Arthur, LLC, a subsidiary of Valero that owns certain terminaling assets (Port Arthur terminal) that support Valero’s Port Arthur Refinery for total consideration of $308.0 million, which consisted of (i) a cash distribution of $262.0 million and (ii) the issuance of 1,081,315 common units and 22,068 general partner units to Valero having an aggregate value of $46.0 million. We funded the cash distribution with $262.0 million of borrowings under ~~our revolving credit facility. See Note 5 for further discussion of~~ the ~~borrowings under our revolving credit facility. These acquisitions were~~Revolver. This acquisition was accounted for as ~~acquisitions~~a transfer of ~~assets.~~

~~Concurrent with~~assets between entities under the ~~acquisitions~~common control of ~~Parkway Pipeline and the Port Arthur terminal described above, we entered into various amended and restated agreements with~~ Valero.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3.	RELATED-PARTY TRANSACTIONS

~~New and Amended Commercial~~Summary of Transactions

Related-Party Agreements ~~in 2017~~

~~Agreement with Diamond Green Diesel~~

Effective March 31, 2017, we entered into a commercial agreement with ~~DGD~~Diamond Green Diesel Holdings LLC (DGD), a joint venture consolidated by Valero, to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we ~~have agreed to construct~~constructed a new 180,000 barrel storage tank and ~~provide~~began leasing to DGD in April 2018. This commercial agreement, which includes both the rail loading facility and the storage ~~services to DGD. The construction of the new~~ tank, ~~is expected to be completed in the first quarter of 2018. The agreement~~ has an initial term that ends on June 30, ~~2033. The agreement~~2033, and contains minimum commitments for DGD’s use of the assets.

~~Agreements~~Revenues – Related Party

Revenues – related party include revenues from lease contracts and revenues from contracts with ~~Valero~~

~~Effective March 31, 2017 and in connection with the DGD agreement described above, we amended~~ our ~~land lease and access agreement with Valero related to our St. Charles terminal to include our use of Valero’s rail loading facility.~~

~~Concurrent with the acquisition of the Red River crude system~~customer, as further described in Note 2, we entered into a 10-year throughput agreement under which we provide transportation services to Valero. The agreement provides Valero an option to renew for one additional five-year term, unless terminated by Valero upon at least 180 days’ prior written notice before the end of the initial term, and it contains minimum throughput requirements and inflation escalators.

~~Summary of Transactions~~

The amounts shown in our balance sheets as “deferred revenue – related party” represent the unearned revenues from Valero associated with Valero’s quarterly deficiency payment, which is the result of Valero not meeting its minimum quarterly throughput commitments under certain schedules of our master transportation services agreement and master terminal services agreement (collectively, the commercial agreements).5.

Related-Party Expenses

~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~All of our operating~~ revenues, ~~are generated by providing services under our commercial agreements described above. The cost of services~~expenses, or financing activities provided to us by Valero ~~including the cost of financing provided to us by Valero in connection with certain acquisitions from Valero as more fully described in Notes 2~~ and ~~5, is~~are reflected in the supplemental information disclosure on our statements of income.

Concentration Risk

~~Substantially all~~All of our ~~operating revenues and “receivables – related party”~~related-party balances resulted from transactions with Valero. Therefore, we are subject to the business risks associated with Valero’s business.

Insurance Recoveries

During the three and nine months ended September 30, 2017, we experienced property damage losses and repair costs associated with Hurricane Harvey primarily at our Houston terminal and Port Arthur products system. As a result of these losses, we ~~have~~ submitted claims under our insurance policies with Valero. The amount shown in our statements of income as other operating expenses reflects the uninsured portion of our losses. ~~As of~~For the three and nine months ended September 30, 2017, we ~~have recorded a~~recognized $2.3 million ~~receivable from Valero related to our property damage claims,~~of insurance recoveries, which ~~was~~were recorded as a reduction to other operating expenses.

~~Operating Leases – Lessor~~


4.	DEBT AND NOTES PAYABLE – RELATED PARTY

Debt

Certain schedules under our commercial agreements with Valero are considered operating leases under U.S. GAAP. These agreements contain minimum throughput requirements and escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. These lease revenues are recorded within “operating revenues – related party” in our statementsDebt, at stated values consisted of ~~income. The components of our lease revenues were as follows~~the following (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Minimum rental revenues $ 70,588
$ 60,133
$ 208,859
$ 164,659
Contingent rental revenues 15,223
10,710
42,721
28,271
Total lease revenues $ 85,811
$ 70,843
$ 251,580
$ 192,930

~~As of September 30, 2017, future minimum rentals to be received related to these noncancelable commercial agreements were as follows (in thousands):~~

Remainder of 2017 $ 70,589
2018 280,056
2019 280,056
2020 280,824
2021 280,056
Thereafter 2,394,350
Total minimum rental payments $ 3,585,931



	Maturity Date	September 30, 2018			December 31, 2017
	Maturity Date	September 30, 2018			December 31, 2017
Revolver	November 2020	$	—		$	410,000
Senior Notes, 4.375%	December 2026	500,000			500,000
Senior Notes, 4.5%	March 2028	500,000			—
Net unamortized discount and debt issuance costs		(10,306		)	(4,717		)
Debt		$	989,694		$	905,283

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


4.	~~PROPERTY AND EQUIPMENT~~

Our property and equipment includes non-leased assets and assets under operating leases for which we are the lessor under U.S. GAAP. Major classes of property and equipment consisted of the following (in thousands):

September 30, 2017

Non-Leased
Assets
Assets
Leased
to Valero Total
Land $ 4,672
$ —
$ 4,672
Pipelines and related assets 224,794
113,381
338,175
Terminals and related assets 120,482
816,684
937,166
Other 10,530
—
10,530
Construction-in-progress 50,363
—
50,363
Property and equipment, at cost 410,841
930,065
1,340,906
Accumulated depreciation (123,924 ) (262,035 ) (385,959 )
Property and equipment, net $ 286,917
$ 668,030
$ 954,947

December 31, 2016

Non-Leased
Assets
Assets
Leased
to Valero Total
Land $ 4,672
$ —
$ 4,672
Pipelines and related assets 224,656
47,366
272,022
Terminals and related assets 112,614
793,765
906,379
Other 9,538
—
9,538
Construction-in-progress 23,677
—
23,677
Property and equipment, at cost 375,157
841,131
1,216,288
Accumulated depreciation (115,538 ) (235,670 ) (351,208 )
Property and equipment, net $ 259,619
$ 605,461
$ 865,080

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~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


5.	~~DEBT AND NOTES PAYABLE~~ – ~~RELATED PARTY~~

~~Debt~~Revolver

We have a $750.0 million senior unsecured revolving credit facility agreement (the Revolver) that matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit of up to $100.0 million. Borrowings onunder the Revolver bear interest at a variable ~~rate, which was 2.75 percent and 2.3125 percent~~rate.

On March 29, 2018, we repaid the outstanding balance of $410.0 million on the Revolver as ~~of September 30, 2017 and December 31, 2016, respectively.~~

discussed below. There was no activity related to ~~our debt~~the Revolver during the nine months ended September 30, 2017. ~~During~~

Senior Notes

On March 29, 2018, we issued in a public offering $500.0 million aggregate principal amount of 4.5 percent Senior Notes due March 15, 2028 (4.5 percent Senior Notes). Gross proceeds from this debt issuance totaled $498.3 million before deducting the ~~nine months ended September 30, 2016, we borrowed $139.0 million~~underwriting discount and ~~$210.0~~other debt issuance costs totaling $4.5 million. We used the proceeds to repay the outstanding balance of $410.0 million under the Revolver ~~in connection with the acquisitions~~and a portion of the ~~McKee Terminal Services Business~~outstanding balance under one of our Loan Agreements (defined below) with Valero.

The 4.5 percent Senior Notes are unsecured and contain various customary restrictive covenants that, among other things, limit our ability to create or permit to exist liens, or to enter into any sale and leaseback transactions, with respect to principal properties, and limit our ability to merge or consolidate with any other entity or transfer or dispose of all or substantially all of our assets. These covenants are subject to a number of important qualifications and limitations. The 4.5 percent Senior Notes are not currently guaranteed by any of our subsidiaries. If in the ~~Meraux and Three Rivers Terminal Services Business, respectively. See Note 2 for information about~~future any of our ~~acquisitions from Valero.~~

~~In connection with the acquisitions of Parkway Pipeline and the Port Arthur terminal as described inNote 2, we borrowed $118.0 million and $262.0 million, respectively,~~subsidiaries becomes a borrower or guarantor under, or grants any lien to secure any obligations pursuant to, the Revolver, then we will cause such subsidiary to guarantee the 4.5 percent Senior Notes. Interest is payable semi-annually on ~~November 1, 2017. These borrowings bear interest at variable rates, which were 2.75 percent~~March 15 and ~~2.875 percent, respectively, as of November 1, 2017.~~September 15, commencing on September 15, 2018.

Notes Payable – Related Party

~~There was no activity under our~~We have two subordinated credit agreements with Valero (the Loan Agreements) ~~for the nine months ended September 30, 2017 and 2016.~~. Borrowings on the Loan Agreements bear interest at a variable rate, which was~~2.73722~~ 3.6038 percent and ~~2.27~~2.86069 percent as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

~~Table~~On March 29, 2018, we paid down $85.0 million under one of ~~Contents~~

~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


6.	~~OPERATING LEASES~~

~~We have long-term operating lease commitments for pipelines and land used in~~ the ~~terminaling and transportation of crude oil and refined petroleum products. Certain leases contain escalation clauses and renewal options that allow~~Loan Agreements. There was no activity under the Loan Agreements for the ~~same rental payment over the lease term or a revised rental payment based on fair rental value or negotiated value. Currently, one~~nine months ended September 30, 2017. The outstanding balance of ~~our leases with Valero does not contain a renewal option. We expect our leases will be renewed or replaced by other leases in the normal course of business.~~

Asthese Loan Agreements was $285.0 million and $370.0 million as of September 30, 2018 and December 31, 2017, ~~our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess~~respectively.

Other Disclosures

Interest and debt expense, net of ~~one year were~~capitalized interest was as follows (inthousands):

Agreements With
Related Party Others Total
Remainder of 2017 $ 2,436
$ 226
$ 2,662
2018 9,744
1,068
10,812
2019 9,744
1,052
10,796
2020 9,745
1,052
10,797
2021 9,745
1,047
10,792
Thereafter 219,893
25,362
245,255
Total minimum rental payments $ 261,307
$ 29,807
$ 291,114

~~Minimum rental expenses for all operating leases are shown in the following table (in thousands). Contingent rental expense for all operating leases was immaterial.~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Minimum rental expenses – related party $ 2,437
$ 2,281
$ 7,310
$ 6,518
Minimum rental expenses – others 304
175
909
541
Total minimum rental expenses $ 2,741
$ 2,456
$ 8,219
$ 7,059



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Interest and debt expense incurred	$	14,442	$	8,912	$	40,809	$	25,957
Less: Capitalized interest	94		165		282		370
Interest and debt expense, net of capitalized interest	$	14,348	$	8,747	$	40,527	$	25,587

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


7.5.	REVENUES

Disaggregation of Revenues

Revenues – related party disaggregated by activity type were as follows (inthousands):



	Pipeline Transportation		Terminaling		Storage and Other		Total
Three Months Ended September 30, 2018:
Revenues from lease contracts	$	17,702	$	93,874	$	502	$	112,078
Revenues from contracts with customer	13,861		13,215		1,436		28,512
Total revenues – related party	$	31,563	$	107,089	$	1,938	$	140,590

Three Months Ended September 30, 2017:
Revenues from lease contracts	$	11,197	$	74,476	$	138	$	85,811
Revenues from contracts with customer	11,845		10,681		1,003		23,529
Total revenues – related party	$	23,042	$	85,157	$	1,141	$	109,340

Nine Months Ended September 30, 2018:
Revenues from lease contracts	$	53,584	$	270,933	$	1,138	$	325,655
Revenues from contracts with customer	39,654		37,823		4,027		81,504
Total revenues – related party	$	93,238	$	308,756	$	5,165	$	407,159

Nine Months Ended September 30, 2017:
Revenues from lease contracts	$	33,379	$	217,793	$	408	$	251,580
Revenues from contracts with customer	37,697		34,667		1,757		74,121
Total revenues – related party	$	71,076	$	252,460	$	2,165	$	325,701

Operating Leases – Lessor

As described in Note 1, certain schedules under our commercial agreements with Valero are considered operating leases under U.S. GAAP. These agreements contain minimum throughput commitments and escalation clauses to adjust transportation tariffs and terminaling and storage fees to reflect changes in price indices. Revenues from lease contracts are reflected separately on our statements of income. The components of our revenues from lease contracts were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Minimum lease revenues	$	91,059	$	70,588	$	270,257	$	208,859
Contingent lease revenues	21,019		15,223		55,398		42,721
Revenues from lease contracts	$	112,078	$	85,811	$	325,655	$	251,580

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables from Contracts with Customer

Our receivables from contracts with our customer are included in receivables – related party. These balances were $9.1 million and $8.3 million as of September 30, 2018 and January 1, 2018, respectively.

Future Minimum Rentals and Remaining Performance Obligations

As of September 30, 2018, future minimum rentals to be received for operating leases (described above) having initial or remaining noncancelable lease terms in excess of one year are shown below under “Lease Contracts,” and future revenues expected to be recognized from our remaining performance obligations from contracts with our customer with an original expected duration of greater than one year are shown below under “Contracts with Customer” (in thousands):



	Lease Contracts		Contracts with Customer
Remainder of 2018	$	91,060	$	20,462
2019	361,282		81,215
2020	362,268		81,426
2021	361,282		81,215
2022	361,282		81,215
Thereafter	2,914,596		116,994
Total	$	4,451,770	$	462,527

Our lease contracts and our contracts with our customer contain annual inflation escalation clauses that are (i) deemed contingent rentals and variable consideration, respectively, and (ii) applied to the remainder of the contracts. The amounts presented above exclude any estimates for future rate changes due to these inflation rate escalations as prescribed by the contracts.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


6.	CASH DISTRIBUTIONS AND NET INCOME PER LIMITED PARTNER COMMON UNIT

Cash Distributions

Our partnership agreement prescribes the amount and priority of cash distributions that our limited partners and general partner will receive. Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions that have been declared since January 1, ~~2016:~~2017:

Quarterly
Period
Ended
Total
Quarterly
Distribution
(Per Unit) Total Cash
Distribution
(In Thousands) Declaration
Date Record
Date Distribution
Date
September 30, 2017 $ 0.4800
$ 46,242
October 19, 2017 November 1, 2017 November 9, 2017
June 30, 2017 0.4550
42,111
July 19, 2017 August 1, 2017 August 10, 2017
March 31, 2017 0.4275
38,043
April 20, 2017 May 2, 2017 May 11, 2017
December 31, 2016 0.4065
34,895
January 20, 2017 February 2, 2017 February 10, 2017
September 30, 2016 0.3850
32,175
October 24, 2016 November 3, 2016 November 10, 2016
June 30, 2016 0.3650
28,912
July 21, 2016 August 1, 2016 August 9, 2016
March 31, 2016 0.3400
25,608
April 21, 2016 May 2, 2016 May 10, 2016
December 31, 2015 0.3200
22,711
January 25, 2016 February 4, 2016 February 11, 2016

The following table reflects the allocation of total cash distributions to the general and limited partners and distribution equivalent right (DER) payments applicable to the period in which the distributions and DERs were earned (in thousands):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
General partner’s distributions:
General partner’s distributions $ 925
$ 644
$ 2,362
$ 1,734
General partner’s incentive distribution
rights (IDRs) 12,074
5,600
30,631
12,462
Total general partner’s distributions 12,999
6,244
32,993
14,196
Limited partners’ distributions:
Common – public 10,789
8,336
30,620
23,495
Common – Valero 22,449
17,590
62,768
28,692
Subordinated – Valero —
—
—
20,297
Total limited partners’ distributions 33,238
25,926
93,388
72,484
DERs 5
5
15
15
Total cash distributions, including DERs $ 46,242
$ 32,175
$ 126,396
$ 86,695

Quarterly

Period

Ended

Total
Quarterly
Distribution
(per unit)

Total Cash
Distribution
(in thousands)

Declaration
Date

Record
Date

Distribution
Date

September 30, 2018

0.5510

56,081

October 18, 2018

November 1, 2018

November 9, 2018

June 30, 2018

0.5510

56,081

July 23, 2018

August 3, 2018

August 13, 2018

March 31, 2018

0.5275

52,826

April 19, 2018

May 1, 2018

May 9, 2018

December 31, 2017

0.5075

50,055

January 24, 2018

February 5, 2018

February 13, 2018

September 30, 2017

0.4800

46,242

October 19, 2017

November 1, 2017

November 9, 2017

June 30, 2017

0.4550

42,111

July 19, 2017

August 1, 2017

August 10, 2017

March 31, 2017

0.4275

38,043

April 20, 2017

May 2, 2017

May 11, 2017

December 31, 2016

0.4065

34,895

January 20, 2017

February 2, 2017

February 10, 2017

14Net Income per Limited Partner Common Unit

~~Table of Contents~~

~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


8.	~~NET INCOME PER LIMITED PARTNER UNIT~~

We calculate net income available to limited partners based on the distributions pertaining to each period’s net income. After considering the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner, limited partners, and other participating securities in accordance with the contractual terms of our partnership agreement and as prescribed under the two-class method. Participating securities include ~~IDRs~~the general partner’s incentive distribution rights (IDRs) and awards under our Valero Energy Partners LP 2013 Incentive Compensation Plan that receive ~~DERs.~~distribution equivalent right (DER) payments. However, the terms of our partnership agreement limit the general partner’s incentive distribution to the amount of available cash, which, as defined in our partnership agreement, is net of reserves deemed appropriate. As such, IDRs are not allocated undistributed earnings or distributions in excess of earnings in the calculation of net income per limited partner common unit.

Net losses of our Predecessor are allocated to the general partner. Subsequent to the effective dates of the acquisitions from Valero, we calculate net income available to limited partners based on the methodology described above.

Basic net income per limited partner common unit is determined pursuant to the two-class method for master limited partnerships. The two-class method is an earnings allocation formula that is used to determine earnings to our general partner, common unitholders, and participating securities according to (i) distributions pertaining to each period’s net income and (ii) participation rights in undistributed earnings.

Diluted net income per limited partner unit is also determined using the two-class method, unless the treasury stock method is more dilutive. For the three and nine months ended September 30, 2017 and 2016, we used the two-class method to determine diluted net income per limited partner unit. We did not have any potentially dilutive instruments outstanding during the three and nine months ended September 30, 2017 and 2016.

Effective August 10, 2016, all of our subordinated units, which were owned by Valero, were converted on a one-for-one basis into common units. The subordinated units were only allocated earnings generated by us through the conversion date. See Note 9 for further discussion of the conversion of subordinated units.

~~Table of Contents~~

~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Net income per unit was computed as follows (in thousands, except per unit amounts):~~

Three Months Ended September 30, 2017
General
Partner
Limited
Partners
Common
Units
Restricted
Units Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs $ 925
$ 33,238
$ —
$ 34,163
General partner’s IDRs 12,074
—
—
12,074
DERs —
—
5
5
Distributions and DERs declared 12,999
33,238
5
46,242
Undistributed earnings 38
11,307
2
11,347
Net income available to
limited partners – basic and diluted $ 13,037
$ 44,545
$ 7
$ 57,589

Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding 68,163

Net income per limited partner unit – basic and diluted $ 0.65

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Diluted net income per limited partner common unit is also determined using the two-class method, unless the treasury stock method is more dilutive. For the three and nine months ended September 30, 2018 and 2017, we used the two-class method to determine diluted net income per limited partner common unit. We did not have any potentially dilutive instruments outstanding during the three and nine months ended September 30, 2018 and 2017.

Net income per unit was computed as follows (in thousands, except per unit amounts):


	Three Months Ended September 30, 2016										Three Months Ended September 30, 2018
			Limited Partners								General Partner			Limited Partners Common Units								Restricted Units		Total
	General Partner		Common Units		Subordinated Units		Restricted Units		Total				Public			Valero			Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	644	$	25,926	$	—	$	—	$	26,570	$	1,122		$	12,388		$	25,769		$	38,157	$	—	$	39,279
General partner’s IDRs	5,600		—		—		—		5,600		16,796			—			—			—		—		16,796
DERs	—		—		—		5		5		—			—			—			—		6		6
Distributions and DERs declared	6,244		25,926		—		5		32,175		17,918			12,388			25,769			38,157		6		56,081
Undistributed earnings	390		15,533		3,607		4		19,534		285			4,538			9,442			13,980		3		14,268
Net income available to limited partners – basic and diluted	$	6,634	$	41,459	$	3,607	$	9	$	51,709	$	18,203		$	16,926		$	35,211		$	52,137	$	9	$	70,349

Net income per limited partner unit – basic and diluted:
Net income per limited partner common unit – basic and diluted:
Weighted-average units outstanding			53,899		12,517															69,251

Net income per limited partner unit – basic and diluted			$	0.77	$	0.29
Net income per limited partner common unit – basic and diluted																				$	0.75

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


									Three Months Ended September 30, 2017
	Nine Months Ended September 30, 2017								General Partner			Limited Partners Common Units								Restricted Units		Total
	General Partner		Limited Partners Common Units		Restricted Units		Total				Public			Valero			Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	2,362	$	93,388	$	—	$	95,750	$	925		$	10,789		$	22,449		$	33,238	$	—	$	34,163
General partner’s IDRs	30,631		—		—		30,631		12,074			—			—			—		—		12,074
DERs	—		—		15		15		—			—			—			—		5		5
Distributions and DERs declared	32,993		93,388		15		126,396		12,999			10,789			22,449			33,238		5		46,242
Undistributed earnings	930		46,834		9		47,773		38			3,666			7,641			11,307		2		11,347
Net income available to limited partners – basic and diluted	$	33,923	$	140,222	$	24	$	174,169	$	13,037		$	14,455		$	30,090		$	44,545	$	7	$	57,589

Net income per limited partner unit – basic and diluted:
Net income per limited partner common unit – basic and diluted:
Weighted-average units outstanding			67,997															68,163

Net income per limited partner unit – basic and diluted			$	2.06
Net income per limited partner common unit – basic and diluted																		$	0.65



	Nine Months Ended September 30, 2018
	General Partner		Limited Partners Common Units						Restricted Units		Total
	General Partner		Public		Valero		Total		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	3,300	$	36,634	$	76,209	$	112,843	$	—	$	116,143
General partner’s IDRs	48,826		—		—		—		—		48,826
DERs	—		—		—		—		19		19
Distributions and DERs declared	52,126		36,634		76,209		112,843		19		164,988
Undistributed earnings	709		11,279		23,465		34,744		6		35,459
Net income available to limited partners – basic and diluted	$	52,835	$	47,913	$	99,674	$	147,587	$	25	$	200,447

Net income per limited partner common unit – basic and diluted:
Weighted-average units outstanding							69,250
Net income per limited partner common unit – basic and diluted							$	2.13

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nine Months Ended September 30, 2016										Nine Months Ended September 30, 2017
			Limited Partners								General Partner			Limited Partners Common Units								Restricted Units		Total
	General Partner		Common Units		Subordinated Units		Restricted Units		Total				Public			Valero			Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	1,734	$	52,187	$	20,297	$	—	$	74,218	$	2,362		$	30,620		$	62,768		$	93,388	$	—	$	95,750
General partner’s IDRs	12,462		—		—		—		12,462		30,631			—			—			—		—		30,631
DERs	—		—		—		15		15		—			—			—			—		15		15
Distributions and DERs declared	14,196		52,187		20,297		15		86,695		32,993			30,620			62,768			93,388		15		126,396
Undistributed earnings	1,155		36,568		20,025		11		57,759		930			15,358			31,476			46,834		9		47,773
Net income available to limited partners – basic and diluted	$	15,351	$	88,755	$	40,322	$	26	$	144,454	$	33,923		$	45,978		$	94,244		$	140,222	$	24	$	174,169

Net income per limited partner unit – basic and diluted:
Net income per limited partner common unit – basic and diluted:
Weighted-average units outstanding			42,597		23,326															67,997

Net income per limited partner unit – basic and diluted			$	2.08	$	1.73
Net income per limited partner common unit – basic and diluted																				$	2.06

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


9.7.	PARTNERS’ CAPITAL

Unit Activity

Activity in the number of units was as follows:


	Common				General Partner						Limited Partners			General Partner Valero	Total
	Public	Valero	Subordinated				Total			Common Unitholders Public		Common Unitholder Valero		General Partner Valero	Total
Balance as of December 31, 2015	21,509,651	15,018,602	28,789,989		General Partner	1,332,829			66,651,071
Balance as of December 31, 2017											22,487,586		46,768,586	1,413,391	70,669,563
Unit-based compensation	5,958	—	—		—			5,958			5,898		—	—	5,898
Units issued in connection with acquisitions (see Note 2)	—	1,878,680	—		38,340			1,917,020
Conversion of subordinated units	—	28,789,989	(28,789,989	)	—			—
Units issued under ATM Program	65,980	—	—		—			65,980
General partner units issued to maintain 2% interest	—	—	—		1,346			1,346			—		—	120	120
Balance as of September 30, 2016	21,581,589	45,687,271	—		1,372,515			68,641,375
Balance as of September 30, 2018											22,493,484		46,768,586	1,413,511	70,675,581

Balance as of December 31, 2016	21,738,692	45,687,271	—		1,375,721			68,801,684			21,738,692		45,687,271	1,375,721	68,801,684
Unit-based compensation	5,997	—	—		—			5,997			5,997		—	—	5,997
Units issued under ATM Program	742,897	—	—		—			742,897			742,897		—	—	742,897
General partner units issued to maintain 2% interest	—	—	—		15,602			15,602			—		—	15,602	15,602
Balance as of September 30, 2017	22,487,586	45,687,271	—		1,391,323			69,566,180			22,487,586		45,687,271	1,391,323	69,566,180

ATM Program

There were no issuances of common units under our ATM Program for the nine months ended September 30, 2018. The table below summarizes activities of the common units issued under our ATM Program and general partner units issued to maintain the 2.0 percent general partner interest in the ~~Partnership.~~Partnership for the nine months ended September 30, 2017 (inthousands, except unit amounts):


	Units Issued	Total Proceeds		Offering Costs		Net Proceeds		Units Issued	Total Proceeds		Offering Costs		Net Proceeds
		(in thousands)
Nine months ended September 30, 2017:
Common – public	742,897	$	35,728	$	542	$	35,186	742,897	$	35,728	$	542	$	35,186
General partner	15,602	748		—		748		15,602	748		—		748

Nine months ended September 30, 2016:
Common – public	65,980	2,853		39		2,814
General partner	1,346	58		—		58

If the Merger Transaction is consummated, our common units will no longer be publicly traded and, as a result, we would not expect issuances of additional common units under our ATM Program following the closing of the Merger Transaction. See Note 1 for further discussion of the Merger Transaction.

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Subordinated Unit Conversion~~

Effective August 10, 2016, all of our subordinated units, which were owned by Valero, were converted on a one-for-one basis into common units. The conversion of the subordinated units does not impact the amount of cash distributions paid or the total number of outstanding units.

Transfers to (from) Partners

Subsequent to the expiration of the subordination period on August 10, 2016, all of our common units have equal rights, including rights to distributions and to our net assets in the event of liquidation. As a result, a reallocation of the carrying values of our public common unitholders’ interest in us and Valero’s common unitholder interest in us is required when a change in ownership occurs in order for the portion of those carrying values associated with activity subsequent to the subordination period to be equal to the respective unitholders’ ownership interests (in units) in us. Transfers to (from) partners resulted from the issuance of equity under our ATM Program for the nine months ended September 30, 2017. During the nine months ended September 30, 2016, transfers to (from) partners resulted from the issuance of equity to Valero in connection with our acquisition of the Meraux and Three Rivers Terminal Services Business and issuance of equity under our ATM Program.


~~10.~~8.	SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in thousands):


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2017			2016				2018			2017
Decrease (increase) in current assets:	Decrease (increase) in current assets:							Decrease (increase) in current assets:
Receivables – related party	Receivables – related party	$	894		$	(7,668	)	Receivables – related party	$	62		$	894
Receivables	Receivables	(225		)	—			Receivables	(92		)	(225		)
Prepaid expenses and other	Prepaid expenses and other	512			223			Prepaid expenses and other	61			512
Increase (decrease) in current liabilities:	Increase (decrease) in current liabilities:							Increase (decrease) in current liabilities:
Accounts payable	Accounts payable	1,361			791			Accounts payable	(5,154		)	1,361
Accounts payable – related party	Accounts payable – related party	1,433			(558		)	Accounts payable – related party	4,246			1,433
Accrued liabilities	Accrued liabilities	(283		)	(212		)	Accrued liabilities	(206		)	(283		)
Accrued liabilities – related party	Accrued liabilities – related party	(99		)	(66		)	Accrued liabilities – related party	(824		)	(3,192		)
Accrued interest payable	Accrued interest payable	5,173			565			Accrued interest payable	4,768			5,173
Accrued interest payable – related party	Accrued interest payable – related party	797			71			Accrued interest payable – related party	(141		)	797
Taxes other than income taxes payable	Taxes other than income taxes payable	1,518			1,000			Taxes other than income taxes payable	2,142			1,518
Deferred revenue – related party		(3,093		)	3,675
Changes in current assets and current liabilities	Changes in current assets and current liabilities	$	7,988		$	(2,179	)	Changes in current assets and current liabilities	$	4,862		$	7,988

Cash flows related to interest and income taxes paid were as follows (in thousands):



	Nine Months Ended September 30,
	2018		2017
Interest paid	$	35,067	$	19,136
Income taxes paid	918		695

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VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncash investing and financing activities that affected recognized assets or liabilities ~~for the nine months ended September 30, 2017 and 2016~~ were as follows (in thousands):

Nine Months Ended
September 30,
2017 2016
Transfer (from) to Valero for:
Deferred income taxes $ —
$ (190 )
Change in accrued capital expenditures —
46
Increase (decrease) in accounts payable related to capital expenditures 2,424
(2,499 )
Noncash capital contributions from Valero 27,866
23,820
Units issued to Valero in connection with the acquisitions (see Note 2) —
85,000



	Nine Months Ended September 30,
	2018		2017
Increase in accounts payable related to capital expenditures	$	4,921	$	2,424
Noncash capital contributions from Valero for capital projects	31,732		27,866

In addition to the activities in the ~~above~~preceding table, noncash financing activities for the nine months ended September 30, 2018 and 2017 included the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the grant of restricted units made to each of our three independent directors and the issuance of ~~common units~~equity under our ATM Program, respectively, as described in Note 9.

~~Noncash financing activities for the nine months ended September 30, 2016 included:~~

~~the conversion of all of our outstanding subordinated units into common units having an aggregate value of $406.4 million, described in~~ ~~Note 9; and~~

the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the issuance of common units (i) to Valero for the acquisition of the Meraux and Three Rivers Terminal Services Business and (ii) under our ATM Program, described in ~~Note 9~~.

The following table presents our investing and financing cash outflows in connection with the acquisitions from Valero described in Note 2 (in thousands). Of the cash consideration paid, the portion attributed to Valero’s historical carrying value of each acquisition was reflected as an investing cash outflow and the excess purchase price paid over the carrying value of each acquisition was reflected as a financing cash outflow.

Investing
Cash
Outflow Financing
Cash
Outflow Total
Cash
Outflow
Nine months ended September 30, 2016:
McKee Terminal Services Business $ 51,361
$ 152,639
$ 204,000
Meraux and Three Rivers Terminal Services Business 52,246
223,754
276,000
$ 103,607
$ 376,393
$ 480,000
7.

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~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

There were no net transfers from Valero during the nine months ended September 30, 2017. The following is a reconciliation of the amounts presented as net transfers from Valero on our statement of partners’ capital and statement of cash flows (in thousands) for the nine months ended September 30, 2016.

Nine Months Ended September 30, 2016
Net transfers from Valero per statement of partners’ capital $ 15,030
Less: Noncash transfers from Valero 144
Net transfers from Valero per statement of cash flows $ 14,886

~~Cash flows related to interest and income taxes paid were as follows (in thousands):~~

Nine Months Ended
September 30,
2017 2016
Interest paid $ 19,136
$ 8,688
Income taxes paid 695
496

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~~VALERO ENERGY PARTNERS LP~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~


~~11.~~9.	FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments that we recognize in our balance sheets at their carrying amounts are shown in the table below along with their associated fair values (in thousands):


		September 30, 2017				December 31, 2016					Fair Value Hierarchy		September 30, 2018								December 31, 2017
		Carrying Amount		Fair Value		Carrying Amount		Fair Value				Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:	Financial assets:									Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	115,755	$	115,755	$	71,491	$	71,491	Cash and cash equivalents		Level 1		$	128,199			$	128,199			$	42,052			$	42,052
Financial liabilities:	Financial liabilities:									Financial liabilities:
Debt:	Debt:									Debt:
Revolver	Revolver	30,000		30,000		30,000		30,000		Revolver	Level 2		—				—				410,000				410,000
Senior Notes	Senior Notes	495,177		516,305		495,355		506,670		Senior Notes	Level 2		989,694				983,810				495,283				523,800
Notes payable – related party	Notes payable – related party	370,000		370,000		370,000		370,000		Notes payable – related party	Level 2		285,000				285,000				370,000				370,000

~~The methods and significant assumptions used to estimate the fair value of these financial instruments are as follows:~~

The fair value of cash and cash equivalents approximates the carrying value due to the low level of credit risk of these assets combined with their market interest rates. The fair value measurement for cash and cash equivalents is categorized as Level 1 in the fair value hierarchy. Fair values determined by Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets.

The fair values of our variable-rate debt, which includes our Revolver and “notes payable – related party,” approximate their carrying values as our borrowings bear interest based upon short-term floating market interest rates. The fair value of our fixed-rate 4.375 percent Senior Notes is determined primarily using the market approach based on quoted prices provided by vendor pricing services. The fair value measurement for these liabilities is categorized as Level 2 in the fair value hierarchy. Fair values determined by Level 2 utilize inputs that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

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~~Item~~ITEM 2. ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE~~

~~PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995~~FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation our disclosures below under the heading “OUTLOOK,” includes forward-looking statements, ~~within~~including forward-looking statements regarding the ~~meaning~~Merger Agreement and the Merger Transaction that we entered into on October 18, 2018 with VLO, Merger Sub, and our general partner, pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero as discussed in Note 1 of Condensed Notes to Consolidated Financial Statements. The safe harbor provisions under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of ~~1934.~~1934 do not apply to forward-looking statements made or referred to in this Form 10-Q. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “would,” “should,” “will,” “may,” and similar expressions.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:

the risk that the potential Merger Transaction is not consummated on the expected time frame, or at all;

failure of closing conditions, delays in the consummation of the potential Merger Transaction and changes to business plans, as circumstances warrant, and other factors, many of which are difficult to control or predict, that could affect Valero’s or our ability to consummate the Merger Transaction;

the diversion of management in connection with the Merger Transaction;

the occurrence of any event, change, or other circumstance that could give rise to the termination of the Merger Agreement;

the suspension, reduction, cessation, or termination of Valero’s obligation under our commercial agreements, omnibus agreement, and ~~our~~ services and secondment agreement;

changes in global economic conditions ~~and the effects of the global economic downturn~~ on Valero’s business and the business of its suppliers, customers, business partners, and credit lenders;

a material decrease in Valero’s profitability;

disruptions due to equipment interruption or failure at our facilities, Valero’s facilities, or third-party facilities on which our business or Valero’s business is dependent;

the risk of contract cancellation, non-renewal, or failure to perform by Valero’s customers, and Valero’s inability to replace such contracts and/or customers;

Valero’s and our ability to remain in compliance with the terms of its and our outstanding indebtedness;

the timing and extent of changes in commodity prices and demand for Valero’s refined petroleum products;

our ability to obtain credit and financing on acceptable terms in light of uncertainty and illiquidity in credit and capital markets;

actions of customers and competitors;

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changes in our cash flows from operations;

changes in state and federal policies and regulations relating to tariffs, environmental, economic, health and safety, energy, and other ~~policies and regulations, including those related to climate change and any changes therein, and any~~ matters;

legal or regulatory investigations, delays, or other factors beyond our control;

operational hazards inherent in refining operations and in transporting and storing crude oil and refined petroleum products;

earthquakes or other natural disasters affecting operations;

changes in capital requirements or in execution of planned capital projects;

the availability and costs of crude oil, other refinery feedstocks, and refined petroleum products;

changes in the cost or availability of third-party vessels, pipelines, and other means of delivering and transporting crude oil, feedstocks, and refined petroleum products;

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direct or indirect effects on our business resulting from actual or threatened terrorist incidents or acts of war;

weather conditions affecting our or Valero’s operations or the areas in which Valero markets its refined petroleum products;

seasonal variations in demand for refined petroleum products;

adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any accruals, which affect us or Valero;

risks related to labor relations and workplace safety;

changes in insurance markets impacting costs and the level and types of coverage available;

political developments; and

~~political developments.~~other factors generally described in the “Risk Factors” section included in our annual report on Form 10-K for the year ended December 31, 2017, in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2018, and in this Form 10-Q, each of which are incorporated by reference herein.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and affect whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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OVERVIEW

2018 Developments

Pending Merger with Valero

On October 18, 2018, we entered into the Merger Agreement with VLO, Merger Sub, and our general partner pursuant to which Valero has agreed to acquire all of our outstanding common units not already owned by Valero. Under the Merger Agreement, the holders of such publicly traded common units will receive $42.25 in cash for each common unit without any interest thereon and all such publicly traded common units will automatically be canceled and cease to exist. See Note 1 of Condensed Notes to Consolidated Financial Statements for further discussion of the Merger Transaction.

Senior Notes

On March 29, 2018, we issued $500.0 million of 4.5 percent Senior Notes. Gross proceeds from the debt issuance totaled $498.3 million. As discussed in Note 4 of Condensed Notes to Consolidated Financial Statements, we used the proceeds to repay the outstanding balance of $410.0 million under the Revolver and $85.0 million of the outstanding balance under one of the Loan Agreements with Valero.

Third Quarter and First Nine Months Results

We reported net income of $70.3 million in the third quarter of 2018 and $200.4 million in the first nine months of 2018. This compares to net income ~~attributable to partners~~ of $57.6 million in the third quarter of ~~2017. This compares to net income of $48.7 million~~2017 and ~~net income attributable to partners of $51.7~~$174.2 million in the ~~third quarter~~first nine months of ~~2016.~~2017.

The increase in net income of ~~$8.9~~$12.8 million ~~was due primarily to $10.0 million of revenues generated by our Meraux and Three Rivers terminals~~ in the third quarter of ~~2017. We~~2018 compared to the third quarter of 2017 and $26.3 million in the first nine months of 2018 compared to the first nine months of 2017 was due primarily to an $18.2 million and $40.6 million increase, respectively, in operating income driven by contributions from our Port Arthur terminal and Parkway pipeline, which we acquired ~~these terminals~~ from Valero in ~~September 2016~~November 2017, as further described in Note 2 of Condensed Notes to Consolidated Financial Statements. Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the third quarter of 2017 compared to the third quarter of 2016 was due primarily to the revenues associated with services provided by these terminals in the third quarter of 2017.

Net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the Meraux and Three Rivers terminals for the periods prior to the date we acquired these businesses from Valero and represent only the costs of operating the terminals. See Note 1 of Condensed Notes to Consolidated Financial Statements for the reason that results of businesses acquired from Valero are included with our results for periods prior to their dates of acquisition. The increase in operating income was partially offset by a $5.6 million and $14.9 million increase, respectively, in interest and debt expense, net ~~income attributable~~of capitalized interest that resulted from incremental borrowings of $380.0 million used to partners of $5.9 million in the third quarter of 2017 compared to the third quarter of 2016 was due primarily to the operating results generated by our Meraux and Three Rivers terminals in the third quarter of 2017 as Valero did not historically charge for these services. The increase is also attributable to the resultsfund a portion of the ~~Red River crude system that we acquired~~amount paid to acquire the Port Arthur terminal and Parkway pipeline, as well as a higher effective interest rate in ~~January 2017 as further described in Note 2 of Condensed Notes~~2018 due to ~~Consolidated Financial Statements.~~

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~~Additional analysis of the changes in the components of net income is provided below under “RESULTS OF OPERATIONS.”~~

~~First Nine Months Results~~

We reported net income and net income attributable to partners of $174.2 million in the first nine months of 2017. This compares to net income of $129.0 million and net income attributable to partners of $144.5 million in the first nine months of 2016.

~~The increase in net income of $45.1 million was due primarily to $46.7 million of revenues generated by~~higher interest rates on our McKee, Meraux, and Three Rivers terminals in the first nine months of 2017. We acquired the McKee terminal from Valero in April 2016 and the Meraux and Three Rivers terminals from Valero in September 2016. As previously noted, Valero did not charge for services provided by these terminals prior to our acquisition; therefore, the increase in net income in the first nine months of 2017 compared to the first nine months of 2016 was due primarily to the revenues associated with services provided by these terminals in the first nine months of 2017.

As previously noted, net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the McKee, Meraux, and Three Rivers terminals for the periods prior to the dates we acquired these businesses from Valero. The increase in net income attributable to partners of $29.7 million in the first nine months of 2017 compared to the first nine months of 2016 is due primarily to the operating results generated by our McKee, Meraux, and Three Rivers terminals in the first nine months of 2017 as Valero did not historically charge for these services. The increase is also attributable to the results of the Red River crude system that we acquired in January 2017 as further described in Note 2 of Condensed Notes to Consolidated Financial Statements.variable rate debt.

Additional analysis of the changes in the components of net income is provided below under “RESULTS OF OPERATIONS.”

OUTLOOK

~~Substantially all~~All of our ~~operating~~ revenues are generated from fee-based ~~arrangements~~commercial agreements with Valero, and the amount of ~~operating~~ revenues we generate depends on the volumes of crude oil and refined petroleum products owned by Valero that we transport through our pipelines and handle at our terminals. These volumes are primarily affected by the reliability of Valero’s refineries served by our pipelines and terminals as well as the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. However, our ~~arrangements~~commercial agreements with Valero contain minimum ~~volume~~throughput commitments that require Valero to ship minimum volumes during each calendar quarter or pay us for the shortfall. Shortfall payments are recognized as revenue in future quarters as they are used for volumes shipped in excess of minimum volume commitments or when we determine that is it not probable that Valero will ship volumes in excess of its minimum volume commitments prior to the expiration of Valero’s use of those payments.a deficiency payment. Valero has historically met or exceeded most of its minimum ~~volume~~throughput commitments, and we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals in ~~2017~~2018 generally consistent with historical ~~levels at our existing assets.~~

Effective March 31, 2017, we entered into an agreement with DGD, a joint venture consolidated by Valero, to construct and operate a rail loading facility located at Valero’s St. Charles Refinery for the purpose of loading DGD’s renewable diesel onto railcars. The construction of the rail loading facility was completed in April 2017, and we began providing services to DGD in May 2017. In addition, we have agreed to construct a new 180,000 barrel storage tank and provide storage services to DGD. The construction of the new tank is expected to be completed in the first quarter of 2018. This agreement contains minimum commitmentslevels.

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~~for DGD’s use of the assets. We expect our revenues to increase in 2017 from the operations of the rail loading facility.~~

Effective November 1, 2017, we acquired Parkway Pipeline and the Port Arthur terminal for total consideration of $200.0 million and $308.0 million, respectively. See Note 2 for further discussion of these acquisitions. We expect our throughput volumes and revenues to increase in 2017 from the operations of Parkway Pipeline and the Port Arthur terminal.

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RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance for the three and nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. The narrative following these tables provides an analysis of our results of operations.

Results of Operations

(in thousands, except per unit amounts)

Three Months Ended September 30,
2017 2016 Change
Operating revenues – related party $ 109,340
$ 92,040
$ 17,300
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below) 26,478
24,089
2,389
Depreciation expense 12,113
11,319
794
Other operating expenses 537
—
537
General and administrative expenses 3,865
4,094
(229 )
Total costs and expenses 42,993

39,502

3,491
Operating income 66,347

52,538

13,809
Other income, net 300
76
224
Interest and debt expense, net of capitalized interest (8,747 ) (3,672 ) (5,075 )
Income before income taxes 57,900
48,942
8,958
Income tax expense 311
235
76
Net income 57,589
48,707
8,882
Less: Net loss attributable to Predecessor —
(3,002 ) 3,002
Net income attributable to partners 57,589
51,709
5,880
Less: General partner’s interest in net income 13,037
6,634
6,403
Limited partners’ interest in net income $ 44,552
$ 45,075
$ (523 )

Net income per limited partner unit – basic and diluted:
Common units $ 0.65
$ 0.77

Subordinated units $ —
$ 0.29

Weighted-average limited partner units outstanding – basic and diluted:
Common units 68,163
53,899

Subordinated units —
12,517



	Three Months Ended September 30,
	2018			2017			Change
Revenues – related party:
Revenues from lease contracts	$	112,078		$	85,811		$	26,267
Revenues from contracts with customer	28,512			23,529			4,983
Total revenues – related party	140,590			109,340			31,250
Costs and expenses:
Cost of revenues from lease contracts (excluding depreciation expense reflected below)	26,753			20,202			6,551
Cost of revenues from contracts with customer (excluding depreciation expense reflected below)	6,176			6,276			(100		)
Depreciation expense associated with lease contracts	15,946			9,288			6,658
Depreciation expense associated with contracts with customer	3,120			2,825			295
Other operating expenses	—			537			(537		)
General and administrative expenses	4,082			3,865			217
Total costs and expenses	56,077			42,993			13,084
Operating income	84,513			66,347			18,166
Other income, net	610			300			310
Interest and debt expense, net of capitalized interest	(14,348		)	(8,747		)	(5,601		)
Income before income tax expense	70,775			57,900			12,875
Income tax expense	426			311			115
Net income	70,349			57,589			12,760
Less: General partner’s interest in net income	18,203			13,037			5,166
Limited partners’ interest in net income	$	52,146		$	44,552		$	7,594

Net income per limited partner common unit – basic and diluted	$	0.75		$	0.65

Weighted-average limited partner common units outstanding – basic and diluted	69,251			68,163

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Operating Highlights and Other Financial Information

(in thousands, except throughput, per barrel, and per unit amounts)


	Three Months Ended September 30,							Three Months Ended September 30,
	2017		2016		Change			2018		2017		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	23,042	$	18,371	$	4,671		$	31,563	$	23,042	$	8,521
Pipeline transportation throughput (BPD) ^(a)	859,473		778,369		81,104			1,141,216		859,473		281,743
Average pipeline transportation revenue per barrel ^(b)	$	0.29	$	0.26	$	0.03		$	0.30	$	0.29	$	0.01

Terminaling:
Terminaling revenues	$	85,157	$	73,534	$	11,623		$	107,089	$	85,157	$	21,932
Terminaling throughput (BPD)	2,693,788		2,394,292		299,496			3,766,632		2,693,788		1,072,844
Average terminaling revenue per barrel ^(b)	$	0.34	$	0.33	$	0.01		$	0.31	$	0.34	$	(0.03	)

Storage and other revenues	$	1,141	$	135	$	1,006		$	1,938	$	1,141	$	797

Total operating revenues – related party	$	109,340	$	92,040	$	17,300
Total revenues – related party								$	140,590	$	109,340	$	31,250

Capital expenditures:
Maintenance	$	921	$	3,352	$	(2,431	)	$	2,726	$	921	$	1,805
Expansion	8,136		953		7,183			2,159		8,136		(5,977		)
Total capital expenditures	9,057		4,305		4,752			$	4,885	$	9,057	$	(4,172	)
Less: Capital expenditures attributable to Predecessor	—		1,113		(1,113		)
Capital expenditures attributable to Partnership	$	9,057	$	3,192	$	5,865

Other financial information:
Distribution declared per unit	$	0.4800	$	0.3850				$	0.5510	$	0.4800

Distribution declared:
Limited partner units – public	$	10,794	$	8,341
Limited partner units – Valero	22,449		17,590
Limited partner common units – public								$	12,394	$	10,794
Limited partner common units – Valero								25,769		22,449
General partner units – Valero	12,999		6,244					17,918		12,999
Total distribution declared	$	46,242	$	32,175				$	56,081	$	46,242

____________________


(a)	Represents the sum of volumes transported through each separately tariffed pipeline segment divided by the number of days in the period.


(b)	Average revenue per barrel is calculated as revenue divided by throughput for the period. Throughput is derived by multiplying the throughput barrels per day (BPD) by the number of days in the period.

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~~Operating~~Total revenues – related party increased ~~$17.3~~$31.3 million, or 1929 percent, in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016.~~2017. The increase was due primarily to the following:

~~Incremental operating revenues~~Revenues from a terminal and pipeline system acquired ~~businesses.~~from Valero in November 2017. We ~~experienced an 11 percent increase in operating~~generated revenues of $16.4 million and $6.8 million in the third quarter of ~~2017~~2018 from the operations of our Port Arthur terminal and Parkway pipeline, respectively. The volumes handled at and transported through these assets were the primary contributors to the increase in our overall terminaling and pipeline transportation throughput in the third quarter of 2018 compared to the third quarter of ~~2016 as a result~~2017. Average pipeline transportation revenue per barrel was higher in the third quarter of ~~revenues~~2018 compared to the third quarter of 2017 due primarily to higher revenue per barrel generated by our Parkway pipeline compared to the ~~Meraux and Three Rivers~~average revenue per barrel generated by our other pipelines. Average terminaling revenue per barrel was lower in the third quarter of 2018 compared to the third quarter of 2017 due primarily to lower revenue per barrel generated by our Port Arthur terminal compared to the average revenue per barrel generated by our other terminals.

Higher throughput volumes. We experienced a 12 percent increase in volumes handled at our other terminals ~~we acquired from Valero~~ in ~~September 2016.~~the third quarter of 2018 compared to the third quarter of 2017. The ~~incremental throughput~~increase in volumes ~~at these terminals~~ had a favorable impact to our operating revenues of ~~$10.0 million.~~

~~Incremental operating revenues from the Red River crude system.~~ The Red River crude system, which was acquired in January 2017, generated operating revenues of $2.6 million. The higher transportation revenue per barrel generated by this system also contributed to a higher average pipeline transportation revenue per barrel$5.6 million in the third quarter of ~~2017~~2018.

We experienced a 23 percent increase in volumes handled at our other pipelines in the third quarter of 2018 compared to the third quarter of ~~2016.~~

~~Higher average revenue per barrel~~. We experienced an increase in the average pipeline transportation and terminaling revenue per barrel of 12 percent and 3 percent, respectively, in the third quarter of 2017 compared to the third quarter of 2016. The increase in the average revenue per barrel had a favorable impact to our operating revenues of $1.9 million.

~~Higher throughput volumes. We experienced a 10 percent increase in volumes transported through our other pipeline systems in the third quarter of 2017 compared to the third quarter of 2016.~~2017. The increase in volumes had a favorable impact to our operating revenues of $1.8 ~~million.~~

million in the third quarter of 2018.

Incremental ~~operating~~ revenues from ~~the DGD rail loading facility.~~ ~~The~~our DGD rail loading facility ~~which was~~and storage tank placed in service in May 2017 and April 2018, respectively. Our DGD rail loading facility and new storage tank generated ~~operating~~combined incremental revenues of ~~$1.0 million~~$800,000 in the third quarter of 2018 compared to the third quarter of 2017.

~~Cost~~Total cost of revenues (excluding depreciation expense) increased ~~$2.4~~$6.5 million, or 1024 percent, in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016~~2017 due primarily to ~~incremental costs of $570,000 to operate our Red River crude system and $735,000 to operate the rail loading facility at our St. Charles terminal. In addition, we incurred higher maintenance~~ expenses of ~~$879,000 at~~$3.7 million and $1.9 million related to the operations of our ~~Houston~~Port Arthur terminal and ~~St. Charles terminals due primarily to inspection activity.~~Parkway pipeline, respectively, which were acquired in November 2017.

~~Depreciation~~

Total depreciation expense increased ~~$794,000,~~$7.0 million, or 757 percent, in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016~~2017 due primarily to depreciation expense ~~recognized on~~of $3.8 million and $2.0 million associated with the assets that compose our ~~Red River crude system,~~Port Arthur terminal and Parkway pipeline, respectively, which ~~was~~were acquired in ~~January~~November 2017.

Other operating expenses ~~reflect~~reflects the uninsured portion of our property damage losses and repair costs incurred in the third quarter of 2017 as a result of damages caused by Hurricane Harvey primarily at our Houston terminal and Port Arthur products system.

General and administrative expenses ~~decreased $229,000,~~increased $217,000, or 6 percent, in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016~~2017 due primarily to ~~acquisition~~incremental costs ~~(legal and investment advisor fees)~~ of ~~$418,000 incurred in connection with~~$173,000 related to the management fee charged to us by Valero for additional services provided to us as a result of our acquisition of ~~the Meraux~~our Port Arthur terminal and ~~Three Rivers terminals~~Parkway pipeline, which were acquired in ~~September 2016. The decrease~~November 2017, and an increase of $139,000 in ~~acquisition costs was partially offset by higher~~ professional ~~fees of $114,000.~~fees.

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“Interest and debt expense, net of capitalized ~~interest”~~interest increased ~~$5.1~~$5.6 million, or 64 percent, in the third quarter of ~~2017~~2018 compared to the third quarter of ~~2016~~2017 due primarily to the following:

Incremental ~~interest expense incurred on the Senior Notes.~~ In December 2016, we issued $500.0 million of 4.375% senior notes due December 2026 (the Senior Notes). We used the proceeds of the Senior Notes to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $2.0 million in the third quarter of 2017.

~~Higher interest rates in 2017.~~ ~~We incurred additional interest of $1.9 million in the third quarter of 2017 on borrowings that have variable interest rates and were outstanding during 2016 and 2017.~~

~~Incremental~~ borrowings in connection with ~~the Meraux and Three Rivers terminals acquisition.~~acquisitions. In connection with the ~~acquisition~~acquisitions of the ~~Meraux~~Port Arthur terminal and ~~Three Rivers terminals from Valero~~Parkway pipeline in ~~September 2016,~~November 2017, we borrowed ~~$210.0~~$380.0 million under the Revolver. Interest expense on the incremental borrowings was ~~approximately $979,000~~$3.5 million in the third quarter of ~~2017.~~2018.

~~Fees~~Incremental interest expense on the 4.5 percent Senior Notes. In March 2018, we issued $500.0 million of 4.5 percent Senior Notes. We used the gross proceeds of $498.3 million to repay the outstanding balance of $410.0 million under the Revolver and ~~amortization~~$85.0 million on a portion of ~~deferred debt issuance costs.~~the outstanding balance under one of the Loan Agreements with Valero. The ~~remaining increase of $261,000~~interest rate on the 4.5 percent Senior Notes is higher than the interest rates on the Revolver and the Loan Agreements with Valero, thereby increasing our effective interest rate in 2018. Incremental interest expense resulting from the 4.5 percent Senior Notes was approximately $1.1 million in the third quarter of ~~2017~~2018.

Higher interest rates in 2018. Borrowings under the Loan Agreements with Valero bear interest at variable rates. We incurred additional interest of $573,000 in the third quarter of 2018 on these borrowings due to higher interest rates in 2018 compared to 2017.

While the above describes the primary changes contributing to the $12.8 million, or 22 percent, increase in net income in the third quarter of 2018 compared to the third quarter of ~~2016 is primarily attributed~~2017, the limited partners’ interest in net income did not increase by an equal percentage because of an increase in the general partner’s interest in net income. Our general partner currently holds IDRs that entitle it to ~~fees associated with~~receive increasing percentages, up to a maximum of 48 percent, of the ~~Revolver~~cash we distribute from operating surplus (as defined in our partnership agreement). The distribution per unit related to the third quarter of 2018 and 2017 was $0.5510 and $0.4800, respectively; therefore, a higher percentage of our net income was allocated to the ~~amortization~~general partner in the third quarter of ~~deferred debt issuance costs.~~

2018 resulting in a 3 percent decrease in the percentage of net income allocated to the limited partners in the third quarter of 2018 compared to the third quarter of 2017.

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Results of Operations

(in thousands, except per unit amounts)

Nine Months Ended September 30,
2017 2016 Change
Operating revenues – related party $ 325,701
$ 258,471
$ 67,230
Costs and expenses:
Cost of revenues (excluding depreciation expense reflected below) 77,078
72,461
4,617
Depreciation expense 36,393
34,652
1,741
Other operating expenses 537
—
537
General and administrative expenses 11,558
12,174
(616 )
Total costs and expenses 125,566
119,287
6,279
Operating income 200,135

139,184

60,951
Other income, net 546
210
336
Interest and debt expense, net of capitalized interest (25,587 ) (9,582 ) (16,005 )
Income before income taxes 175,094
129,812
45,282
Income tax expense 925
780
145
Net income 174,169
129,032
45,137
Less: Net loss attributable to Predecessor —
(15,422 ) 15,422
Net income attributable to partners 174,169
144,454
29,715
Less: General partner’s interest in net income 33,923
15,351
18,572
Limited partners’ interest in net income $ 140,246
$ 129,103
$ 11,143

Net income per limited partner unit – basic and diluted:

Common units $ 2.06
$ 2.08

Subordinated units $ —
$ 1.73

Weighted-average limited partner units outstanding – basic and diluted:

Common units 67,997
42,597

Subordinated units —
23,326



	Nine Months Ended September 30,
	2018			2017			Change
Revenues – related party:
Revenues from lease contracts	$	325,655		$	251,580		$	74,075
Revenues from contracts with customer	81,504			74,121			7,383
Total revenues – related party	407,159			325,701			81,458
Costs and expenses:
Cost of revenues from lease contracts (excluding depreciation expense reflected below)	77,867			59,570			18,297
Cost of revenues from contracts with customer (excluding depreciation expense reflected below)	19,717			17,508			2,209
Depreciation expense associated with lease contracts	47,384			27,768			19,616
Depreciation expense associated with contracts with customer	9,087			8,625			462
Other operating expenses	—			537			(537		)
General and administrative expenses	12,352			11,558			794
Total costs and expenses	166,407			125,566			40,841
Operating income	240,752			200,135			40,617
Other income, net	1,403			546			857
Interest and debt expense, net of capitalized interest	(40,527		)	(25,587		)	(14,940		)
Income before income tax expense	201,628			175,094			26,534
Income tax expense	1,181			925			256
Net income	200,447			174,169			26,278
Less: General partner’s interest in net income	52,835			33,923			18,912
Limited partners’ interest in net income	$	147,612		$	140,246		$	7,366

Net income per limited partner common unit – basic and diluted	$	2.13		$	2.06

Weighted-average limited partner common units outstanding – basic and diluted	69,250			67,997

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Operating Highlights and Other Financial Information

(in thousands, except throughput, per barrel, and per unit amounts)


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2017		2016		Change			2018		2017		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	71,076	$	57,934	$	13,142		$	93,238	$	71,076	$	22,162
Pipeline transportation throughput (BPD) ^(a)	941,289		849,015		92,274			1,078,958		941,289		137,669
Average pipeline transportation revenue per barrel ^(b)	$	0.28	$	0.25	$	0.03		$	0.32	$	0.28	$	0.04

Terminaling:
Terminaling revenues	$	252,460	$	200,132	$	52,328		$	308,756	$	252,460	$	56,296
Terminaling throughput (BPD)	2,760,000		2,131,113		628,887			3,576,253		2,760,000		816,253
Average terminaling revenue per barrel ^(b)	$	0.34	$	0.34	$	—		$	0.32	$	0.34	$	(0.02	)

Storage and other revenues	$	2,165	$	405	$	1,760		$	5,165	$	2,165	$	3,000

Total operating revenues – related party	$	325,701	$	258,471	$	67,230
Total revenues – related party								$	407,159	$	325,701	$	81,458

Capital expenditures:
Maintenance	$	4,294	$	9,063	$	(4,769	)	$	7,651	$	4,294	$	3,357
Expansion	20,003		6,848		13,155			10,317		20,003		(9,686		)
Total capital expenditures	24,297		15,911		8,386			$	17,968	$	24,297	$	(6,329	)
Less: Capital expenditures attributable to Predecessor	—		3,394		(3,394		)
Capital expenditures attributable to Partnership	$	24,297	$	12,517	$	11,780

Other financial information:
Distribution declared per unit	$	1.3625	$	1.0900				$	1.6295	$	1.3625

Distribution declared:
Limited partner units – public	$	30,635	$	23,510
Limited partner units – Valero	62,768		48,989
Limited partner common units – public								$	36,653	$	30,635
Limited partner common units – Valero								76,209		62,768
General partner units – Valero	32,993		14,196					52,126		32,993
Total distribution declared	$	126,396	$	86,695				$	164,988	$	126,396

____________________


(a)	Represents the sum of volumes transported through each separately tariffed pipeline ~~segment.~~segment divided by the number of days in the period.


(b)	Average revenue per barrel is calculated as revenue divided by throughput for the period. Throughput is derived by multiplying the throughput barrels per day by the number of days in the period.

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~~Operating~~Total revenues – related party increased ~~$67.2~~$81.5 million, or 2625 percent, in the first nine months of ~~2017~~2018 compared to the first nine months of ~~2016.~~2017. The increase was due primarily to the following:

~~Incremental operating revenues~~Revenues from a terminal and pipeline system acquired ~~businesses.~~from Valero in November 2017. We ~~experienced an 18 percent increase in operating~~generated revenues of $47.5 million and $19.3 million in the first nine months of ~~2017~~2018 from the operations of our Port Arthur terminal and Parkway pipeline, respectively. The volumes handled at and transported through these assets were the primary contributors to the increase in our overall terminaling and pipeline transportation throughput in the first nine months of 2018 compared to the first nine months of 2016 as a result of revenues generated by the McKee, Meraux, and Three Rivers terminals we acquired from Valero in April 2016 and September 2016. As previously noted, Valero did not charge for services provided by these terminals prior to our acquisitions; therefore, these terminals generated incremental operating revenues of $46.7 million2017. Average pipeline transportation revenue per barrel was higher in the first nine months of ~~2017.~~

~~Incremental operating revenues from the Red River crude system.~~ The incremental throughput volumes from the Red River crude system generated operating revenues of $7.2 million. The higher transportation revenue per barrel generated by this system also contributed to a higher average pipeline transportation revenue per barrel in the first nine months of 20172018 compared to the first nine months of ~~2016.~~2017 due primarily to higher revenue per barrel generated by our Parkway pipeline compared to the average revenue per barrel generated by our other pipelines. Average terminaling revenue per barrel was lower in the first nine months of 2018 compared to the first nine months of 2017 due primarily to lower revenue per barrel generated by our Port Arthur terminal compared to the average revenue per barrel generated by our other terminals.

Higher throughput ~~volumes~~volumes. . We experienced a 73 percent increase in volumes handled at our other terminals ~~and pipeline systems~~ in the first nine months of ~~2017~~2018 compared to the first nine months of ~~2016.~~2017. The increase in volumes had a favorable impact to our operating revenues of ~~$10.8 million.~~

~~Incremental operating revenues from the DGD rail loading facility.~~ ~~The DGD rail loading facility, which was placed in service in May 2017, generated operating revenues of $1.8~~$8.8 million in the first nine months of ~~2017.~~2018.

~~Higher average pipeline transportation revenue per barrel~~Incremental revenues from our DGD rail loading facility and storage tank placed in service in May 2017 and April 2018, respectively. ~~. We experienced an increase~~Our DGD rail loading facility and new storage tank generated combined incremental revenues of $3.0 million in ~~average pipeline transportation revenue per barrel~~the first nine months of 122018 compared to the first nine months of 2017.

Total cost of revenues (excluding depreciation expense) increased $20.5 million, or 27 percent, in the first nine months of ~~2017~~2018 compared to the first nine months of ~~2016.~~2017. The increase was due primarily to expenses of $12.0 million and $6.5 million related to the operations of our Port Arthur terminal and Parkway pipeline, respectively, which were acquired in ~~average pipeline transportation revenue per barrel had a favorable impact to our operating revenues of $772,000.~~

November 2017.

~~Cost of revenues (excluding~~Total depreciation ~~expense)~~expense increased ~~$4.6~~$20.1 million, or 655 percent, ~~for~~in the first nine months of ~~2017~~2018 compared to the first nine months of 2016 due primarily to incremental costs of $1.5 million to operate our Red River crude system and $1.3 million to operate the rail loading facility at our St. Charles terminal. In addition, we incurred higher maintenance expenses of $879,000 at our Houston terminal due primarily to inspection activity.

~~Depreciation expense increased $1.7 million, or 5 percent, in the first nine months of~~ 2017 ~~compared to the first nine months of 2016~~ due primarily to depreciation expense ~~recognized on~~of $11.4 million and $6.1 million associated with the assets that compose our ~~Red River crude system,~~Port Arthur terminal and Parkway pipeline, respectively, which ~~was~~were acquired in ~~January~~November 2017.

Other operating expenses ~~reflect~~reflects the uninsured portion of our property damage losses and repair costs incurred in the first nine months of 2017 as a result of damages caused by Hurricane Harvey primarily at our Houston terminal and Port Arthur products system.

General and administrative expenses ~~decreased $616,000,~~increased $794,000, or 57 percent, ~~for~~in the first nine months of ~~2017~~2018 compared to the first nine months of ~~2016~~2017 due primarily to acquisition costs (legal and investment advisor fees) of $805,000 incurred in connection with our acquisitions of the McKee, Meraux, and Three Rivers terminals in 2016. The decrease in acquisition costs in the first nine months of 2017 was partially offset by incremental costs of ~~$204,000~~$518,000 related to the management fee charged to us by Valero for additional services provided to us as a result of our acquisition of our Port Arthur terminal and Parkway pipeline, which were acquired in ~~connection with the acquired businesses~~November 2017, and ~~higher~~an increase of $340,000 in professional ~~fees of $135,000.~~fees.

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“Interest and debt expense, net of capitalized ~~interest”~~interest increased ~~$16.0~~$14.9 million, or 58 percent, in the first nine months of ~~2017~~2018 compared to the first nine months of ~~2016~~2017 due to the following:

Incremental ~~interest expense incurred on the Senior Notes.~~ As previously noted in the analysis of third quarter results, we issued the Senior Notes in December 2016 and used the proceeds to repay $494.0 million of outstanding borrowings under the Revolver. The interest rate on the Senior Notes is higher than the Revolver, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $6.8 million in the first nine months of 2017.

~~Higher interest rates in 2017.~~ ~~We incurred additional interest of $4.1 million in the first nine months of 2017 on borrowings that have variable interest rates and were outstanding during 2016 and 2017.~~

~~Incremental~~ borrowings in connection with ~~the 2016~~ acquisitions. In connection with the ~~acquisition~~acquisitions of the ~~McKee~~Port Arthur terminal and Parkway pipeline in ~~April 2016 and the Meraux and Three Rivers terminals in September 2016 from Valero,~~November 2017, we borrowed ~~$139.0~~$380.0 million ~~and $210.0 million, respectively,~~ under the Revolver. Interest expense on the incremental borrowings was ~~approximately $4.3~~$9.7 million in the first nine months of ~~2017.~~2018.

~~Fees~~Incremental interest expense on the 4.5 percent Senior Notes. In March 2018, we issued $500.0 million of 4.5 percent Senior Notes. We used the gross proceeds of $498.3 million to repay the outstanding balance of $410.0 million under the Revolver and ~~amortization~~$85.0 million on a portion of ~~deferred debt issuance costs.~~the outstanding balance under one of the Loan Agreements with Valero. The ~~remaining increase of $786,000~~interest rate on the 4.5 percent Senior Notes is higher than the interest rates on the Revolver and the Loan Agreements with Valero, thereby increasing our effective interest rate in 2018. Incremental interest expense resulting from the 4.5 percent Senior Notes was approximately $2.5 million in the first nine months of ~~2017~~2018.

Higher interest rates in 2018. Borrowings under the Revolver and the Loan Agreements with Valero bear interest at variable rates. We incurred additional interest of $2.0 million in the first nine months of 2018 on these borrowings due to higher interest rates in 2018 compared to 2017.

While the above describes the primary changes contributing to the $26.3 million, or 15 percent, increase in net income in the first nine months of 2018 compared to the first nine months of ~~2016 is primarily attributed~~2017, the limited partners’ interest in net income did not increase by an equal percentage because of an increase in the general partner’s interest in net income. Our general partner currently holds IDRs that entitle it to ~~fees associated with~~receive increasing percentages, up to a maximum of 48 percent, of the ~~Revolver~~cash we distribute from operating surplus (as defined in our partnership agreement). The distribution per unit related to the first nine months of 2018 and 2017 was $1.6295 and $1.3625, respectively; therefore, a higher percentage of our net income was allocated to the ~~amortization~~general partner in the first nine months of ~~deferred debt issuance costs.~~2018 resulting in an 7 percent decrease in the percentage of net income allocated to the limited partners in the first nine months of 2018 compared to the first nine months of 2017.

~~Table of Contents~~

LIQUIDITY AND CAPITAL RESOURCES

~~Sources of Liquidity~~Overview

We expect our ongoing sources of liquidity to include cash generated from operations and borrowings under the ~~Revolver, and issuances of~~Revolver. In the event the Merger Transaction is not consummated, we may also issue additional debt and equity ~~securities. We may also~~securities under suitable market conditions, or enter into financing transactions with ~~Valero in connection with acquisitions.~~Valero. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make the quarterly cash ~~distributions.~~distribution for the third quarter of 2018.

~~ATM Program~~Our liquidity consisted of the following as of September 30, 2018 (in thousands):



	Facility Amount		Borrowings		Availability
Revolver	$	750,000	$	—	$	750,000
Cash and cash equivalents	N/A		N/A		128,199
Total liquidity					$	878,199

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Revolver

The Revolver consists of aggregate commitments of $750.0 million and matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the issuance of letters of credit of up to $100.0 million. As of September 30, 2018, we had no borrowings and no letters of credit outstanding under the Revolver. As a result, we had $750.0 million of available capacity.

ATMProgram

On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). ~~During the nine months ended~~As of September 30, ~~2017,~~2018, we ~~issued 742,897~~have sold common units having an aggregate value of $45.5 million under our ATM Program, ~~and received proceeds of $35.2~~resulting in $304.5 million ~~which is net of $542,000 of expenses incurred with respect to the sale of these units.Concurrent with the issuance~~remaining available. There were no issuances of common units under our ATM Program ~~our general partner contributed $748,000 in exchange for 15,602 general partner units to maintain its 2.0 percent general partner interest in the Partnership.~~

~~Distributions~~

On October 19, 2017, the board of directors of our general partner declared a distribution of $0.48 per unit applicable to the third quarter of 2017, which equates to $46.2 million in total distributions to unitholders of record as of November 1, 2017. This quarterly distribution per unit is more than the minimum quarterly distribution of $0.2125 per unit.

~~Our distributions are declared subsequent to quarter end. The table below summarizes information related to our quarterly cash distributions that have been declared since January 1, 2016:~~

Quarterly
Period
Ended Total
Quarterly
Distribution
(Per Unit) Total Cash
Distribution
(In Thousands) Declaration
Date Record
Date Distribution
Date
September 30, 2017 $ 0.4800
$ 46,242
October 19, 2017 November 1, 2017 November 9, 2017
June 30, 2017 0.4550
42,111
July 19, 2017 August 1, 2017 August 10, 2017
March 31, 2017 0.4275
38,043
April 20, 2017 May 2, 2017 May 11, 2017
December 31, 2016 0.4065
34,895
January 20, 2017 February 2, 2017 February 10, 2017
September 30, 2016 0.3850
32,175
October 24, 2016 November 3, 2016 November 10, 2016
June 30, 2016 0.3650
28,912
July 21, 2016 August 1, 2016 August 9, 2016
March 31, 2016 0.3400
25,608
April 21, 2016 May 2, 2016 May 10, 2016
December 31, 2015 0.3200
22,711
January 25, 2016 February 4, 2016 February 11, 2016

~~Revolver~~

The Revolver consists of aggregate commitments of $750.0 million and matures in November 2020. We have the option to increase the aggregate commitments under the Revolver to $1.0 billion, subject to certain restrictions. The Revolver also provides for the ~~issuance of letters of credit up to $100.0 million. As of~~nine months ended September 30, ~~2017, we had $30.0 million of borrowings~~2018. If the Merger Transaction is consummated, our common units will no longer be publicly traded and, ~~no letters of credit outstanding under the Revolver. As~~as a result, we ~~had $720 million~~would not expect issuances of ~~available capacity.~~

~~Table~~additional common units under our ATM Program or otherwise to provide a source of ~~Contents~~

~~Effective November~~liquidity following the closing of the Merger Transaction. See Note 1 ~~2017, we borrowed $380.0 million under the Revolver in connection with the acquisitions of Parkway Pipeline and the Port Arthur terminal, as disclosed inNote 2~~ of Condensed Notes to Consolidated Financial ~~Statements.~~Statements for further discussion of the Merger Transaction.

Cash Flows Summary

Components of our cash flows are set forth below (in thousands):


		Nine Months Ended September 30,							Nine Months Ended September 30,
		2017			2016				2018			2017
Cash flows provided by (used in):	Cash flows provided by (used in):							Cash flows provided by (used in):
Operating activities	Operating activities	$	219,819		$	162,212		Operating activities	$	264,228		$	219,819
Investing activities	Investing activities	(95,948		)	(119,489		)	Investing activities	(17,960		)	(95,948		)
Financing activities	Financing activities	(79,607		)	(88,107		)	Financing activities	(160,121		)	(79,607		)
Net increase (decrease) in cash and cash equivalents		$	44,264		$	(45,384	)

Net increase in cash and cash equivalents								Net increase in cash and cash equivalents	$	86,147		$	44,264

Cash Flows for the Nine Months Ended September 30, 2018

Our operations generated $264.2 million of cash in the first nine months of 2018, driven primarily by net income of $200.4 million plus noncash adjustments (primarily for depreciation expense) of $58.9 million and a favorable change in working capital of $4.9 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in our working capital is further described in Note 8 of Condensed Notes to Consolidated Financial Statements and mainly resulted from:

an increase in accrued interest payable of $4.6 million due primarily to interest expense incurred on $500.0 million of 4.375 percent notes due December 2026 (4.375 percent Senior Notes), which is paid semi-annually on June 15 and December 15;

an increase in accounts payable – related party of $4.2 million attributable primarily to the timing of invoices from Valero for services provided by Valero to our general partner under our services and secondment agreement; partially offset by


��	a decrease in accounts payable of $5.2 million attributable primarily to the timing of project expenditures and liabilities assumed in connection with our acquisition of the Parkway pipeline in November 2017.

Table of Contents

The $264.2 million of cash generated by our operations, along with $498.3 million in gross proceeds from the issuance of our 4.5 percent Senior Notes, were used mainly to:

make debt repayments of $495.0 million, of which $410.0 million and $85.0 million related to the Revolver and one of the Loan Agreements, respectively;

pay $159.0 million in cash distributions to limited partners and our general partner;

fund $18.0 million in capital expenditures; and

pay $4.5 million in debt issuance costs.

Cash Flows for the Nine Months Ended September 30, 2017

Our operations generated $219.8 million of cash in the first nine months of 2017, driven primarily by net income of $174.2 million plus noncash adjustments ~~(mainly~~(primarily for depreciation expense) of $37.6 million and a favorable change in working capital of $8.0 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in ~~working capital was composed primarily of an increase in accrued interest payable of $5.2 million, an increase in “accrued interest payable~~ – ~~related party” of $0.8 million, an increase in accounts payable of $1.4 million, and an increase in “accounts payable~~ – ~~related party” of $1.4 million, partially offset by a decrease in “deferred revenue~~ – ~~related party” of $3.1 million. The change in~~ our working capital is further described in Note 108 of Condensed Notes to Consolidated Financial ~~Statements. The~~Statements and mainly resulted from:

an increase in accrued interest ~~was~~payable of $6.0 million due primarily to the interest expense incurred on ~~the~~our 4.375 percent Senior Notes, which is paid semi-annually on June 15 and December ~~15. The~~15;

an increase in accounts payable ~~was~~of $1.4 million due primarily to the timing of project ~~expenditures. The~~expenditures;

an increase in ~~“accounts~~accounts payable –related ~~party” was~~party of $1.4 million attributable primarily to the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment ~~agreement. The~~agreement; partially offset by

a decrease in ~~“deferred revenue~~accrued liabilities – related ~~party” was~~party of $3.1 million due to Valero’s use of deficiency payments that it had paid to us in previous periods associated with its minimum volume commitments to us.

The $219.8 million of cash generated by our operations, along with $36.5 million in proceeds received in connection with the issuance of common units under our ATM Program, were used mainly to:

pay $115.0 million in cash distributions to limited partners and our general partner;

fund the $71.8 million acquisition of the Red River crude system;

fund $24.3 million in capital expenditures; and

pay $1.0 million in debt issuance and ~~offering costs.~~

~~Cash Flows for the Nine Months Ended September 30, 2016~~

Our operations generated $162.2 million of cash in the first nine months of 2016, driven primarily by net income of $129.0 million plus noncash adjustments (primarily for depreciation expense) of $35.4 million, partially offset by an unfavorable change in working capital of $2.2 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of an increase in “accounts receivable – ~~related party” of $7.7 million~~, ~~partially offset by an increase in “deferred revenue~~ – ~~related party” of $3.7 million. The change in our working capital is further described~~

~~Table of Contents~~

~~in Note 10 of Condensed Notes to Consolidated Financial Statements. The increase in “accounts receivable~~ – ~~related party” was attributable primarily to billings related to our McKee, Meraux, and Three Rivers terminals, which were acquired in 2016. The increase in “deferred revenue~~ – ~~related party” was due to higher deficiency payments made by Valero associated with its minimum volume commitments to us.~~

The $162.2 million of cash generated by our operations, along with $349.0 million in borrowings under the Revolver, $14.9 million of net cash transferred from Valero related to the cash flows associated with our Predecessor, and the $2.9 million in proceeds received in connection with our ATM Program, were used mainly to:

fund $480.0 million for the acquisition from Valero of the McKee, Meraux, and Three Rivers terminals ($103.6 million represented Valero’s carrying value in the net assets transferred to us and was reflected as an investing activity, and $376.4 million represented the excess purchase price paid over the carrying value and was reflected as a financing activity);

~~pay $77.2 million in cash distributions to limited partners and our general partner;~~

~~fund $15.9 million in capital expenditures;~~

~~make debt repayments of $868,000 on our capital lease obligations; and~~

~~pay $412,000 in~~ offering costs.

Capital Expenditures

Our operations can be capital intensive, requiring investments to expand, upgrade, or enhance existing operations and to meet environmental and operational regulations. Our capital requirements consist of maintenance capital expenditures and expansion capital expenditures as those terms are defined in our partnership agreement. Examples of maintenance capital expenditures are those made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows. In contrast, examples of expansion capital expenditures include those made to expand and upgrade our systems and facilities and to construct or acquire new systems or facilities to grow our business.

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Our capital expenditures were as follows (in thousands):


		Nine Months Ended September 30,					Nine Months Ended September 30,
		2017		2016			2018		2017
Maintenance	Maintenance	$	4,294	$	9,063	Maintenance	$	7,651	$	4,294
Expansion (a)	Expansion (a)	20,003		6,848		Expansion (a)	10,317		20,003
Total capital expenditures	Total capital expenditures	$	24,297	$	15,911	Total capital expenditures	$	17,968	$	24,297

(a) This table excludes amounts paid for our acquisitions. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.	(a) This table excludes amounts paid for our acquisitions. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.					(a) This table excludes amounts paid for our acquisitions. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.

Our capital expenditures in the first nine months of 2018 were primarily for:

the construction of a new tank at our Meraux terminal;

the construction of a new tank at the St. Charles terminal to be used by DGD;

~~Table~~the construction of ~~Contents~~a new tank and improvement of assets at our Port Arthur products system;

the upgrade of certain pipelines at our Collierville crude system that will enhance the flexibility of crude oil receipts and shipments; and

the improvement of assets at our Three Rivers terminal.

Our capital expenditures in the first nine months of 2017 were primarily for:

the construction of athe DGD rail loading facility and a new tank at the St. Charles terminal;

the construction of a new tank at our ~~and~~ Port Arthur products system; and

the improvement of assets at our Corpus Christi terminals.

~~Our~~In addition to the above-mentioned capital expenditures, $31.7 millionof capital projects were funded by Valero in the first nine months of ~~2016 were~~2018 primarily ~~for:~~related to our Port Arthur, St. Charles, Corpus Christi, Meraux, Houston, Three Rivers, and McKee terminals. Valero agreed to fund these projects in connection with our acquisition of these terminals from Valero.

~~the construction of a connection to receive crude oil from the Seaway pipeline into our Lucas crude system;~~

~~the improvement of assets at our Meraux, Three Rivers, St. Charles, and Houston terminals to extend the useful lives of the tanks; and~~

~~the improvement of assets at our Lucas crude system for enhanced monitoring of pipeline shipments.~~

For ~~2017,~~2018, we expect our capital expenditures to ~~be approximately $49.0~~range from $30.0 million to $40.0 million. Our estimate consists of approximately ~~$14.0~~$15.0 million to $20.0 million for maintenance capital expenditures and approximately ~~$35.0~~$15.0 million to $20.0 million for expansion capital expenditures.We continuously evaluate our capital budget and make changes as conditions warrant. We anticipate that these capital expenditures will be funded from cash flows from operations. The foregoing capital expenditure estimate does not include any amounts related to strategic ~~acquisitions.~~acquisitions that may occur.

Distributions

In ~~addition~~the first nine months of 2018, we paid cash distributions of $159.0 million to our limited partners and our general partner that included distributions declared for the fourth quarter of 2017, the first quarter of 2018, and the second quarter of 2018.

On October 18, 2018, the board of directors of our general partner declared a distribution of $0.5510 per unit applicable to the ~~above-mentioned capital expenditures, Valero funded $28.0~~third quarter of 2018, which equates to $56.1 million in total distributions to unitholders of ~~capital projects primarily~~record as of November 1, 2018.

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CONTRACTUAL OBLIGATIONS AND OTHER

Contractual Obligations

As of September 30, 2018, our contractual obligations included debt and notes payable – related party, operating lease obligations, purchase obligations, and other long-term liabilities. In March 2018, we (i) issued in a public offering $500.0 million aggregate principal amount of our 4.5 percent Senior Notes, (ii) made a debt repayment of $410.0 million related to the ~~St. Charles, Meraux, Corpus Christi, Three Rivers, McKee,~~Revolver, and ~~Houston terminals. Valero agreed to fund these projects in connection~~(iii) paid $85.0 million under one of the Loan Agreements with ~~the acquisitions from~~ Valero. See Note 104 of Condensed Notes to Consolidated Financial Statements for further description of these ~~noncash~~ activities.

~~Contractual Obligations~~

~~As of September 30, 2017, our contractual obligations included debt obligations, operating leases, purchase obligations, and other long-term liabilities.~~ There were no other material changes outside the ordinary course of business with respect to our contractual obligations during the nine months ended September 30, ~~2017.~~2018.

Regulatory Matters

Rate and Other Regulations

Our interstate common carrier crude oil and refined petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission under the Interstate Commerce Act and Energy Policy Act. Our pipelines and terminal operations are also subject to safety regulations adopted by the Department of Transportation, as well as to state regulations. For more information on federal and state regulations affecting our business, please read our annual report on Form 10-K for the year ended December 31, ~~2016.~~

2017 and the risk factor included in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2018.

Environmental Matters and Compliance Costs

We are subject to extensive federal, state, and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment or otherwise relate to protection of the environment. Compliance with these laws and regulations may require us to remediate environmental damage from any discharge of petroleum or chemical substances from our facilities or require us to install additional pollution control equipment on our equipment and facilities. Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints.

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There were no significant changes to our environmental matters and compliance costs during the nine months ended September 30, ~~2017.~~2018.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. ~~generally accepted accounting principles~~GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. As of September 30, ~~2017,~~2018, there were no significant changes to our critical accounting estimates since the date our annual report on Form 10-K for the year ended December 31, ~~2016~~2017 was filed.


~~Item 3.~~ Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	~~Quantitative and Qualitative Disclosures About Market Risk~~

Market risk is the risk of loss arising from adverse changes in market rates and prices. Because we do not take ownership of or receive any payments based on the value of the crude oil or refined petroleum products that we handle and do not engage in the trading of any commodities, we have no direct exposure to commodity price fluctuations.

Our commercial agreements with Valero are indexed to inflation to mitigate our exposure to increases in the cost of labor and materials used in our business.

The following table provides information about our debt obligations (dollars in thousands), the fair values of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.


		September 30, 2017																								September 30, 2018
		Expected Maturity Dates																								Expected Maturity Dates
		2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value			Remainder of 2018			2019			2020			2021			2022			There- after			Total (a)			Fair Value
Fixed rate	Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	516,305	Fixed rate	$	—		$	—		$	—		$	—		$	—		$	1,000,000		$	1,000,000		$	983,810
Average interest rate	Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%			Average interest rate	—		%	—		%	—		%	—		%	—		%	4.44		%	4.44		%
Variable rate	Variable rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000	Variable rate	$	—		$	—		$	285,000		$	—		$	—		$	—		$	285,000		$	285,000
Average interest rate	Average interest rate	—		%	—		%	—		%	2.74		%	—		%	—		%	2.74		%			Average interest rate	—		%	—		%	3.60		%	—		%	—		%	—		%	3.60		%


		December 31, 2016																								December 31, 2017
		Expected Maturity Dates																								Expected Maturity Dates
		2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value			2018			2019			2020			2021			2022			There- after			Total (a)			Fair Value
Fixed rate		$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	506,670	Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	523,800
Average interest rate	Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%			Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Variable rate	Variable rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000	Variable rate	$	—		$	—		$	780,000		$	—		$	—		$	—		$	780,000		$	780,000
Average interest rate	Average interest rate	—		%	—		%	—		%	2.27		%	—		%	—		%	2.27		%			Average interest rate	—		%	—		%	2.87		%	—		%	—		%	—		%	2.87		%

(a) Excludes unamortized discount and deferred issuance costs.

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~~Item~~ITEM 4. ~~Controls and Procedures~~CONTROLS AND PROCEDURES


(a)	Evaluation of disclosure controls and procedures

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of September 30, ~~2017.~~2018.


(b)	Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We continue the implementation process to prepare for the adoption of Topic 842, which we discuss in Note 1 of Condensed Notes to Consolidated Financial Statements. We expect that there will be changes affecting our internal control over financial reporting in conjunction with adopting this standard. The most significant changes we expect relate to the implementation of a lease evaluation system and a lease accounting system, including the integration of our lease accounting system with our general ledger and modifications to the related procurement and payment processes.

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PART II – OTHER INFORMATION

~~Item~~ITEM 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS

None.

~~Item~~ITEM 1A. ~~Risk Factors~~RISK FACTORS

~~There~~Except as set forth below, there have been no material changes from the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, ~~2016.~~2017, and our quarterly report on Form 10-Q for the quarterly period ended March 31, 2018.

The Merger Transaction may not be consummated, which may cause the market price of our common units to decline.

The Merger Agreement contains conditions, some of which are beyond the parties’ control, such as any required regulatory approvals and the absence of injunctions or rulings prohibiting consummation of the Merger Transaction, that, if not satisfied or waived, may prevent, delay or otherwise result in the Merger Transaction not occurring, even though Valero may have delivered, or have been ready, willing and able to deliver, a written consent approving the Merger Transaction. We cannot predict with certainty whether and when any of the conditions to the completion of the Merger Transaction will be satisfied. If the Merger Transaction does not occur, the market price of our common units may decline.

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If the Merger Transaction with Valero does not close, we will not benefit from the expenses we have incurred in the pursuit of the Merger Transaction.

The Merger Transaction with Valero may not be completed. If the Merger Transaction is not completed, we will have incurred substantial expenses for which no ultimate benefit will have been received by us. We currently expect to incur merger-related expenses consisting of independent advisory, legal and accounting fees, and financial printing and other related charges, much of which may be incurred even if the Merger Transaction is not completed.

The Merger Agreement limits our ability to make distributions to our unitholders.

The Merger Agreement provides that prior to the closing of the Merger Transaction, our general partner may not declare, and we may not pay, any distribution other than the distribution of $0.551 per common unit that we declared for the third quarter of 2018 without the prior written consent of Valero. Our partnership agreement does not require us to make distributions to partners. Valero is under no obligation to consent to any future distributions and, even if Valero were to provide such consent, there is no guarantee as to whether our general partner will declare distributions to our unitholders.

We may be subject to lawsuits relating to the Merger Transaction, which could materially adversely affect our operations and financial condition or prevent or delay completion of the Merger Transaction.

Our directors and officers may be subject to lawsuits relating to the Merger. Such litigation is common in connection with acquisitions of public companies, regardless of any merits related to the underlying acquisition. While we will evaluate and defend against any actions vigorously, the costs of the defense of such lawsuits and other effects of such litigation could have an adverse effect on our operations and financial condition. In addition, the attention of our management may be diverted to the Merger Transaction and related lawsuits rather than our own operations and pursuit of other opportunities that could have been beneficial to us.

One of the conditions to consummating the Merger Transaction is that no injunction or other order prohibiting or otherwise preventing the consummation of the Merger Transaction has been issued by any court or governmental entity of competent jurisdiction in the U.S. Consequently, if any lawsuit is filed challenging the Merger Transaction and is successful in obtaining an injunction preventing the parties to the Merger Agreement from consummating the Merger Transaction, such injunction may prevent the Merger Transaction from being completed in the expected timeframe, or at all.

Failure to complete, or significant delays in completing, the Merger Transaction with Valero could negatively affect the trading price of our common units and our future business and financial results.

The Merger Transaction with Valero is a taxable transaction and the resulting tax liability of our common unitholders, if any, will depend on each such common unitholder’s particular situation.

The receipt of cash as merger consideration in exchange for our publicly traded common units in the Merger Transaction will be treated as a taxable sale by such common unitholders for U.S. federal income tax purposes. The amount of ordinary income and capital gain or loss recognized by each common unitholder in the Merger Transaction will vary depending on each common unitholder’s particular situation, including the amount of cash received by the common unitholder as consideration in the Merger Transaction, the adjusted tax basis of the common units exchanged by the common unitholder in the Merger Transaction, the amount of depreciation and amortization deductions previously allocated to the common unitholder and the amount of any suspended passive losses that may be available to the common unitholder in respect of itscommon units to offset a portion of any gain recognized by the common unitholder.

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While the Merger Agreement with Valero is in effect, we may be limited in our ability to pursue other attractive business opportunities.

Valero is interested only in acquiring our publicly traded common units and is not interested in selling the common units or general partner interest in us that it owns. Therefore, even if a proposal or offer to acquire our assets or equity interests were to materialize, Valero, which indirectly owns approximately 67.5 percent of our common units, and has a majority position on the board of directors of our general partner, would likely decide not to vote or tender its common units or general partner interest in favor of any such transaction and recommend against approval of such transactions by our common unitholders.

We have also agreed to refrain from taking certain actions with respect to our business and financial affairs pending completion of the Merger Transaction or termination of the Merger Agreement. These restrictions could be in effect for an extended period of time if completion of the Merger Transaction is delayed.

In addition to the economic costs associated with pursuing a merger, our management continues to devote substantial time and other resources to the proposed Merger Transaction and related matters, which could limit our ability to pursue other attractive business opportunities, including potential joint ventures, standalone projects and other transactions. If we are unable to pursue such other attractive business opportunities, our growth prospects and the long-term strategic position of our business could be adversely affected.

~~Item~~ITEM 6. ~~Exhibits~~EXHIBITS



Exhibit No.		Description

~~10.01~~+2.01		~~Purchase~~Agreement and ~~Sale Agreement (Parkway Pipeline),~~Plan of Merger, dated ~~November 1, 2017,~~as of October 18, 2018, by and ~~between~~among Valero ~~Terminaling and Distribution Company~~Energy Corporation, Forest Merger Sub, LLC, Valero Energy Partners LP and Valero Energy Partners ~~LP -~~ GP LLC–incorporated by reference to Exhibit ~~10.01~~2.1 to the Partnership’s Current Report on Form 8-K dated ~~November 1, 2017~~ and filed ~~November 2, 2017~~October 18, 2018 (SEC File No. 1-36232).

~~10.02~~10.01		~~Contribution~~Support Agreement, ~~(Port Arthur),~~ dated ~~November 1, 2017,~~as of October 18, 2018, by and between Valero Energy Partners LP and Valero Terminaling and Distribution ~~Company and Valero Energy Partners LP -~~ Company–incorporated by reference to Exhibit ~~10.02~~10.1 to the Partnership’s Current Report on Form 8-K dated ~~November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).~~

~~10.03~~		Amendment and Restatement of Schedules to Amended and Restated Omnibus Agreement, dated November 1, 2017, by and among the various parties thereto - incorporated by reference to Exhibit 10.04 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017 (SEC File No. 1-36232).

~~10.04~~		Amendment and Restatement of Exhibits to Amended and Restated Services and Secondment Agreement, dated November 1, 2017, by and among Valero Services, Inc., Valero Refining Company-Tennessee, L.L.C., Valero Refining-Texas, L.P., and Valero Energy Partners GP LLC - incorporated by reference to Exhibit 10.06 to Partnership’s Current Report on Form 8-K dated November 1, 2017 and filed November 2, 2017October 18, 2018 (SEC File No. 1-36232).

*31.01		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal executive officer.

*31.02		Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal financial officer.

**32.01		Section 1350 Certifications ~~(as adopted pursuant to~~(under Section 906 of the Sarbanes-Oxley Act of 2002).

***101		Interactive Data Files

______________


*	Filed herewith.


**	Furnished herewith.


***	Submitted electronically herewith.


+	Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Valero Energy Partners LP agrees to furnish supplementally a copy of any such omitted schedule to the SEC upon request.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	VALERO ENERGY PARTNERS LP
	(Registrant)

	By:	Valero Energy Partners GP LLC
		its general partner


	By:	/s/ Donna M. Titzman
		Donna M. Titzman
		~~Senior~~Executive Vice President and
		Chief Financial Officer ~~and Treasurer~~
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)

Date: November ~~8, 2017~~5, 2018

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	Partnership
	Common Unitholders Public			Common Unitholder Valero			Subordinated Unitholder Valero			General Partner Valero			Net Investment			Total
Balance as of December 31, 2015	$	581,489		$	28,430		$	(313,961	)	$	(5,805	)	$	103,999		$	394,152
Net income (loss):
Attributable to Predecessor	—			—			—			—			(15,422		)	(15,422		)
Attributable to partners	42,096			41,685			45,322			15,351			—			144,454
Net transfers from Valero Energy Corporation	—			—			—			—			15,030			15,030
Allocation of Valero Energy Corporation’s net investment in acquisitions	—			67,800			32,758			3,049			(103,607		)	—
Consideration paid to Valero Energy Corporation for acquisitions	—			(397,859		)	(153,067		)	(14,074		)	—			(565,000		)
Units issued to Valero Energy Corporation in connection with acquisitions	—			83,300			—			1,700			—			85,000
Conversion of subordinated units	—			(406,374		)	406,374			—			—			—
Unit issuance	6,096			—			—			58			—			6,154
Transfers to (from) partners	(73,075		)	75,765			—			(2,690		)	—			—
Noncash capital contributions from Valero Energy Corporation	—			11,057			12,084			679			—			23,820
Cash distributions to unitholders and distribution equivalent right payments	(22,052		)	(15,908		)	(29,510		)	(9,761		)	—			(77,231		)
Unit-based compensation	134			—			—			—			—			134
Balance as of September 30, 2016	$	534,688		$	(512,104	)	$	—		$	(11,493	)	$	—		$	11,091

Balance as of December 31, 2016	$	548,619		$	(482,197	)	$	—		$	(10,598	)	$	—		$	55,824
Net income attributable to partners	46,001			94,245			—			33,923			—			174,169
Unit issuance	33,429			—			—			748			—			34,177
Transfers to (from) partners	(16,097		)	19,816			—			(3,719		)	—			—
Noncash capital contributions from Valero Energy Corporation	—			27,308			—			558			—			27,866
Cash distributions to unitholders and distribution equivalent right payments	(28,713		)	(58,890		)	—			(27,446		)	—			(115,049		)
Unit-based compensation	197			—			—			—			—			197
Balance as of September 30, 2017	$	583,436		$	(399,718	)	$	—		$	(6,534	)	$	—		$	177,184



Remainder of 2017	$	70,589
2018	280,056
2019	280,056
2020	280,824
2021	280,056
Thereafter	2,394,350
Total minimum rental payments	$	3,585,931



	September 30, 2017
	Non-Leased Assets			Assets Leased to Valero			Total
Land	$	4,672		$	—		$	4,672
Pipelines and related assets	224,794			113,381			338,175
Terminals and related assets	120,482			816,684			937,166
Other	10,530			—			10,530
Construction-in-progress	50,363			—			50,363
Property and equipment, at cost	410,841			930,065			1,340,906
Accumulated depreciation	(123,924		)	(262,035		)	(385,959		)
Property and equipment, net	$	286,917		$	668,030		$	954,947



	Agreements With
	Related Party		Others		Total
Remainder of 2017	$	2,436	$	226	$	2,662
2018	9,744		1,068		10,812
2019	9,744		1,052		10,796
2020	9,745		1,052		10,797
2021	9,745		1,047		10,792
Thereafter	219,893		25,362		245,255
Total minimum rental payments	$	261,307	$	29,807	$	291,114



	Investing Cash Outflow		Financing Cash Outflow		Total Cash Outflow
Nine months ended September 30, 2016:
McKee Terminal Services Business	$	51,361	$	152,639	$	204,000
Meraux and Three Rivers Terminal Services Business	52,246		223,754		276,000
	$	103,607	$	376,393	$	480,000



	Nine Months Ended September 30, 2016
Net transfers from Valero per statement of partners’ capital	$	15,030
Less: Noncash transfers from Valero	144
Net transfers from Valero per statement of cash flows	$	14,886