Valero Energy Partners (VLP) 10-Q 2017 Q1 Quarterly report

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 March 31, 2017

OR

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, 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 68,165,561 common units and 1,391,133general partner units outstanding at April 28, 2017.

VALERO ENERGY PARTNERS LP

TABLE OF CONTENTS

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	1
Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016	2
Consolidated Statements of Partners’ Capital for the Three Months Ended March 31, 2017 and 2016	3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	4
Condensed Notes to Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	34
Item 4. Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 6. Exhibits	36
SIGNATURE	37

i

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY PARTNERS LP

CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2017			December 31, 2016
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	65,724		$	71,491
Receivables – related party	35,774			36,889
Receivables	852			1,682
Prepaid expenses and other	753			997
Total current assets	103,103			111,059
Property and equipment, at cost	1,302,607			1,216,288
Accumulated depreciation	(362,441		)	(351,208		)
Property and equipment, net	940,166			865,080
Deferred charges and other assets, net	2,904			3,118
Total assets	$	1,046,173		$	979,257
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable	$	7,898		$	10,652
Accounts payable – related party	7,317			7,348
Accrued liabilities	992			870
Accrued liabilities – related party	76			192
Accrued interest payable	6,805			1,280
Accrued interest payable – related party	728			47
Taxes other than income taxes	1,751			2,457
Deferred revenue – related party	1,489			3,525
Total current liabilities	27,056			26,371
Debt	525,057			525,355
Notes payable – related party	370,000			370,000
Other long-term liabilities	1,795			1,707
Commitments and contingencies
Partners’ capital:
Common unitholders – public (22,478,290 and21,738,692 units outstanding)	569,029			548,619
Common unitholder – Valero (45,687,271 and 45,687,271 units outstanding)	(437,495		)	(482,197		)
General partner – Valero (1,391,133 and 1,375,721 units outstanding)	(9,269		)	(10,598		)
Total partners’ capital	122,265			55,824
Total liabilities and partners’ capital	$	1,046,173		$	979,257

See Condensed Notes to Consolidated Financial Statements.

1

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per unit amounts)

(unaudited)

	Three Months Ended March 31,
	2017			2016 (a)
Operating revenues – related party	$	105,816		$	78,767
Costs and expenses:
Operating expenses (b)	23,545			24,286
General and administrative expenses (c)	3,830			4,365
Depreciation expense	11,775			11,512
Total costs and expenses	39,150			40,163
Operating income	66,666			38,604
Other income, net	64			77
Interest and debt expense, net of capitalized interest (d)	(8,289		)	(2,659		)
Income before income taxes	58,441			36,022
Income tax expense	304			242
Net income	58,137			35,780
Less: Net loss attributable to Predecessor	—			(7,518		)
Net income attributable to partners	58,137			43,298
Less: General partner’s interest in net income	9,467			3,504
Limited partners’ interest in net income	$	48,670		$	39,794
Net income per limited partner unit – basic and diluted:
Common units	$	0.72		$	0.61
Subordinated units	$	—		$	0.61
Weighted-average limited partner units outstanding:
Common units – basic and diluted	67,664			36,520
Subordinated units – basic and diluted	—			28,790
Cash distribution declared per unit	$	0.4275		$	0.3400
(a) Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business from Valero Energy Corporation. See Notes 1 and 2.
Supplemental information – each income statement line item reflected below includes expenses incurred for services or financing provided by related party as follows:
(b) Operating expenses – related party	$	15,632		$	15,083
(c) General and administrative expenses – related party	$	3,186		$	3,062
(d) Interest and debt expense – related party	$	2,107		$	1,566

See Condensed Notes to Consolidated Financial Statements.

2

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in thousands)

(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 (a)	—			—			—			—			(7,518		)	(7,518		)
Attributable to partners	13,101			9,151			17,542			3,504			—			43,298
Net transfers from Valero Energy Corporation (a)	—			—			—			—			6,414			6,414
Offering costs	(5		)	—			—			—			—			(5		)
Noncash capital contributions from Valero Energy Corporation	—			2,459			4,713			218			—			7,390
Cash distributions to unitholders and distribution equivalent right payments	(6,883		)	(4,806		)	(9,213		)	(1,809		)	—			(22,711		)
Unit-based compensation	34			—			—			—			—			34
Balance as of March 31, 2016 (a)	$	587,736		$	35,234		$	(300,919	)	$	(3,892	)	$	102,895		$	421,054
Balance as of December 31, 2016	$	548,619		$	(482,197	)	$	—		$	(10,598	)	$	—		$	55,824
Net income attributable to partners	15,808			32,862			—			9,467			—			58,137
Transfers to (from) partners	(19,766		)	21,375			—			(1,609		)	—			—
Unit issuance	33,153			—			—			739			—			33,892
Noncash capital contributions from Valero Energy Corporation	—			9,036			—			184			—			9,220
Cash distributions to unitholders and distribution equivalent right payments	(8,872		)	(18,571		)	—			(7,452		)	—			(34,895		)
Unit-based compensation	87			—			—			—			—			87
Balance as of March 31, 2017	$	569,029		$	(437,495	)	$	—		$	(9,269	)	$	—		$	122,265
(a)  Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business from Valero Energy Corporation. See Notes 1 and 2.

See Condensed Notes to Consolidated Financial Statements.

3

VALERO ENERGY PARTNERS LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2017			2016 (a)
Cash flows from operating activities:
Net income	$	58,137		$	35,780
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	11,775			11,512
Changes in current assets and current liabilities	4,368			(1,986		)
Changes in deferred charges and credits and other operating activities, net	438			206
Net cash provided by operating activities	74,718			45,512
Cash flows from investing activities:
Capital expenditures	(9,017		)	(7,200		)
Acquisition of undivided interest in Red River crude system	(71,793		)	—
Net cash used in investing activities	(80,810		)	(7,200		)
Cash flows from financing activities:
Repayment of capital lease obligations	—			(326		)
Payment of debt issuance costs	(401		)	—
Proceeds from issuance of common units	35,296			—
Proceeds from issuance of general partner units	739			—
Payment of offering costs	(414		)	(107		)
Cash distributions to unitholders and distribution equivalent right payments	(34,895		)	(22,711		)
Net transfers from Valero Energy Corporation	—			6,327
Net cash provided by (used in) financing activities	325			(16,817		)
Net increase (decrease) in cash and cash equivalents	(5,767		)	21,495
Cash and cash equivalents at beginning of period	71,491			80,783
Cash and cash equivalents at end of period	$	65,724		$	102,278
(a) Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business from Valero Energy Corporation. See Notes 1 and 2.

See Condensed Notes to Consolidated Financial Statements.

4

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 in this report to “Partnership,” “we,” “us,” or “our” refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole. References in this report to “Valero” refer collectively to Valero Energy Corporation and its subsidiaries, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.

We acquired from Valero the McKee Terminal Services Business on April 1, 2016 and the Meraux and Three Rivers Terminal Services Business on September 1, 2016. On January 18, 2017, we acquired the Red River crude system. See Note 2 for further discussion of these acquisitions.

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 fee-based transportation and terminaling services to Valero.

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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The balance sheet as of December 31, 2016 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.

5

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Acquisitions from Valero

The acquisitions from Valero noted above were accounted for as transfers of businesses between entities under the common control of Valero. Accordingly, we recorded these acquisitions on our balance sheet at Valero’s carrying value as of the beginning of the period of transfer, and we retrospectively adjusted prior period financial statements and financial information to furnish comparative information. We refer to 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 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 amounts reported as of December 31, 2016 have been reclassified to conform to the 2017 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

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, with early adoption permitted. Our early adoption of this ASU effective January 1, 2017 did not have an effect on our financial position or results of operations. However, more of our future acquisitions may be accounted for as asset acquisitions.

6

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify the principles for recognizing revenue. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual periods. We recently completed our evaluation of the provisions of this ASU and concluded that our adoption of the ASU will not materially change the amount or timing of revenues recognized by us, nor will it materially affect our financial position. As described in our revenue recognition policy, our revenues are generated from the transportation of crude oil and refined petroleum products through our pipelines and terminals. These revenues are based on the volume (barrels) of crude oil and refined petroleum products transported at contracted rates per barrel, and we recognize these revenues upon completion of the transportation service, which is the point when our performance obligation is fulfilled. As also described in our revenue recognition policy, certain of our commercial agreements are considered operating leases under U.S. GAAP. The scope of the new standard does not extend to revenues generated by lease arrangements; therefore, lease revenues generated by us will continue to be accounted for under existing accounting standards and be reflected in a separate revenue line item on our statement of income. We will adopt this ASU effective January 1, 2018, and we expect to use the modified retrospective method of adoption as permitted by the ASU. Under that 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 do not, however, expect to make such an adjustment to partners’ capital.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10),” to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. 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 using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU effective January 1, 2018 will not affect our financial position or results of operations, but will result in revised disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (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. The new standard is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with early adoption permitted. We anticipate adopting the new standard on January 1, 2019. We recently completed our evaluation of the provisions of this standard, and a multi-disciplined implementation team has gained an understanding of the standard’s accounting and disclosure provisions. This team is developing enhanced contracting and lease evaluation processes and information systems to support such processes, as well as new and enhanced accounting systems to account for our leases and support the required disclosures. We continue to evaluate the effect that adopting this standard will have on our financial statements and related disclosures.

7

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. ACQUISITIONS

Acquisitions in 2016

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.

Acquisition in 2017

Red River Crude System

Effective January 18, 2017, we acquired a 40 percent undivided interest in (i) the newly constructed Hewitt segment of 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 (the Hewitt Storage Tanks), and (iii) a pipeline connection from Hewitt Station to Wasson Station (the Wasson Interconnect) for total cash consideration of $71.8 million. We funded this acquisition with available cash on hand.

The Hewitt segment consists of a 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 in Hewitt, Oklahoma. 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.

8

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Presentation of Reported Financial Information

The following table presents our previously reported statement of income for the three months ended March 31, 2016 (as presented in our Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC) on May 6, 2016) retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business (in thousands).

	Three Months Ended March 31, 2016
	Valero Energy Partners LP (Previously Reported)			McKee Terminal Services Business			Meraux and Three Rivers Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Operating revenues – related party	$	78,767		$	—		$	—		$	78,767
Costs and expenses:
Operating expenses	19,096			1,781			3,409			24,286
General and administrative expenses	4,161			67			137			4,365
Depreciation expense	9,388			1,233			891			11,512
Total costs and expenses	32,645			3,081			4,437			40,163
Operating income (loss)	46,122			(3,081		)	(4,437		)	38,604
Other income, net	77			—			—			77
Interest and debt expense, net of capitalized interest	(2,659		)	—			—			(2,659		)
Income (loss) before income taxes	43,540			(3,081		)	(4,437		)	36,022
Income tax expense	242			—			—			242
Net income (loss)	43,298			(3,081		)	(4,437		)	35,780
Less: Net loss attributable to Predecessor	—			(3,081		)	(4,437		)	(7,518		)
Net income attributable to partners	$	43,298		$	—		$	—		$	43,298

9

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents our previously reported statement of cash flows for the three months ended March 31, 2016 (as presented in our Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016) retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business (in thousands).

	Three Months Ended March 31, 2016
	Valero Energy Partners LP (Previously Reported)			McKee Terminal Services Business			Meraux and Three Rivers Terminal Services Business			Valero Energy Partners LP (Currently Reported)
Cash flows from operating activities:
Net income (loss)	$	43,298		$	(3,081	)	$	(4,437	)	$	35,780
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense	9,388			1,233			891			11,512
Changes in current assets and current liabilities	(1,986		)	—			—			(1,986		)
Changes in deferred charges and credits and other operating activities, net	206			—			—			206
Net cash provided by (used in) operating activities	50,906			(1,848		)	(3,546		)	45,512
Cash flows from investing activities:
Capital expenditures	(6,267		)	—			(933		)	(7,200		)
Net cash used in investing activities	(6,267		)	—			(933		)	(7,200		)
Cash flows from financing activities:
Repayment of capital lease obligations	(326		)	—			—			(326		)
Payment of offering costs	(107		)	—			—			(107		)
Cash distributions to unitholders and distribution equivalent right payments	(22,711		)	—			—			(22,711		)
Net transfers from Valero Energy Corporation	—			1,848			4,479			6,327
Net cash provided by (used in) financing activities	(23,144		)	1,848			4,479			(16,817		)
Net increase in cash and cash equivalents	21,495			—			—			21,495
Cash and cash equivalents at beginning of period	80,783			—			—			80,783
Cash and cash equivalents at end of period	$	102,278		$	—		$	—		$	102,278

10

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. RELATED-PARTY TRANSACTIONS

New Agreements

Agreement with Diamond Green Diesel

Effective March 31, 2017, we entered into an agreement with 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. In addition, we have agreed to construct a new 180,000 barrel storage tank and provide storage services to DGD. Construction of the rail loading facility is expected to be complete in the second quarter of 2017, and construction of the new tank is targeted for completion in the fourth quarter of 2017. The initial term of the agreement commences in the month following the respective construction completion dates and ends on June 30, 2033.

Agreements with Valero

Effective March 31, 2017 and in connection with the DGD agreement described above, we amended our land 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 as 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).

All of our operating revenues are generated by providing services to Valero under our commercial agreements with Valero. The cost of services 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, are reflected in the supplemental information disclosure on our statements of income.

Concentration Risk

All of our operating revenues were derived from transactions with Valero and all of the “receivables – related party” were due from Valero. Therefore, we are subject to the business risks associated with Valero’s business.

11

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Operating Leases – Lessor

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 statements of income. The components of our lease revenues are as follows (in thousands):

	Three Months Ended March 31,
	2017		2016
Minimum rental revenues	$	68,448	$	48,249
Contingent rental revenues	12,529		8,337
Total lease revenues	$	80,977	$	56,586

As of March 31, 2017, future minimum rentals to be received related to these noncancelable commercial agreements were as follows (in thousands):

Remainder of 2017	$	211,001
2018	280,056
2019	280,056
2020	280,824
2021	280,056
Thereafter	2,394,350
Total minimum rental payments	$	3,726,343

12

VALERO ENERGY PARTNERS LP

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):

	March 31, 2017
	Non-Leased Assets			Assets Leased to Valero			Total
Land	$	4,672		$	—		$	4,672
Pipelines and related assets	224,794			112,738			337,532
Terminals and related assets	114,127			805,035			919,162
Other	10,016			—			10,016
Construction-in-progress	31,225			—			31,225
Property and equipment, at cost	384,834			917,773			1,302,607
Accumulated depreciation	(118,091		)	(244,350		)	(362,441		)
Property and equipment, net	$	266,743		$	673,423		$	940,166

	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

13

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. DEBT AND NOTES PAYABLE – RELATED PARTY

Debt

There was no significant activity related to our debt during the three months ended March 31, 2017 and 2016.

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 on the Revolver bear interest at a variable rate, which was 2.3125 percent as of March 31, 2017 and December 31, 2016.

Notes Payable – Related Party

There was no activity in our two subordinated credit agreements with Valero (the Loan Agreements) for the three months ended March 31, 2017 and 2016. Borrowings on the Loan Agreements bear interest at a variable rate, which was2.284percent and 2.270 percent as of March 31, 2017 and December 31, 2016, respectively.

14

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 for the same rental payment over the lease term or a revised rental payment based on fair rental value or negotiated value. Currently, one 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.

As of March 31, 2017, our future minimum rentals for leases having initial or remaining noncancelable lease terms in excess of one year were as follows (in thousands):

	Agreements With
	Related Party		Others		Total
Remainder of 2017	$	7,307	$	666	$	7,973
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	220,674		25,362		246,036
Total minimum rental payments	$	266,959	$	30,247	$	297,206

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 March 31,
	2017		2016
Minimum rental expenses – related party	$	2,437	$	2,044
Minimum rental expenses – others	305		241
Total minimum rental expenses	$	2,742	$	2,285

15

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. 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:

Quarterly Period Ended	Total Quarterly Distribution (Per Unit)		Total Cash Distribution (In Thousands)		Declaration Date	Record Date	Distribution Date
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 March 31,
	2017		2016
General partner’s distributions:
General partner’s distributions	$	595	$	512
General partner’s incentive distribution rights (IDRs)	8,307		2,638
Total general partner’s distributions	8,902		3,150
Limited partners’ distributions:
Common – public	9,605		7,310
Common – Valero	19,531		5,355
Subordinated – Valero	—		9,788
Total limited partners’ distributions	29,136		22,453
DERs	5		5
Total cash distributions, including DERs	$	38,043	$	25,608

16

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 and awards under our Valero Energy Partners LP 2013 Incentive Compensation Plan (2013 ICP) that receive DERs. 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 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 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 months ended March 31, 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 months ended March 31, 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.

17

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 March 31, 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	$	595	$	29,136	$	—	$	29,731
General partner’s IDRs	8,307		—		—		8,307
DERs	—		—		5		5
Distributions and DERs declared	8,902		29,136		5		38,043
Undistributed earnings	565		19,525		4		20,094
Net income available to limited partners – basic and diluted	$	9,467	$	48,661	$	9	$	58,137
Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			67,664
Net income per limited partner unit – basic and diluted			$	0.72

18

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Three Months Ended March 31, 2016
			Limited Partners
	General Partner		Common Units		Subordinated Units		Restricted Units		Total
Allocation of net income to determine net income available to limited partners:
Distributions, excluding general partner’s IDRs	$	512	$	12,665	$	9,788	$	—	$	22,965
General partner’s IDRs	2,638		—		—		—		2,638
DERs	—		—		—		5		5
Distributions and DERs declared	3,150		12,665		9,788		5		25,608
Undistributed earnings	354		9,692		7,640		4		17,690
Net income available to limited partners – basic and diluted	$	3,504	$	22,357	$	17,428	$	9	$	43,298
Net income per limited partner unit – basic and diluted:
Weighted-average units outstanding			36,520		28,790
Net income per limited partner unit – basic and diluted			$	0.61	$	0.61

19

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. PARTNERS’ CAPITAL

Unit Activity

Activity in the number of units was as follows:

	Common			General Partner
	Public	Valero	Subordinated		Total
Balance as of December 31, 2015	21,509,651	15,018,602	28,789,989	1,332,829	66,651,071
Unit-based compensation	5,958	—	—	—	5,958
Balance as of March 31, 2016	21,515,609	15,018,602	28,789,989	1,332,829	66,657,029
Balance as of December 31, 2016	21,738,692	45,687,271	—	1,375,721	68,801,684
Unit-based compensation	5,997	—	—	—	5,997
Units issued under ATM program	733,601	—	—	—	733,601
General partner units issued to maintain 2% interest	—	—	—	15,412	15,412
Balance as of March 31, 2017	22,478,290	45,687,271	—	1,391,133	69,556,694

ATM Program

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 three months ended March 31, 2017, we issued 733,601 common units under our ATM Program and received proceeds of $34.9 million, which is net of $414,000 of expenses with respect to the sales of these units.

Concurrent with the issuance of common units under our ATM Program, our general partner contributed $739,000 in exchange for 15,412 general partner units to maintain its 2.0 percent general partner interest in the Partnership.

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 during the three months ended March 31, 2017.

20

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. 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):

	Three Months Ended March 31,
	2017			2016
Decrease (increase) in current assets:
Receivables – related party	$	1,115		$	(827	)
Receivables	340			—
Prepaid expenses and other	(355		)	(199		)
Increase (decrease) in current liabilities:
Accounts payable	(171		)	412
Accounts payable – related party	(31		)	(2,007		)
Accrued liabilities	122			101
Accrued liabilities – related party	(116		)	118
Accrued interest payable	5,525			38
Accrued interest payable – related party	681			62
Taxes other than income taxes	(706		)	(6		)
Deferred revenue – related party	(2,036		)	322
Changes in current assets and current liabilities	$	4,368		$	(1,986	)

Noncash investing and financing activities that affected recognized assets or liabilities for the three months ended March 31, 2017 and 2016 were as follows (in thousands):

	Three Months Ended March 31,
	2017			2016
Changes in capital expenditures included in accounts payable	$	2,583		$	2,953
Noncash capital contributions from Valero for projects related to acquisitions	9,220			7,390
Change in accrued capital expenditures transferred from Valero	—			(87		)
Amortization of ATM deferred offering costs	(47		)	—

In addition to the activities in the above table, noncash financing activities for the three months ended March 31, 2017 included the transfers to (from) partners to reflect the impact of ownership changes occurring as a result of the issuance of common units under our ATM Program described in Note 9.

21

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a reconciliation of the amounts presented as net transfers from Valero on our statements of partners’ capital and statements of cash flows (in thousands). Noncash transfers from (to) Valero primarily represent the change in amounts accrued by our Predecessor for capital expenditures as we do not reflect capital expenditures in our statements of cash flows until such amounts are paid.

	Three Months Ended March 31,
	2017		2016 (a)
Net transfers from Valero per statements of partners’ capital	$	—	$	6,414
Less: Noncash transfers from Valero	—		87
Net transfers from Valero per statements of cash flows	$	—	$	6,327
(a) Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business.

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

	Three Months Ended March 31,
	2017		2016
Interest paid	$	1,908	$	2,502

22

VALERO ENERGY PARTNERS LP

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. 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):

	March 31, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	65,724	$	65,724	$	71,491	$	71,491
Financial liabilities:
Debt	525,057		537,205		525,355		536,670
Notes payable – related party	370,000		370,000		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 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-Q, including without limitation our disclosures below under the heading “OUTLOOK,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similar expressions.

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

• the suspension, reduction, or termination of Valero’s obligation under our commercial agreements 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;

• changes in our cash flows from operations;

• state and federal environmental, economic, health and safety, energy, and other policies and regulations, including those related to climate change and any changes therein, and any legal or regulatory investigations, delays, or other factors beyond our control;

• 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;

24

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

• 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; and

• political developments.

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

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

OVERVIEW

We reported net income and net income attributable to partners of $58.1 million in the first quarter of 2017. This compares to net income of $35.8 million and net income attributable to partners of $43.3 million in the first quarter of 2016.

The increase in net income of $22.4 million was due primarily to $22.5 million of revenues generated by our McKee, Meraux, and Three Rivers terminals in the first quarter of 2017. We acquired these terminals from Valero subsequent to the first quarter of 2016. Valero was not charged for services provided by these terminals prior to our acquisition of them; therefore, the increase in net income in the first quarter of 2017 compared to the first quarter of 2016 was due primarily to the revenue associated with services provided by these terminals.

Net income attributable to partners represents our results of operations only and excludes the results of our Predecessor. Our Predecessor’s results are those that are associated with the McKee, Meraux, and Three Rivers terminals for the periods prior to the dates we acquired these businesses from Valero. We acquired these terminals subsequent to the first quarter of 2016. As a result, net income attributable to partners of $43.3 million in the first quarter of 2016 excludes the $7.5 million loss generated by these terminals during that period. As previously noted, the McKee, Meraux, and Three Rivers terminals did not historically charge for services provided to Valero; therefore, the results of our Predecessor include only the costs associated with those 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.) Therefore, the increase in net income attributable to partners of $14.8 million in the first quarter of 2017 compared to the first quarter of 2016 is due primarily to the operating results generated by

25

our McKee, Meraux, and Three Rivers terminals in the first quarter of 2017. The increase is also partially attributable to the results of the Red River crude system that we acquired in January 2017 as noted below.

Effective January 18, 2017, we acquired a 40 percent undivided interest in (i) the newly constructed Hewitt segment of Plains’ Red River pipeline, (ii) two 150,000 shell barrel capacity tanks located at Hewitt Station, and (iii) a pipeline connection from Hewitt Station to Wasson Station, collectively referred to as the Red River crude system, for total cash consideration of $71.8 million. The pipeline supports Valero’s Ardmore Refinery and began supplying crude oil to Valero in January 2017.

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

OUTLOOK

Because our operating revenues are generated from fee-based arrangements with Valero, the amount of operating revenues we generate primarily depends on the volumes of crude oil and refined petroleum products that we transport through our pipelines and handle at our terminals. These volumes are primarily affected by refinery reliability and the supply of, and demand for, crude oil and refined petroleum products in the markets served by our assets. For 2017, we expect that Valero will transport volumes through our pipelines and throughput volumes at our terminals generally consistent with historical levels.

26

RESULTS OF OPERATIONS

The following tables highlight our results of operations and our operating performance for the three months ended March 31, 2017 and 2016. The narrative following these tables provides an analysis of our results of operations.

Results of Operations

(in thousands, except per unit amounts)

	Three Months Ended March 31,
	2017			2016			Change
Operating revenues – related party	$	105,816		$	78,767		$	27,049
Costs and expenses:
Operating expenses	23,545			24,286			(741		)
General and administrative expenses	3,830			4,365			(535		)
Depreciation expense	11,775			11,512			263
Total costs and expenses	39,150			40,163			(1,013		)
Operating income	66,666			38,604			28,062
Other income, net	64			77			(13		)
Interest and debt expense, net of capitalized interest	(8,289		)	(2,659		)	(5,630		)
Income before income taxes	58,441			36,022			22,419
Income tax expense	304			242			62
Net income	58,137			35,780			22,357
Less: Net loss attributable to Predecessor	—			(7,518		)	7,518
Net income attributable to partners	58,137			43,298			14,839
Less: General partner’s interest in net income	9,467			3,504			5,963
Limited partners’ interest in net income	$	48,670		$	39,794		$	8,876
Net income per limited partner unit – basic and diluted:
Common units	$	0.72		$	0.61
Subordinated units	$	—		$	0.61
Weighted-average limited partner units outstanding – basic and diluted:
Common units	67,664			36,520
Subordinated units	—			28,790

27

Operating Highlights and Other Financial Information

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

	Three Months Ended March 31,
	2017		2016		Change
Operating highlights:
Pipeline transportation:
Pipeline transportation revenues	$	23,175	$	20,245	$	2,930
Pipeline transportation throughput (BPD) (a)	962,200		918,936		43,264
Average pipeline transportation revenue per barrel (b)	$	0.27	$	0.24	$	0.03
Terminaling:
Terminaling revenues	$	82,506	$	58,387	$	24,119
Terminaling throughput (BPD)	2,734,478		1,849,858		884,620
Average terminaling revenue per barrel (b)	$	0.34	$	0.35	$	(0.01	)
Storage revenues	$	135	$	135	$	—
Total operating revenues – related party	$	105,816	$	78,767	$	27,049
Capital expenditures:
Maintenance	$	2,038	$	2,845	$	(807	)
Expansion	6,979		4,355		2,624
Total capital expenditures	9,017		7,200		1,817
Less: Capital expenditures attributable to Predecessor	—		933		(933		)
Capital expenditures attributable to Partnership	$	9,017	$	6,267	$	2,750
Other financial information:
Distribution declared per unit	$	0.4275	$	0.3400
Distribution declared:
Limited partner units – public	$	9,610	$	7,315
Limited partner units – Valero	19,531		15,143
General partner units – Valero	8,902		3,150
Total distribution declared	$	38,043	$	25,608

____________________

(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 revenues increased $27.0 million, or 34 percent, in the first quarter of 2017 compared to the first quarter of 2016. The increase was due primarily to the following:

• Incremental terminaling throughput from acquired businesses. We experienced a 38 percent increase in terminaling revenues in the first quarter of 2017 compared to the first quarter of 2016 generated by the McKee, Meraux, and Three Rivers terminals we acquired from Valero during the second and third quarters of 2016. The incremental throughput volumes at these terminals had a favorable impact to our operating revenues of $22.5 million.

• Incremental operating revenues at Red River crude system. The incremental throughput volumes at the Red River crude system had a favorable impact to our operating revenues of $2.0 million. The higher transportation revenue per barrel generated by this system contributed to a higher average pipeline transportation revenue per barrel in the first quarter of 2017 compared to the first quarter of 2016.

Operating expenses decreased $741,000, or 3 percent, in the first quarter of 2017 compared to the first quarter of 2016 due primarily to lower maintenance expense of $1.1 million at the St. Charles and Meraux terminals, which was mainly related to inspection activity in the first quarter of 2016. This decrease was partially offset by operating expenses of $459,000 related to our Red River crude system, which was acquired in the first quarter of 2017.

General and administrative expenses decreased $535,000, or 12 percent, in the first quarter of 2017 compared to the first quarter of 2016 due primarily to lower transaction costs of $375,000 associated with the acquisition of businesses from Valero and lower public company costs of $245,000. These decreases were partially offset by incremental costs of $124,000 related to the management fee charged to us by Valero as a result of additional administrative services provided to us in connection with our acquisitions from Valero in 2016.

Depreciation expense increased $263,000, or 2 percent, in the first quarter of 2017 compared to the first quarter of 2016 due primarily to depreciation expense recognized on the assets that compose our Red River crude system, which was acquired in the first quarter of 2017.

“Interest and debt expense, net of capitalized interest” increased $5.6 million in the first quarter of 2017 compared to the first quarter of 2016 due to incremental borrowings of $139.0 million and $210.0 million under our revolving credit facility in connection with the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business from Valero, respectively, and to incremental interest expense incurred on $500.0 million of 4.375% senior notes due December 2026, which we issued in December 2016 (the Senior Notes). Interest expense on the incremental borrowings was approximately $2.0 million in the first quarter of 2017. We used the proceeds of the Senior Notes to repay $494.0 million of outstanding borrowings under our revolving credit facility. The interest rate on the Senior Notes is higher than our revolving credit facility, thereby increasing the effective interest rate in 2017. Incremental interest expense resulting from the Senior Notes was approximately $2.6 million in the first quarter of 2017.

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LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility, and issuances of additional debt and equity securities. We may also enter into financing transactions with Valero in connection with acquisitions. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and long-term capital expenditure requirements and to make quarterly cash distributions.

Unit Offerings

On September 16, 2016, we entered into an equity distribution agreement pursuant to which we may offer and sell from time to time our common units having an aggregate offering price of up to $350.0 million based on amounts, at prices, and on terms to be determined by market conditions and other factors at the time of our offerings (such continuous offering program, or at-the-market program, referred to as our “ATM Program”). In the first quarter of 2017, we issued 733,601 common units under the ATM Program and received proceeds of $34.9 million, which is net of $414,000 of expenses with respect to the sale of these units. Concurrent with the issuance of common units under our ATM Program, our general partner contributed $739,000 in exchange for 15,412 general partner units to maintain its 2.0 percent general partner interest in the Partnership.

Distributions

On April 20, 2017, the board of directors of our general partner declared a distribution of $0.4275 per unit applicable to the first quarter of 2017, which equates to $38.0 million in total distributions to unitholders of record as of May 2, 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
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

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.

Revolving Credit Facility

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

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March 31, 2017, we had $30.0 million of borrowings and no letters of credit outstanding under the Revolver. See Note 5 of Condensed Notes to Consolidated Financial Statements for a description of the Revolver.

Senior Notes

On December 9, 2016, we issued in a public offering $500.0 million aggregate principal amount of our Senior Notes. Gross proceeds from this debt issuance totaled $499.8 million before deducting the underwriting discount and other debt issuance costs totaling $4.5 million. See Note 5 of Condensed Notes to Consolidated Financial Statements for a description of our Senior Notes.

Notes Payable – Related Party

During the three months ended March 31, 2017, we made no repayments under our two subordinated credit agreements with Valero (the Loan Agreements). As of March 31, 2017, we had $370.0 million outstanding under the Loan Agreements. See Note 5 of Condensed Notes to Consolidated Financial Statements for a description of the Loan Agreements.

Cash Flows Summary

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

	Three Months Ended March 31,
	2017			2016 (a)
Cash flows provided by (used in):
Operating activities	$	74,718		$	45,512
Investing activities	(80,810		)	(7,200		)
Financing activities	325			(16,817		)
Net increase (decrease) in cash and cash equivalents	$	(5,767	)	$	21,495
(a) Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business.

Cash Flows for the Three Months Ended March 31, 2017

Our operations generated $74.7 million of cash in the first three months of 2017, driven primarily by net income of $58.1 million plus noncash adjustments (primarily for depreciation expense) of $12.2 million and favorable changes in working capital of $4.4 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 of $6.2 million, partially offset by a decrease in “deferred revenue – related party” of $2.0 million. The change in our working capital is further described in Note 10 of Condensed Notes to Consolidated Financial Statements. The increase in accrued interest was due primarily to the interest on our Senior Notes, which is paid semi-annually beginning in June 2017. The decrease in “deferred revenue – related party” was due to lower deficiency payments associated with minimum volume commitments.

The $74.7 million of cash generated by our operations, along with $36.0 million in proceeds received in connection with our ATM program, were used mainly to:

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

• pay $34.9 million in cash distributions to limited partners and our general partner;

• fund $9.0 million in capital expenditures; and

• pay $815,000 in debt issuance and offering costs.

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Cash Flows for the Three Months Ended March 31, 2016

Our operations generated $45.5 million of cash in the first three months of 2016, driven primarily by net income of $35.8 million plus noncash adjustments (primarily for depreciation expense) of $11.7 million, partially offset by unfavorable changes in working capital of $2.0 million. See “RESULTS OF OPERATIONS” for further discussion of our operations. The change in working capital was composed primarily of a decrease in “accounts payable – related party” of $2.0 million. The change in our working capital is further described in Note 10 of Condensed Notes to Consolidated Financial Statements. The decrease in “accounts payable – related party” was attributable primarily to the timing of invoices from Valero for services provided to our general partner under our amended and restated services and secondment agreement.

The $45.5 million of cash generated by our operations, along with $6.3 million of net cash transferred from Valero related to the cash flows associated with our Predecessor, were used mainly to:

• pay $22.7 million in cash distributions to limited partners and our general partner;

• fund $7.2 million in capital expenditures;

• make debt repayments of $326,000 on our capital lease obligations; and

• pay $107,000 in debt issuance and offering costs.

Capital Expenditures

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

Our capital expenditures were as follows (in thousands):

	Three Months Ended March 31,
	2017		2016 (a)
Maintenance	$	2,038	$	2,845
Expansion (b)	6,979		4,355
Total capital expenditures	$	9,017	$	7,200
(a) Financial information has been retrospectively adjusted for the acquisitions of the McKee Terminal Services Business and the Meraux and Three Rivers Terminal Services Business.
(b) This table excludes amounts paid to Valero for the acquired businesses. See Note 2 of Condensed Notes to Consolidated Financial Statements for further discussion of our acquisitions.

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

• the construction of a rail loading facility at the St. Charles terminal;

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

• the improvement of assets at our McKee, Houston, and Corpus Christi terminals to extend the useful lives of the tanks.

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Our capital expenditures in the first three months of 2016 were primarily for:

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

• the improvement of assets at our Three Rivers and St. Charles terminals to extend the useful lives of the tanks; and

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

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

In addition to the above-mentioned capital expenditures, Valero funded $9.2 million of capital projects primarily related to the St. Charles, Meraux, Corpus Christi, Three Rivers, and Houston terminals. Valero agreed to fund these projects in connection with the acquisitions from Valero. See Note 10 of Condensed Notes to Consolidated Financial Statements for further description of these noncash activities.

Contractual Obligations

As of March 31, 2017, our contractual obligations included debt obligations, operating leases, purchase obligations, and other long-term liabilities. There were no material changes outside the ordinary course of business with respect to our contractual obligations during the three months ended March 31, 2017.

Regulatory Matters

Rate and Other Regulations

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

Environmental Matters and Compliance Costs

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

There were no significant changes to our environmental matters and compliance costs during the three months ended March 31, 2017.

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CRITICAL ACCOUNTING ESTIMATES

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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.

	March 31, 2017
	Expected Maturity Dates
	2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	507,205
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Floating rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000
Average interest rate	—		%	—		%	—		%	2.29		%	—		%	—		%	2.29		%

	December 31, 2016
	Expected Maturity Dates
	2017			2018			2019			2020			2021			There- after			Total (a)			Fair Value
Fixed rate	$	—		$	—		$	—		$	—		$	—		$	500,000		$	500,000		$	506,670
Average interest rate	—		%	—		%	—		%	—		%	—		%	4.38		%	4.38		%
Floating rate	$	—		$	—		$	—		$	400,000		$	—		$	—		$	400,000		$	400,000
Average interest rate	—		%	—		%	—		%	2.27		%	—		%	—		%	2.27		%
(a) Excludes unamortized discount and deferred issuance costs.

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Item 4. 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 March 31, 2017.

(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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

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.

Item 6. Exhibits

Exhibit No.	Description
*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 Section 906 of the Sarbanes-Oxley Act of 2002).
***101	Interactive Data Files

______________

* Filed herewith.

** Furnished herewith.

*** Submitted electronically herewith.

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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 Vice President,
	Chief Financial Officer and Treasurer
	(Duly Authorized Officer and Principal
	Financial and Accounting Officer)

Date: May 9, 2017

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