================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] 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 1-16417
VALERO L.P.
(Exact name of registrant as specified in its charter)
Delaware 74-2956831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Valero Place
San Antonio, Texas
(Address of principal executive offices)
78212
(Zip Code)
Telephone number: (210) 370-2000
(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 X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No ____
The number of common units outstanding as of October 31, 2003 was 13,442,072.
================================================================================
VALERO L.P. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002............................................... 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2003 and 2002............................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002..................................... 4
Notes to Consolidated Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 32
Item 4. Controls and Procedures............................................. 33
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 33
Signatures......................................................... 35
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
September 30, December 31,
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents.................... $ 15,289 $ 33,533
Receivable from Valero Energy................ 17,701 8,482
Accounts receivable.......................... 2,502 1,502
Other current assets.......................... 1,472 177
------- -------
Total current assets...................... 36,964 43,694
------- -------
Property, plant and equipment................... 913,460 486,939
Less accumulated depreciation and amortization.. (156,309) (137,663)
------- -------
Property, plant and equipment, net........... 757,151 349,276
Goodwill........................................ 4,715 4,715
Investment in Skelly-Belvieu Pipeline Company... 15,856 16,090
Other noncurrent assets, net.................... 4,088 1,733
------- -------
Total assets................................ $ 818,774 $ 415,508
======= =======
Liabilities and Partners' Equity
Current liabilities:
Current portion of long-term debt............ $ 449 $ 747
Accounts payable and accrued liabilities..... 10,792 8,133
Payable to Valero Energy..................... 6,877 -
Taxes other than income taxes................ 5,044 3,797
------- -------
Total current liabilities................. 23,162 12,677
------- -------
Long-term debt, less current portion............ 357,646 108,911
Other long-term liabilities..................... 798 25
Commitments and contingencies (see Note 5)
Partners' equity:
Common units................................. 310,012 170,655
Subordinated units........................... 117,591 117,042
General partner's equity..................... 9,565 6,198
------- -------
Total partners' equity..................... 437,168 293,895
------- -------
Total liabilities and partners' equity..... $ 818,774 $ 415,508
======= =======
See accompanying notes to consolidated financial statements.
2
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except unit and per unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues................................................... $ 51,695 $ 32,161 $ 131,053 $ 88,215
------ ------ ------- ------
Costs and expenses:
Operating expenses...................................... 19,445 10,376 47,441 29,125
General and administrative expenses..................... 1,588 1,783 5,102 5,270
Depreciation and amortization expense................... 7,135 4,157 18,687 12,388
------ ------ ------- ------
Total costs and expenses............................. 28,168 16,316 71,230 46,783
------ ------ ------- ------
Operating income........................................... 23,527 15,845 59,823 41,432
Equity income from Skelly-Belvieu
Pipeline Company...................................... 657 843 1,988 2,365
Interest expense, net.................................... (4,504) (1,738) (11,617) (3,090)
------ ------ ------- ------
Income before income tax expense........................... 19,680 14,950 50,194 40,707
Income tax expense....................................... - - - (395)
------ ------ ------- ------
Net income................................................. $ 19,680 $ 14,950 $ 50,194 $ 40,312
====== ====== ======= ======
Allocation of net income:
Net income............................................... $ 19,680 $ 14,950 $ 50,194 $ 40,312
Less net income applicable to the Wichita
Falls Business for the month ended
January 31, 2002....................................... - - - (650)
------ ------ ------- ------
Net income applicable to the general and limited
partners' interests.................................... 19,680 14,950 50,194 39,662
General partner's interest in net income................... (1,138) (1,064) (2,828) (1,558)
------ ------ ------- ------
Limited partners' interest in net income................... $ 18,542 $ 13,886 $ 47,366 $ 38,104
====== ====== ======= ======
Net income per unit applicable to limited partners......... $ 0.82 $ 0.72 $ 2.23 $ 1.98
==== ==== ==== ====
Weighted average number of units outstanding............... 22,477,019 19,253,894 21,256,196 19,249,921
========== ========== ========== ==========
Cash distributions per unit applicable to limited partners. $ 0.75 $ 0.70 $ 2.20 $ 2.05
==== ==== ==== ====
See accompanying notes to consolidated financial statements.
3
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Cash Flows from Operating Activities:
Net income .................................................... $ 50,194 $ 40,312
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense........................ 18,687 12,388
Equity income from Skelly-Belvieu Pipeline Company........... (1,988) (2,365)
Distributions of equity income from Skelly-Belvieu
Pipeline Company........................................... 1,988 2,665
Provision for deferred income taxes.......................... - 54
Changes in operating assets and liabilities:
Increase in receivable from Valero Energy................... (9,219) (1,605)
(Increase) decrease in accounts receivable.................. (1,000) 1,329
Increase in other current assets............................ (1,295) (296)
Increase in accounts payable and accrued liabilities........ 2,659 3,708
Increase in payable to Valero Energy........................ 6,877 -
Increase in taxes other than income taxes................... 1,247 2,796
Other, net................................................... 2,734 617
------- ------
Net cash provided by operating activities................... 70,884 59,603
------- ------
Cash Flows from Investing Activities:
Reliability capital expenditures............................... (5,302) (2,834)
Expansion capital expenditures................................. (10,537) (1,481)
Acquisitions................................................... (410,936) (75,000)
Distributions in excess of equity income from
Skelly-Belvieu Pipeline Company.............................. 234 -
------- ------
Net cash used in investing activities....................... (426,541) (79,315)
------- ------
Cash Flows from Financing Activities:
Proceeds from 6.05% senior note private placement, net of
discount and issuance costs.................................. 247,328 -
Proceeds from 6.875% senior note offering, net of discount
and issuance costs........................................... - 98,394
Proceeds from other long-term debt borrowings.................. 25,000 75,000
Repayment of long-term debt.................................... (25,298) (91,046)
Distributions to unitholders and general partner............... (47,508) (38,744)
Distributions to Valero Energy and affiliates.................. - (512)
General partner contributions, net of redemption............... 2,930 -
Proceeds from sale of common units to the public, net of
issuance costs............................................... 269,026 -
Redemption of common units held by UDS Logistics, LLC.......... (134,065) -
------- ------
Net cash provided by financing activities................... 337,413 43,092
------- ------
Net (decrease) increase in cash and cash equivalents........... (18,244) 23,380
Cash and cash equivalents as of the beginning of the period.... 33,533 7,796
------- ------
Cash and cash equivalents as of the end of the period.......... $ 15,289 $ 31,176
======= ======
Non-Cash Activities - Adjustment related to the transfer of
the Wichita Falls Business to Valero L.P. by Valero Energy:
Property, plant and equipment............................. $ - $ 64,160
Accrued liabilities and taxes other than income taxes..... - (382)
Deferred income tax liabilities........................... - (13,147)
Net Valero Energy investment.............................. - (50,631)
See accompanying notes to consolidated financial statements.
4
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2003 and 2002
(unaudited)
NOTE 1: Organization, Basis of Presentation, Revenue Changes and New Accounting
Pronouncements
Organization
Valero L.P. is a Delaware limited partnership and through its wholly owned
subsidiary, Valero Logistics Operations, L.P. (Valero Logistics), owns and
operates crude oil and refined product pipeline and terminalling assets that
serve Valero Energy Corporation's (Valero Energy) McKee, Three Rivers, Corpus
Christi East and Corpus Christi West refineries located in Texas and the Ardmore
refinery located in Oklahoma. Valero Logistics also owns and operates the crude
oil storage tanks that serve Valero Energy's Corpus Christi West and Texas City
refineries located in Texas, and the Benicia refinery located in California. The
pipeline, terminalling and storage tank assets provide for the transportation of
crude oil and other feedstocks to the refineries and the transportation of
refined products from the refineries to terminals or third-party pipelines for
further distribution. Revenues of Valero L.P. and its subsidiaries are earned
primarily from providing these services to Valero Energy (see Note 6).
As used in this report, the term Partnership may refer, depending on the
context, to Valero L.P., Valero Logistics, or both taken as a whole. Riverwalk
Logistics, L.P., a wholly owned subsidiary of Valero Energy, is the 2% general
partner of Valero L.P. Valero Energy, through various affiliates, is also a
limited partner in Valero L.P., resulting in a combined ownership of 45.7% as of
September 30, 2003 (see Note 8). The remaining 54.3% limited partnership
interest is held by public unitholders.
Valero Energy is an independent refining and marketing company. Its operations
consist of 14 refineries with a combined crude oil and other feedstock
throughput capacity of approximately 2.1 million barrels per day and an
extensive network of company-operated and dealer-operated convenience stores.
Valero Energy's refining operations rely on various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks and rail car loading equipment) that support its refining and retail
operations, including the logistics assets owned and operated by the
Partnership. Valero Energy markets the refined products produced at the McKee,
Three Rivers, Ardmore, Corpus Christi East, Corpus Christi West, Texas City and
Benicia refineries primarily in Texas, Oklahoma, Colorado, New Mexico, Arizona,
California and several other mid-continent states through a network of
company-operated and dealer-operated convenience stores, as well as through
other wholesale and spot market sales and exchange agreements.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with United States generally accepted accounting principles (GAAP)
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Certain previously reported amounts have been reclassified to conform to the
2003 presentation.
Operating results for the nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. The balance sheet as of December 31, 2002 has been derived
from the audited consolidated financial statements as of that date and does not
include the balances of the acquisitions discussed in Note 3. These consolidated
financial statements should be read along with the audited consolidated
financial statements and notes thereto included in Valero L.P.'s Annual Report
on Form 10-K for the year ended December 31, 2002.
5
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Changes
Effective January 1, 2003, the Partnership began purchasing the additives that
are blended with refined products at the various refined product terminals and
increased its blending fee correspondingly. As a result, the fee charged to
blend additives into refined products was increased from $0.04 per barrel to
$0.12 per barrel.
In conjunction with the March 2003 acquisitions discussed in Note 3, the
Partnership began charging a filtering fee for jet fuel terminalled at the Hobby
Airport terminal, and began charging a throughput fee for each barrel of crude
oil and intermediate feedstocks received by the Corpus Christi West refinery,
the Texas City refinery and the Benicia refinery representing the type of
feedstock stored in the crude oil storage tank assets that were acquired from
Valero Energy.
New Accounting Pronouncements
FASB Interpretation No. 46
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
FIN 46 requires the consolidation of a variable interest entity (VIE) in which
an enterprise absorbs a majority of the entity's expected losses, receives a
majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interest in the entity. Prior to the
issuance of FIN 46, an entity was generally consolidated by an enterprise when
the enterprise had a controlling financial interest through ownership of a
majority voting interest in the entity.
FIN 46 was applicable to VIEs created after January 31, 2003, and to VIEs in
which an enterprise obtained an interest after that date. However, for VIEs
created before February 1, 2003, FIN 46 first became applicable as of the first
fiscal year or interim period beginning after June 15, 2003. In October 2003,
the FASB issued FASB Staff Position No. 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities," which
deferred the applicable implementation date of FIN 46 for VIEs created before
February 1, 2003 from the third quarter to the fourth quarter of 2003. The
Partnership holds a variable interest in a VIE that was created prior to
February 1, 2003, but it has not obtained any new variable interests during the
nine months ended September 30, 2003. As such, FIN 46 first applies to the
Partnership effective December 31, 2003, versus July 1, 2003 as previously
reported.
As of September 30, 2003, the Partnership participates in a joint venture
(Skelly-Belvieu Pipeline Company, LLC) with ConocoPhillips, and the
Partnership's share of this joint venture is 50%. The joint venture owns and
operates a refined product pipeline that is only used by each venture partner.
The joint venture was created by a contribution of capital from each partner in
the form of cash and/or property equal to its proportional share in the venture.
In addition, each venture partner shares in all profits and losses equal to its
proportional share in the venture, and there are no limits on the exposure to
losses or on the ability to share in returns. The Partnership provides
management services to the joint venture for which it receives an administrative
fee. The Partnership does not control this joint venture, and it records its
proportional share of the venture's operating results using the equity method.
Under FIN 46, the Partnership's joint venture interest and its other contractual
relationships with the joint venture represent variable interests in the joint
venture; however, the Partnership is not the primary beneficiary of the joint
venture. As a result, the Partnership will not consolidate the joint venture,
but will continue to account for its joint venture interest under the equity
method.
FASB Statement No. 143
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
an obligation associated with the retirement of a tangible long-lived asset. An
asset retirement obligation should be recognized in the financial statements in
the period in which it meets the definition of a liability as defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements." The amount of the
liability would initially be measured at fair value. Subsequent to initial
measurement, an entity would recognize changes in the amount of the liability
resulting from (a) the passage of time and (b) revisions to either the timing or
amount of estimated cash flows. Statement No. 143 also establishes standards for
accounting for the cost associated with an asset retirement obligation. It
requires that, upon initial recognition of a liability for an asset retirement
obligation, an entity capitalize that cost by recognizing an increase in the
carrying amount of the related long-lived asset. The capitalized asset
retirement cost would then be allocated to expense using a systematic and
rational method.
6
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Partnership adopted the provisions of Statement No. 143 effective January 1,
2003 and has determined that it is obligated by contractual or regulatory
requirements to remove assets or perform other remediation upon retirement of
certain of its assets. Determination of the amounts to be recognized upon
adoption is based upon numerous estimates and assumptions, including expected
settlement dates, future retirement costs, future inflation rates and the
credit-adjusted risk-free interest rate. However, the fair value of the asset
retirement obligation cannot be reasonably estimated as of September 30, 2003,
because the settlement dates are indeterminate. The Partnership will record an
asset retirement obligation in the periods in which it can reasonably determine
the settlement dates. Accordingly, the adoption of Statement No. 143 did not
have an impact on the Partnership's financial position or results of operations.
NOTE 2: Equity and Debt Offerings, Redemption of Common Units and Related
Transactions
March 2003 Common Unit Offering
On March 18, 2003, Valero L.P. consummated a public offering of common units,
selling 5,750,000 common units to the public at $36.75 per unit, before
underwriters' discount of $1.56 per unit. Net proceeds were $202.3 million, or
$35.19 per unit, before offering expenses of $2.0 million. In order to maintain
a 2% general partner interest, Riverwalk Logistics, L.P. contributed $4.3
million to Valero L.P. The net proceeds of the common unit offering and the
general partner contribution were primarily used to fund the acquisition of the
Crude Oil Storage Tanks (see Note 3).
On April 16, 2003, Valero L.P. closed on the exercise of a portion of the
underwriters' over-allotment option, by selling 581,000 common units at $35.19
per unit. Net proceeds from this sale were $20.4 million and Riverwalk
Logistics, L.P. contributed $0.5 million to maintain its 2% general partner
interest. The common unit proceeds and general partner contribution were used to
pay down the outstanding balance on the revolving credit facility.
Private Placement of 6.05% Senior Notes and Revolving Credit Facility
Also on March 18, 2003, concurrent with the closing of the common unit offering,
Valero Logistics issued, in a private placement, $250.0 million of 6.05% senior
notes, due March 2013, at a price of 99.719% before consideration of debt
issuance costs of $2.0 million. In addition, Valero Logistics borrowed $25.0
million under its amended $175.0 million revolving credit facility. The net
proceeds from the 6.05% senior notes and borrowings under the revolving credit
facility were used to redeem common units held by an affiliate of Valero Energy,
redeem a related portion of the general partner interest and partially fund the
acquisition of the South Texas Pipelines and Terminals (see Note 3).
Redemption of Common Units and Amendment to Partnership Agreement
On March 18, 2003, subsequent to the common unit offering and private placement
of 6.05% senior notes discussed above, Valero L.P. redeemed from UDS Logistics,
LLC, a wholly owned subsidiary of Valero Energy, 3,809,750 common units at a
total cost of $134.1 million, or $35.19 per common unit. In order to maintain a
2% general partner interest, Valero L.P. redeemed a portion of Riverwalk
Logistics, L.P.'s general partner interest at a total cost of $2.9 million. In
addition to the redemption transaction, Valero L.P. amended its partnership
agreement to reduce the vote required to remove the general partner from 66 2/3%
to 58% of its outstanding units and to exclude from participating in such a vote
the common and subordinated units held by affiliates of the general partner.
Summary
The net proceeds from the March 2003 common unit offering (including the
over-allotment option exercise), the private placement of 6.05% senior notes and
the borrowings under the revolving credit facility were used to redeem common
units held by UDS Logistics, LLC and acquire the South Texas Pipelines and
Terminals and the Crude Oil Storage Tanks from Valero Energy.
7
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the proceeds received and use of proceeds is as follows (in
thousands):
Proceeds received:
Sale of common units to the public.............. $ 202,342
Private placement of 6.05% senior notes......... 249,298
Borrowings under the revolving credit facility.. 25,000
Exercise of a portion of the underwriters'
over-allotment option........................ 20,445
General partner contributions................... 4,749
-------
Total proceeds............................... 501,834
-------
Use of proceeds:
South Texas Pipelines and Terminals............. 150,000
Crude Oil Storage Tanks......................... 200,000
Redemption of common units...................... 134,065
Repayment of a portion of the borrowings
under the revolving credit facility.......... 20,000
Redemption of general partner interest.......... 2,857
Professional fees and other costs of equity
issuance..................................... 2,000
Debt issuance costs............................. 1,970
-------
Total use of proceeds........................ 510,892
-------
Net cash on hand paid out......................... $ (9,058)
=======
Both the South Texas Pipelines and Terminals and the Crude Oil Storage Tanks
acquisitions were approved by the conflicts committee of the board of directors
of Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., based in
part on an opinion from its independent financial advisor that the consideration
paid by the Partnership was fair, from a financial point of view, to the
Partnership and its public unitholders.
August 2003 Common Unit Offering
On August 11, 2003, Valero L.P. consummated a public offering of common units,
selling 1,236,250 common units, which included 161,250 common units related to
the underwriter's over-allotment option, to the public at $41.15 per unit,
before underwriter's discount of $1.85 per unit. Net proceeds were $48.6
million, or $39.30 per unit, before offering expenses of $0.3 million. In order
to maintain its 2% general partner interest, Riverwalk Logistics, L.P.
contributed $1.0 million to Valero L.P. The net proceeds of the common unit
offering and the general partner contribution were primarily used to fund the
acquisitions of the Southlake refined product pipeline and the Paulsboro refined
product terminal (see Note 3). Primarily as a result of this common unit
offering, Valero Energy now owns 45.7% of Valero L.P., including the 2% general
partner interest.
NOTE 3: Acquisitions
Telfer Asphalt Terminal
On January 7, 2003, the Partnership completed its acquisition of Telfer Oil
Company's (Telfer) California asphalt terminal for $15.1 million. The asphalt
terminal includes two storage tanks with a combined storage capacity of 350,000
barrels, six 5,000-barrel polymer modified asphalt tanks, a truck rack, rail
facilities and various other tanks and equipment. In conjunction with the Telfer
acquisition, the Partnership entered into a six-year Terminal Storage and
Throughput Agreement with Valero Energy (see Note 6). A portion of the purchase
price represented payment to the principal owner of Telfer for a non-compete
agreement and for the lease of certain facilities adjacent to the terminal
operations.
South Texas Pipelines and Terminals
On March 18, 2003, Valero Energy contributed a South Texas pipeline system to
the Partnership for $150.0 million, excluding transaction costs. The South Texas
pipeline system is comprised of the Houston pipeline system, the Valley pipeline
system and the San Antonio pipeline system (together referred to as the South
Texas Pipelines and Terminals) as follows:
8
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The Houston pipeline system is a 204-mile refined product pipeline
originating in Corpus Christi, Texas and ending in Pasadena, Texas at the
Houston ship channel. The pipeline has the capacity to transport 105,000
barrels per day of refined products produced at Valero Energy's Corpus
Christi East and Corpus Christ West refineries and third party refineries
located in Corpus Christi. The pipeline system includes four refined
product terminals (Hobby Airport, Placedo, Houston asphalt and Almeda,
which is currently idle) with a combined storage capacity of 310,900
barrels of refined products and 75,000 barrels of asphalt.
o The Valley pipeline system is a 130-mile refined product pipeline
originating in Corpus Christi and ending in Edinburg, Texas. The pipeline
has the capacity to transport 27,100 barrels per day of refined products.
Currently, the pipeline transports refined products produced at Valero
Energy's Corpus Christi East and Corpus Christi West refineries. The
pipeline system includes a refined product terminal in Edinburg with a
storage capacity of 184,600 barrels.
o The San Antonio pipeline system is comprised of two segments: the north
segment, which runs from Pettus, Texas to San Antonio, Texas and the south
segment which runs from Pettus to Corpus Christi. The north segment is 74
miles long and has a capacity of 24,000 barrels per day. The south segment
is 60 miles long and has a capacity of 15,000 barrels per day and ends at
Valero Energy's Corpus Christi East refinery. The pipeline system includes
a refined product terminal in east San Antonio with a storage capacity of
148,200 barrels.
In conjunction with the South Texas Pipelines and Terminals acquisition, the
Partnership entered into several agreements with Valero Energy (see Note 6).
Pro Forma Financial Information
The following unaudited pro forma financial information assumes that the South
Texas Pipelines and Terminals acquisition was funded with $111.0 million of net
proceeds from the issuance of the 6.05% senior notes, $25.0 million of
borrowings under the revolving credit facility, $6.7 million of net proceeds
from the issuance of 185,422 common units and the related general partner
capital contribution and $7.3 million of available cash. The unaudited pro forma
financial information for the nine months ended September 30, 2003 and 2002,
assumes that the transaction occurred on January 1, 2003 and 2002, respectively.
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands)
Revenues............................... $ 136,897 $ 108,774
Operating income....................... 61,813 46,094
Net income............................. 50,530 39,345
Net income per unit applicable to
limited partners..................... 2.24 1.91
Crude Oil Storage Tanks
On March 18, 2003, Valero Energy contributed 58 crude oil storage tanks and
related assets (the Crude Oil Storage Tanks) to the Partnership for $200.0
million, excluding transaction costs. The Crude Oil Storage Tanks consist of
certain tank shells, foundations, tank valves, tank gauges, pressure equipment,
temperature equipment, corrosion protection, leak detection, tank lighting and
related equipment located at the following Valero Energy refineries:
o Corpus Christi West refinery, which has a total capacity to process 225,000
barrels per day of crude oil and other feedstocks;
9
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o Texas City refinery, which has a total capacity to process 243,000 barrels
per day of crude oil and other feedstocks; and
o Benicia refinery, which has a total capacity to process 180,000 barrels per
day of crude oil and other feedstocks.
Historically, the Crude Oil Storage Tanks were operated as part of Valero
Energy's refining operations and, as a result, no separate fee was charged
related to these assets and, accordingly, no revenues were recorded by Valero
Energy. The Crude Oil Storage Tanks were not accounted for separately by Valero
Energy and were not operated as an autonomous business unit. As a result, the
purchase of the Crude Oil Storage Tanks represented an asset acquisition and,
therefore, no pro forma impact of this transaction has been included above. In
conjunction with the Crude Oil Storage Tanks acquisition, the Partnership
entered into several agreements with Valero Energy (see Note 6).
Shell Pipeline Interest
On May 1, 2003, the Partnership acquired Shell Pipeline Company, LP's (Shell)
28% interest in the Amarillo to Abernathy refined product pipeline and Shell's
46% interest in the Abernathy to Lubbock refined product pipeline for $1.6
million. After this acquisition, the Partnership owns a 67% interest and
ConocoPhillips owns the remaining 33% interest in the Amarillo to Abernathy
refined product pipeline and the Partnership owns a 46% interest and
ConocoPhillips owns the remaining 54% interest in the Abernathy to Lubbock
refined product pipeline.
Southlake Refined Product Pipeline
Effective August 1, 2003, the Partnership acquired the Southlake refined product
pipeline from Valero Energy for $29.9 million. The pipeline, which has a
capacity of 27,300 barrels per day, is a 375-mile pipeline connecting Valero
Energy's McKee refinery to the Partnership's Southlake refined product terminal
near Dallas, Texas.
Paulsboro Refined Product Terminal
On September 3, 2003, the Partnership acquired the Paulsboro refined product
terminal from ExxonMobil Oil Corporation for $14.1 million. The Paulsboro
refined product terminal is located in Paulsboro, New Jersey, next to Valero
Energy's Paulsboro refinery. The terminal has a storage capacity of 90,800
barrels.
Purchase Price Allocations
The Telfer, South Texas Pipelines and Terminals, Crude Oil Storage Tanks, Shell
pipeline interest, Southlake, and Paulsboro acquisitions were accounted for
using the purchase method. The purchase price for each acquisition has been
initially allocated based on the estimated fair values of the individual assets
acquired and liabilities assumed at the date of acquisition based on each
asset's anticipated contribution to the Partnership, pending completion of final
purchase price allocations.
Property,
plant and Intangible
equipment assets Total
--------- ------ -----
(in thousands)
Telfer Asphalt Terminal.................... $ 14,807 $ 250 $ 15,057
South Texas Pipelines and Terminals........ 150,115 - 150,115
Crude Oil Storage Tanks.................... 200,198 - 200,198
Shell Pipeline Interest.................... 1,600 - 1,600
Southlake Refined Product Pipeline......... 29,911 - 29,911
Paulsboro Refined Product Terminal......... 14,055 - 14,055
------- --- -------
Total Purchase Price Allocations...... $ 410,686 $ 250 $ 410,936
======= === =======
10
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Long-term Debt
Long-term debt consisted of the following:
September 30, December 31,
2003 2002
---- ----
(in thousands)
6.05% senior notes due 2013................. $ 249,276 $ -
6.875% senior notes due 2012................ 99,159 99,700
8.0% Port Authority of Corpus Christi
note payable.............................. 9,660 9,958
Revolving credit facility................... - -
------- -------
Total debt................................ 358,095 109,658
Less current portion........................ (449) (747)
------- -------
Long-term debt, less current portion...... $ 357,646 $ 108,911
======= =======
Interest payments totaled $15.4 million and $1.7 million for the nine months
ended September 30, 2003 and 2002, respectively.
Valero L.P. has no operations and its only asset is its investment in Valero
Logistics, which owns and operates the Partnership's pipelines, terminals and
crude oil storage tank assets. Valero L.P. has fully and unconditionally
guaranteed the senior notes issued by Valero Logistics and any obligations under
Valero Logistics' revolving credit facility.
6.05% Senior Notes
On March 18, 2003, Valero Logistics completed the sale of $250.0 million of
6.05% senior notes due March 15, 2013, issued in a private placement, for total
proceeds of $249.3 million, before debt issuance costs. Debt issuance costs of
$2.0 million are being amortized into interest expense over the life of the
senior notes using the effective interest method. The 6.05% senior notes do not
have sinking fund requirements. Interest on the 6.05% senior notes is payable
semiannually in arrears on March 15 and September 15 of each year beginning
September 15, 2003.
The 6.05% senior notes rank equally with all other existing senior unsecured
indebtedness of Valero Logistics, including indebtedness under the revolving
credit facility and the 6.875% senior notes due July 15, 2012. The 6.05% senior
notes contain restrictions on Valero Logistics' ability to incur secured
indebtedness unless the same security is also provided for the benefit of
holders of the 6.05% senior notes. In addition, the 6.05% senior notes limit
Valero Logistics' ability to incur indebtedness secured by certain liens and to
engage in certain sale-leaseback transactions. The 6.05% senior notes are
irrevocably and unconditionally guaranteed on a senior unsecured basis by Valero
L.P. The guarantee by Valero L.P. ranks equally with all of its existing
unsecured and unsubordinated indebtedness and is required to rank equally with
any future unsecured and unsubordinated indebtedness. At the option of Valero
Logistics, the 6.05% senior notes may be redeemed in whole or in part at any
time at a redemption price, which includes a make-whole premium, plus accrued
and unpaid interest to the redemption date.
The 6.05% senior notes issued on March 18, 2003 were not registered under the
Securities Act of 1933 or any other securities laws and consequently the 6.05%
senior notes were originally subject to transfer and resale restrictions. The
6.05% senior notes included registration rights which provided that Valero
Logistics would use its best efforts to file, within 90 days of issuance, a
registration statement for the exchange of the 6.05% senior notes for new notes
of the same series that generally would be freely transferable, and to
consummate the exchange offer within 210 days. In July of 2003, Valero Logistics
closed on the exchange of the outstanding $250.0 million 6.05% senior notes that
were not registered under the Securities Act of 1933 for $250.0 million of 6.05%
senior notes that have been registered under the Securities Act of 1933.
Accordingly, the new senior notes are freely transferable.
11
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 6.05% senior notes also include a change-in-control provision, which
requires that an investment grade entity own and control the general partner of
Valero L.P. and Valero Logistics. Otherwise, Valero Logistics must offer to
purchase the 6.05% senior notes at a price equal to 100% of their outstanding
principal balance plus accrued interest through the date of purchase.
$175.0 Million Revolving Credit Facility
On March 6, 2003, Valero Logistics entered into an amended revolving credit
facility with the various banks included in the existing revolving credit
facility and with a group of new banks to increase the revolving credit facility
to $175.0 million. In addition, the amount that may be borrowed to fund
distributions to unitholders was increased from $25.0 million to $40.0 million.
In addition to increasing the amount that may be borrowed under the revolving
credit facility, the "Total Debt to EBITDA Ratio" as defined in the revolving
credit facility was changed such that the ratio may not exceed 4.0 to 1.0 (as
opposed to 3.0 to 1.0 in the original facility), and Valero L.P. is now
guaranteeing the revolving credit facility. This guarantee by Valero L.P. ranks
equally with all of its existing unsecured senior obligations and is required to
rank equally with any future unsecured senior obligations.
Interest Rate Swaps
During the first four months of 2003, Valero Logistics entered into interest
rate swap agreements to manage its exposure to changes in interest rates. The
interest rate swap agreements have an aggregate notional amount of $167.5
million, of which $60.0 million is tied to the maturity of the 6.875% senior
notes and $107.5 million is tied to the maturity of the 6.05% senior notes.
Under the terms of the interest rate swap agreements, the Partnership will
receive a fixed rate (6.875% and 6.05% for the $60.0 million and $107.5 million
of interest rate swap agreements, respectively) and will pay a variable rate
based on LIBOR plus a percentage that varies with each agreement. As of
September 30, 2003, the weighted average effective interest rate for the
interest rate swaps was 3.0%. The Partnership accounts for the interest rate
swaps as fair value hedges, with changes in the fair value of each swap and the
related debt instrument recorded as an adjustment to interest expense in the
consolidated statement of income. As of September 30, 2003, the aggregate
estimated fair value of the interest rate swaps was $(0.6) million.
NOTE 5: Commitments and Contingencies
Environmental, Health and Safety
The Partnership's operations are subject to extensive federal, state and local
environmental and safety laws and regulations. Although the Partnership believes
its operations are in substantial compliance with applicable environmental and
safety laws and regulations, risks of additional costs and liabilities are
inherent in pipeline, terminalling and storage operations, and there can be no
assurance that significant costs and liabilities will not be incurred. Moreover,
it is possible that other developments, such as increasingly stringent
environmental and safety laws, regulations and enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations,
could result in substantial costs and liabilities. Accordingly, the Partnership
has adopted policies, practices and procedures in the areas of pollution
control, pipeline integrity, operator qualifications, public relations, product
safety, occupational health and the handling, storage, use and disposal of
hazardous materials that are designed to prevent material environmental or other
damage, and to limit the financial liability which could result from such
events. However, some risk of environmental or other damage is inherent in
pipeline, terminalling and storage operations, as it is with other entities
engaged in similar businesses. Although environmental and safety costs may have
a significant impact on results of operations for any single period, the
Partnership believes that such costs will not have a material adverse effect on
its financial position.
In connection with the South Texas Pipelines and Terminals acquisition, Valero
Energy has agreed to indemnify the Partnership for environmental liabilities
that are known as of March 18, 2003 or are discovered within 10 years after
March 18, 2003 related to:
o the South Texas Pipelines and Terminals that arose as a result of events
occurring or conditions existing prior to March 18, 2003; and
12
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o any real or personal property on which the South Texas Pipelines and
Terminals are located that arose prior to March 18, 2003.
In connection with the Crude Oil Storage Tanks acquisition, Valero Energy has
agreed to indemnify the Partnership for environmental liabilities related to:
o the Crude Oil Storage Tanks that arose as a result of events occurring or
conditions existing prior to March 18, 2003;
o any real or personal property on which the Crude Oil Storage Tanks are
located that arose prior to March 18, 2003; and
o any actions taken by Valero Energy before, on or after March 18, 2003, in
connection with the ownership, use or operation of the Corpus Christi West
refinery, the Texas City refinery and the Benicia refinery or the property
on which the Crude Oil Storage Tanks are located, or any accident or
occurrence in connection therewith.
In connection with the Southlake acquisition, Valero Energy has agreed to
indemnify the Partnership for environmental liabilities that are known as of
August 1, 2003 or are discovered within 10 years after August 1, 2003 related
to:
o the Southlake refined product pipeline that arose as a result of events
occurring or conditions existing prior to August 1, 2003; and
o any real or personal property on which the Southlake refined product
pipeline is located that arose prior to August 1, 2003.
In connection with the Paulsboro acquisition, ExxonMobil has agreed to indemnify
the Partnership for 10 years from September 4, 2003 for environmental
liabilities related to:
o claims asserted by a third party that arose out of ownership or operation
of the terminal prior to September 4, 2003; and
o governmental environmental enforcement actions related to the operation of
the terminal prior to September 4, 2003.
Additionally, ExxonMobil has agreed to indemnify the Partnership for
environmental liabilities in connection with off-site disposal activities
performed prior to September 4, 2003.
Legal
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Partnership's financial position or results of operations.
NOTE 6: Related Party Transactions
The Partnership has related party transactions with Valero Energy for pipeline
tariff, terminalling fee and crude oil storage tank fee revenues, certain
employee costs, insurance costs, operating expenses, administrative costs and
rent expense. The receivable from Valero Energy as of December 31, 2002 and
through March 18, 2003 represented the net amount due for these related party
transactions and the net cash collected under Valero Energy's centralized cash
management program on the Partnership's behalf. Beginning March 19, 2003, the
receivable from Valero Energy represents amounts due for pipeline tariff,
terminalling fee and crude oil storage tank fee revenues and the payable to
Valero Energy represents amounts due for employee costs, insurance costs,
operating expenses, administrative costs and rent expense.
13
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes transactions with Valero Energy:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Revenues............................ $ 50,727 $ 31,981 $ 129,491 $ 87,783
Operating expenses................... 7,116 3,686 17,311 10,470
General and administrative expenses.. 1,374 1,490 4,342 4,421
Telfer Terminal Storage and Throughput Agreement
On January 7, 2003, the Partnership and Valero Energy entered into a six-year
Terminal Storage and Throughput Agreement pursuant to which Valero Energy agreed
to (a) lease the asphalt storage tanks and related equipment for a monthly fee
of $0.60 per barrel of storage capacity, (b) move asphalt through the terminal
during the term of the agreement for a fee of $1.25 per barrel of throughput
with a guaranteed minimum annual throughput of 280,000 barrels, and (c)
reimburse the Partnership for certain costs, including utilities.
South Texas Pipelines and Terminals Agreements
In conjunction with the acquisition of the South Texas Pipelines and Terminals,
Valero Energy and the Partnership entered into the following agreements:
o Throughput Commitment Agreement pursuant to which Valero Energy agreed, for
an initial period of seven years, to (i) transport in the Houston and
Valley pipeline systems an aggregate of 40% of the Corpus Christi East and
Corpus Christi West refineries, gasoline and distillate production but only
if the combined throughput on these pipelines is less than 110,000 barrels
per day, (ii) transport in the Pettus to San Antonio refined product
pipeline 25% of the Three Rivers refinery gasoline and distillate
production and in the Pettus to Corpus Christi refined product pipeline 90%
of the Three Rivers refinery raffinate production, (iii) use the Houston
asphalt terminal for an aggregate of 7% of the asphalt production of the
Corpus Christi East and Corpus Christi West refineries, (iv) use the
Edinburg refined product terminal for an aggregate of 7% of the gasoline
and distillate production of the Corpus Christi East and Corpus Christi
West refineries, but only if the throughput at this terminal is less than
20,000 barrels per day; and (v) use the San Antonio terminal for 75% of the
throughput in the Pettus to San Antonio refined product pipeline. In the
event Valero Energy does not transport in the pipelines or use the
terminals to handle the minimum volume requirements and if its obligation
has not been suspended under the terms of the agreement, it will be
required to make a cash payment determined by multiplying the shortfall in
volume by the applicable weighted average tariff rate or terminal fee.
Also, Valero Energy agreed to allow the Partnership to increase its tariff
to compensate for any revenue shortfall in the event the Partnership has to
curtail throughput in the Corpus Christi to Edinburg refined product
pipeline as a result of repair and replacement activities.
o Terminalling Agreements pursuant to which Valero Energy agreed, during the
initial period of five years, to pay a terminalling fee for each barrel of
refined product stored or handled by or on behalf of Valero Energy at the
terminals included in the South Texas Pipelines and Terminals, including an
additive fee for gasoline additives blended at the terminals. At the Hobby
Airport terminal, Valero Energy will also pay a filtering fee for each
barrel of jet fuel stored or handled at the terminal.
Additionally, Valero Energy has indicated to the Partnership that the segment of
the Corpus Christi to Edinburg refined product pipeline that runs approximately
60 miles south from Corpus Christi to Seeligson Station will require repair and,
in some places, replacement. Valero Energy has agreed to indemnify the
Partnership for any costs the Partnership incurs to repair and replace this
segment in excess of $1.5 million; however, the Partnership will be responsible
for any costs related to expanding the pipeline.
14
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crude Oil Storage Tanks Agreements
In conjunction with the acquisition of the Crude Oil Storage Tanks, Valero
Energy and the Partnership entered into the following agreements:
o Handling and Throughput Agreement pursuant to which Valero Energy agreed to
pay the Partnership a fee, for an initial period of ten years, for 100% of
crude oil delivered to each of the Corpus Christi West refinery, the Texas
City refinery or the Benicia refinery and to use the Partnership for
handling all deliveries to these refineries. The throughput fees under the
agreement are adjustable annually, generally based on 75% of the regional
consumer price index applicable to the location of each refinery.
o Services and Secondment Agreements pursuant to which Valero Energy agreed
to second to the Partnership personnel who will provide operating and
routine maintenance services with respect to the Crude Oil Storage Tanks.
The annual reimbursement for services is an aggregate $3.5 million for the
initial year and is subject to adjustment based on actual expenses incurred
and increases in the regional consumer price index. The initial term of the
Services and Secondment Agreements is ten years with a Partnership option
to extend for an additional five years.
o Lease and Access Agreements pursuant to which Valero Energy will lease to
the Partnership the real property on which the Crude Oil Storage Tanks are
located for an aggregate of $0.7 million per year. The initial term of each
lease will be 25 years, subject to automatic renewal for successive
one-year periods thereafter. The Partnership may terminate any of these
leases upon 30 days notice after the initial term or at the end of a
renewal period. In addition, the Partnership may terminate any of these
leases upon 180 days notice prior to the expiration of the current term if
the Partnership ceases to operate the Crude Oil Storage Tanks or ceases
business operations.
NOTE 7: Employee Benefit Expenses
The Partnership, which has no employees, relies on employees of Valero Energy
and its affiliates to provide the necessary services to operate the
Partnership's assets. Effective January 1, 2003, most of the employees providing
services to the Partnership became employees of Valero GP, LLC, a wholly owned
subsidiary of Valero Energy. The Valero GP, LLC employees are included in the
various employee benefit plans of Valero Energy and its affiliates. These plans
include qualified, non-contributory defined benefit retirement plans, defined
contribution 401(k) plans, employee and retiree medical, dental and life
insurance plans, long-term incentive plans (i.e., unit options and bonuses) and
other such benefits.
The Partnership's share of allocated Valero Energy employee benefit plan
expenses was $0.8 million and $0.5 million for the three months ended September
30, 2003 and 2002, respectively, and $2.1 million and $1.2 million for the nine
months ended September 30, 2003 and 2002, respectively. These employee benefit
plan expenses are included in operating expenses with the related payroll costs.
The Board of Directors of Valero GP, LLC previously adopted the 2000 Long-Term
Incentive Plan (the LTIP) under which Valero GP, LLC may award up to 250,000
common units to certain key employees of Valero Energy's affiliates providing
services to Valero L.P. and to directors and officers of Valero GP, LLC. Awards
under the LTIP can include awards such as unit options, restricted common units,
distribution equivalent rights (DERs) and contractual rights to receive common
units.
On January 24, 2003, under the LTIP, Valero GP, LLC granted 30,000 contractual
rights to receive common units and DERs to its eligible recipients, excluding
the outside directors. In conjunction with the grant of contractual rights to
receive common units under the LTIP, Valero GP, LLC purchased 30,000 newly
issued Valero L.P. common units from Valero L.P. for total consideration of $1.1
million. In addition, in March of 2003, Valero GP, LLC settled the previous
purchase of 55,250 common units with the payment of $2.3 million.
In January of 2003, one-third of the previously issued 55,250 contractual rights
vested and Valero GP, LLC distributed actual Valero L.P. common units to the
officers and directors. Certain of the officers and directors settled their tax
withholding on the vested common units by delivering 6,491 common units to
Valero GP, LLC. In September 2003, 6,666 contractual rights vested and 2,429
vested common units were used to settle the related tax withholding. As of
September 30, 2003, Valero GP, LLC owns 69,082 common units of Valero L.P.
15
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Partnership's share of the LTIP expenses was $0.1 million and $0.2 million
for the three months ended September 30, 2003 and 2002, respectively, and $0.4
million and $0.5 million for the nine months ended September 30, 2003 and 2002,
respectively. These LTIP expenses are included in general and administrative
expenses.
In June of 2003, the Board of Directors of Valero GP, LLC adopted the 2003
Employee Unit Incentive Plan (the UIP) under which Valero GP, LLC may award up
to 500,000 common units to employees of Valero GP, LLC or its affiliates,
excluding officers and directors of Valero GP, LLC and its affiliates. Awards
under the UIP can include unit options, unit appreciation rights, restricted
units, performance awards, unit compensation and other unit-based awards.
NOTE 8: Partners' Equity
Outstanding Equity
Prior to the redemption of common units and the common unit offering in March
2003, the exercise of a portion of the underwriters' over-allotment option in
April 2003 and the common unit offering in August 2003, Valero Energy, through
various affiliates, owned 73.6% of Valero L.P.'s outstanding partners' equity.
After giving effect to the redemption of common units, the March and August
common unit offerings and the over-allotment option exercise, outstanding
partners' equity of Valero L.P. as of September 30, 2003 includes 13,442,072
common units (614,572 of which are held by UDS Logistics, LLC and 69,082 of
which are held by Valero GP, LLC), 9,599,322 subordinated units held by UDS
Logistics, LLC and a 2% general partner interest held by Riverwalk Logistics,
L.P. As a result, Valero Energy now owns 45.7% of Valero L.P., including the 2%
general partner interest.
Net Income per Unit Applicable to Limited Partners
The computation of net income per unit applicable to limited partners is based
on the weighted-average number of common and subordinated units outstanding
during the period. Net income per unit applicable to limited partners is
computed by dividing net income applicable to limited partners, after deducting
the general partner's 2% interest and incentive distributions, by the
weighted-average number of limited partnership units outstanding. Basic and
diluted net income per unit applicable to limited partners is the same because
the Partnership has no potentially dilutive securities outstanding. The
Partnership generated sufficient net income such that the amount of net income
per unit allocated to common units was equal to the amount allocated to the
subordinated units.
Cash Distributions
The Partnership makes quarterly distributions of 100% of its available cash,
generally defined as cash receipts less cash disbursements and cash reserves
established by the general partner in its sole discretion. These quarterly
distributions are declared and paid within 45 days subsequent to each
quarter-end.
16
VALERO L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the allocation of total cash distributions to the
general and limited partners applicable to the period in which the distributions
are earned:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per unit data)
General partner interest........................ $ 369 $ 282 $ 1,036 $ 821
General partner incentive distribution.......... 759 339 1,861 763
------ ------ ------ ------
Total general partner distribution............ 1,128 621 2,897 1,584
Limited partners' distributions................. 17,280 13,478 48,898 39,471
------ ------ ------ ------
Total cash distributions...................... $ 18,408 $ 14,099 $ 51,795 $ 41,055
====== ====== ====== ======
Cash distributions per unit applicable to
limited partners.............................. $ 0.75 $ 0.70 $ 2.20 $ 2.05
==== ==== ==== ====
NOTE 9: Subsequent Events
Universal Shelf Registration Statement
On October 2, 2003, Valero L.P. and Valero Logistics filed with the Securities
and Exchange Commission a $750.0 million universal shelf registration statement
covering the issuance of an unspecified amount of common units or debt
securities or a combination thereof. Valero L.P. may, in one or more offerings,
offer and sell common units representing limited partner interests in Valero
L.P. Valero Logistics may, in one or more offerings, offer and sell its debt
securities, which will be fully and unconditionally guaranteed by Valero L.P.
The universal shelf registration statement was declared effective on October 14,
2003.
Distributions
On October 29, 2003, the Partnership declared a quarterly distribution of $0.75
per unit payable on November 14, 2003 to unitholders of record on November 6,
2003.
Grants of Restricted Units and Unit Options
On October 29, 2003, Valero GP, LLC granted 3,720 contractual rights to receive
common units and DERs and 60,625 unit options to certain officers and employees
under Valero GP, LLC's various long-term incentive plans.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Information
This report includes forward-looking statements regarding future events
and the future financial performance of the Partnership. All forward-looking
statements are based on the Partnership's beliefs as well as assumptions made by
and information currently available to the Partnership. Words such as
"believes", "expects", "intends", "forecasts", "projects" and similar
expressions, identify forward-looking statements. These statements reflect the
Partnership's current views with respect to future events and are subject to
various risks, uncertainties and assumptions including:
o Any reduction in the quantities of crude oil and refined products
transported in the Partnership's pipelines and handled at the Partnership's
terminals and storage tanks;
o Any significant decrease in the demand for refined products in the markets
served by the Partnership's pipelines and terminals;
o Any material decline in production by any of Valero Energy's McKee, Three
Rivers, Corpus Christi East, Corpus Christi West, Texas City, Benicia or
Ardmore refineries;
o Any downward pressure on market prices caused by new competing refined
product pipelines that could cause Valero Energy to decrease the volumes
transported in the Partnership's pipelines;
o Any challenges to the Partnership's tariff rates or changes in the FERC's
ratemaking methodology;
o Any material decrease in the supply of or material increase in the price of
crude oil available for transport through the Partnership's pipelines and
storage tanks;
o Inability to expand the Partnership's business and acquire new assets as
well as to attract third party shippers;
o Conflicts of interest with Valero Energy;
o Any inability to borrow additional funds;
o Any substantial costs related to environmental and safety risks, including
increased costs of compliance;
o Any change in the credit rating assigned to Valero Logistics' indebtedness;
o Any change in the credit rating assigned to Valero Energy's indebtedness;
o Any reductions in space allocated to the Partnership in interconnecting
third party pipelines;
o Any material increase in the price of natural gas;
o Terrorist attacks, threats of war or terrorist attacks or political or
other disruptions that limit crude oil production; and,
o The Partnership's former use of Arthur Andersen LLP as its independent
auditor.
If one or more of these risks or uncertainties materialize, or if the underlying
assumptions prove incorrect, actual results may vary materially from those
described in the forward-looking statement. Readers are cautioned not to place
undue reliance on this forward-looking information, which is as of the date of
this Form 10-Q, and the Partnership undertakes no obligation to update publicly
or revise any forward-looking information, whether as a result of new
information, future events or otherwise.
Introduction
The following discussion and analysis of the Partnership's results of operations
and financial condition should be read in conjunction with Part I - Financial
Information, Item 1. Financial Statements.
Significant Developments in 2003
On January 7, 2003, the Partnership acquired an asphalt terminal located in
Pittsburg, California from Telfer for $15.1 million. The statement of income for
the nine months ended September 30, 2003 includes the results of operations of
the Telfer asphalt terminal from January 7, 2003 through September 30, 2003.
18
On March 18, 2003, Valero L.P. consummated a public offering of common units
resulting in net proceeds of $204.6 million (including the general partner
contribution), Valero Logistics issued 6.05% senior notes in a private placement
resulting in net proceeds of $247.3 million and Valero Logistics borrowed $25.0
million under its revolving credit facility. A portion of the net proceeds from
the 6.05% senior notes were used to redeem 3,809,750 common units owned by UDS
Logistics, LLC and a prorata portion of general partner interest for $136.9
million. The remainder of the net proceeds from the 6.05% senior notes, along
with the net proceeds from the common unit offering, cash on hand and borrowings
under the revolving credit facility were used to pay $350 million related to the
contribution by Valero Energy to Valero Logistics of the South Texas Pipelines
and Terminals and the Crude Oil Storage Tanks. The statement of income for the
nine months ended September 30, 2003 includes the results of operations of the
South Texas Pipelines and Terminals and the Crude Oil Storage Tanks from March
19, 2003 through September 30, 2003, and includes the impact of the debt and
equity financings related to the above acquisitions and redemption. On April 16,
2003, Valero L.P. closed on the exercise of a portion of the underwriters'
over-allotment option, by selling 581,000 additional common units for net
proceeds of $20.9 million (including the general partner contribution), which
were used to pay down a portion of the outstanding borrowings under the
revolving credit facility.
On May 1, 2003, the Partnership acquired Shell's 28% interest in the Amarillo to
Abernathy refined product pipeline and Shell's 46% interest in the Abernathy to
Lubbock refined product pipeline for $1.6 million. The statement of income for
the nine months ended September 30, 2003, includes the results of operations of
the additional Shell pipeline interest from May 1, 2003 through September 30,
2003.
Effective August 1, 2003, the Partnership acquired the Southlake refined product
pipeline from Valero Energy for $29.9 million. The Southlake refined product
pipeline originates at Valero Energy's McKee refinery and ends at the
Partnership's Southlake refined product terminal near Dallas, Texas. The
statement of income for the nine months ended September 30, 2003 includes the
results of operations of the Southlake refined product pipeline from August 1,
2003 through September 30, 2003.
On August 11, 2003, Valero L.P. closed on a public offering by selling 1,236,250
common units for net proceeds of $49.3 million (including the general partner
contribution).
On September 3, 2003, the Partnership acquired a refined product terminal in
Paulsboro, New Jersey from ExxonMobil for $14.1 million. The statement of income
for the nine months ended September 30, 2003 includes the results of operations
of the Paulsboro refined product terminal from September 4, 2003 through
September 30, 2003.
Seasonality
The operating results of the Partnership are affected by factors affecting the
business of Valero Energy, including refinery utilization rates, the demand for
refined products and industry refining capacity.
The throughput of crude oil that the Partnership transports is directly affected
by the level of, and refiner demand for, crude oil in markets served directly by
the Partnership's crude oil pipelines and crude oil storage tanks. Crude oil
inventories tend to increase due to overproduction of crude oil by producing
companies and countries, planned maintenance turnaround activity by refiners and
unplanned outages at refineries.
The throughput of the refined products that the Partnership transports is
directly affected by the level of, and user demand for, refined products in the
markets served directly or indirectly by the Partnership's refined product
pipelines and terminals. Demand for gasoline in most markets peaks during the
summer driving season, which extends from May through September, and declines
during the fall and winter months. Demand for gasoline in the Arizona market,
however, generally is higher in the winter months than summer months due to
greater tourist activity and second home usage in the winter months.
19
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
The results of operations for the three months ended September 30, 2003
presented in the following table are derived from the consolidated statement of
income for Valero L.P. and subsidiaries for the three months ended September 30,
2003, which includes the results of operations of the South Texas Pipelines and
Terminals, the Crude Oil Storage Tanks, the Telfer asphalt terminal and the
Shell pipeline interest for the full quarter, the results of operations of the
Southlake refined product pipeline from August 1, 2003 through September 30,
2003 and the results of operations of the Paulsboro refined product terminal
from September 4, 2003 through September 30, 2003. The results of operations for
the three months ended September 30, 2002 presented in the following table are
derived from the consolidated statement of income for Valero L.P. and
subsidiaries for the three months ended September 30, 2002.
Financial Data:
Three Months Ended September 30,
--------------------------------
2003 2002
---- ----
Statement of Income Data: (in thousands, except unit and per
unit data)
Revenues........................................................ $ 51,695 $ 32,161
------ ------
Costs and expenses:
Operating expenses............................................ 19,445 10,376
General and administrative expenses........................... 1,588 1,783
Depreciation and amortization expense......................... 7,135 4,157
------ ------
Total costs and expenses................................... 28,168 16,316
------ ------
Operating income................................................ 23,527 15,845
Equity income from Skelly-Belvieu Pipeline Company............ 657 843
Interest expense, net......................................... (4,504) (1,738)
------ ------
Net income...................................................... 19,680 14,950
Less net income applicable to general partner................. (1,138) (1,064)
------ ------
Net income applicable to the limited partners' interest........ $ 18,542 $ 13,886
====== ======
Net income per unit applicable to limited partners............. $ 0.82 $ 0.72
==== ====
Weighted average number of limited partnership units
outstanding................................................. 22,477,019 19,253,894
========== ==========
Earnings before interest, taxes and depreciation and
amortization (EBITDA) (a).................................... $ 31,319 $ 20,845
====== ======
Distributable cash flow (a).................................... $ 24,089 $ 18,003
====== ======
September 30, September 30,
Balance Sheet Data: 2003 2002
---- ----
Long-term debt, including current portion (1).................. $ 358,095 $ 109,769
Partners' equity (2)........................................... 437,168 292,973
Debt-to-capitalization ratio (1) / ((1)+(2))................... 45.0% 27.3%
20
(a) The following is a reconciliation of income before income tax expense to
EBITDA and distributable cash flow.
Three Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands)
Income before income tax expense..................... $ 19,680 $ 14,950
Plus interest expense, net........................ 4,504 1,738
Plus depreciation and amortization expense........ 7,135 4,157
------ ------
EBITDA............................................... 31,319 20,845
Less equity income from Skelly-Belvieu Pipeline
Company.......................................... (657) (843)
Less interest expense, net......................... (4,504) (1,738)
Less reliability capital expenditures.............. (2,664) (1,304)
Plus distributions from Skelly-Belvieu Pipeline
Company.......................................... 595 1,043
------ ------
Distributable cash flow.............................. $ 24,089 $ 18,003
====== ======
For a discussion regarding the Partnership's rationale for utilizing the
non-GAAP measures of EBITDA and distributable cash flow, please see Valero
L.P.'s Annual Report on Form 10-K for the year ended December 31, 2002.
Operating Data:
The following table reflects total throughput, on a barrels per day basis, for
the Partnership's crude oil pipelines, refined product pipelines, refined
product terminals and crude oil storage tanks for the three months ended
September 30, 2003 and 2002. Effective August 1, 2003, the Partnership acquired
the Southlake refined product pipeline and on September 3, 2003 the Partnership
acquired the Paulsboro refined product terminal. The throughput related to these
newly acquired assets included in the table below is calculated based on
throughput for the period from date of acquisition through September 30, 2003
divided by the 92 days in the three months ended September 30, 2003.
Three Months Ended September 30,
--------------------------------
2003 2002 % Change
---- ---- --------
(barrels per day)
Crude oil pipeline throughput.......... 385,181 368,988 4%
======= =======
Refined product pipeline throughput.... 432,885 310,604 39%
======= =======
Refined product terminal throughput.... 236,440 177,279 33%
======= =======
Crude oil storage tank throughput...... 433,921 N/A N/A
=======
Net income for the three months ended September 30, 2003 was $19.7 million as
compared to $15.0 million for the three months ended September 30, 2002. The
increase of $4.7 million was primarily attributable to the additional operating
income generated from the acquisitions completed in 2003, partially offset by
the higher interest cost incurred to fund a portion of the acquisitions. Net
income generated by the acquired assets, net of incremental interest costs
during the three months ended September 30, 2003, totaled $4.5 million.
21
Revenues for the three months ended September 30, 2003 were $51.7 million as
compared to $32.2 million for the three months ended September 30, 2002, an
increase of 61% or $19.5 million. The following discusses significant revenue
increases and decreases:
o revenues for the Crude Oil Storage Tanks acquired on March 18, 2003 totaled
$8.3 million for the three months ended September 30, 2003;
o revenues for the refined product pipelines increased $6.7 million and
throughput increased 39% primarily due to the acquisitions of the South
Texas Pipelines and the Southlake refined product pipeline. Revenues for
the South Texas Pipelines and the Southlake refined product pipeline were
$7.6 million and throughput totaled 133,316 barrels per day during the
third quarter of 2003. Partially offsetting the increased revenues related
to the acquisitions was a $0.7 million decrease in revenues related to the
McKee to Colorado Springs to Denver pipeline resulting from Valero Energy
maximizing production at its Denver refinery and lower jet fuel sales by
Valero Energy in Denver, resulting in lower throughput in this pipeline;
o revenues for the refined product terminals increased $3.8 million and
throughput increased 33% primarily due to the acquisitions of the Telfer
asphalt terminal, the South Texas Terminals, and the Paulsboro refined
product terminal. Revenues for the above acquisitions were $3.2 million and
throughput totaled 57,428 barrels per day for the three months ended
September 30, 2003. Revenues for the other refined product terminals,
excluding the newly acquired terminals, increased $0.6 million primarily
due to an increase in the additive blending fee from $0.04 per barrel to
$0.12 per barrel effective January 1, 2003 and a 1% increase in throughput
barrels; and
o revenues for the crude oil pipelines increased $0.7 million and throughput
increased 4% primarily due to increased revenues for the Ardmore crude oil
pipelines and the Corpus Christi to Three Rivers crude oil pipeline.
Operating expenses increased $9.1 million for the three months ended September
30, 2003 as compared to the three months ended September 30, 2002 primarily due
to the following items:
o the acquisition of the South Texas Pipelines and Terminals increased
operating expenses by $4.3 million;
o the acquisition of the Crude Oil Storage Tanks increased operating expenses
by $1.8 million;
o the acquisitions of the Telfer asphalt terminal, Southlake refined product
pipeline and Paulsboro refined product terminal increased operating
expenses by $1.2 million;
o chemical expenses related to drag reducing agents and gasoline additives
increased $0.6 million as a result of the Partnership purchasing the
additives during 2003 versus customers supplying the additives in 2002;
o maintenance expenses increased $0.5 million due primarily to the increased
number of pipeline and terminal integrity inspections and repairs performed
during 2003; and
o employee benefit expenses increased $0.5 million as a result of higher
accruals for incentive compensation due to higher net income and increases
in medical and pension costs.
22
General and administrative expenses were as follows:
Three Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands)
Services agreement.............................. $ 1,300 $ 1,300
Third party expenses............................ 410 677
Reimbursement from partners on jointly owned
pipelines.................................... (122) (194)
----- -----
General and administrative expenses........ $ 1,588 $ 1,783
===== =====
General and administrative expenses decreased 11% for the three months ended
September 30, 2003 as compared to the three months ended September 30, 2002 due
to lower third party legal and accounting expenses, partially offset by lower
reimbursements from partners on jointly owned pipelines as a result of the
Partnership's purchase of Shell's interest in the Amarillo to Abernathy and the
Abernathy to Lubbock refined product pipelines.
Depreciation and amortization expense increased 72% during the three months
ended September 30, 2003 as compared to the three months ended September 30,
2002 due to the additional depreciation expense recognized for the acquisitions
completed in 2003.
Equity income from Skelly-Belvieu Pipeline Company for the three months ended
September 30, 2003 decreased 22% as compared to the three months ended September
30, 2002 due to a 17% decrease in throughput barrels in the Skellytown to Mont
Belvieu refined product pipeline. The decrease in throughput is due to both
Valero Energy and ConocoPhillips utilizing greater quantities of liquefied
petroleum gases (LPGs) to run their North Texas refining operations instead of
selling the LPGs to third parties in Mont Belvieu.
Interest expense for the three months ended September 30, 2003 was $4.5 million,
net of interest income and capitalized interest of $0.1 million, as compared to
$1.7 million of interest expense, net of interest income and capitalized
interest of $0.1 million, for the three months ended September 30, 2002.
Interest expense was higher in 2003 due to interest expense related to the
$250.0 million of 6.05% senior notes issued in March of 2003. Partially
offsetting the higher interest expense in 2003 is the effect of interest rate
swaps entered into during the first four months of 2003. The Partnership entered
into $167.5 million (notional amount) of interest rate swaps, which effectively
convert $167.5 million of fixed-rate debt to variable-rate debt, reducing the
effective interest rate on such debt by approximately 3% based on current rates.
Net income applicable to the general partner for both the three months ended
September 30, 2003 and 2002 includes the effect of $0.8 million of incentive
distributions.
23
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
The results of operations for the nine months ended September 30, 2003 presented
in the following table are derived from the consolidated statement of income for
Valero L.P. and subsidiaries for the nine months ended September 30, 2003, which
includes the results of operations of the South Texas Pipelines and Terminals
and the Crude Oil Storage Tanks for the period from March 19, 2003 through
September 30, 2003, the Telfer asphalt terminal from January 7, 2003 through
September 30, 2003, the Shell pipeline interest from May 1, 2003 through
September 30, 2003, the Southlake refined product pipeline from August 1, 2003
through September 30, 2003 and the Paulsboro refined product terminal from
September 4, 2003 through September 30, 2003. The results of operations for the
nine months ended September 30, 2002 presented in the following table are
derived from the consolidated statement of income for Valero L.P. and
subsidiaries for the nine months ended September 30, 2002, which includes the
Wichita Falls Business for the month ended January 31, 2002 prior to its actual
acquisition on February 1, 2002 and the results of operations of the crude
hydrogen pipeline from June 1, 2002 through September 30, 2002.
Financial Data:
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Statement of Income Data: (in thousands, except unit and per
unit data)
Revenues........................................................ $ 131,053 $ 88,215
------- ------
Costs and expenses:
Operating expenses............................................ 47,441 29,125
General and administrative expenses........................... 5,102 5,270
Depreciation and amortization expense......................... 18,687 12,388
------- ------
Total costs and expenses................................... 71,230 46,783
------- ------
Operating income................................................ 59,823 41,432
Equity income from Skelly-Belvieu Pipeline Company............ 1,988 2,365
Interest expense, net......................................... (11,617) (3,090)
------- ------
Income before income tax expense................................ 50,194 40,707
Income tax expense............................................ - (395)
------- ------
Net income...................................................... 50,194 40,312
Less net income applicable to general partner................. (2,828) (1,558)
Less net income related to the Wichita Falls Business
for the month ended January 31, 2002...................... - (650)
------- ------
Net income applicable to the limited partners' interest........ $ 47,366 $ 38,104
======= ======
Net income per unit applicable to limited partners............. $ 2.23 $ 1.98
==== ====
Weighted average number of limited partnership units
outstanding................................................. 21,256,196 19,249,921
========== ==========
EBITDA (a)...................................................... $ 80,498 $ 56,185
====== ======
Distributable cash flow (a)..................................... $ 63,813 $ 50,561
====== ======
September 30, December 31,
Balance Sheet Data: 2003 2002
---- ----
Long-term debt, including current portion (1).................. $ 358,095 $ 109,658
Partners' equity (2)........................................... 437,168 293,895
Debt-to-capitalization ratio (1) / ((1)+(2))................... 45.0% 27.2%
24
(a) The following is a reconciliation of income before income tax expense to
EBITDA and distributable cash flow.
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands)
Income before income tax expense.................... $ 50,194 $ 40,707
Plus interest expense, net....................... 11,617 3,090
Plus depreciation and amortization expense....... 18,687 12,388
------ ------
EBITDA.............................................. 80,498 56,185
Less equity income from Skelly-Belvieu Pipeline
Company......................................... (1,988) (2,365)
Less interest expense, net........................ (11,617) (3,090)
Less reliability capital expenditures............. (5,302) (2,834)
Plus distributions from Skelly-Belvieu Pipeline
Company......................................... 2,222 2,665
------ ------
Distributable cash flow............................. $ 63,813 $ 50,561
====== ======
For a discussion regarding the Partnership's rationale for utilizing the
non-GAAP measures of EBITDA and distributable cash flow, please see Valero
L.P.'s Annual Report on Form 10-K for the year ended December 31, 2002.
Operating Data:
The following table reflects total throughput, on a barrels per day basis, for
the Partnership's crude oil pipelines, refined product pipelines, refined
product terminals and crude oil storage tanks for the nine months ended
September 30, 2003 and 2002. During 2003, the Partnership has completed several
acquisitions as discussed above. The throughput related to these newly acquired
assets included in the table below is calculated based on throughput for the
period from the date of acquisition through September 30, 2003 divided by the
273 days in the nine months ended September 30, 2003.
Nine Months Ended September 30,
-------------------------------
2003 2002 % Change
---- ---- --------
(barrels per day)
Crude oil pipeline throughput......... 355,636 347,518 2%
======= =======
Refined product pipeline throughput... 375,945 292,551 29%
======= =======
Refined product terminal throughput... 215,925 177,675 22%
======= =======
Crude oil storage tank throughput..... 330,192 N/A N/A
=======
Net income for the nine months ended September 30, 2003 was $50.2 million as
compared to $40.3 million for the nine months ended September 30, 2002. The
increase of $9.9 million was primarily attributable to the additional operating
income generated from the acquisitions completed in 2003, partially offset by
the higher interest cost incurred to fund a portion of the acquisitions and
higher operating expenses. Net income generated by the acquired assets, net of
incremental interest costs during the nine months ended September 30, 2003,
totaled $11.1 million.
25
Revenues for the nine months ended September 30, 2003 were $131.1 million as
compared to $88.2 million for the nine months ended September 30, 2002, an
increase of 49% or $42.9 million. The following discusses significant revenue
increases and decreases:
o revenues for the Crude Oil Storage Tanks from March 19, 2003 through
September 30, 2003 totaled $18.3 million;
o revenues for the refined product pipelines increased $12.5 million and
throughput increased 29% primarily due to the acquisitions of the South
Texas Pipelines on March 18, 2003 and the Southlake refined product
pipeline on August 1, 2003. Revenues for the South Texas Pipelines and
Southlake refined product pipeline were $14.5 million and throughput
totaled 90,913 barrels per day from date of acquisition through September
30, 2003. Partially offsetting the increased revenues related to the
acquisitions was a $3.4 million decrease in revenues related to the McKee
to Colorado Springs to Denver pipeline resulting from Valero Energy
maximizing production at its Denver refinery and lower jet fuel sales by
Valero Energy in Denver, resulting in lower throughput in this pipeline;
o revenues for the refined product terminals increased $8.8 million and
throughput increased 22% primarily due to the acquisitions of the Telfer
asphalt terminal on January 7, 2003, the South Texas Terminals on March 18,
2003 and the Paulsboro refined product terminal on September 3, 2003.
Revenues for the Telfer asphalt terminal, the South Texas Terminals and the
Paulsboro terminal were $7.4 million and throughput totaled 39,785 barrels
per day from the date of acquisition through September 30, 2003. Revenues
for the other refined product terminals, excluding the newly acquired
terminals, increased $1.4 million primarily due to an increase in the
additive blending fee from $0.04 per barrel to $0.12 per barrel effective
January 1, 2003, partially offset by a 1% decrease in throughput barrels;
and
o revenues for the crude oil pipelines increased $3.2 million primarily due
to increased revenues for the Wichita Falls to McKee and the Corpus Christi
to Three Rivers crude oil pipelines due to a combined 11% increase in
throughput barrels. Revenues and throughput for the Partnership's other
crude oil pipelines for the first nine months of 2003 were comparable to
the first nine months of 2002 as the impact of the economic-based refinery
production cuts made by Valero Energy in the first quarter of 2003, coupled
with the Ardmore refinery turnaround in March and April of 2003, offset the
economic-based refinery production cuts initiated by Valero Energy in the
first nine months of 2002.
Operating expenses increased $18.3 million for the nine months ended September
30, 2003 as compared to the nine months ended September 30, 2002 primarily due
to the following items:
o the acquisition of the South Texas Pipelines and Terminals increased
operating expenses by $8.5 million;
o the acquisition of the Crude Oil Storage Tanks increased operating expenses
by $3.4 million;
o the acquisition of the Telfer asphalt terminal, Southlake refined product
pipeline and Paulsboro refined product terminal increased operating
expenses by an aggregate of $2.2 million;
o chemical expense related to drag reducing agents and gasoline additives
increased $1.4 million as a result of the Partnership purchasing the
additives during 2003 versus customers supplying the additives in 2002;
o employee benefit expenses increased $1.0 million as a result of higher
accruals for incentive compensation due to higher net income and increases
in medical and pension costs; and
o maintenance expenses increased $0.8 million due primarily to the increased
number of pipeline and terminal integrity inspections and repairs performed
during the first nine months of 2003 as compared to 2002.
26
General and administrative expenses were as follows:
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands)
Services agreement................................... $ 3,900 $ 3,900
Third party expenses................................. 1,598 1,839
General and administrative expenses related to the
Wichita Falls Business for the month ended
January 31, 2002.................................. - 40
Reimbursement from partners on jointly owned
pipelines......................................... (396) (509)
----- -----
General and administrative expenses............. $ 5,102 $ 5,270
===== =====
General and administrative expenses decreased 3% for the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002 due
primarily to a decrease in general and administrative costs from third parties,
partially offset by lower reimbursements from partners on jointly owned
pipelines as a result of the Partnership's purchase of Shell's interest in the
Amarillo to Abernathy and the Abernathy to Lubbock refined product pipelines.
Depreciation and amortization expense increased by 51% during the nine months
ended September 30, 2003 as compared to the nine months ended September 30, 2002
due primarily to the acquisitions completed in 2003.
Equity income from Skelly-Belvieu Pipeline Company for the nine months ended
September 30, 2003 decreased 16% as compared to the nine months ended September
30, 2002 due to a 10% decrease in throughput barrels in the Skellytown to Mont
Belvieu refined product pipeline. The decrease in throughput is due to both
Valero Energy and ConocoPhillips utilizing greater quantities of LPGs to run
their North Texas refining operations instead of selling the LPGs to third
parties in Mont Belvieu.
Interest expense for the nine months ended September 30, 2003 was $11.6 million,
net of interest income and capitalized interest of $0.2 million, as compared to
$3.1 million of interest expense, net of interest income and capitalized
interest of $0.2 million, for the nine months ended September 30, 2002. Interest
expense was higher in 2003 due to interest expense related to the $100.0 million
of 6.875% senior notes issued in July of 2002 and the $250.0 million of 6.05%
senior notes issued in March of 2003. Partially offsetting the higher interest
expense in 2003 is the effect of interest rate swaps entered into during the
first four months of 2003. The Partnership entered into $167.5 million (notional
amount) of interest rate swaps, which effectively convert $167.5 million of
fixed-rate debt to variable-rate debt, reducing the effective interest rate on
such debt by approximately 3% based on current rates.
Income tax expense for the nine months ended September 30, 2002 represents
income tax expense incurred by the Wichita Falls Business during the month ended
January 31, 2002, prior to the transfer of the Wichita Falls Business to the
Partnership.
Net income for the nine months ended September 30, 2002 includes $0.7 million of
net income related to the Wichita Falls Business for the month ended January 31,
2002, which was allocated entirely to the general partner. Net income applicable
to the general partner for the nine months ended September 30, 2003 and 2002
includes the effect of $1.9 million and $0.8 million, respectively, of incentive
distributions.
27
Liquidity and Capital Resources
The Partnership's primary cash requirements, in addition to normal operating
expenses, are for capital expenditures (both reliability and expansion),
business and asset acquisitions, distributions to partners and debt service. The
Partnership expects to fund its short-term needs for such items as reliability
capital expenditures and quarterly distributions to the partners from operating
cash flows. Capital expenditures for long-term needs resulting from future
expansion projects and acquisitions are expected to be funded by a variety of
sources including cash flows from operating activities, borrowings under the
revolving credit facility and the issuance of additional common units, debt
securities and other capital market transactions.
Amended Revolving Credit Facility
On March 6, 2003, Valero Logistics amended its revolving credit facility,
increasing its credit limit to $175.0 million. On March 18, 2003, Valero
Logistics borrowed $25.0 million under the revolving credit facility to
partially fund the purchase of the South Texas Pipelines and Terminals from
Valero Energy, which borrowings were repaid during the second quarter of 2003
primarily with the proceeds from the underwriters' exercise of a portion of the
over-allotment option associated with the March 2003 common unit offering. The
revolving credit facility expires on January 15, 2006. At Valero Logistics'
option, borrowings under the revolving credit facility bear interest based on
either an alternative base rate or LIBOR. Valero Logistics also incurs a
facility fee on the aggregate commitments of lenders under the revolving credit
facility, whether used or unused. Borrowings under the revolving credit facility
may be used for working capital and general partnership purposes; however,
borrowings to fund distributions to unitholders are limited to $40.0 million.
All borrowings designated as borrowings subject to the $40.0 million sublimit
must be reduced to zero for a period of at least 15 consecutive days during each
fiscal year. The revolving credit facility also allows Valero Logistics to issue
letters of credit for an aggregate of $75.0 million.
The amended revolving credit facility requires that Valero Logistics maintain
certain financial ratios and includes other restrictive covenants, including a
prohibition on distributions by Valero Logistics to Valero L.P. if any default,
as defined in the revolving credit facility, exists or would result from the
distribution. Valero L.P. has guaranteed the obligations under the revolving
credit facility.
6.05% Senior Notes
On March 18, 2003, Valero Logistics issued, in a private placement, $250.0
million of 6.05% senior notes, due March 15, 2013, for proceeds of $247.3
million, net of discount of $0.7 million and debt issuance costs of $2.0
million. The net proceeds were used to redeem 3,809,750 common units held by an
affiliate of Valero Energy ($134.1 million), redeem a related portion of the
general partner interest ($2.9 million) and partially fund the South Texas
Pipelines and Terminals acquisition. The 6.05% senior notes are redeemable and
do not have sinking fund requirements. Interest on the 6.05% senior notes is
payable semiannually in arrears on March 15 and September 15 of each year
beginning September 15, 2003. Valero L.P. has guaranteed the 6.05% senior notes.
The 6.05% senior notes were not registered under the Securities Act of 1933 or
any other securities laws and consequently the 6.05% senior notes were subject
to transfer and resale restrictions. In July 2003, Valero Logistics closed on
the exchange of the outstanding $250.0 million 6.05% senior notes that were not
registered under the Securities Act of 1933 for $250.0 million of 6.05% senior
notes that have been registered under the Securities Act of 1933. Accordingly,
the new senior notes are freely transferable.
6.875% Senior Notes
The $100.0 million of 6.875% senior notes are due July 15, 2012 with interest
payable on January 15 and July 15 of each year. The 6.875% senior notes are
redeemable, do not have sinking fund requirements and rank equally with all
other existing senior unsecured indebtedness of Valero Logistics, including
indebtedness under the revolving credit facility. Valero L.P. has guaranteed the
6.875% senior notes.
28
Common Unit Offerings
On March 18, 2003, Valero L.P. closed on a public offering of 5,750,000 common
units at a price of $36.75 per unit, before underwriters' discount of $1.56 per
unit, for net proceeds of $202.3 million before offering expenses of $2.0
million. In order to maintain its 2% general partner interest, Riverwalk
Logistics, L.P. made a $4.3 million general partner contribution. The
Partnership used the net proceeds of the common unit offering and the general
partner contribution primarily to fund the acquisition of the Crude Oil Storage
Tanks. On April 16, 2003, Valero L.P. closed on the exercise of a portion of the
underwriters' over-allotment option, by selling 581,000 common units at $35.19
per unit, net of underwriters' discount. Net proceeds from this sale of $20.4
million, combined with a $0.5 million contribution from Riverwalk Logistics,
L.P. to maintain its 2% general partner interest, were used to pay down the
outstanding balance due under the revolving credit facility.
On August 11, 2003, Valero L.P. closed on a public offering of 1,236,250 common
units, which included 161,250 common units related to an over-allotment option,
at a price of $41.15 per unit, before underwriter's discount of $1.85 per unit,
for net proceeds of $48.6 million before offering expenses of $0.3 million. In
order to maintain its 2% general partner interest, Riverwalk Logistics, L.P.
made a $1.0 million general partner contribution. The Partnership used the net
proceeds of this common unit offering and general partner contribution primarily
to fund the acquisitions of the Southlake refined product pipeline and the
Paulsboro refined product terminal. Primarily as a result of this common unit
offering, Valero Energy's ownership of Valero L.P. has been reduced to 45.7%,
including the 2% general partner interest.
Shelf Registration Statement
On October 2, 2003, Valero L.P. and Valero Logistics filed a $750.0 million
universal shelf registration statement with the Securities and Exchange
Commission covering the issuance of an unspecified amount of common units or
debt securities or a combination thereof. Valero L.P. may, in one or more
offerings, offer and sell common units representing limited partner interests in
Valero L.P. Valero Logistics may, in one or more offerings, offer and sell its
debt securities, which will be fully and unconditionally guaranteed by Valero
L.P.
Interest Rate Swaps
During the first four months of 2003, Valero Logistics entered into interest
rate swap agreements to manage its exposure to changes in interest rates. The
interest rate swap agreements have an aggregate notional amount of $167.5
million, of which $60.0 million is tied to the maturity of the 6.875% senior
notes and $107.5 million is tied to the maturity of the 6.05% senior notes.
Under the terms of the interest rate swap agreements, the Partnership will
receive the fixed rate (6.875% and 6.05%, respectively) and will pay a variable
rate based on LIBOR plus a percentage that varies with each agreement. The
Partnership accounts for the interest rate swaps as fair value hedges, with
changes in the fair value of each swap and the related debt instrument recorded
as an adjustment to interest expense in the consolidated statement of income.
Distributions
Valero L.P.'s partnership agreement, as amended, sets forth the calculation to
be used to determine the amount and priority of cash distributions that the
common unitholders, subordinated unitholders and the general partner will
receive. During the subordination period, the holders of Valero L.P.'s common
units are entitled to receive each quarter a minimum quarterly distribution of
$0.60 per unit ($2.40 annualized) prior to any distribution of available cash to
holders of Valero L.P.'s subordinated units. The subordination period is defined
generally as the period that will end on the first day of any quarter beginning
after March 31, 2006 if (1) Valero L.P. has distributed at least the minimum
quarterly distribution on all outstanding units with respect to each of the
immediately preceding three consecutive, non-overlapping four-quarter periods
and (2) Valero L.P.'s adjusted operating surplus, as defined in the partnership
agreement, during such periods equals or exceeds the amount that would have been
sufficient to enable Valero L.P. to distribute the minimum quarterly
distribution on all outstanding units on a fully diluted basis and the related
distribution on the 2% general partner interest during those periods. If the
subordination period ends, the rights of the holders of subordinated units will
no longer be subordinated to the rights of the holders of common units and the
subordinated units may be converted into common units, on a one-for-one basis.
The general partner is entitled to incentive distributions if the amount Valero
L.P. distributes with respect to any quarter exceeds $0.60 per unit.
29
The following table reflects the allocation of the total cash distributions to
the general and limited partners applicable to the period in which the
distributions are earned:
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(in thousands, except
per unit data)
General partner interest............................ $ 1,036 $ 821
General partner incentive distribution.............. 1,861 763
------ ------
Total general partner distribution................ 2,897 1,584
Limited partners' distributions..................... 48,898 39,471
------ ------
Total cash distributions.......................... $ 51,795 $ 41,055
====== ======
Cash distributions per unit applicable to limited
partners.......................................... $ 2.20 $ 2.05
==== ====
On August 14, 2003, Valero L.P. paid a quarterly cash distribution of $0.75 per
unit for the second quarter of 2003. On October 29, 2003, Valero L.P. declared a
quarterly cash distribution of $0.75 per unit for the third quarter of 2003,
which is payable on November 14, 2003 to holders of record on November 6, 2003.
Capital Requirements
The petroleum pipeline and storage industry is capital-intensive, requiring
significant investments to maintain, upgrade or enhance existing operations and
to comply with environmental and safety laws and regulations. The Partnership's
capital expenditures consist primarily of:
o reliability capital expenditures (formerly referred to as maintenance
capital expenditures), such as those required to maintain equipment
reliability and safety and to address environmental and safety regulations;
and
o expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals and storage
tanks. In addition, expansion capital expenditures may include acquisitions
of pipeline, terminal or storage tank assets.
During the nine months ended September 30, 2003, the Partnership incurred
reliability capital expenditures of $5.3 million primarily related to tank and
pipeline pump station upgrades at numerous locations and a terminal system
automation project. Expansion capital expenditures of $10.5 million during the
nine months ended September 30, 2003 were related to modifications of the
Albuquerque refined product terminal, the addition of new pumps on the Wichita
Falls to McKee crude oil pipeline and construction of the Nuevo Laredo pipeline
and propane terminal.
For the remainder of 2003, the Partnership expects to incur approximately $10.1
million of capital expenditures including approximately $4.4 million for
reliability capital expenditures and approximately $5.7 million for expansion
capital expenditures, including a refined product pipeline from Laredo, Texas to
Nuevo Laredo, Mexico and a propane terminal in Nuevo Laredo. The Partnership
expects to fund its capital expenditures from cash provided by operations and to
the extent necessary, from proceeds of borrowings under the revolving credit
facility or debt and equity offerings.
Acquisitions during the first nine months of 2003 include the January 7, 2003
purchase of an asphalt terminal from Telfer for $15.1 million, the March 18,
2003 purchases of the South Texas Pipelines and Terminals and the Crude Oil
Storage Tanks from Valero Energy for a total of $350.0 million, the May 1, 2003
purchase of Shell's interest in the Amarillo to Abernathy and the Abernathy to
Lubbock refined product pipelines for $1.6 million, the August 1, 2003 purchase
of the Southlake refined product pipeline from Valero Energy for $29.9 million
and the September 3, 2003 purchase of the Paulsboro refined product terminal
from ExxonMobil for $14.1 million. Acquisitions during the first nine months of
2002 represent the February 1, 2002 purchase, under a purchase option included
in the Omnibus Agreement, of the Wichita Falls crude oil pipeline and storage
facilities from Valero Energy for $64.0 million and the May 29, 2002 acquisition
of a crude hydrogen pipeline from Praxair, Inc. for $11.0 million, both of which
were funded with proceeds under the revolving credit facility.
30
The Partnership believes it has sufficient funds from operations, and to the
extent necessary, from public and private capital markets and bank markets, to
fund its ongoing operating requirements. The Partnership expects that, to the
extent necessary, it can raise additional funds from time to time through equity
or debt financings. However, there can be no assurance regarding the
availability of any future financings or whether such financings can be made
available on terms acceptable to the Partnership.
Environmental, Health and Safety
The Partnership is subject to extensive federal, state and local environmental
and safety laws and regulations, including those relating to the discharge of
materials into the environment, waste management, pollution prevention measures,
pipeline integrity and operator qualifications. Because environmental and safety
laws and regulations are becoming more complex and stringent and new
environmental and safety laws and regulations are continuously being enacted or
proposed, the level of future expenditures required for environmental, health
and safety matters is expected to increase.
Valero Energy has agreed to indemnify the Partnership, for a period of
approximately 10 years, for pre-acquisition environmental damage related to
assets transferred or otherwise acquired by the Partnership from Valero Energy.
These indemnifications do not include liabilities that result from a change in
environmental law subsequent to acquisition. As an operator or owner of the
assets, the Partnership could be held liable for pre-acquisition environmental
damage should Valero Energy be unable to fulfill its obligation. However, the
Partnership believes that such a situation is remote given Valero Energy's
financial condition. As of September 30, 2003, the Partnership is not aware of
any material environmental liabilities that were not covered by the
environmental indemnifications.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Partnership is exposed is interest rate
risk on its debt. The Partnership manages its debt considering various financing
alternatives available in the market and manages its exposure to changing
interest rates principally through the use of a combination of fixed and
variable-rate debt. In addition, the Partnership utilizes interest rate swap
agreements to manage a portion of the exposure to changing interest rates by
converting certain fixed-rate debt to variable-rate debt.
Borrowings under the revolving credit facility expose the Partnership to
increases in the benchmark interest rate underlying its variable-rate revolving
credit facility. As of September 30, 2003, the Partnership's fixed-rate debt
consisted of the 6.05% senior notes, the 6.875% senior notes and the 8.0% Port
of Corpus Christi Authority note payable.
The following table provides information about the Partnership's long-term debt
and interest rate derivative instruments, all of which are sensitive to changes
in interest rates. For long-term debt, principal cash flows and related
weighted-average interest rates by expected maturity dates are presented. For
interest rate swaps, the table presents notional amounts and weighted-average
interest rates by expected (contractual) maturity dates. Weighted-average
variable rates are based on implied forward interest rates in the yield curve at
the reporting date.
September 30, 2003
---------------------------------------------------------------------------------------------
Expected Maturity Dates
-----------------------------------------------------------------
There- Fair
2003 2004 2005 2006 2007 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
(in thousands, except interest rates)
Long-term Debt:
Fixed rate................... $ 449 $ 485 $ 524 $ 566 $ 611 $ 357,025 $ 359,660 $ 385,505
Average interest rate...... 8.0% 8.0% 8.0% 8.0% 8.0% 6.3% 6.3%
Variable rate................ $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate...... - - - - - - -
Interest Rate Swaps
Fixed to Variable:
Notional amount.............. $ - $ - $ - $ - $ - $ 167,500 $ 167,500 $ (624)
Average pay rate........... 3.0% 3.4% 4.8% 5.8% 6.5% 7.5% 6.3%
Average receive rate....... 6.3% 6.3% 6.3% 6.3% 6.3% 6.4% 6.4%
December 31, 2002
---------------------------------------------------------------------------------------------
Expected Maturity Dates
------------------------------------------------------------------
There- Fair
2003 2004 2005 2006 2007 after Total Value
---- ---- ---- ---- ---- ----- ----- -----
(in thousands, except interest rates)
Long-term Debt:
Fixed rate................... $ 747 $ 485 $ 524 $ 566 $ 611 $ 107,025 $ 109,958 $ 109,922
Average interest rate...... 8.0% 8.0% 8.0% 8.0% 8.0% 6.9% 7.0%
Variable rate................ $ - $ - $ - $ - $ - $ - $ - $ -
Average interest rate...... - - - - - - -
Prior to 2003, the Partnership did not engage in interest rate hedging
transactions.
32
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The principal executive officer and principal financial officer of Valero
GP, LLC have evaluated Valero L.P.'s 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 Quarterly Report on Form 10-Q. Based
on that evaluation, these officers concluded that the design and operation
of Valero L.P.'s disclosure controls and procedures are effective in
ensuring that information required to be disclosed by Valero L.P. in the
reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal control over financial reporting.
There have been no changes in Valero L.P.'s internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act
of 1934) that occurred during Valero L.P.'s last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, Valero
L.P.'s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges
Exhibit 31.1 Rule 13a-14(a) Certifications (under Section 302 of the
Sarbanes-Oxley Act of 2002)
Exhibit 32.1 Section 1350 Certifications (as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002)
(b) Reports on Form 8-K
(i) On July 28, 2003, Valero L.P. furnished a Current Report on Form 8-K
dated July 28, 2003 reporting Item 9 and furnishing a copy of Valero L.P.'s
press release relating to its earnings announcement for the second quarter of
2003. Financial statements were not filed with this report.
(ii) On August 4, 2003, Valero L.P. furnished a Current Report on Form 8-K
dated August 4, 2003 reporting Item 9 and furnishing a copy of a news release
with respect to Valero L.P.'s intention to offer and sell approximately
1,150,000 common units, including common units subject to over-allotments, in an
underwritten public offering. Financial statements were not filed with this
report.
(iii) On August 5, 2003, Valero L.P. furnished a Current Report on Form 8-K
dated August 5, 2003 reporting Item 9 and furnishing a copy of a slide
presentation made by Valero L.P.'s management to analysts and investors in
August 2003 during the roadshow presentations related to the sale of 1,236,250
common units to the public. Financial statements were not filed with this
report.
33
(iv) On August 6, 2003, Valero L.P. furnished a Current Report on Form 8-K
dated August 5, 2003 reporting Item 9 and furnishing a copy of the news release
with respect to Valero L.P.'s announcement of a public offering of 1,075,000
common units plus an additional 161,250 common units subject to an
over-allotment option. Financial statements were not filed with this report.
(v) On August 6, 2003, Valero L.P. filed a Current Report on Form 8-K dated
August 5, 2003 reporting Item 5 (Other Events) in connection with Valero L.P.'s
execution of an underwriting agreement for the public offering of up to
1,236,250 common units (including 161,250 common units subject to an
over-allotment option) under Valero L.P.'s shelf registration statement. The
sales price of the common units was $41.15 per unit with an underwriter discount
of $1.85 per unit. Financial statements were not filed with this report.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 L.P.
(Registrant)
By: Riverwalk Logistics, L.P., its general partner
By: Valero GP, LLC, its general partner
By: /s/ Curtis V. Anastasio
-------------------------------------
(Curtis V. Anastasio)
President and Chief Executive Officer
November 14, 2003
By: /s/ Steven A. Blank
-------------------------------------
(Steven A. Blank)
Senior Vice President and Chief Financial Officer
November 14, 2003
By: /s/ Clayton E. Killinger
-------------------------------------
(Clayton E. Killinger)
Vice President and Controller
November 14, 2003
35
Exhibit 12.1
VALERO L.P. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio)
Nine
Months
Ended
September 30, Years Ended December 31,
------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Earnings:
Income from continuing operations
before provision for income taxes and
income from equity investees $ 48,206 $ 52,350 $ 42,694 $ 35,968 $ 65,445 $ 54,910
Add:
Fixed charges 12,073 5,492 4,203 5,266 997 1,001
Amortization of capitalized
interest 40 48 39 34 32 28
Distributions from Skelly-Belvieu
Pipeline Company 2,222 3,590 2,874 4,658 4,238 3,692
Less: Interest capitalized (96) (255) (298) - (115) (121)
------ ------ ------ ------ ------ ------
Total earnings $ 62,445 $ 61,225 $ 49,512 $ 45,926 $ 70,597 $ 59,510
====== ====== ====== ====== ====== ======
Fixed charges:
Interest expense (1) $ 11,253 $ 4,968 $ 3,721 $ 5,181 $ 777 $ 796
Amortization of debt issuance costs 510 160 90 - - -
Interest capitalized 96 255 298 - 115 121
Rental expense interest factor (2) 214 109 94 85 105 84
------ ------ ------ ------ ------ ------
Total fixed charges $ 12,073 $ 5,492 $ 4,203 $ 5,266 $ 997 $ 1,001
====== ====== ====== ====== ====== ======
Ratio of earnings to fixed charges 5.2x 11.1x 11.8x 8.7x 70.8x 59.5x
====== ====== ====== ====== ====== ======
(1) The interest expense, net reported in the Partnership's consolidated
statements of income for the nine months ended September 30, 2003 and the
year ended December 31, 2002 includes interest income of $146,000 and
$248,000, respectively.
(2) The interest portion of rental expense represents one-third of rents, which
is deemed representative of the interest portion of rental expense.
36
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Curtis V. Anastasio, the principal executive officer of Valero GP, LLC,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 14, 2003
/s/ Curtis V. Anastasio
- -----------------------
Curtis V. Anastasio
President, Chief Executive Officer and Director
37
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Steven A. Blank, the principal financial officer of Valero GP, LLC, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report; and
(c) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 14, 2003
/s/ Steven A. Blank
- -------------------
Steven A. Blank
Senior Vice President and Chief Financial Officer
38
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valero L.P. on Form 10-Q for the
quarter ended September 30, 2003, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Curtis V. Anastasio, President,
Chief Executive Officer and Director of Valero GP, LLC hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Valero L.P.
/s/ Curtis V. Anastasio
- -----------------------
Curtis V. Anastasio
President, Chief Executive Officer and Director
November 14, 2003
A signed original of the written statement required by Section 906 has been
provided to Valero L.P. and will be retained by Valero L.P. and furnished to the
Securities and Exchange Commission or its staff upon request.
39
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Valero L.P. on Form 10-Q for the
quarter ended September 30, 2003, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Steven A. Blank, Senior Vice
President and Chief Financial Officer of Valero GP, LLC hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Valero L.P.
/s/ Steven A. Blank
- -------------------
Steven A. Blank
Senior Vice President and Chief Financial Officer
November 14, 2003
A signed original of the written statement required by Section 906 has been
provided to Valero L.P. and will be retained by Valero L.P. and furnished to the
Securities and Exchange Commission or its staff upon request.
40