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
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-16417
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 Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)
Telephone number:
(210) 345-2000
(Registrants 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. The definition of accelerated filer and large accelerated filer is in Rule 12b-2 of the Securities Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of common units outstanding as of November 1, 2006 was 46,809,749.
VALERO L.P. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
|
|
September 30, |
|
December 31, |
|
||
|
|
2006 |
|
2005 |
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
66,729 |
|
$ |
36,054 |
|
Receivable from Valero Energy |
|
21,132 |
|
21,873 |
|
||
Accounts receivable, net of allowance for doubtful
accounts of $1,063 and $1,976 as of
|
|
79,213 |
|
110,066 |
|
||
Inventories |
|
8,577 |
|
17,473 |
|
||
Other current assets |
|
25,948 |
|
30,138 |
|
||
Assets of businesses held for sale |
|
|
|
79,807 |
|
||
Total current assets |
|
201,599 |
|
295,411 |
|
||
|
|
|
|
|
|
||
Property and equipment, at cost |
|
2,497,919 |
|
2,417,529 |
|
||
Accumulated depreciation and amortization |
|
(325,337 |
) |
(257,316 |
) |
||
Property and equipment, net |
|
2,172,582 |
|
2,160,213 |
|
||
Intangible assets, net |
|
55,164 |
|
59,159 |
|
||
Goodwill |
|
774,966 |
|
767,587 |
|
||
Investment in joint ventures |
|
74,103 |
|
73,986 |
|
||
Deferred charges and other assets, net |
|
22,128 |
|
10,636 |
|
||
Total assets |
|
$ |
3,300,542 |
|
$ |
3,366,992 |
|
|
|
|
|
|
|
||
Liabilities and Partners Equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
566 |
|
$ |
1,046 |
|
Payable to Valero Energy |
|
12,712 |
|
12,800 |
|
||
Accounts payable |
|
62,858 |
|
104,320 |
|
||
Accrued interest payable |
|
9,740 |
|
16,391 |
|
||
Accrued liabilities |
|
39,568 |
|
46,917 |
|
||
Taxes other than income taxes |
|
12,020 |
|
9,013 |
|
||
Income taxes payable |
|
1,154 |
|
4,001 |
|
||
Liabilities of businesses held for sale |
|
|
|
11,100 |
|
||
Total current liabilities |
|
138,618 |
|
205,588 |
|
||
|
|
|
|
|
|
||
Long-term debt, less current portion |
|
1,178,476 |
|
1,169,659 |
|
||
Long-term payable to Valero Energy |
|
5,765 |
|
5,507 |
|
||
Deferred income taxes |
|
20,296 |
|
13,576 |
|
||
Other long-term liabilities |
|
70,716 |
|
71,883 |
|
||
Commitments and contingencies (Note 6) |
|
|
|
|
|
||
|
|
|
|
|
|
||
Partners equity: |
|
|
|
|
|
||
Common units (46,809,749 and 37,210,427 outstanding as of September 30, 2006 and December 31, 2005, respectively) |
|
1,839,881 |
|
1,749,007 |
|
||
Subordinated units (0 and 9,599,322 outstanding as of September 30, 2006 and December 31, 2005, respectively) |
|
|
|
114,127 |
|
||
General partners equity |
|
39,095 |
|
38,913 |
|
||
Accumulated other comprehensive income (loss) |
|
7,695 |
|
(1,268 |
) |
||
Total partners equity |
|
1,886,671 |
|
1,900,779 |
|
||
Total liabilities and partners equity |
|
$ |
3,300,542 |
|
$ |
3,366,992 |
|
See Condensed Notes to Consolidated Financial Statements.
3
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Services revenues: |
|
|
|
|
|
|
|
|
|
||||
Third parties |
|
$ |
92,679 |
|
$ |
84,211 |
|
$ |
267,613 |
|
$ |
86,457 |
|
Valero Energy |
|
69,209 |
|
63,999 |
|
194,298 |
|
176,694 |
|
||||
Total services revenues |
|
161,888 |
|
148,210 |
|
461,911 |
|
263,151 |
|
||||
Product sales |
|
129,135 |
|
110,175 |
|
383,084 |
|
110,175 |
|
||||
Total revenues |
|
291,023 |
|
258,385 |
|
844,995 |
|
373,326 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
||||
Cost of product sales |
|
117,759 |
|
101,217 |
|
350,260 |
|
101,217 |
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
||||
Third parties |
|
57,753 |
|
46,183 |
|
164,168 |
|
70,852 |
|
||||
Valero Energy |
|
24,749 |
|
22,246 |
|
68,559 |
|
38,907 |
|
||||
Total operating expenses |
|
82,502 |
|
68,429 |
|
232,727 |
|
109,759 |
|
||||
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
||||
Third parties |
|
3,425 |
|
3,092 |
|
9,556 |
|
4,356 |
|
||||
Valero Energy |
|
7,963 |
|
6,908 |
|
20,767 |
|
12,708 |
|
||||
Total general and administrative expenses |
|
11,388 |
|
10,000 |
|
30,323 |
|
17,064 |
|
||||
Depreciation and amortization expense |
|
24,994 |
|
22,732 |
|
74,022 |
|
40,255 |
|
||||
Total costs and expenses |
|
236,643 |
|
202,378 |
|
687,332 |
|
268,295 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
54,380 |
|
56,007 |
|
157,663 |
|
105,031 |
|
||||
Equity earnings in joint ventures |
|
1,464 |
|
1,541 |
|
4,514 |
|
2,340 |
|
||||
Interest and other expenses, net |
|
(15,289 |
) |
(14,637 |
) |
(47,630 |
) |
(26,344 |
) |
||||
Income
from continuing operations before
|
|
40,555 |
|
42,911 |
|
114,547 |
|
81,027 |
|
||||
Income tax expense (benefit) |
|
(614 |
) |
2,050 |
|
1,997 |
|
2,050 |
|
||||
Income from continuing operations |
|
41,169 |
|
40,861 |
|
112,550 |
|
78,977 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) from discontinued operations |
|
|
|
4,306 |
|
(377 |
) |
4,306 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
41,169 |
|
45,167 |
|
112,173 |
|
83,283 |
|
||||
Less general partners interest and incentive distributions |
|
(4,310 |
) |
(3,892 |
) |
(12,550 |
) |
(7,215 |
) |
||||
Limited partners interest in net income |
|
$ |
36,859 |
|
$ |
41,275 |
|
$ |
99,623 |
|
$ |
76,068 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of basic and diluted units outstanding |
|
46,809,749 |
|
46,809,749 |
|
46,809,749 |
|
31,051,243 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income loss per unit applicable to limited partners: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.79 |
|
$ |
0.79 |
|
$ |
2.14 |
|
$ |
2.31 |
|
Discontinued operations |
|
|
|
0.09 |
|
(0.01 |
) |
0.14 |
|
||||
Net income |
|
$ |
0.79 |
|
$ |
0.88 |
|
$ |
2.13 |
|
$ |
2.45 |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash distributions per unit applicable to limited partners |
|
$ |
0.915 |
|
$ |
0.855 |
|
$ |
2.685 |
|
$ |
2.510 |
|
See Condensed Notes to Consolidated Financial Statements.
4
VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Thousands of Dollars)
|
|
Nine Months Ended
|
|
||||
|
|
2006 |
|
2005 |
|
||
Cash Flows from Operating Activities: |
|
|
|
|
|
||
Net income |
|
$ |
112,173 |
|
$ |
83,283 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
74,022 |
|
41,425 |
|
||
Equity earnings from joint ventures |
|
(4,601 |
) |
(2,340 |
) |
||
Distributions from joint ventures |
|
4,052 |
|
2,488 |
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Decrease (increase) in receivable from Valero Energy |
|
741 |
|
(1,343 |
) |
||
Decrease (increase) in accounts receivable |
|
32,997 |
|
(10,680 |
) |
||
Decrease (increase) in inventories |
|
8,672 |
|
(1,928 |
) |
||
Decrease (increase) in other current assets |
|
1,335 |
|
(1,334 |
) |
||
(Decrease) increase in payable to Valero Energy |
|
(88 |
) |
7,528 |
|
||
Decrease in accrued interest payable |
|
(6,652 |
) |
(7,152 |
) |
||
(Increase) decrease in accounts payable and other accrued liabilities |
|
(36,693 |
) |
19,961 |
|
||
Increase in taxes other than income taxes |
|
3,205 |
|
2,019 |
|
||
Other, net |
|
(7,184 |
) |
3,471 |
|
||
Net cash provided by operating activities |
|
181,979 |
|
135,398 |
|
||
|
|
|
|
|
|
||
Cash Flows from Investing Activities: |
|
|
|
|
|
||
Reliability capital expenditures |
|
(21,334 |
) |
(12,369 |
) |
||
Strategic growth capital expenditures |
|
(48,981 |
) |
(28,926 |
) |
||
Kaneb acquisition, net of cash acquired |
|
|
|
(505,669 |
) |
||
Other acquisition |
|
(12,827 |
) |
|
|
||
Investment in other noncurrent assets |
|
(9,404 |
) |
(999 |
) |
||
Proceeds from sale of Held Separate Businesses, net |
|
|
|
454,109 |
|
||
Proceeds from sale of Australia and New Zealand subsidiaries |
|
70,072 |
|
|
|
||
Proceeds from sale of other assets |
|
120 |
|
26,788 |
|
||
Proceeds from insurance settlement |
|
3,661 |
|
|
|
||
Distributions in excess of equity earnings from joint ventures |
|
472 |
|
|
|
||
Other |
|
912 |
|
|
|
||
Net cash provided by (used in) investing activities |
|
17,309 |
|
(67,066 |
) |
||
|
|
|
|
|
|
||
Cash Flows from Financing Activities: |
|
|
|
|
|
||
Long-term debt borrowings |
|
59,000 |
|
713,194 |
|
||
Long-term debt repayments |
|
(48,480 |
) |
(700,520 |
) |
||
Decrease in cash book overdrafts |
|
(8,216 |
) |
|
|
||
Contributions from general partner |
|
352 |
|
29,197 |
|
||
Distributions to unitholders and general partner |
|
(135,596 |
) |
(83,839 |
) |
||
Other |
|
(395 |
) |
|
|
||
Net cash used in financing activities |
|
(133,335 |
) |
(41,968 |
) |
||
|
|
|
|
|
|
||
Effect of foreign exchange rate changes on cash |
|
(660 |
) |
(833 |
) |
||
|
|
|
|
|
|
||
Net increase in cash and cash equivalents |
|
30,675 |
|
25,531 |
|
||
Cash and cash equivalents at the beginning of the period |
|
36,054 |
|
16,147 |
|
||
Cash and cash equivalents at the end of the period |
|
$ |
66,729 |
|
$ |
41,678 |
|
|
|
|
|
|
|
||
Supplemental cash flow information: |
|
|
|
|
|
||
Cash paid during the period for interest |
|
$ |
62,941 |
|
$ |
37,013 |
|
Cash paid during the period for income taxes |
|
$ |
5,952 |
|
$ |
47 |
|
See Condensed Notes to Consolidated Financial Statements.
5
VALERO L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS AND ACCOUNTING PRONOUNCEMENTS
Organization and Operations
Valero L.P. (NYSE: VLI) is a publicly traded Delaware limited partnership engaged in the crude oil and refined product transportation, terminalling and storage business. Valero L.P. has terminal facilities in the United States, the Netherland Antilles, Canada, Mexico, the Netherlands and the United Kingdom.
As used in this report, references to we, us, our or the Partnership collectively refer, depending on the context, to Valero L.P. or a wholly owned subsidiary of Valero L.P.
These unaudited consolidated financial statements include the accounts of the Partnership and subsidiaries in which the Partnership has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in 50% or less owned entities are accounted for using the equity method of accounting.
These 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 consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and nine months ended September 30, 2006 and 2005 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.
The consolidated balance sheet as of December 31, 2005 has been derived from the audited consolidated financial statements as of that date. You should read these consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.
We conduct our operations through our subsidiaries, primarily Valero Logistics Operations, L.P. (Valero Logistics) and Kaneb Pipe Line Operating Partnership, L.P. (KPOP). We have four business segments: refined product terminals, refined product pipelines, crude oil pipelines and crude oil storage tanks.
Our operations are managed by Valero GP, LLC. Valero GP, LLC is the general partner of Riverwalk Logistics, L.P., which is the 2% general partner of Valero L.P. As of September 30, 2006, Valero GP, LLC and Riverwalk Logistics, L.P. were indirect wholly owned subsidiaries of Valero GP Holdings, LLC (Holdings) (NYSE: VEH). Holdings is an approximately 59% owned subsidiary of Valero Energy Corporation (Valero Energy) (NYSE: VLO) and owned approximately 41% by the public.
Other
UDS Logistics, LLC, an indirect, wholly owned subsidiary of Valero Energy, owned 21.4% of our limited partner interests and the 2% general partner interest as of December 31, 2005. On January 15, 2006, UDS Logistics, LLC changed its name to Valero GP Holdings, LLC. Prior to July 19, 2006, Holdings completed certain organizational transactions resulting in Valero GP, LLC, Riverwalk Holdings, LLC, and Riverwalk Logistics, L.P. becoming wholly owned subsidiaries of Holdings.
On July 19, 2006, Holdings completed its initial public offering of 17.25 million units representing limited liability company interests at $22.00 per unit. All of these units were sold by subsidiaries of Valero Energy. As a result, Holdings did not receive any proceeds from this offering. Valero Energy retains an approximate 59% ownership interest in Holdings, but has stated its intention to further reduce and ultimately sell all of its interest in Holdings, pending market conditions.
6
New Accounting Pronouncements
FASB Interpretation No. 48
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, by defining a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. An enterprise recognizes a tax position if it is more-likely-than-not that the tax position will be sustained, based on the technical merits of the position, upon examination. An uncertain tax position is measured in the financial statements at the largest amount of benefit that is more-likely-than-not to be realized. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we are continuing to evaluate its effect on our financial position or results of operations.
EITF Issue No. 06-3
In June 2006, the FASB ratified its consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (EITF No. 06-3). EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include sales, use, value added, and some excise taxes. These taxes should be presented on either a gross or a net basis, and if reported on a gross basis, a company should disclose amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented. The guidance in EITF No. 06-3 is effective for all periods beginning after December 15, 2006 and is not expected to significantly affect our financial position or results of operations.
FASB Statement No. 157
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. Statement No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures. Statement No. 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged. The provisions of Statement No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required. The adoption of Statement No. 157 is not expected to materially affect our financial position or results of operations.
On September 20, 2006, we executed a terminal services agreement (St. James Terminal Agreement) with Valero Marketing and Supply Company (VMSC), a wholly owned subsidiary of Valero Energy. Pursuant to the St. James Terminal Agreement, we will provide crude oil storage and blending services to VMSC at the facility in St. James, Louisiana for a monthly minimum throughput fee plus per barrel throughput charges. The St. James Terminal Agreement has an initial term of five years with an option to extend for an additional five years with a one year notice from VMSC prior to the expiration of the initial term.
Capwood Pipeline
Effective January 1, 2006, we purchased a 23.77% interest in Capwood pipeline from Valero Energy for $12.8 million, which was paid from borrowings under our existing revolving credit agreement. The Capwood pipeline is a 57-mile crude oil pipeline that extends from Patoka, Illinois to Wood River, Illinois. Plains All American Pipeline L.P., the operator of the Capwood pipeline, owns the remaining 76.23% interest. Our financial statements include the results of operations of our interest in the Capwood pipeline in the crude oil pipelines segment for the three and nine months ended September 30, 2006.
7
Kaneb Acquisition
On July 1, 2005, we completed our acquisition (the Kaneb Acquisition) of Kaneb Services LLC (KSL) and Kaneb Pipe Line Partners, L.P. (KPP, and, together with KSL, Kaneb). The Kaneb Acquisition was accounted for using the purchase method. The purchase price and the final purchase price allocation were as follows (in thousands):
Cash paid for the outstanding equity securities of KSL |
|
$ |
509,307 |
|
Value of Valero L.P.s common units issued in exchange for KPP common units |
|
1,451,249 |
|
|
Transaction costs |
|
9,505 |
|
|
Fair value of long-term debt assumed |
|
779,707 |
|
|
Fair value of other liabilities assumed |
|
180,389 |
|
|
Total |
|
$ |
2,930,157 |
|
Current assets |
|
$ |
605,721 |
|
Property and equipment |
|
1,429,652 |
|
|
Goodwill |
|
770,252 |
|
|
Intangible assets |
|
58,900 |
|
|
Other noncurrent assets |
|
65,632 |
|
|
Total |
|
$ |
2,930,157 |
|
The condensed statements of income include the results of operations of the Kaneb Acquisition commencing on July 1, 2005. As a result, information for the three months ended September 30, 2006 and 2005 and nine months ended September 30, 2006 presented below represents actual results of operations. The unaudited pro forma financial information for the nine months ended September 30, 2005 includes the historical financial information of Kaneb and the Partnership for that period. This financial information assumes the following:
· we completed the Kaneb Acquisition on January 1, 2005;
· we borrowed $525.0 million to purchase all of the outstanding equity securities of KSL,
· we issued approximately 23.8 million common units in exchange for all of the outstanding common units of KPP,
· we received a contribution from our general partner of $29.2 million to maintain its 2% interest; and
· the results of operations of Martin Oil LLC (a marketing subsidiary of KSL), our Australia and New Zealand subsidiaries, and certain assets we divested in conjunction with the Kaneb Acquisition (Held Separate Businesses), are reported as discontinued operations.
The unaudited pro forma information is not necessarily indicative of the results of future operations:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars, Except Per Unit Data) |
|
||||||||||
Revenues |
|
$ |
291,023 |
|
$ |
258,385 |
|
$ |
844,995 |
|
$ |
719,431 |
|
Operating income |
|
54,380 |
|
56,007 |
|
157,663 |
|
81,684 |
|
||||
Income from continuing operations |
|
41,169 |
|
40,861 |
|
112,550 |
|
54,386 |
|
||||
Income (loss) from discontinued operations |
|
|
|
4,306 |
|
(377 |
) |
10,761 |
|
||||
Net income |
|
$ |
41,169 |
|
$ |
45,167 |
|
$ |
112,173 |
|
$ |
65,147 |
|
Income (loss) per unit applicable to limited partners: |
|
|
|
|
|
|
|
|
|
||||
Continuing operations |
|
$ |
0.79 |
|
$ |
0.79 |
|
$ |
2.14 |
|
$ |
0.94 |
|
Discontinued operations |
|
|
|
0.09 |
|
(0.01 |
) |
0.23 |
|
||||
Net income |
|
$ |
0.79 |
|
$ |
0.88 |
|
$ |
2.13 |
|
$ |
1.17 |
|
8
Sale of Australia and New Zealand subsidiaries
On March 30, 2006, we sold our Australia and New Zealand subsidiaries to ANZ Terminals Pty. Ltd., for total proceeds of $70.1 million. The proceeds were used for working capital purposes, including paying down outstanding debt. This transaction included the sale of eight terminals with an aggregate storage capacity of 1.1 million barrels. For the nine months ended September 30, 2006, revenues and pre-tax income related to the Australia and New Zealand subsidiaries included in income (loss) from discontinued operations totaled $5.0 million and $0.6 million, respectively. The results of operations for the three and nine months ended September 30, 2005 have been restated to reflect the sale of the Australia and New Zealand subsidiaries as income (loss) from discontinued operations.
4. PRODUCT IMBALANCES
Product imbalances occur when customers deliver more or less refined product volumes into our pipelines than they are entitled to receive. We value assets and liabilities related to product imbalances at current market prices. Included in other current assets on the consolidated balance sheets are $16.9 million and $20.0 million of product imbalance assets as of September 30, 2006 and December 31, 2005, respectively. Included in accrued liabilities on the consolidated balance sheets are $15.2 million and $17.5 million of product imbalance liabilities as of September 30, 2006 and December 31, 2005, respectively.
Credit Agreement Amendments
On June 6, 2006, we completed certain amendments to our $525 million term loan agreement ($525 Million Term Loan Agreement) and our $400 million revolving credit agreement (the $400 Million Revolving Credit Agreement). Both agreements were amended to (i) eliminate the provision that the failure of Valero Energy to own or control our general partner constitutes a change of control; (ii) extend the maturities of the agreements to 2011; (iii) include certain material construction projects in the definition of Consolidated EBITDA; and (iv) eliminate the requirement that we maintain a minimum consolidated interest coverage ratio. Additionally, the amendments reduced the applicable margin on LIBOR loans, which vary depending upon our credit rating. The term loan agreement of our UK subsidiary (the UK Term Loan) was also amended to (i) extend its maturity to 2011; (ii) include certain material construction projects in the definition of Consolidated EBITDA; and (iii) eliminate the requirement that we maintain a minimum consolidated interest coverage ratio.
Our $525 Million Term Loan Agreement, $400 Million Revolving Credit Agreement and UK Term Loan all require that we maintain certain financial ratios and include other restrictive covenants, including a prohibition on distributions if any defaults, as defined in the agreements, exist or would result from the distribution. Our management believes that we are in compliance with all of these ratios and covenants as of September 30, 2006.
$400 Million Revolving Credit Agreement
During the nine months ended September 30, 2006, we borrowed $59.0 million under our $400 Million Revolving Credit Agreement to fund the purchase of the Capwood pipeline and a portion of our capital expenditures. Additionally, we repaid $48.0 million during the nine months ended September 30, 2006. The $400 Million Revolving Credit Agreement bears interest based on either an alternative base rate or LIBOR, which was 5.9% as of September 30, 2006. As of September 30, 2006, we had $384.1 million available for borrowing under our $400 Million Revolving Credit Agreement. Additionally, our $400 Million Revolving Credit Agreement allows us to increase the amount we can borrow to a maximum of $600 million by giving notice to the lenders, so long as we are not in default.
Interest Rate Swaps
As of September 30, 2006, the weighted-average interest rate for our interest rate swaps was 7.0%. As of September 30, 2006 and December 31, 2005, the aggregate estimated fair value of the interest rate swaps included in other long-term liabilities on our consolidated balance sheets was $5.0 million and $4.0 million, respectively.
9
6. COMMITMENTS AND CONTINGENCIES
Litigation and Environmental Matters
We have contingent liabilities resulting from various litigation, claims and commitments, the most significant of which are discussed below. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending ourselves in legal matters are expensed as incurred. As of September 30, 2006, we have recorded $2.8 million of accruals related to settled matters. As of September 30, 2006, we have recorded accruals for contingent losses totaling $48.3 million. The actual payment of any amounts accrued and the timing of any such payments ultimately made is uncertain. We believe that should we be unable to successfully defend ourselves in any of these unsettled matters, the ultimate payment of any or all of the amounts reserved would not have a material adverse effect on our financial position or liquidity. However, if any actual losses ultimately exceed the amounts accrued, there could be a material adverse effect on our results of operations.
Grace Energy Corporation Matter. In 1997, Grace Energy Corporation (Grace Energy) sued subsidiaries of Kaneb in Texas state court. The complaint sought recovery of the cost of remediation of fuel leaks in the 1970s from a pipeline that had once connected a former Grace Energy terminal with Otis Air Force Base in Massachusetts (Otis AFB). Grace Energy alleges the Otis AFB pipeline and related environmental liabilities had been transferred in 1978 to an entity that was part of Kanebs acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace Energy in 1993. Kaneb contends that it did not acquire the Otis AFB pipeline and never assumed any responsibility for any associated environmental damage.
In 2000, the court entered final judgment that: (i) Grace Energy could not recover its own remediation costs of $3.5 million, (ii) Kaneb owned the Otis AFB pipeline and its related environmental liabilities and (iii) Grace Energy was awarded $1.8 million in attorney costs. Both Kaneb and Grace Energy appealed the trial courts final judgment to the Texas Court of Appeals in Dallas. In 2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay of actions against Grace Energy. Once that stay is lifted, we intend to resume vigorous prosecution of the appeal.
The Otis AFB is a part of a Superfund Site pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis AFB pipeline. Relying on the Texas state courts final judgment assigning ownership of the Otis AFB pipeline to Kaneb, the U.S. Department of Justice advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for the remediation costs associated with the two spill areas. In 2002, the Department of Justice asserted that it had incurred over $49.0 million in costs and expected to incur additional costs of approximately $19.0 million for remediation of the two spill areas. The Department of Justice has not filed a lawsuit against us on this matter and we have not made any payments toward costs incurred by the Department of Justice.
Port of Vancouver Matter. We own a chemical and refined products terminal on property owned by the Port of Vancouver, and we lease the land under the terminal from the Port of Vancouver. Under an Agreed Order entered into with the Washington Department of Ecology when Kaneb purchased the terminal in 1998, Kaneb agreed to investigate and remediate groundwater contamination by the terminals previous owner and operator originating from the terminal. Investigation and remediation at the terminal are ongoing, in compliance with the Agreed Order. In April 2006, the Washington Department of Ecology commented on our site investigation work plan and asserted that the groundwater contamination at the terminal was commingled with a groundwater contamination plume under other property owned by the Port of Vancouver. We dispute this assertion. No lawsuits have been filed against us in this matter, and we have not made any payments toward remediation of the allegedly commingled plume. Factors that could affect estimated remediation costs include whether Kaneb will be found to have ultimate responsibility for some portion of the allegedly commingled plume, the Port of Vancouvers contribution to the remediation effort and the amount the Port of Vancouver actually receives from other potentially responsible parties.
St. Eustatius Tax Agreement. On June 1, 1989, the governments of the Netherlands Antilles and St. Eustatius approved a Free Zone and Profit Tax Agreement retroactive to January 1, 1989, which expired on December 31, 2000. This agreement required a subsidiary of Kaneb, which we acquired on July 1, 2005, to pay the greater of 2% of taxable income, as defined therein, or 500,000 Netherlands Antilles guilders (approximately $0.3 million) per year. The agreement further provided that any amounts paid in order to meet the minimum annual payment were available to
10
offset future tax liabilities under the agreement to the extent that the minimum annual payment is greater than 2% of taxable income.
On February 22, 2006, we entered into a revised agreement (the 2005 Tax and Maritime Agreement) with the governments of St. Eustatius and the Netherlands Antilles. The 2005 Tax and Maritime Agreement is effective beginning January 1, 2005 and expires on December 31, 2014. Under the terms of the 2005 Tax and Maritime Agreement, we agreed to make a one-time payment of five million Netherlands Antilles guilders (approximately $2.8 million) in full and final settlement of all of our liabilities, taxes, fees, levies, charges, or otherwise (including settlement of audits) due or potentially due to St. Eustatius. We further agreed to pay an annual minimum profit tax to St. Eustatius of one million Netherlands Antilles guilders (approximately $0.6 million), beginning as of January 1, 2005. We agreed to pay the minimum annual profit tax in twelve equal monthly installments. To the extent the minimum annual profit tax exceeds 2% of taxable profit (as defined in the 2005 Tax and Maritime Agreement), we can carry forward that excess to offset future tax liabilities. If the minimum annual profit tax is less than 2% of taxable profit, we agreed to pay that difference.
Other
We are also a party to additional claims and legal proceedings arising in the ordinary course of business. We believe the possibility is remote that the final outcome of any of these claims or proceedings to which we are a party would have a material adverse effect on our financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial position or liquidity.
Commitments
On April 13, 2006, we entered into an agreement to purchase three 30,000 barrel and two 52,000 barrel tank barges over the next two years for our St. Eustatius facility. The contract price is $34.1 million, which is subject to adjustment based on the actual cost incurred for the steel.
7. RELATED PARTY TRANSACTIONS
We have related party transactions with Valero Energy for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, which are comparable to the fees charged to third parties for similar services. In addition, we reimburse Valero Energy for the actual costs of Valero Energy employees working solely on our behalf and for charges incurred on our behalf.
Additionally, Valero Energy charges us an administrative service fee for certain administrative functions, primarily information systems support, ad valorem taxes, risk management, and human resources administration. If we cease to obtain such administrative services from Valero Energy, our results of operations may be adversely impacted.
The receivable from Valero Energy as of September 30, 2006 and December 31, 2005 represents amounts due for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, and the payable to Valero Energy primarily represents amounts due for employee costs and the administrative service fee.
The following table summarizes information pertaining to transactions with Valero Energy:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
$ |
69,173 |
|
$ |
63,999 |
|
$ |
194,262 |
|
$ |
176,694 |
|
Operating expenses |
|
24,749 |
|
22,246 |
|
68,559 |
|
38,907 |
|
||||
General and administrative expenses |
|
7,963 |
|
6,908 |
|
20,767 |
|
12,708 |
|
||||
Our share of allocated Valero Energy employee benefit plan expenses, excluding compensation expense related to restricted common units and unit options, was $8.5 million and $8.9 million for the three months ended
11
September 30, 2006 and 2005, respectively, and was $25.1 million and $15.0 million for the nine months ended September 30, 2006 and 2005, respectively. These employee benefit plan expenses and the related payroll costs are included in operating expenses and general and administrative expenses.
Services Agreement
Effective July 1, 2005, the services agreement was amended (the 2005 Services Agreement) to account for our significant growth following the closing of the Kaneb Acquisition resulting in an increase in the administrative fee to $13.8 million for the first year from July 1, 2005 to June 30, 2006.
Effective January 1, 2006, we amended the 2005 Services Agreement (the 2006 Services Agreement) to reflect that Valero GP, LLC directly performs many of the services previously provided by Valero Energy under the 2005 Services Agreement, primarily consisting of information systems, legal, corporate development and health, safety and environmental functions. The Valero Energy employees who had previously performed these services became employees of Valero GP, LLC, and their costs are now directly charged to us. Accordingly, the annual fee charged to us by Valero Energy for administrative services was reduced from $13.8 million to approximately $1.9 million per year. This annual fee will increase to approximately $2.9 million and $3.4 million in 2007 and 2008, respectively. The annual fee will remain at approximately $3.4 million through the term of the agreement. In addition, each annual fee will be subject to adjustments to account for Valero Energys annual salary increase. Subject to approval by our Conflicts Committee, the amounts may also be adjusted for changed service levels.
The 2006 Services Agreement will expire on December 31, 2010 with automatic two-year renewal options unless terminated by either party at least six months prior to the renewal period. We may cancel or reduce the level of services that Valero Energy provides us on 60 days prior written notice. The 2006 Services Agreement will terminate upon the change of control of either Valero Energy or us.
Valero Energy charged us for administrative services under the services agreements in the amount of $0.3 million and $3.1 million for the three months ended September 30, 2006 and 2005, respectively, and $1.3 million and $3.5 million for the nine months ended September 2006 and 2005, respectively.
2006 Omnibus Agreement
On March 31, 2006, Valero L.P. entered into an amended and restated omnibus agreement (the 2006 Omnibus Agreement) with Valero Energy, Valero GP, LLC, Riverwalk Logistics, L.P., and Valero Logistics. The 2006 Omnibus Agreement amended certain definitions and other provisions in the April 16, 2001 omnibus agreement, which it supersedes, to clarify the parties intent as to the Valero Energy ownership requirements for the application of the business restrictions described below.
Under the 2006 Omnibus Agreement, Valero Energy has agreed, and will cause its controlled affiliates to agree, for so long as Valero Energy owns 20% or more of us or our general partner, not to engage in the business of transporting crude oil and other feedstocks or refined products, including petrochemicals, or operating crude oil storage facilities or refined product terminalling assets in the United States. This restriction does not apply to:
· any business retained by Ultramar Diamond Shamrock (UDS) as of April 16, 2001, the closing of our initial public offering, or any business owned by Valero Energy at the date of its acquisition of UDS on December 31, 2001;
· any business with a fair market value of less than $10 million;
· any business acquired by Valero Energy in the future that constitutes less than 50% of the fair market value of a larger acquisition, provided we have been offered and declined the opportunity to purchase the business; and
· any newly constructed pipeline, terminalling or storage assets that we have not offered to purchase at fair market value within one year of construction.
Also under the 2006 Omnibus Agreement, Valero Energy has agreed to indemnify us for environmental liabilities related to the assets transferred to us in connection with our initial public offering in 2001, provided that such liabilities arose prior to and are discovered within ten years after that date (excluding liabilities resulting from a change in law after April 16, 2001).
12
On July 19, 2006, we entered into a non-compete agreement with Holdings, Riverwalk Logistics, L.P., and Valero GP, LLC (the Non-Compete Agreement). The Non-Compete Agreement will not be effective until Holdings is no longer subject to the Amended and Restated Omnibus Agreement dated March 31, 2006. Under the Non-Compete Agreement, we will have a right of first refusal with respect to the potential acquisition of assets that relate to the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals) in the United States and internationally. Holdings will have a right of first refusal with respect to the potential acquisition of general partner and other equity interests in publicly traded partnerships under common ownership with the general partner interest. With respect to any other business opportunities, neither the Partnership nor Holdings are prohibited from engaging in any business, even if the Partnership and Holdings would have a conflict of interest with respect to such other business opportunity.
Administration Agreement
On July 19, 2006, in connection with Holdings initial public offering, Valero GP, LLC entered into an administration agreement with Holdings (the Administration Agreement). The Administration Agreement provides, among other things, that all of Holdings employees will be employees of Valero GP, LLC. Valero GP, LLC will provide all executive management, accounting, legal, cash management, corporate finance and other administrative services to Holdings. Under the Administration Agreement, Holdings will pay Valero GP, LLC $0.5 million annually. This fee will be increased annually to reflect Valero GP, LLCs annual merit increases. Holdings will also reimburse Valero GP, LLC for all direct public company costs and any other direct costs, such as outside legal and accounting fees, that Valero GP, LLC incurs while providing services to Holdings pursuant to the Administration Agreement. The Administration Agreement will terminate on December 31, 2011, with automatic two-year renewals unless terminated by either party on six months written notice. Holdings may cancel or reduce the services provided by Valero GP, LLC under the Administration Agreement on 60 days written notice. The Administration Agreement will terminate upon a change of control of either Holdings or Valero GP, LLC.
Amended and Restated 2000 Long-Term Incentive Plan
Effective October 1, 2006, the Valero GP, LLC 2000 Long-Term Incentive Plan was amended as follows:
· increase the number of units authorized for issuance under the Plan from 250,000 units (of which 223,147 have been granted to date) to 1,500,000 units;
· permit the cashless-broker exercise of options;
· provide that if an award under the Plan expires, is cancelled, exercised, paid or otherwise terminates without the delivery of units then the units covered by such award, to the extent of such expiration, cancellation, exercise, payment or termination, shall again be units with respect to which awards under the Plan may be granted;
· amend the Plan to meet the requirements of, and facilitate compliance with, Section 409A of the Internal Revenue Code; and
· amend the definition of Change of Control to reflect that as a result of its recently completed initial public offering, Valero GP Holdings, LLC is now the 100% owner of the general partner of Valero L.P.
8. PARTNERS EQUITY
Allocation of Income and Income Per Unit
We identified our general partner interest and subordinated units as participating securities and we use the two-class method when calculating income per unit applicable to limited partners, which is based on the weighted-average number of common and subordinated units outstanding during the period. Basic and diluted net income per unit applicable to limited partners is the same because we have no potentially dilutive securities outstanding.
During the quarter ended September 30, 2006, our general partner reimbursed us for certain charges we incurred related to services historically provided under our Services Agreement with Valero Energy. Generally accepted accounting principles require us to record the charges as expenses and record the reimbursement as a capital contribution.
13
The following table details the calculation of net income applicable to the general partner:
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income applicable to general partner and limited partners interest |
|
$ |
41,169 |
|
$ |
45,167 |
|
$ |
112,173 |
|
$ |
83,283 |
|
Charges reimbursed by general partner |
|
352 |
|
|
|
352 |
|
|
|
||||
Net income before charges reimbursed by general partner |
|
41,521 |
|
45,167 |
|
112,525 |
|
83,283 |
|
||||
General partner incentive distribution |
|
3,909 |
|
3,049 |
|
10,869 |
|
5,662 |
|
||||
Net income before charges reimbursed by general partner and after general partner incentive distribution |
|
37,612 |
|
42,118 |
|
101,656 |
|
77,621 |
|
||||
General partner interest |
|
2 |
% |
2 |
% |
2 |
% |
2 |
% |
||||
General partner allocation of net income before charges reimbursed by general partner and after general partner incentive distribution |
|
753 |
|
843 |
|
2,033 |
|
1,553 |
|
||||
Charges reimbursed by general partner |
|
(352 |
) |
|
|
(352 |
) |
|
|
||||
General partner incentive distribution |
|
3,909 |
|
3,049 |
|
10,869 |
|
5,662 |
|
||||
Net income applicable to general partner |
|
$ |
4,310 |
|
$ |
3,892 |
|
$ |
12,550 |
|
$ |
7,215 |
|
Cash Distributions
On July 19, 2006, we declared a quarterly cash distribution of $0.885 per unit paid on August 14, 2006 to unitholders of record on August 7, 2006, which totaled $45.8 million. On October 26, 2006, we declared a quarterly cash distribution of $0.915 per unit to be paid on November 14, 2006 to unitholders of record on November 7, 2006, which totaled $47.7 million.
The following table reflects the allocation of total cash distributions to the general and limited partners applicable to the period in which the distributions were earned:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
General partner interest |
|
$ |
955 |
|
$ |
879 |
|
$ |
2,787 |
|
$ |
2,157 |
|
General partner incentive distribution |
|
3,909 |
|
3,049 |
|
10,869 |
|
7,210 |
|
||||
Total general partner distribution |
|
4,864 |
|
3,928 |
|
13,656 |
|
9,367 |
|
||||
Limited partners distribution |
|
42,830 |
|
40,022 |
|
125,684 |
|
98,478 |
|
||||
Total cash distributions |
|
$ |
47,694 |
|
$ |
43,950 |
|
$ |
139,340 |
|
$ |
107,845 |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash distributions per unit applicable to limited partners |
|
$ |
0.915 |
|
$ |
0.855 |
|
$ |
2.685 |
|
$ |
2.510 |
|
Subordinated Units
Effective April 1, 2006, we satisfied all the conditions included in our partnership agreement for the subordination period to end. Accordingly, all 9,599,322 subordinated units converted into common units on a one-for-one basis on May 8, 2006, the first business day after the record date for the distribution related to the first quarter earnings of 2006. Riverwalk Holdings, LLC held the 9,599,322 subordinated units at the time of conversion.
14
Comprehensive Income
For the three and nine months ended September 30, 2006, the difference between our net income and our comprehensive income resulted from foreign currency translation adjustments. Our total comprehensive income was as follows:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
41,169 |
|
$ |
45,167 |
|
$ |
112,173 |
|
$ |
83,283 |
|
Foreign currency translation adjustment |
|
(103 |
) |
641 |
|
8,963 |
|
641 |
|
||||
Comprehensive income |
|
$ |
41,066 |
|
$ |
45,808 |
|
$ |
121,136 |
|
$ |
83,924 |
|
10. SEGMENT INFORMATION
Our reportable segments consist of refined product terminals, refined product pipelines, crude oil pipelines and crude oil storage tanks. The operations we acquired from Kaneb on July 1, 2005 principally involve transporting refined petroleum products and fertilizer as a common carrier, the storage of petroleum products, specialty chemicals, and other liquids, and the sale of bunker fuel at St. Eustatius in the Caribbean and Point Tupper in Nova Scotia, Canada. The results of Kanebs transportation operations are included in our refined product pipelines segment. The results of Kanebs storage and bunker fuel operations are included in our refined product terminals segment.
Results of operations for the reportable segments were as follows:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Refined product terminals |
|
$ |
204,567 |
|
$ |
178,973 |
|
$ |
601,958 |
|
$ |
200,394 |
|
Refined product pipelines |
|
59,333 |
|
53,749 |
|
163,580 |
|
98,609 |
|
||||
Crude oil pipelines |
|
15,072 |
|
14,041 |
|
43,989 |
|
39,601 |
|
||||
Crude oil storage tanks |
|
12,051 |
|
11,622 |
|
35,468 |
|
34,722 |
|
||||
Total revenues |
|
$ |
291,023 |
|
$ |
258,385 |
|
$ |
844,995 |
|
$ |
373,326 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income: |
|
|
|
|
|
|
|
|
|
||||
Refined product terminals |
|
$ |
26,602 |
|
$ |
26,370 |
|
$ |
75,474 |
|
$ |
33,850 |
|
Refined product pipelines |
|
22,209 |
|
23,470 |
|
62,176 |
|
41,714 |
|
||||
Crude oil pipelines |
|
9,236 |
|
8,431 |
|
27,634 |
|
23,680 |
|
||||
Crude oil storage tanks |
|
7,721 |
|
7,736 |
|
22,702 |
|
22,851 |
|
||||
Total segment operating income |
|
$ |
65,768 |
|
$ |
66,007 |
|
$ |
187,986 |
|
$ |
122,095 |
|
Less general and administrative expenses |
|
11,388 |
|
10,000 |
|
30,323 |
|
17,064 |
|
||||
Total operating income |
|
$ |
54,380 |
|
$ |
56,007 |
|
$ |
157,663 |
|
$ |
105,031 |
|
15
Revenues from Valero Energy by reportable segment were as follows:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
||||
Refined product terminals |
|
$ |
14,341 |
|
$ |
14,721 |
|
$ |
38,795 |
|
$ |
35,887 |
|
Refined product pipelines |
|
28,183 |
|
23,615 |
|
77,526 |
|
66,484 |
|
||||
Crude oil pipelines |
|
14,634 |
|
14,041 |
|
42,509 |
|
39,601 |
|
||||
Crude oil storage tanks |
|
12,051 |
|
11,622 |
|
35,468 |
|
34,722 |
|
||||
Total revenues |
|
$ |
69,209 |
|
$ |
63,999 |
|
$ |
194,298 |
|
$ |
176,694 |
|
Total assets by reportable segment were as follows:
|
|
September 30, |
|
December 31, |
|
||
|
|
2006 |
|
2005 |
|
||
|
|
(Thousands of Dollars) |
|
||||
|
|
|
|
|
|
||
Refined product terminals |
|
$ |
1,624,070 |
|
$ |
1,701,782 |
|
Refined product pipelines |
|
1,276,491 |
|
1,286,571 |
|
||
Crude oil pipelines |
|
120,996 |
|
123,698 |
|
||
Crude oil storage tanks |
|
199,727 |
|
204,580 |
|
||
Total segment assets |
|
3,221,284 |
|
3,316,631 |
|
||
General partnership assets |
|
79,258 |
|
50,361 |
|
||
Total consolidated assets |
|
$ |
3,300,542 |
|
$ |
3,366,992 |
|
16
11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Valero L.P. has no operations and its assets consist mainly of its investments in Valero Logistics, KSL and KPP. KPP is the majority owner of KPOP. Valero Logistics and KPOP are 100% indirectly owned by Valero L.P. Valero Logistics and KPOP own and operate pipelines, terminals and storage tanks and have issued publicly traded senior notes. The senior notes issued by Valero Logistics were and continue to be fully and unconditionally guaranteed by Valero L.P. In connection with the Kaneb Acquisition, effective July 1, 2005, Valero L.P. fully and unconditionally guaranteed the outstanding senior notes issued by KPOP. Additionally, effective July 1, 2005, both Valero Logistics and KPOP fully and unconditionally guaranteed the outstanding senior notes of the other. All guarantors are jointly and severally liable for performance under the terms of the guarantees.
As a result, the following condensed consolidating financial statements are being presented for the current year as an alternative to providing separate financial statements for Valero Logistics and KPOP.
Condensed Consolidating Balance Sheet
September 30, 2006
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership, L.P. |
|
Non- Guarantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current assets |
|
$ |
380 |
|
$ |
104,266 |
|
$ |
651,145 |
|
$ |
129,257 |
|
$ |
(683,449 |
) |
$ |
201,599 |
|
Property and equipment, net |
|
|
|
795,461 |
|
676,927 |
|
700,194 |
|
|
|
2,172,582 |
|
||||||
Goodwill |
|
|
|
4,715 |
|
172,625 |
|
597,626 |
|
|
|
774,966 |
|
||||||
Investment in wholly owned subsidiaries |
|
2,382,282 |
|
23,394 |
|
656,634 |
|
1,324,421 |
|
(4,386,731 |
) |
|
|
||||||
Equity investments |
|
|
|
15,636 |
|
|
|
58,467 |
|
|
|
74,103 |
|
||||||
Other noncurrent assets, net |
|
228 |
|
9,617 |
|
660 |
|
66,787 |
|
|
|
77,292 |
|
||||||
Total assets |
|
$ |
2,382,890 |
|
$ |
953,089 |
|
$ |
2,157,991 |
|
$ |
2,876,752 |
|
$ |
(5,070,180 |
) |
$ |
3,300,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liabilities and Partners Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current liabilities |
|
$ |
503,914 |
|
$ |
38,491 |
|
$ |
35,747 |
|
$ |
243,915 |
|
$ |
(683,449 |
) |
$ |
138,618 |
|
Long-term debt, less current portion |
|
|
|
592,019 |
|
547,137 |
|
39,320 |
|
|
|
1,178,476 |
|
||||||
Long-term payable to Valero Energy |
|
|
|
|
|
|
|
5,776 |
|
|
|
5,765 |
|
||||||
Deferred income taxes |
|
|
|
|
|
|
|
20,296 |
|
|
|
20,296 |
|
||||||
Other long-term liabilities |
|
|
|
5,520 |
|
3,712 |
|
61,473 |
|
|
|
70,716 |
|
||||||
Partners equity |
|
1,878,976 |
|
317,059 |
|
1,571,395 |
|
2,505,972 |
|
(4,386,731 |
) |
1,886,671 |
|
||||||
Total liabilities and partners equity |
|
$ |
2,382,890 |
|
$ |
953,089 |
|
$ |
2,157,991 |
|
$ |
2,876,752 |
|
$ |
(5,070,180 |
) |
$ |
3,300,542 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
17
Condensed Consolidating Balance Sheet
December 31, 2005
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership, L.P. |
|
Non- Guarantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current assets |
|
$ |
44 |
|
$ |
196,481 |
|
$ |
622,669 |
|
$ |
240,741 |
|
$ |
(764,524 |
) |
$ |
295,411 |
|
Property and equipment, net |
|
|
|
783,945 |
|
694,374 |
|
681,894 |
|
|
|
2,160,213 |
|
||||||
Goodwill |
|
|
|
4,715 |
|
193,127 |
|
569,745 |
|
|
|
767,587 |
|
||||||
Investment in wholly owned subsidiaries |
|
2,403,969 |
|
16,920 |
|
603,474 |
|
1,273,313 |
|
(4,297,676 |
) |
|
|
||||||
Equity investments |
|
|
|
15,087 |
|
|
|
58,899 |
|
|
|
73,986 |
|
||||||
Other noncurrent assets, net |
|
228 |
|
8,677 |
|
771 |
|
60,119 |
|
|
|
69,795 |
|
||||||
Total assets |
|
$ |
2,404,241 |
|
$ |
1,025,825 |
|
$ |
2,114,415 |
|
$ |
2,884,711 |
|
$ |
(5,062,200 |
) |
$ |
3,366,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Liabilities and Partners Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current liabilities |
|
$ |
502,194 |
|
$ |
50,252 |
|
$ |
40,341 |
|
$ |
377,325 |
|
$ |
(764,524 |
) |
$ |
205,588 |
|
Long-term debt, less current portion |
|
|
|
581,921 |
|
551,607 |
|
36,131 |
|
|
|
1,169,659 |
|
||||||
Long-term payable to Valero Energy |
|
|
|
|
|
|
|
5,507 |
|
|
|
5,507 |
|
||||||
Deferred income taxes |
|
|
|
|
|
|
|
13,576 |
|
|
|
13,576 |
|
||||||
Other long-term liabilities |
|
|
|
4,821 |
|
2,124 |
|
64,938 |
|
|
|
71,883 |
|
||||||
Partners equity |
|
1,902,047 |
|
388,831 |
|
1,520,343 |
|
2,387,234 |
|
(4,297,676 |
) |
1,900,779 |
|
||||||
Total liabilities and partners equity |
|
$ |
2,404,241 |
|
$ |
1,025,825 |
|
$ |
2,114,415 |
|
$ |
2,884,711 |
|
$ |
(5,062,200 |
) |
$ |
3,366,992 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
18
Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2006
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership, L.P. |
|
Non- Guarantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
|
|
$ |
68,713 |
|
$ |
31,013 |
|
$ |
191,550 |
|
$ |
(253 |
) |
$ |
291,023 |
|
Costs and expenses |
|
730 |
|
36,563 |
|
26,363 |
|
173,240 |
|
(253 |
) |
236,643 |
|
||||||
Operating income |
|
(730 |
) |
32,150 |
|
4,650 |
|
18,310 |
|
|
|
54,380 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity earnings |
|
41,899 |
|
385 |
|
19,923 |
|
20,917 |
|
(81,660 |
) |
1,464 |
|
||||||
Interest and other expense, net |
|
|
|
(9,709 |
) |
(4,718 |
) |
(862 |
) |
|
|
(15,289 |
) |
||||||
Income from continuing operations before income tax benefit |
|
41,169 |
|
22,826 |
|
19,855 |
|
38,365 |
|
(81,660 |
) |
40,555 |
|
||||||
Income tax benefit |
|
|
|
|
|
|
|
(614 |
) |
|
|
(614 |
) |
||||||
Income from continuing operations |
|
41,169 |
|
22,826 |
|
19,855 |
|
38,979 |
|
(81,660 |
) |
41,169 |
|
||||||
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
$ |
41,169 |
|
$ |
22,826 |
|
$ |
19,855 |
|
$ |
38,979 |
|
$ |
(81,660 |
) |
$ |
41,169 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
19
Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2005
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership L.P. |
|
Non- Guarantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
|
|
$ |
62,237 |
|
$ |
29,560 |
|
$ |
166,804 |
|
$ |
(216 |
) |
$ |
258,385 |
|
Costs and expenses |
|
672 |
|
34,268 |
|
18,772 |
|
148,882 |
|
(216 |
) |
202,378 |
|
||||||
Operating income |
|
(672 |
) |
27,969 |
|
10,788 |
|
17,922 |
|
|
|
56,007 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity earnings |
|
45,839 |
|
190 |
|
21,913 |
|
30,630 |
|
(97,031 |
) |
1,541 |
|
||||||
Interest and other expense, net |
|
|
|
(7,536 |
) |
(6,534 |
) |
(567 |
) |
|
|
(14,637 |
) |
||||||
Income from continuing operations before income tax expense |
|
45,167 |
|
20,623 |
|
26,167 |
|
47,985 |
|
(97,031 |
) |
42,911 |
|
||||||
Income tax expense |
|
|
|
|
|
|
|
2,050 |
|
|
|
2,050 |
|
||||||
Income from continuing operations |
|
45,167 |
|
20,623 |
|
26,167 |
|
45,935 |
|
(97,031 |
) |
40,861 |
|
||||||
Income from discontinued operations |
|
|
|
|
|
3,133 |
|
1,173 |
|
|
|
4,306 |
|
||||||
Net income |
|
$ |
45,167 |
|
$ |
20,623 |
|
$ |
29,300 |
|
$ |
47,108 |
|
$ |
(97,031 |
) |
$ |
45,167 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
20
Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2006
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership, L.P. |
|
Non- Garantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
|
|
$ |
194,091 |
|
$ |
85,121 |
|
$ |
566,522 |
|
$ |
(739 |
) |
$ |
844,995 |
|
Costs and expenses |
|
1,735 |
|
104,528 |
|
68,795 |
|
513,013 |
|
(739 |
) |
687,332 |
|
||||||
Operating income |
|
(1,735 |
) |
89,563 |
|
16,326 |
|
53,509 |
|
|
|
157,663 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity earnings |
|
113,908 |
|
765 |
|
53,160 |
|
55,022 |
|
(218,341 |
) |
4,514 |
|
||||||
Interest and other expense, net |
|
|
|
(26,504 |
) |
(18,751 |
) |
(2,375 |
) |
|
|
(47,630 |
) |
||||||
Income from continuing operations before income tax expense |
|
112,173 |
|
63,824 |
|
50,735 |
|
106,156 |
|
(218,341 |
) |
114,547 |
|
||||||
Income tax expense |
|
|
|
|
|
|
|
1,997 |
|
|
|
1,997 |
|
||||||
Income from continuing operations |
|
112,173 |
|
63,824 |
|
50,735 |
|
104,159 |
|
(218,341 |
) |
112,550 |
|
||||||
Income (loss) from discontinued operations |
|
|
|
|
|
317 |
|
(694 |
) |
|
|
(377 |
) |
||||||
Net income |
|
$ |
112,173 |
|
$ |
63,824 |
|
$ |
51,052 |
|
$ |
103,465 |
|
$ |
(218,341 |
) |
$ |
112,173 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
21
Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2005
(Thousands of Dollars)
|
|
Valero L.P. |
|
Valero Logistics Operations, L.P. |
|
Kaneb Pipe Line Operating Partnership L.P. |
|
Non- Guarantor Subsidiaries (a) |
|
Eliminations |
|
Valero L.P. Consolidated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues |
|
$ |
|
|
$ |
177,179 |
|
$ |
29,560 |
|
$ |
167,142 |
|
$ |
(555 |
) |
$ |
373,326 |
|
Costs and expenses |
|
1,304 |
|
99,415 |
|
18,772 |
|
149,359 |
|
(555 |
) |
268,295 |
|
||||||
Operating income |
|
(1,304 |
) |
77,764 |
|
10,788 |
|
17,783 |
|
|
|
105,031 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity earnings |
|
84,587 |
|
836 |
|
21,913 |
|
30,633 |
|
(135,629 |
) |
2,340 |
|
||||||
Interest and other expense, net |
|
|
|
(19,229 |
) |
(6,534 |
) |
(581 |
) |
|
|
(26,344 |
) |
||||||
Income from continuing operations before income tax expense |
|
83,283 |
|
59,371 |
|
26,167 |
|
47,835 |
|
(135,629 |
) |
81,027 |
|
||||||
Income tax expense |
|
|
|
|
|
|
|
2,050 |
|
|
|
2,050 |
|
||||||
Income from continuing operations |
|
83,283 |
|
59,371 |
|
26,167 |
|
45,785 |
|
(135,629 |
) |
78,977 |
|
||||||
Income from discontinued operations |
|
|
|
|
|
3,133 |
|
1,173 |
|
|
|
4,306 |
|
||||||
Net income |
|
$ |
83,283 |
|
$ |
59,371 |
|
$ |
29,300 |
|
$ |
46,958 |
|
$ |
(135,629 |
) |
$ |
83,283 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
22
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2006
(Thousands of Dollars)
|
|
Valero
|
|
Valero
|
|
Kaneb Pipe
|
|
Non-
|
|
Eliminations |
|
Valero L.P.
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
$ |
112,173 |
|
$ |
63,824 |
|
$ |
51,052 |
|
$ |
103,465 |
|
$ |
(218,341 |
) |
$ |
112,173 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Depreciation and amortization |
|
|
|
28,023 |
|
18,326 |
|
27,673 |
|
|
|
74,022 |
|
||||||
Equity income, net of distributions |
|
21,688 |
|
(216 |
) |
(53,160 |
) |
(51,044 |
) |
82,732 |
|
|
|
||||||
Changes in operating assets and liabilities and other |
|
(2,480 |
) |
(7,197 |
) |
(8,843 |
) |
14,304 |
|
|
|
(4,216 |
) |
||||||
Net cash provided by (used in) operating activities |
|
131,381 |
|
84,434 |
|
7,375 |
|
94,398 |
|
(135,609 |
) |
181,979 |
|
||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Capital expenditures |
|
|
|
(26,104 |
) |
(6,530 |
) |
(37,681 |
) |
|
|
(70,315 |
) |
||||||
Proceeds from sale of assets |
|
|
|
8 |
|
58 |
|
70,126 |
|
|
|
70,192 |
|
||||||
Acquisition and investment in noncurrent assets |
|
|
|
(14,423 |
) |
(50 |
) |
(7,758 |
) |
|
|
(22,231 |
) |
||||||
Other |
|
(77 |
) |
(6,259 |
) |
26,604 |
|
(21,658 |
) |
6,435 |
|
5,045 |
|
||||||
Cash flows provided by (used in) investing activities |
|
(77 |
) |
(46,778 |
) |
20,082 |
|
3,029 |
|
6,435 |
|
(17,309 |
) |
||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Distributions |
|
(135,596 |
) |
(135,596 |
) |
|
|
(13 |
) |
135,609 |
|
(135,596 |
) |
||||||
Long-term debt borrowings |
|
|
|
59,000 |
|
|
|
|
|
|
|
59,000 |
|
||||||
Long-term debt repayments |
|
|
|
(48,480 |
) |
|
|
|
|
|
|
(48,480 |
) |
||||||
Net intercompany borrowings (repayments) |
|
4,074 |
|
107,954 |
|
(26,879 |
) |
(85,149 |
) |
|
|
|
|
||||||
Other |
|
352 |
|
(7,054 |
) |
|
|
4,878 |
|
(6,435 |
) |
(8,259 |
) |
||||||
Cash flows provided by (used in) financing activities |
|
(131,170 |
) |
(24,176 |
) |
(26,879 |
) |
(80,284 |
) |
129,174 |
|
(133,335 |
) |
||||||
Effect of foreign exchange rate changes on cash |
|
|
|
|
|
|
|
(660 |
) |
|
|
(660 |
) |
||||||
Net increase in cash and cash equivalents |
|
134 |
|
13,480 |
|
578 |
|
16,483 |
|
|
|
30,675 |
|
||||||
Cash and cash equivalents at the beginning of the period |
|
10 |
|
1,590 |
|
114 |
|
34,340 |
|
|
|
36,054 |
|
||||||
Cash and cash equivalents at the end of the period |
|
$ |
144 |
|
$ |
15,070 |
|
$ |
692 |
|
$ |
50,823 |
|
$ |
|
|
$ |
66,729 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
23
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2005
(Thousands of Dollars)
|
|
|
|
Valero
|
|
Kaneb Pipe
|
|
Non-
|
|
Eliminations |
|
Valero L.P.
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
|
$ |
83,283 |
|
$ |
59,371 |
|
$ |
29,300 |
|
$ |
46,958 |
|
$ |
(135,629 |
) |
$ |
83,283 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Depreciation and amortization |
|
|
|
26,033 |
|
3,828 |
|
11,564 |
|
|
|
41,425 |
|
||||||
Equity income, net of distributions |
|
(748 |
) |
176 |
|
(21,913 |
) |
(29,305 |
) |
51,790 |
|
|
|
||||||
Changes in operating assets and liabilities and other |
|
3,835 |
|
(633 |
) |
1,119 |
|
6,369 |
|
|
|
10,690 |
|
||||||
Net cash provided by (used in) operating activities |
|
86,370 |
|
84,947 |
|
12,334 |
|
35,586 |
|
(83,839 |
) |
135,398 |
|
||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Capital expenditures |
|
|
|
(33,568 |
) |
(1,278 |
) |
(6,449 |
) |
|
|
(41,295 |
) |
||||||
Proceeds from sale of assets |
|
|
|
|
|
85,466 |
|
395,431 |
|
|
|
480,897 |
|
||||||
Acquisition and investment in noncurrent assets |
|
(522,574 |
) |
(1,487 |
) |
864 |
|
15,042 |
|
1,487 |
|
(506,668 |
) |
||||||
Other |
|
141 |
|
|
|
|
|
(141 |
) |
|
|
|
|
||||||
Cash flows provided by (used in) investing activities |
|
(522,433 |
) |
(35,055 |
) |
85,052 |
|
403,883 |
|
1,487 |
|
(67,066 |
) |
||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Distributions |
|
(83,839 |
) |
(83,839 |
) |
|
|
|
|
83,839 |
|
(83,839 |
) |
||||||
Long-term debt borrowings |
|
|
|
713,194 |
|
|
|
|
|
|
|
713,194 |
|
||||||
Long-term debt repayments |
|
|
|
(513,467 |
) |
(123,668 |
) |
(63,385 |
) |
|
|
(700,520 |
) |
||||||
Net intercompany borrowings (repayments) |
|
490,706 |
|
(180,760 |
) |
31,218 |
|
(341,164 |
) |
|
|
|
|
||||||
Other |
|
29,197 |
|
|
|
|
|
1,487 |
|
(1,487 |
) |
29,197 |
|
||||||
Cash flows provided by (used in) financing activities |
|
436,064 |
|
(64,872 |
) |
(92,450 |
) |
(403,062 |
) |
82,352 |
|
(41,968 |
) |
||||||
Effect of foreign exchange rate changes on cash |
|
|
|
|
|
|
|
(833 |
) |
|
|
(833 |
) |
||||||
Net increase in cash and cash equivalents |
|
1 |
|
(14,980 |
) |
4,936 |
|
35,574 |
|
|
|
25,531 |
|
||||||
Cash and cash equivalents at the beginning of the period |
|
10 |
|
16,041 |
|
|
|
96 |
|
|
|
16,147 |
|
||||||
Cash and cash equivalents at the end of the period |
|
$ |
11 |
|
$ |
1,061 |
|
$ |
4,936 |
|
$ |
35,670 |
|
$ |
|
|
$ |
41,678 |
|
(a) Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words anticipates, believes, expects, plans, intends, estimates, forecasts, budgets, projects, will, could, should, may and similar expressions. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Please read our Annual Report on Form 10-K for the year ended December 31, 2005, Part I, Item 1A Risk Factors for a discussion of certain of those risks, uncertainties and assumptions.
If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those described in any forward-looking statement. Other unknown or unpredictable factors could also have material adverse effects on our future results. Readers are cautioned not to place undue reliance on this forward-looking information, which is as of the date of the Form 10-Q. We do not intend to update these statements unless it is required by the securities laws to do so, and we undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Valero L.P. is a publicly traded Delaware limited partnership formed in 1999 engaged in the crude oil and refined product transportation, terminalling and storage business. Valero L.P. has terminal facilities in the United States, the Netherlands Antilles, Canada, Mexico, the Netherlands and the United Kingdom.
We conduct our operations through our wholly owned subsidiaries, primarily Valero Logistics Operations, L.P. (Valero Logistics) and Kaneb Pipe Line Operating Partnership, L.P. (KPOP). Our operations are divided into four reportable business segments: refined product terminals, refined product pipelines, crude oil pipelines and crude oil storage tanks.
Refined Product Terminals. We own 57 terminals in the United States that provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids. We also own international terminal operations on the island of St. Eustatius in the Caribbean, Point Tupper in Nova Scotia, Canada, the United Kingdom, the Netherlands and Nuevo Laredo in Mexico. We sold eight terminals located in Australia and New Zealand on March 30, 2006.
Refined Product Pipelines. We own common carrier pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 6,449 miles, consisting of the Central West System which is connected to Valero Energy refineries and the East Pipeline and the North Pipeline which we acquired from Kaneb. In addition, we own a 2,000 mile anhydrous ammonia pipeline located in Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and Nebraska.
Crude Oil Pipelines. We own 797 miles of crude oil pipelines which transport crude oil and other feedstocks, such as gas oil, from various points in Texas, Oklahoma, Kansas and Colorado to Valero Energys McKee, Three Rivers and Ardmore refineries as well as associated crude oil storage facilities in Texas and Oklahoma that are located along the crude oil pipelines. We also own 57 miles of crude oil pipeline in Illinois, which serves ConocoPhillips Wood River refinery.
Crude Oil Storage Tanks . We own 60 crude oil and intermediate feedstock storage tanks and related assets that store and deliver crude oil and intermediate feedstock to Valero Energys refineries in Benicia, California and Corpus Christi and Texas City in Texas.
25
We provide transportation, storage services and ancillary services to our customers, including Valero Energy, which indirectly owns our general partner. Factors that affect the results of our operations include:
· company-specific factors, such as integrity issues and maintenance requirements that impact the throughput rates of our assets;
· seasonal factors that affect the demand for refined products and fertilizers transported by and/or stored in our assets;
· industry factors, such as changes in the prices of petroleum products that affect demand and operations of our competitors; and
· other factors such as refinery utilization rates and maintenance turnaround schedules that impact the operations of refineries served by our assets.
Effective January 1, 2006, we purchased a 23.77% interest in Capwood pipeline from Valero Energy for $12.8 million, which was paid from borrowings under our existing revolving credit agreement. The Capwood pipeline is a 57-mile crude oil pipeline that extends from Patoka, Illinois to Wood River, Illinois. Plains All American Pipeline L.P., the operator of the Capwood pipeline, owns the remaining 76.23% interest. Our financial statements include the results of operations of our interest in the Capwood pipeline in the crude oil pipelines segment for the three and nine months ended September 30, 2006.
On March 30, 2006, we sold our Australia and New Zealand subsidiaries to ANZ Terminals Pty. Ltd., for $70.1 million. The proceeds were used for working capital purposes, including paying down outstanding debt. This transaction included the sale of eight terminals with an aggregate storage capacity of 1.1 million barrels. For the nine months ended September 30, 2006, revenues and pre-tax income related to the Australia and New Zealand subsidiaries are included in loss from discontinued operations totaled $5.0 million and $0.6 million, respectively.
UDS Logistics, LLC, an indirect, wholly owned subsidiary of Valero Energy, owned 21.4% of our limited partner interests and the 2% general partner interest as of December 31, 2005. On January 15, 2006, UDS Logistics, LLC, changed its name to Valero GP Holdings, LLC (Holdings). Prior to July 19, 2006, Holdings completed certain organizational transactions resulting in Valero GP, LLC, Riverwalk Holdings, LLC, and Riverwalk Logistics, L.P. becoming wholly owned subsidiaries of Holdings.
On July 19, 2006, Holdings completed its initial public offering of 17.25 million units representing limited liability company interests at $22.00 per unit. All of these units were sold by subsidiaries of Valero Energy. As a result, Holdings did not receive any proceeds from this offering. Valero Energy retains an approximate 59% ownership interest in Holdings, but has stated its intention to further reduce and ultimately sell all of its interest in Holdings. We expect the acquisition to close in the fourth quarter of 2006 and to fund the acquisition with borrowings under our revolving credit agreement.
On September 18, 2006, we signed a definitive agreement to acquire a crude oil, storage and blending facility in St. James, Louisiana from Koch Supply and Trading, L.P. for $140 million. The acquisition includes 17 crude oil tanks and three heated refined product tanks with a total capacity of approximately 3.3 million barrels. Additionally, the facility has a rail-loading facility and three docks with barge and ship access. The facility is located on approximately 220 acres of land on the west bank of the Mississippi River approximately 60 miles west of New Orleans and has an additional 585 acres of undeveloped land. We expect the acquisition to close in the fourth quarter of 2006 and to fund the acquisition with borrowings under our revolving credit agreement.
26
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
|
|
Three Months Ended
|
|
|
|
|||||
|
|
2006 |
|
2005 |
|
Change |
|
|||
Statement of Income Data: |
|
|
|
|
|
|
|
|||
Revenues: |
|
|
|
|
|
|
|
|||
Services revenues |
|
$ |
161,888 |
|
$ |
148,210 |
|
$ |
13,678 |
|
Product sales |
|
129,135 |
|
110,175 |
|
18,960 |
|
|||
Total revenues |
|
291,023 |
|
258,385 |
|
32,638 |
|
|||
|
|
|
|
|
|
|
|
|||
Costs and expenses: |
|
|
|
|
|
|
|
|||
Cost of product sales |
|
117,759 |
|
101,217 |
|
16,542 |
|
|||
Operating expenses |
|
82,502 |
|
68,429 |
|
14,073 |
|
|||
General and administrative expenses |
|
11,388 |
|
10,000 |
|
1,388 |
|
|||
Depreciation and amortization |
|
24,994 |
|
22,732 |
|
2,262 |
|
|||
Total costs and expenses |
|
236,643 |
|
202,378 |
|
34,265 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
54,380 |
|
56,007 |
|
(1,627 |
) |
|||
Equity income from joint ventures |
|
1,464 |
|
1,541 |
|
(77 |
) |
|||
Interest and other expenses, net |
|
(15,289 |
) |
(14,637 |
) |
(652 |
) |
|||
Income from continuing operations before income tax expense (benefit) |
|
40,555 |
|
42,911 |
|
(2,356 |
) |
|||
Income tax expense (benefit) |
|
(614 |
) |
2,050 |
|
(2,664 |
) |
|||
Income from continuing operations |
|
41,169 |
|
40,861 |
|
308 |
|
|||
|
|
|
|
|
|
|
|
|||
Income (loss) from discontinued operations |
|
|
|
4,306 |
|
(4,306 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income |
|
41,169 |
|
45,167 |
|
(3,998 |
) |
|||
Less general partners interest and incentive distributions |
|
(4,310 |
) |
(3,892 |
) |
(418 |
) |
|||
Limited partners interest in net income |
|
$ |
36,859 |
|
$ |
41,275 |
|
$ |
(4,416 |
) |
|
|
|
|
|
|
|
|
|||
Weighted-average units outstanding |
|
46,809,749 |
|
46,809,749 |
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Income (loss) per unit applicable to limited partners: |
|
|
|
|
|
|
|
|||
Continuing operations |
|
$ |
0.79 |
|
$ |
0.79 |
|
$ |
|
|
Discontinued operations |
|
|
|
0.09 |
|
(0.09 |
) |
|||
Net income |
|
$ |
0.79 |
|
$ |
0.88 |
|
$ |
(0.09 |
) |
27
|
|
Three Months Ended |
|
|
|
|||||
|
|
September 30, |
|
|
|
|||||
|
|
2006 |
|
2005 |
|
Change |
|
|||
|
|
|
|
|
|
|
|
|||
Refined Product Terminals: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day)(a) |
|
267,144 |
|
253,415 |
|
13,729 |
|
|||
Throughput revenues |
|
$ |
13,273 |
|
$ |
12,387 |
|
$ |
886 |
|
Storage lease revenues |
|
62,925 |
|
56,411 |
|
6,514 |
|
|||
Product sales (bunkering) |
|
128,369 |
|
110,175 |
|
18,194 |
|
|||
Total revenues |
|
204,567 |
|
178,973 |
|
25,594 |
|
|||
Cost of product sales |
|
117,161 |
|
101,217 |
|
15,944 |
|
|||
Operating expenses |
|
49,555 |
|
39,450 |
|
10,105 |
|
|||
Depreciation and amortization |
|
11,249 |
|
11,936 |
|
(687 |
) |
|||
Segment operating income |
|
$ |
26,602 |
|
$ |
26,370 |
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|||
Refined Product Pipelines: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
722,952 |
|
688,126 |
|
34,826 |
|
|||
Throughput revenues |
|
$ |
58,567 |
|
$ |
53,749 |
|
$ |
4,818 |
|
Product sales |
|
766 |
|
|
|
766 |
|
|||
Total revenues |
|
59,333 |
|
53,749 |
|
5,584 |
|
|||
Cost of product sales |
|
598 |
|
|
|
598 |
|
|||
Operating expenses |
|
25,972 |
|
22,507 |
|
3,465 |
|
|||
Depreciation and amortization |
|
10,554 |
|
7,772 |
|
2,782 |
|
|||
Segment operating income |
|
$ |
22,209 |
|
$ |
23,470 |
|
$ |
(1,261 |
) |
|
|
|
|
|
|
|
|
|||
Crude Oil Pipelines: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
410,211 |
|
382,615 |
|
27,596 |
|
|||
Revenues |
|
$ |
15,072 |
|
$ |
14,041 |
|
$ |
1,031 |
|
Operating expenses |
|
4,559 |
|
4,455 |
|
104 |
|
|||
Depreciation and amortization |
|
1,277 |
|
1,155 |
|
122 |
|
|||
Segment operating income |
|
$ |
9,236 |
|
$ |
8,431 |
|
$ |
805 |
|
|
|
|
|
|
|
|
|
|||
Crude Oil Storage Tanks: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
513,904 |
|
504,060 |
|
9,844 |
|
|||
Revenues |
|
$ |
12,051 |
|
$ |
11,622 |
|
$ |
429 |
|
Operating expenses |
|
2,416 |
|
2,017 |
|
399 |
|
|||
Depreciation and amortization |
|
1,914 |
|
1,869 |
|
45 |
|
|||
Segment operating income |
|
$ |
7,721 |
|
$ |
7,736 |
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|||
Consolidated Information: |
|
|
|
|
|
|
|
|||
Revenues |
|
$ |
291,023 |
|
$ |
258,385 |
|
$ |
32,638 |
|
Cost of product sales |
|
117,759 |
|
101,217 |
|
16,542 |
|
|||
Operating expenses |
|
82,502 |
|
68,429 |
|
14,073 |
|
|||
Depreciation and amortization |
|
24,994 |
|
22,732 |
|
2,262 |
|
|||
Segment operating income |
|
65,768 |
|
66,007 |
|
(239 |
) |
|||
General and administrative expenses |
|
11,388 |
|
10,000 |
|
1,388 |
|
|||
Consolidated operating income |
|
$ |
54,380 |
|
$ |
56,007 |
|
$ |
(1,627 |
) |
(a) Excludes throughputs related to storage lease and bunkering operations.
28
Highlights
Income from continuing operations for the three months ended September 30, 2006 increased slightly compared to the three months ended September 30, 2005, despite a decline in consolidated segmental operating income. Lower income tax expense for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, was offset by the decline in consolidated segmental operating income and higher general and administrative expense.
Consolidated segmental operating income for the three months ended September 30, 2006 decreased $0.2 million compared to the three months ended September 30, 2005, primarily due to a $1.2 million decrease in operating income for the refined product pipelines segment, partially offset by a $0.8 million increase in operating income for the crude oil pipelines segment and a $0.2 million increase in operating income for the refined product terminals segment.
Refined Product Terminals
Revenues increased by $25.6 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to increases in bunkering revenues of $18.2 million and storage lease revenues of $6.5 million. Bunkering revenue increased as more barrels were sold and at a higher average sales price.
Cost of product sales increased $15.9 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005 consistent with the increase in bunkering revenues. Cost of product sales reflects the cost of bunker fuel sold to marine vessels at our facilities at St. Eustatius in the Caribbean and Point Tupper in Nova Scotia, Canada.
Operating expenses increased $10.1 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to higher planned maintenance and reimbursable project expenses. Reimbursable project expenses are charged back to our customers and its fluctuations are in conjunction with fluctuations in revenues. Operating expenses further increased compared to the three months ended September 30, 2005, due to higher internal overhead expense.
Depreciation and amortization expense decreased $0.7 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to the final purchase price allocation of our property and equipment related to the Kaneb Acquisition.
Refined Product Pipelines
Revenues increased by $5.6 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to higher tariff rates as the annual index adjustment was effective July 1, 2006, coupled with supply dynamics in the El Paso market resulting in higher throughputs in the McKee to El Paso refined product pipeline system. Revenues also increased due to the expansion of our refined product pipeline in South Texas and northeastern Mexico (Burgos project). The Burgos project commenced operations on the Edinburg to Harlingen segment in October 2005, and the Harlingen to Brownsville segment in March 2006. In addition, revenue increased by $0.8 million due to the commencement of butane blending on our east pipeline in the third quarter of 2006.
Cost of product sales totaled $0.6 million for the three months ended September 30, 2006 as butane blending on our central east pipelines commenced in the third quarter of 2006. Cost of product sales reflects the cost of butane blended into gasoline on our east pipeline.
Operating expenses increased $3.5 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to higher maintenance and internal overhead expenses.
Depreciation and amortization expense increased by $2.8 million for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, primarily due to the final purchase price allocation of our property and equipment related to the Kaneb Acquisition and completion of the Burgos project in July 2006.
29
Crude Oil Pipelines
Revenues increased by $1.0 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, due to higher tariff rates as the annual index adjustment was effective July 1, 2006. In addition, our purchase of the Capwood pipeline, which increased throughputs by approximately 34,000 barrels per day, resulted in additional revenues of $0.4 million for the three months ended September 30, 2006.
Crude Oil Storage Tanks
Revenues increased by $0.4 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to higher throughput at the Corpus Christi North Beach storage facility. In addition, Valero Energys Corpus Christi refinery experienced the effects of two hurricanes and operating issues during the three months ended September 30, 2005, which resulted in lower throughputs and revenues for that period.
Operating expenses increased by $0.4 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, due to increased dockage and wharfage costs at the Corpus Christi North Beach storage facility.
General
General and administrative expenses increased by $1.4 million for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, primarily due to increased headcount resulting from a reduction in administrative services received from Valero Energy.
For the three months ended September 30, 2006, we recorded an income tax benefit of $0.6 million compared to income tax expense of $2.1 million for the three months ended September 30, 2005. The income tax benefit for the three months ended September 30, 2006 resulted from a reduction in the Canadian federal income tax rate as well as adjustments to our deferred tax assets and liabilities based on the filing of our 2005 income tax returns.
30
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Financial
Highlights
(Unaudited, Thousands of Dollars, Except Unit and Per Unit
Data)
|
|
Nine Months Ended
|
|
|
|
|||||
|
|
2006 |
|
2005 |
|
Change |
|
|||
Statement of Income Data: |
|
|
|
|
|
|
|
|||
Revenues: |
|
|
|
|
|
|
|
|||
Services revenues |
|
$ |
461,911 |
|
$ |
263,151 |
|
$ |
198,760 |
|
Product sales |
|
383,084 |
|
110,175 |
|
272,909 |
|
|||
Total revenues |
|
844,995 |
|
373,326 |
|
471,669 |
|
|||
|
|
|
|
|
|
|
|
|||
Costs and expenses: |
|
|
|
|
|
|
|
|||
Cost of product sales |
|
350,260 |
|
101,217 |
|
249,043 |
|
|||
Operating expenses |
|
232,727 |
|
109,759 |
|
122,968 |
|
|||
General and administrative expenses |
|
30,323 |
|
17,064 |
|
13,259 |
|
|||
Depreciation and amortization |
|
74,022 |
|
40,255 |
|
33,767 |
|
|||
Total costs and expenses |
|
687,332 |
|
268,295 |
|
419,037 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating income |
|
157,663 |
|
105,031 |
|
52,632 |
|
|||
Equity income from joint ventures |
|
4,514 |
|
2,340 |
|
2,174 |
|
|||
Interest and other expenses, net |
|
(47,630 |
) |
(26,344 |
) |
(21,286 |
) |
|||
Income from continuing operations before income tax expense |
|
114,547 |
|
81,027 |
|
33,520 |
|
|||
Income tax expense |
|
1,997 |
|
2,050 |
|
(53 |
) |
|||
Income from continuing operations |
|
112,550 |
|
78,977 |
|
33,573 |
|
|||
|
|
|
|
|
|
|
|
|||
Income (loss) from discontinued operations |
|
(377 |
) |
4,306 |
|
(4,683 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income |
|
112,173 |
|
83,283 |
|
28,890 |
|
|||
Less general partners interest and incentive distributions |
|
(12,550 |
) |
(7,215 |
) |
(5,335 |
) |
|||
Limited partners interest in net income |
|
$ |
99,623 |
|
$ |
76,068 |
|
$ |
23,555 |
|
|
|
|
|
|
|
|
|
|||
Weighted-average units outstanding |
|
46,809,749 |
|
31,051,243 |
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Income (loss) per unit applicable to limited partners: |
|
|
|
|
|
|
|
|||
Continuing operations |
|
$ |
2.14 |
|
$ |
2.31 |
|
$ |
(0.17 |
) |
Discontinued operations |
|
(0.01 |
) |
0.14 |
|
(0.15 |
) |
|||
Net income |
|
$ |
2.13 |
|
$ |
2.45 |
|
$ |
(0.32 |
) |
|
|
September 30, |
|
December 31, |
|
|
|
|||
|
|
2006 |
|
2005 |
|
Change |
|
|||
Balance Sheet Data: |
|
|
|
|
|
|
|
|||
Long-term debt, including current portion |
|
$ |
1,179,042 |
|
$ |
1,170,705 |
|
$ |
8,337 |
|
Partners equity |
|
1,886,671 |
|
1,900,779 |
|
(14,108 |
) |
|||
Debt-to-capitalization ratio (a) |
|
38.5 |
% |
38.1 |
% |
0.4 |
% |
|||
(a) Our debt-to-capitalization ratio is defined as our long-term debt, including current portion, divided by the sum of our long-term debt, including current portion, and partners equity.
31
Segment
Operating Highlights
(Thousands of Dollars, Except Barrels/Day Information)
|
|
Nine Months Ended
|
|
|
|
|||||
|
|
2006 |
|
2005 |
|
Change |
|
|||
|
|
|
|
|
|
|
|
|||
Refined Product Terminals: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) (a) |
|
261,619 |
|
252,933 |
|
8,686 |
|
|||
Throughput revenues |
|
$ |
36,689 |
|
$ |
33,808 |
|
$ |
2,881 |
|
Storage lease revenues |
|
182,951 |
|
56,411 |
|
126,540 |
|
|||
Product sales (bunkering) |
|
382,318 |
|
110,175 |
|
272,143 |
|
|||
Total revenues |
|
601,958 |
|
200,394 |
|
401,564 |
|
|||
Cost of product sales |
|
349,662 |
|
101,217 |
|
248,445 |
|
|||
Operating expenses |
|
143,626 |
|
49,672 |
|
93,954 |
|
|||
Depreciation and amortization |
|
33,196 |
|
15,655 |
|
17,541 |
|
|||
Segment operating income |
|
$ |
75,474 |
|
$ |
33,850 |
|
$ |
41,624 |
|
|
|
|
|
|
|
|
|
|||
Refined Product Pipelines: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
711,215 |
|
524,290 |
|
186,925 |
|
|||
Throughput revenues |
|
$ |
162,814 |
|
$ |
98,609 |
|
$ |
64,205 |
|
Product sales |
|
766 |
|
|
|
766 |
|
|||
Total revenues |
|
163,580 |
|
98,609 |
|
64,971 |
|
|||
Cost of product sales |
|
598 |
|
|
|
598 |
|
|||
Operating expenses |
|
69,510 |
|
41,362 |
|
28,148 |
|
|||
Depreciation and amortization |
|
31,296 |
|
15,533 |
|
15,763 |
|
|||
Segment operating income |
|
$ |
62,176 |
|
$ |
41,714 |
|
$ |
20,462 |
|
|
|
|
|
|
|
|
|
|||
Crude Oil Pipelines: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
426,129 |
|
362,574 |
|
63,555 |
|
|||
Revenues |
|
$ |
43,989 |
|
$ |
39,601 |
|
$ |
4,388 |
|
Operating expenses |
|
12,546 |
|
12,464 |
|
82 |
|
|||
Depreciation and amortization |
|
3,809 |
|
3,457 |
|
352 |
|
|||
Segment operating income |
|
$ |
27,634 |
|
$ |
23,680 |
|
$ |
3,954 |
|
|
|
|
|
|
|
|
|
|||
Crude Oil Storage Tanks: |
|
|
|
|
|
|
|
|||
Throughput (barrels/day) |
|
503,769 |
|
512,349 |
|
(8,580 |
) |
|||
Revenues |
|
$ |
35,468 |
|
$ |
34,722 |
|
$ |
746 |
|
Operating expenses |
|
7,045 |
|
6,261 |
|
784 |
|
|||
Depreciation and amortization |
|
5,721 |
|
5,610 |
|
111 |
|
|||
Segment operating income |
|
$ |
22,702 |
|
$ |
22,851 |
|
$ |
(149 |
) |
|
|
|
|
|
|
|
|
|||
Consolidated Information: |
|
|
|
|
|
|
|
|||
Revenues |
|
$ |
844,995 |
|
$ |
373,326 |
|
$ |
471,669 |
|
Cost of product sales |
|
350,260 |
|
101,217 |
|
249,043 |
|
|||
Operating expenses |
|
232,727 |
|
109,759 |
|
122,968 |
|
|||
Depreciation and amortization |
|
74,022 |
|
40,255 |
|
33,767 |
|
|||
Segment operating income |
|
187,986 |
|
122,095 |
|
65,891 |
|
|||
General and administrative expenses |
|
30,323 |
|
17,064 |
|
13,259 |
|
|||
Consolidated operating income |
|
$ |
157,663 |
|
$ |
105,031 |
|
$ |
52,632 |
|
(a) Excludes throughputs related to storage lease and bunkering operations.
32
Highlights
Income from continuing operations for the nine months ended September 30, 2006 increased $33.6 million compared to the nine months ended September 30, 2005 due to higher consolidated segmental operating income and higher equity earnings in joint ventures, partially offset by increased general and administrative expense and increased interest expense. All of these increases predominantly resulted from the Kaneb Acquisition.
Consolidated segmental operating income for the nine months ended September 30, 2006 increased $65.9 million compared to the nine months ended September 30, 2005, primarily due to a $41.6 million increase in operating income for the refined product terminals segment and a $20.5 million increase in operating income for the refined product pipelines segment. These increases relate primarily to the effect of the Kaneb Acquisition.
Refined Product Terminals
Revenues increased by $401.6 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to the Kaneb Acquisition. The Kaneb Acquisition contributed $382.3 million of bunkering revenues and $183.0 million of storage lease revenues for the nine months ended September 30, 2006 compared to $110.2 million of bunkering revenues and $56.4 million of storage lease revenue for the period from the Kaneb Acquisition on July 1, 2005 to September 30, 2005.
Cost of product sales totaled $349.7 million for the nine months ended September 30, 2006 and $101.2 million for the period from the Kaneb Acquisition on July 1, 2005 to September 30, 2005. Cost of product sales reflects the cost of bunker fuel sold to marine vessels at our facilities at St. Eustatius in the Caribbean and Point Tupper in Nova Scotia, Canada, which we acquired as part of the Kaneb Acquisition.
Operating expenses increased $94.0 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to the inclusion of operating expenses related to the assets acquired in the Kaneb Acquisition. Operating expenses further increased compared to the nine months ended September 30, 2005, due to increased internal overhead expense.
Depreciation and amortization expense increased $17.5 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to an increase in our property and equipment related to the Kaneb Acquisition.
Refined Product Pipelines
Revenues increased by $65.0 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to the Kaneb Acquisition, which increased throughputs by approximately 144,000 barrels per day, resulting in additional revenues of $55.6 million. Revenues also increased due to the expansion of the Burgos project, which commenced operations on the Edinburg to Harlingen segment in October 2005, and the Harlingen to Brownsville segment in March 2006. In addition, supply dynamics in the El Paso and Denver markets caused higher throughputs and revenues on the McKee to El Paso refined product pipeline system and the McKee to Denver refined product pipelines.
Operating expenses increased by $28.1 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to the inclusion of operating expenses related to the assets acquired in the Kaneb Acquisition.
Depreciation and amortization expense increased by $15.8 million for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily due to increases in our property and equipment related to the Kaneb Acquisition.
C rude Oil Pipelines
Revenues increased by $4.4 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, due to higher revenues of $2.4 million on the Ardmore crude oil pipelines for the nine months ended September 30, 2006 as lower overall throughputs resulted from a maintenance turnaround at Valero Energys Ardmore refinery during the nine months ended September 30, 2005. In addition, our purchase of the Capwood pipeline, which increased throughputs by approximately 41,000 barrels per day, resulted in additional revenues of $1.5 million.
33
Crude Oil Storage Tanks
Revenues increased by $0.7 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily due to increased throughput in our Corpus Christi North Beach storage facility. In addition, Valero Energys Corpus Christi refinery experienced a maintenance turnaround and effects of two hurricanes during 2005 which resulted in lower throughputs and revenues for the nine months ended September 30, 2005.
Operating expenses increased by $0.8 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, due to increased dockage and wharfage costs at the Corpus Christi North Beach storage facility.
General
General and administrative expenses increased by $13.3 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, due to increased headcount as a result of the Kaneb Acquisition. This increase in general and administrative expenses was partially offset by a decrease of $2.3 million in the service fee charges to us under the 2006 Services Agreement by Valero Energy.
Equity income from joint ventures increased by $2.2 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, primarily related to our 50% ownership in a terminal and storage facility in Linden, New Jersey, which was acquired in the Kaneb Acquisition.
Interest expense increased by $21.3 million for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, due to higher average debt balances resulting from debt assumed in the Kaneb Acquisition and debt incurred to fund the Kaneb Acquisition combined with higher interest rates in 2006.
Related Party Transactions
We have related party transactions with Valero Energy for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, which are comparable to the fees charged to third parties for similar services. In addition, we reimburse Valero Energy for the actual costs of Valero Energy employees working solely on our behalf and for charges incurred on our behalf.
Additionally, Valero Energy charges us an administrative service fee for certain administrative functions, primarily information systems support, ad valorem taxes, risk management, and human resources administration. If we cease to obtain such administrative services from Valero Energy our costs for those services may increase, which would adversely impact our results of operations.
Services Agreement
For the three and nine months ended September 30, 2006, Valero Energy charged us $0.3 million and $1.3 million, respectively, for administrative services. Effective July 1, 2005, the services agreement was amended (the 2005 Services Agreement) to account for our significant growth following the closing of the Kaneb Acquisition resulting in an increase in the administrative fee to $13.8 million for the first year from July 1, 2005 to June 30, 2006.
Effective January 1, 2006, we amended the 2005 Services Agreement (the 2006 Services Agreement) to reflect that Valero GP, LLC directly perform many of the services previously provided by Valero Energy under the 2005 Services Agreement, primarily consisting of information systems, legal, corporate development and health, safety and environmental functions. The Valero Energy employees who had previously performed these services became employees of Valero GP, LLC, and their costs are now directly charged to us. Accordingly, the annual fee charged to us by Valero Energy for administrative services was reduced from $13.8 million to approximately $1.9 million per year. This annual fee will increase to approximately $2.9 million and $3.4 million in 2007 and 2008, respectively. The annual fee will remain at approximately $3.4 million through the term of the agreement. In addition, each annual fee will be subject to adjustments to account for Valero Energys annual salary increase. Subject to approval by our Conflicts Committee, the amounts may also be adjusted for changed service levels.
The 2006 Services Agreement will expire on December 31, 2010 with automatic two-year renewal options unless terminated by either party at least six months prior to the renewal period. We may cancel or reduce the level of
34
services that Valero Energy provides us on 60 days prior written notice. The 2006 Services Agreement will terminate upon the change of control of either Valero Energy or us.
2006 Omnibus Agreement
On March 31, 2006, Valero L.P. entered into an amended and restated omnibus agreement (the 2006 Omnibus Agreement) with Valero Energy, Valero GP, LLC, Riverwalk Logistics, L.P., and Valero Logistics. The 2006 Omnibus Agreement amended certain definitions and other provisions in the April 16, 2001 omnibus agreement, which it supersedes, to clarify the parties intent as to the Valero Energy ownership requirements for the application of the business restrictions described below.
Under the 2006 Omnibus Agreement, Valero Energy has agreed, and will cause its controlled affiliates to agree, for so long as Valero Energy owns 20% or more of us or our general partner, not to engage in the business of transporting crude oil and other feedstocks or refined products, including petrochemicals, or operating crude oil storage facilities or refined product terminalling assets in the United States. This restriction does not apply to:
· any business retained by Ultramar Diamond Shamrock (UDS) as of April 16, 2001, the closing of our initial public offering, or any business owned by Valero Energy at the date of its acquisition of UDS on December 31, 2001;
· any business with a fair market value of less than $10 million;
· any business acquired by Valero Energy in the future that constitutes less than 50% of the fair market value of a larger acquisition, provided we have been offered and declined the opportunity to purchase the business; and
· any newly constructed pipeline, terminalling or storage assets that we have not offered to purchase at fair market value within one year of construction.
Also under the 2006 Omnibus Agreement, Valero Energy has agreed to indemnify us for environmental liabilities related to the assets transferred to us in connection with our initial public offering, provided that such liabilities arose prior to and are discovered within ten years after that date (excluding liabilities resulting from a change in law after April 16, 2001).
Non-Compete Agreement
On July 19, 2006, we entered into a non-compete agreement with Holdings, Riverwalk Logistics, L.P., and Valero GP, LLC (the Non-Compete Agreement). The Non-Compete Agreement will not be effective until Holdings is no longer subject to the Amended and Restated Omnibus Agreement dated March 31, 2006. Under the Non-Compete Agreement, we will have a right of first refusal with respect to the potential acquisition of assets that relate to the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals) in the United States and internationally. Holdings will have a right of first refusal with respect to the potential acquisition of general partner and other equity interests in publicly traded partnerships under common ownership with the general partner interest. With respect to any other business opportunities, neither the Partnership nor Holdings are prohibited from engaging in any business, even if the Partnership and Holdings would have a conflict of interest with respect to such other business opportunity.
Administration Agreement
On July 19, 2006, in connection with Holdings initial public offering, Valero GP, LLC entered into an administration agreement with Holdings (the Administration Agreement). The Administration Agreement provides, among other things, that all of Holdings employees will be employees of Valero GP, LLC. Valero GP, LLC will provide all executive management, accounting, legal, cash management, corporate finance and other administrative services to Holdings. Under the Administration Agreement, Holdings will pay Valero GP, LLC $0.5 million annually. This fee will be increased annually to reflect Valero GP, LLCs annual merit increases. Holdings will also reimburse Valero GP, LLC for all direct public company costs and any other direct costs, such as outside legal and accounting fees, that Valero GP, LLC incurs while providing services to Holdings pursuant to the Administration Agreement. The Administration Agreement will terminate on December 31, 2011, with automatic two-year renewals unless terminated by either party on six months written notice. Holdings may cancel or reduce the services provided by Valero GP, LLC under the Administration Agreement on 60 days written notice. The Administration Agreement will terminate upon a change of control of either Holdings or Valero GP, LLC.
35
Amended and Restated 2000 Long-Term Incentive Plan
Effective October 1, 2006, the Valero GP, LLC 2000 Long-Term Incentive Plan was amended as follows:
· increase the number of units authorized for issuance under the Plan from 250,000 units (of which 223,147 have been granted to date) to 1,500,000 units;
· permit the cashless-broker exercise of options;
· provide that if an award under the Plan expires, is cancelled, exercised, paid or otherwise terminates without the delivery of units then the units covered by such award, to the extent of such expiration, cancellation, exercise, payment or termination, shall again be units with respect to which awards under the Plan may be granted;
· amend the Plan to meet the requirements of, and facilitate compliance with, Section 409A of the Internal Revenue Code; and
· amend the definition of Change of Control to reflect that as a result of its recently completed initial public offering, Valero GP Holdings, LLC is now the 100% owner of the general partner of Valero L.P.
St James Terminal Agreement
On September 20, 2006, we executed a terminal services agreement (St. James Terminal Agreement) with Valero Marketing and Supply Company (VMSC), a wholly owned subsidiary of Valero Energy. Pursuant to the St. James Terminal Agreement, we will provide crude oil storage and blending services to VMSC at the facility in St. James, Louisiana for a monthly minimum throughput fee plus per barrel throughput charges. The St. James Terminal Agreement has an initial term of five years with an option to extend for an additional five years with a one year notice from VMSC prior to the expiration of the initial term.
Technical Termination under IRC §708(b)(1)(B)
Valero Energy has stated its intention to sell its remaining interests in Holdings, pending market conditions. If Valero Energy completes the sale of its remaining interests such that 50% or more of the total interests in Holdings capital and profits are sold within a twelve-month period, Holdings partnership will terminate for federal income tax purposes. A technical termination is a federal income tax concept that has no impact on the day-to-day business or operations of a partnership. A technical termination of Holdings will result in a deemed sale or exchange of its interests in our capital and profits. This deemed sale or exchange of its interests in our capital and profits will also cause the technical termination of our partnership for federal tax purposes if this deemed sale, together with all other sales of our units, results in a sale or exchange of 50% or more of our capital and profits interest within a twelve-month period. A technical termination would, among other things, result in the closing of our taxable year for all unitholders and would result in a deferral of depreciation and cost recovery deductions allowable in computing our taxable income. Thus, if this occurs, our unitholders will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated, and for future years, as a percentage of the cash distributed to unitholders with respect to that period. The technical termination of our partnership for federal income tax purposes would have no effect on our financial position or results of operations.
36
Outlook
For the remainder of 2006, we expect the results of the fourth quarter of 2006 to be lower than the third quarter of 2006 due to higher maintenance expenses and lower expected thoughputs due to seasonality.
Results for the first quarter of 2007 are expected to be lower than the fourth quarter of 2006 due to several planned outages at our customers refineries and continued lower expected thoughputs due to seasonality.
Despite lower expectations for the first quarter of 2007, we expect 2007 annual results to be comparable to 2006 as we expect operating income to increase by $15 to $20 million, which includes higher depreciation of approximately $15 million. Operating income and depreciation expense are expected to increase primarily due to the effects of the following:
· a full year of operations in 2007 of the St. James crude oil terminal as we expect to complete the acquisition in the fourth quarter of 2006;
· a full year of operations in 2007 of the Burgos project which was completed in July 2006; and
· terminal expansion projects at St. Eustatius in the Caribbean and Amsterdam in the Netherlands as well as other projects that are expected to start contributing to our results of operations in 2007.
In addition, we expect higher interest expense to offset the increase in operating income due to higher debt balances, including borrowings related to funding the acquisitions and capital expenditures described above.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary cash requirements are for distributions to partners, debt service, reliability and strategic growth capital expenditures, acquisitions and normal operating expenses. We have typically generated sufficient cash from our current operations to fund day-to-day operating and general and administrative expenses, reliability capital expenditures and distribution requirements. We also have available borrowing capacity under our existing revolving credit facility and, to the extent necessary, may raise additional funds through equity or debt offerings to fund strategic capital expenditures or other cash requirements not funded from operations. However, there can be no assurance regarding the availability of any additional funds or whether such additional funds can be obtained on terms acceptable to us.
Cash Flows for the Nine Months Ended September 30, 2006 and 2005
Net cash provided by operating activities for the nine months ended September 30, 2006 was $182.0 million compared to $135.4 million for the nine months ended September 30, 2005. The increase in cash generated from operating activities is primarily due to higher net income adjusted for non-cash items.
Net cash provided by operating activities for the nine months ended September 30, 2006, combined with available cash on hand, were used to fund distributions to unitholders and the general partner in the aggregate amount of $135.6 million. The proceeds from long-term debt borrowings totaling $59.0 million were used to fund the purchase of the Capwood pipeline and a portion of our capital expenditures. The proceeds from the sale of the Australia and New Zealand subsidiaries totaling $70.1 million were used for working capital purposes, including paying down outstanding debt.
The net cash provided by operating activities for the nine months ended September 30, 2005 was $135.4 million. The net cash provided by operations, combined with available cash on hand, were used to fund distributions to unitholders and the general partner in the aggregate amount of $83.8 million. Proceeds from long-term debt borrowings totaling $713.2 million, combined with proceeds from the general partner contribution totaling $29.2 million and proceeds received from the sale of Martin Oil LLC to a subsidiary of Valero Energy totaling $26.8 million were used to fund the acquisition of KSL, repay certain outstanding indebtedness of KSL and KPP and to fund capital expenditures and investment of other noncurrent assets of $42.3 million. Proceeds received from the sale of the Held Separate Businesses on September 30, 2005 were used to repay debt outstanding under the $400 Million Revolving Credit Agreement and the $525 Million Term Loan Agreement.
37
Partners Equity
Cash Distributions. On July 19, 2006, we declared a quarterly cash distribution of $0.885 per unit to be paid on August 14, 2006 to unitholders of record on August 7, 2006, which totaled $45.8 million. On October 26, 2006, we declared a quarterly cash distribution of $0.915 per unit to be paid on November 14, 2006 to unitholders of record on November 7, 2006, which totaled $47.7 million.
The following table reflects the allocation of total cash distributions to the general and limited partners applicable to the period in which the distributions were earned:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Thousands of Dollars) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
||||
General partner interest |
|
$ |
955 |
|
$ |
879 |
|
$ |
2,787 |
|
$ |
2,157 |
|
General partner incentive distribution |
|
3,909 |
|
3,049 |
|
10,869 |
|
7,210 |
|
||||
Total general partner distribution |
|
4,864 |
|
3,928 |
|
13,656 |
|
9,367 |
|
||||
Limited partners distribution |
|
42,830 |
|
40,022 |
|
125,684 |
|
98,478 |
|
||||
Total cash distributions |
|
$ |
47,694 |
|
$ |
43,950 |
|
$ |
139,340 |
|
$ |
107,845 |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash distributions per unit applicable to limited partners |
|
$ |
0.915 |
|
$ |
0.855 |
|
$ |
2.685 |
|
$ |
2.510 |
|
Subordinated Units. Effective April 1, 2006, we satisfied all the conditions included in our partnership agreement for the subordination period to end. Accordingly, all 9,599,322 subordinated units converted into common units on a one-for-one basis on May 8, 2006, the first business day after the record date for the distribution related to the first quarter earnings of 2006. Riverwalk Holdings, LLC held the 9,599,322 subordinated units at the time of conversion.
Capital Requirements
The petroleum pipeline and terminalling industry is capital intensive, requiring significant investments to maintain, upgrade or enhance existing operations and to comply with environmental and safety laws and regulations.
Our capital expenditures consist primarily of:
· reliability capital expenditures, such as those required to maintain equipment reliability and safety and to address environmental and safety regulations; and
· strategic growth capital expenditures, such as those to expand and upgrade pipeline capacity and to construct new pipelines, terminals and storage tanks. In addition, strategic growth capital expenditures may include acquisitions of pipelines, terminals, storage tank assets, or other logistic assets.
During the nine months ended September 30, 2006, we incurred reliability capital expenditures of $22.8 million, including $1.5 million related to noncurrent assets, primarily related to the upgrade and enhancement of the assets acquired with the Kaneb Acquisition. Strategic growth capital expenditures of $56.9 million, including $7.9 million related to noncurrent assets, during the nine months ended September 30, 2006 primarily related to the Burgos project, which we completed in July 2006, the St Eustatius tank expansion and other terminal expansion projects.
For the remainder of 2006, we expect to incur approximately $75 million of capital expenditures, including $20 million for reliability capital projects and $55 million for strategic growth capital projects. We continuously evaluate our capital forecast and make changes as economic conditions warrant. If conditions warrant, our actual capital expenditures for 2006 may exceed the forecasted amounts.
Other Contingencies
We are subject to certain loss contingencies, the outcome of which could have an effect on our cash flows. Specifically, we may be required to make substantial payments to the U.S. Department of Justice for certain remediation costs as further disclosed in Note 6 of Condensed Notes to Consolidated Financial Statements.
38
Long-Term Contractual Obligations
Credit Agreement Amendments
On June 6, 2006, we completed certain amendments to our $525 million term loan agreement ($525 Million Term Loan Agreement) and our $400 million revolving credit agreement (the $400 Million Revolving Credit Agreement). Both agreements were amended to (i) eliminate the provision that the failure of Valero Energy to own or control our general partner constitutes a change of control; (ii) extend the maturities of the agreements to 2011; (iii) include certain material construction projects in the definition of Consolidated EBITDA; and (iv) eliminate the requirement that we maintain a minimum consolidated interest coverage ratio. Additionally, the amendments reduced the applicable margin on LIBOR loans, which vary depending upon our credit rating. The term loan agreement of our UK subsidiary (the UK Term Loan) was also amended to (i) extend its maturity to 2011; (ii) include certain material construction projects in the definition of Consolidated EBITDA; and (iii) eliminate the requirement that we maintain a minimum consolidated interest coverage ratio.
Our $525 Million Term Loan Agreement, $400 Million Revolving Credit Agreement and UK Term Loan all require that we maintain certain financial ratios and include other restrictive covenants, including a prohibition on distributions if any defaults, as defined in the agreements, exist or would result from the distribution. Our management believes that we are in compliance with all of these ratios and covenants as of September 30, 2006.
$400 Million Revolving Credit Agreement
During the nine months ended September 30, 2006, we borrowed $59.0 million under our $400 Million Revolving Credit Agreement to fund the purchase of the Capwood pipeline and our capital expenditures. Additionally, we repaid $48.0 million during the nine months ended September 30, 2006. The $400 Million Revolving Credit Agreement bears interest based on either an alternative base rate or LIBOR, which was 5.9% as of September 30, 2006. As of September 30, 2006, we had $384.1 million available for borrowing under our $400 Million Revolving Credit Agreement. Additionally, we may request an increase in the amount of commitments under our $400 Million Revolving Credit Agreement for up to a maximum of $600 million.
The terms of our 6.05% and 6.875% senior notes require that Valero Energy or an investment grade entity own, directly or indirectly, 51% of our general partner interests, which will no longer be the case if Valero Energy sells its remaining interests in Holdings. Within 30 days of such a sell down by Valero Energy, we would be required to provide notice to the noteholders in which we offer to purchase the senior notes at a price equal to 100% of the principal amount, plus accrued interest through the date of purchase.
We believe that our cash on hand, cash from operations, and sources of liquidity described above, including the increase in our $400 Million Revolving Credit Agreement to a maximum of $600 million, would be sufficient to satisfy our capital needs for acquisitions, capital expenditures, and the potential need to repurchase our senior notes.
Interest Rate Swaps
As of September 30, 2006, the weighted-average interest rate for our interest rate swaps was 7.0%. As of September 30, 2006 and December 31, 2005, the aggregate estimated fair value of the interest rate swaps included in other long-term liabilities in our consolidated balance sheets was $5.0 million and $4.0 million, respectively.
Environmental, Health and Safety
We are subject to extensive federal, state and local environmental and safety laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures, pipeline integrity and operator qualifications, among others. Because environmental and safety laws and regulations are becoming more complex and stringent and new environmental and safety laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental, health and safety matters is expected to increase.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
39
statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.
40
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table provides information about our 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, 2006 |
|
||||||||||||||||||||||
|
|
Expected Maturity Dates |
|
|
|
|
|
||||||||||||||||||
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
Fair Value |
|
||||||||
|
|
(Thousands of Dollars, Except Interest Rates) |
|
||||||||||||||||||||||
Long-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed rate |
|
$ |
566 |
|
$ |
611 |
|
$ |
660 |
|
$ |
713 |
|
$ |
770 |
|
$ |
894,202 |
|
$ |
897,522 |
|
$ |
936,290 |
|
Average interest rate |
|
8.0 |
% |
8.0 |
% |
8.0 |
% |
8.0 |
% |
8.0 |
% |
6.6 |
% |
6.6 |
% |
|
|
||||||||
Variable rate |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
240,000 |
|
$ |
240,000 |
|
$ |
240,000 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
6.0 |
% |
6.0 |
% |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest Rate Swaps Fixed to Variable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Notional amount |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
167,500 |
|
$ |
167,500 |
|
$ |
(4,981 |
) |
Average pay rate |
|
7.0 |
% |
6.8 |
% |
6.6 |
% |
6.7 |
% |
6.8 |
% |
6.8 |
% |
6.8 |
% |
|
|
||||||||
Average receive rate |
|
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
|
|
|
|
December 31, 2005 |
|
||||||||||||||||||||||
|
|
Expected Maturity Dates |
|
|
|
|
|
||||||||||||||||||
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
Fair Value |
|
||||||||
|
|
(Thousands of Dollars, Except Interest Rates) |
|
||||||||||||||||||||||
Long-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed rate |
|
$ |
1,046 |
|
$ |
611 |
|
$ |
660 |
|
$ |
713 |
|
$ |
36,901 |
|
$ |
854,881 |
|
$ |
894,812 |
|
$ |
954,039 |
|
Average interest rate |
|
8.0 |
% |
8.0 |
% |
8.0 |
% |
8.0 |
% |
6.7 |
% |
6.6 |
% |
6.6 |
% |
|
|
||||||||
Variable rate |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
229,000 |
|
$ |
|
|
$ |
229,000 |
|
$ |
229,000 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
5.2 |
% |
|
|
5.2 |
% |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest Rate Swaps Fixed to Variable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Notional amount |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
167,500 |
|
$ |
167,500 |
|
$ |
(4,002 |
) |
Average pay rate |
|
6.6 |
% |
6.6 |
% |
6.6 |
% |
6.6 |
% |
6.7 |
% |
6.6 |
% |
6.6 |
% |
|
|
||||||||
Average receive rate |
|
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
6.3 |
% |
|
|
41
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management has evaluated, with the participation of the principal executive officer and principal financial officer of Valero GP, LLC, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were effective as of September 30, 2006.
(b) Changes in internal control over financial reporting.
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
42
The information below describes new proceedings or material developments in proceedings that we previously reported in our annual report on Form 10-K for the year ended December 31, 2005, or our quarterly report on Form 10-Q for the quarter ended June 30, 2006.
Environmental Enforcement Matters
As we first reported in our quarterly report on Form 10-Q for the quarter ended June 30, 2006, the California Bay Area Air Quality Management District proposed penalties totaling $494,000 for alleged air violations at the Martinez Terminal. The Martinez Terminal was sold to Pacific Energy Group LLC, a subsidiary of Pacific Energy Partners, L.P., on September 30, 2005. As part of the asset purchase agreement, Pacific Energy Group LLC, a subsidiary of Pacific Energy Partners, L.P., assumed responsibility for the notices of violation at the Martinez Terminal. A settlement agreement has been signed by all parties, and Pacific will pay the total amount of penalty assessed.
We are also a party to additional claims and legal proceedings arising in the ordinary course of business. We believe that the possibility is remote that the final outcome of any of these claims or proceedings to which we or our subsidiaries are a party would have a material adverse effect on our financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operation, financial position or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
On August 18, 2006, Valero L.P. filed a definitive proxy statement pursuant to Section 14(a) of the Securities Exchange Act of 1934 to solicit the consent of its unitholders to approve certain amendments to the Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan (the Plan).
As further described in the proxy statement, the proposed amendments to the Plan were to:
· increase the number of Units authorized for issuance under the Plan from 250,000 Units (of which 221,556 have been granted to date) to 1,500,000 Units;
· permit the cashless-broker exercise of options;
· provide that if an award under the Plan expires, is cancelled, exercised, paid or otherwise terminates without the delivery of Units then the Units covered by such award, to the extent of such expiration, cancellation, exercise, payment or termination, shall again be Units with respect to which awards under the Plan may be granted;
· amend the Plan to meet the requirements of, and facilitate compliance with, Section 409A of the Code; and
· amend the definition of Change of Control to reflect that as a result its recently completed initial public offering, Valero GP Holdings, LLC is now the 100% owner of the general partner of Valero L.P.
The consent expired on September 18, 2006. The unitholders approved the proposal and voted as follows:
For |
|
Against |
|
Abstain |
|
Non-Votes |
23,968,943 |
|
2,141,205 |
|
335,634 |
|
0 |
43
|
Exhibit 10.01 |
|
Terminal Services Agreement executed September 20, 2006, between Valero Logistics Operations, L.P. and Valero Marketing and Supply Company- incorporated by reference to Exhibit 10.01 to Valero L.P.s Current Report on Form 8-K dated September 28, 2006 and filed October 3, 2006. |
+ |
Exhibit 10.02 |
|
Second Amended and Restated 2000 Long-Term Incentive Plan- incorporated by reference to Exhibit 10.01 to Valero L.P.s Current Report on Form 8-K dated September 18, 2006 and filed September 22, 2006. |
* |
Exhibit 10.03 |
|
Non-Compete Agreement between Valero GP Holdings, LLC, Valero L.P., Riverwalk Logistics, L.P. and Valero GP, LLC, effective as of July 19, 2006. |
* |
Exhibit 10.04 |
|
Administration Agreement between Valero GP Holdings, LLC and Valero GP, LLC, effective as of July 19, 2006. |
+* |
Exhibit 10.05 |
|
Change of Control Severance Agreement by and among Valero L.P., Valero GP, LLC and Curtis V. Anastasio, dated November 6, 2006. |
+* |
Exhibit 10.06 |
|
Form of Change of Control Severance Agreement by and among Valero L.P., Valero GP, LLC and each of the executive officers of Valero GP, LLC, all dated November 6, 2006. |
|
|
|
|
+ |
Exhibit 10.07 |
|
Form of Unit Option Award Agreement under the Valero GP, LLC Second Amended and Restated 2000 Long-Term Incentive Plan incorporated by reference to Exhibit 10.02 to Valero L.P.s Current Report on Form 8-K dated November 2, 2006 and filed November 3, 2006. |
|
|
|
|
+ |
Exhibit 10.08 |
|
Form of Restricted Unit Award Agreement under the Valero GP, LLC Second Amended and Restated 2000 Long-Term Incentive Plan incorporated by reference to Exhibit 10.03 to Valero L.P.s Current Report on Form 8-K dated November 2, 2006 and filed November 3, 2006. |
|
|
|
|
* |
Exhibit 12.01 |
|
Statement of Computation of Ratio of Earnings to Fixed Charges |
|
|
|
|
* |
Exhibit 31.01 |
|
Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
|
* |
Exhibit 32.01 |
|
Section 1350 Certifications (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
* Filed herewith.
+ Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.
44
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VALERO 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 8, 2006 |
|
|
By: |
/s/ Steven A. Blank |
|
|
|
|
|
|
|
|
||
|
Steven A. Blank |
|
|
||
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
|
||
|
November 8, 2006 |
|
|
By: |
/s/ Thomas R. Shoaf |
|
|
|
|
|
|
|
|
||
|
Thomas R. Shoaf |
|
|
||
|
Vice President and Controller |
|
|
||
|
November 8, 2006 |
|
|
45
Exhibit 10.03
NON-COMPETE AGREEMENT
THIS NON-COMPETE AGREEMENT (this Agreement ) is entered into this 19 th day of July, 2006, and effective as of the Effective Time (as defined below), by and among Valero GP Holdings, LLC, a Delaware limited liability company ( Holdings ), Valero L.P., a Delaware limited partnership (the MLP ), Riverwalk Logistics, L.P., a Delaware limited partnership and general partner of the MLP ( Riverwalk ), and Valero GP, LLC, a Delaware limited liability company and general partner of Riverwalk ( Valero GP and together with the MLP, Riverwalk, and their respective Subsidiaries, the Partnership Parties ).
R E C I T A L
The parties hereto desire, by their execution of this Agreement, to evidence the terms and conditions pursuant to which business opportunities available to the Partnership Parties and Holdings and their respective affiliates (other than the Partnership Parties) will be addressed.
WHEREAS, Valero Energy Corporation ( Valero Energy ), Valero GP, Riverwalk, the MLP and Valero Logistics Operations, L.P. are parties to the Amended and Restated Omnibus Agreement, dated as of March 31, 2006 (the Omnibus Agreement ), pursuant to which Holdings, as a Controlled Valero Affiliate (as defined in the Omnibus Agreement), is prohibited from engaging in a Restricted Business (as defined in the Omnibus Agreement);
WHEREAS, Valero Energy has stated its intent to reduce its ownership of Holdings, which would result in Holdings no longer being a Controlled Valero Affiliate and no longer being bound by the terms of the Omnibus Agreement;
WHEREAS , it is the intent of the parties hereto to be bound by the provisions of this Agreement effective immediately upon Holdings no longer being bound by the provisions of the Omnibus Agreement.
In consideration of the premises and the covenants, conditions, and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.1 Definitions.
Affiliate shall have the meaning attributed to such term in the MLP Agreement.
Agreement shall mean this Non-Compete Agreement, as it may be amended, modified, or supplemented from time to time.
Conflicts Committee means a committee of the Board of Directors of Holdings or Valero GP, as applicable, as defined in the Holdings Agreement or the MLP Agreement, respectively.
Effective Time means the time at which Holdings is no longer a Controlled Valero Affiliate under the terms of the Omnibus Agreement.
Holdings means Valero GP Holdings, LLC, a Delaware limited liability company, and any successors thereto.
Holdings Agreement means the Second Amended and Restated Limited Liability Company Agreement of Holdings, and any amendments thereto and restatements thereof.
Logistics Business means any business, asset or group of assets related the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals), in the United States or internationally that is not a Public Equity Security.
Logistics Business Notice shall have the meaning set forth in Section 2.1(b).
MLP means Valero L.P., a Delaware limited partnership, and any successors thereto.
MLP Agreement means the Third Amended and Restated Agreement of Limited Partnership of the MLP, and any amendments thereto and restatements thereof.
Partnership Parties means Valero GP, the MLP, Riverwalk and their respective Subsidiaries.
Person means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.
Public Equity Securities shall mean (i) general partner interests (or securities which have characteristics similar to general partner interests) and incentive distribution rights or similar rights in publicly traded partnerships or interests in Persons that own or control such general partner or similar interests (collectively, GP Interests ) and securities convertible, exercisable, exchangeable or otherwise representing ownership or control of such GP Interests and (ii) incentive distribution rights and limited partner interests (or securities which have characteristics similar to incentive distribution rights or limited partner interests) in publicly traded partnerships or interests in Persons that own or control such limited partner or similar
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interests (collectively, non-GP Interests ); provided that such non-GP Interests are owned by the owners of the GP Interests being acquired or their respective Affiliates.
Public Equity Securities Notice shall have the meaning set forth in Section 2.1(b).
Riverwalk means Riverwalk Logistics, L.P., a Delaware limited partnership, and any successors thereto.
Valero GP means Valero GP, LLC, a Delaware limited liability company, and any successors thereto.
ARTICLE II:
Business Opportunities
2.1 Public Equity Securities Opportunity. (a) During the term of this Agreement, the Partnership Parties are prohibited from acquiring Public Equity Securities unless and until the opportunity to acquire such Public Equity Securities has been offered to Holdings and Holdings has declined or abandoned such opportunity as provided in Section 2.1(b).
2.2 Logistics Business Opportunity. (a) During the term of this Agreement, Holdings is prohibited from acquiring a Logistics Business unless and until the opportunity to acquire such Logistics Business has been offered to the Partnership Parties and the Partnership Parties have declined or abandoned such opportunity as provided in Section 2.2(b).
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pursue the opportunity to acquire such Logistics Business. If at any time the Partnership Parties abandon such opportunity, as evidenced (x) in writing by Valero GP (on behalf of the Partnership Parties), or (y) by the Partnership Parties failure to consummate the acquisition of the Logistics Business within one year of the Logistics Business Notice, Holdings shall have the unrestricted right to pursue such opportunity.
2.3 No Obligation to Present Business Opportunities. Other than as set forth Section 2.1 with respect to Public Equity Securities, none of the Partnership Parties shall have any obligation to present any business opportunity (including, but not limited to, Logistics Businesses) to Holdings and its Affiliates. Other than as set forth in Section 2.2 with respect to Logistics Businesses, Holdings shall have no obligation to present any business opportunity (including, but not limited to, Public Equity Securities) to the Partnership Parties and their Affiliates.
This Agreement shall remain in effect for as long as Holdings or any of its Affiliates owns directly or indirectly 20% or more of Valero GP or Riverwalk or their successors.
3.1 Choice of Law. This Agreement shall be subject to and governed by the laws of the State of Texas, excluding any conflicts-of-law rule or principle that might refer to the construction or interpretation of this Agreement to the laws of another state.
3.2 Notice. All notices or requests or consents provided for or permitted to be given pursuant to this Agreement must be in writing and must be given by depositing same in the United States mail, addressed to the Person to be notified, postpaid, and registered or certified with return receipt requested or by delivering such notice in person or by telecopier or telegram to such party. Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipients normal business hours, or at the beginning of the recipients next business day after receipt if not received during the recipients normal business hours. All notices to be sent to a party pursuant to this Agreement shall be sent to or made at the address set forth below such partys signature to this Agreement, or at such other address as such party may stipulate to the other parties in the manner provided in this Section 3.2.
3.3 Entire Agreement; Supersedure. This Agreement constitutes the entire agreement of the parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein.
3.4 Effect of Waiver or Consent. No waiver or consent, express or implied, by any party to or of any breach or default by any Person in the performance by such Person of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such Person of the same or any other obligations of such Person hereunder. Failure on the part of a party to complain of any act of any Person or to
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declare any Person in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder until the applicable statute of limitations period has run.
3.5 Amendment or Modification. This Agreement may be amended or modified from time to time only by the written agreement of all the parties hereto. Each such instrument shall be reduced to writing and shall be designated on its face an Amendment or an Addendum to this Agreement.
3.6 Assignment. No party shall have the right to assign its rights or obligations under this Agreement, by operation of law or otherwise, without the consent of the other parties hereto.
3.7 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all signatory parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument.
3.8 Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
3.9 Gender, Parts, Articles and Sections. Whenever the context requires, the gender of all words used in this Agreement shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. All references to Article numbers and Section numbers refer to Parts, Articles and Sections of this Agreement, unless the context otherwise requires.
3.10 Further Assurances. In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions.
3.11 Withholding or Granting of Consent. Each party may, with respect to any consent or approval that it is entitled to grant pursuant to this Agreement, grant or withhold such consent or approval in its sole and uncontrolled discretion, with or without cause, and subject to such conditions as it shall deem appropriate.
3.12 Laws and Regulations. Notwithstanding any provision of this Agreement to the contrary, no party hereto shall be required to take any act, or fail to take any act, under this Agreement if the effect thereof would be to cause such party to be in violation of any applicable law, statute, rule or regulation.
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3.13 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.
3.14 Negotiation of Rights of Limited Partners, Assignees, and Third Parties. The provisions of this Agreement are enforceable solely by the parties to this Agreement, and no limited Partner, assignee, member or other Person shall have the right to enforce any provision of this Agreement or to compel any party to this Agreement to comply with the terms of this Agreement.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date.
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VALERO GP HOLDINGS, LLC |
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Senior Vice President, Chief Financial Officer and Treasurer |
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ADMINISTRATION AGREEMENT
BETWEEN
VALERO GP HOLDINGS, LLC
AND
VALERO GP, LLC
DATED AS OF July 19, 2006
This ADMINISTRATION AGREEMENT (this Agreement ) is entered into as of July 19, 2006 and effective as of Effective Date, as defined below, between VALERO GP HOLDINGS, LLC, a Delaware limited liability company ( Holdings ), and VALERO GP, LLC, a Delaware limited liability company ( Valero GP ).
WHEREAS, management of Holdings has determined that certain executive management, accounting, legal, cash management, corporate finance and other administrative services required by Holdings should be performed by Valero GP in exchange for an administrative services fee;
WHEREAS, on March 10, 2006, upon recommendation by management of Valero GP and the Conflicts Committee of the Board of Directors of Valero GP (the Conflicts Committee ), the Board of Directors of Valero GP approved the terms of this Agreement;
WHEREAS, Valero GP has agreed to provide certain administrative services under this Agreement to Holdings; and
NOW, THEREFORE, for and in consideration of the mutual covenants contained in this Agreement, the parties hereto hereby agree as follows:
Section 1.1 Definitions. The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.
ARTICLE II
PROVISION OF SERVICES
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Section 2.2 Fees for Administrative Services.
Section 2.4 Cancellation or Reduction of Services. Holdings may terminate or reduce the level of any Administrative Service on 60 days prior written notice to Valero GP. Upon such termination or reduction, the Administrative Services Fee shall be reduced
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accordingly, whether on a temporary or a permanent basis, for such time as such service is reduced or terminated.
Section 2.5 Term. The provisions of this Article II will apply until this Agreement is terminated or amended in accordance with Section 3.1 or Section 3.12, respectively.
Section 3.1 Termination/Change of Control.
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Valero GP represents that it will provide or cause the services to be provided to Holdings with reasonable care and in accordance with all applicable laws, rules, and regulations, including without limitation those of the Federal Energy Regulatory Commission. EXCEPT AS SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE AND IN SECTION 2.1 (d), ALL PRODUCTS OBTAINED FOR HOLDINGS ARE AS IS, WHERE IS, WITH ALL FAULTS AND VALERO GP MAKES NO (AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES RENDERED OR PRODUCTS OBTAINED FOR HOLDINGS. FURTHERMORE, HOLDINGS MAY NOT RELY UPON ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO VALERO GP BY ANY PARTY (INCLUDING, AN AFFILIATE OR DESIGNEE OF VALERO GP) PERFORMING SERVICES ON BEHALF OF VALERO GP HEREUNDER, UNLESS SUCH PARTY MAKES AN EXPRESS WARRANTY TO HOLDINGS. HOWEVER, IN THE CASE OF SERVICES PROVIDED BY A THIRD PARTY FOR HOLDINGS, IF THE THIRD PARTY PROVIDER OF SUCH SERVICES MAKES AN EXPRESS WARRANTY TO HOLDINGS, HOLDINGS IS ENTITLED TO CAUSE VALERO GP TO RELY ON AND TO ENFORCE SUCH WARRANTY.
IT IS EXPRESSLY UNDERSTOOD BY HOLDINGS THAT VALERO GP AND ITS AFFILIATES AND DESIGNEES SHALL HAVE NO LIABILITY FOR THE FAILURE OF THIRD PARTY PROVIDERS TO PERFORM ANY SERVICES HEREUNDER AND FURTHER THAT VALERO GP AND ITS AFFILIATES AND DESIGNEES SHALL HAVE NO LIABILITY WHATSOEVER FOR THE SERVICES PROVIDED BY ANY SUCH THIRD PARTY UNLESS IN EITHER EVENT SUCH SERVICES ARE PROVIDED IN A MANNER WHICH WOULD EVIDENCE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT ON THE PART OF VALERO GP OR ITS AFFILIATES OR DESIGNEES BUT VALERO GP SHALL, ON BEHALF OF HOLDINGS, PURSUE ALL RIGHTS AND REMEDIES UNDER
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ANY SUCH THIRD PARTY CONTRACT. HOLDINGS AGREES THAT THE REMUNERATION PAID TO ALERO GP HEREUNDER FOR THE SERVICES TO BE PERFORMED REFLECT THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. IN NO EVENT SHALL VALERO GP BE LIABLE TO HOLDINGS OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES OR FROM THE BREACH OF THIS AGREEMENT, REGARDLESS OF THE FAULT OF VALERO GP, ANY VALERO GP AFFILIATE OR DESIGNEE, OR ANY THIRD PARTY PROVIDER OR WHETHER VALERO GP, ANY VALERO GP AFFILIATE OR DESIGNEE, OR THE THIRD PARTY PROVIDER ARE WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY NEGLIGENT. TO THE EXTENT ANY THIRD PARTY PROVIDER HAS LIMITED ITS LIABILITY TO VALERO GP OR ITS AFFILIATE OR DESIGNEE FOR SERVICES UNDER AN OUTSOURCING OR OTHER AGREEMENT, HOLDINGS AGREES TO BE BOUND BY SUCH LIMITATION OF LIABILITY FOR ANY PRODUCT OR SERVICE PROVIDED TO HOLDINGS BY SUCH THIRD PARTY PROVIDER UNDER VALERO GPS OR SUCH AFFILIATES OR DESIGNEES AGREEMENT.
The requirement that any force majeure situation be removed or remedied with all reasonable diligence shall not require the settlement of strikes, lockouts or other labor difficulty by the party involved, contrary to its wishes. Rather, all such difficulties may be handled entirely within the discretion of the party concerned.
Valero GP, LLC
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One Valero Way
San Antonio, Texas 78249
Attention: Legal Department
Telecopy: (210) 345-4861
Valero GP Holdings, LLC
One Valero Way
San Antonio, Texas 78249
Attention: Legal Department
Telecopy: (210) 345-xxxx
or at such other address of which notice may have been given by such party in accordance with the provisions of this Section.
Section 3.8 Counterparts. This Agreement may be executed in several counterparts, no one of which needs to be executed by all of the parties. Such counterpart, including a facsimile transmission of this Agreement, shall be deemed to be an original and shall have the same force and effect as an original. All counterparts together shall constitute but one and the same instrument.
Section 3.9 Applicable Law. he provisions of this Agreement shall be construed in accordance with the laws of the State of Texas, excluding any conflicts of law rule or principle that might refer the construction or interpretation hereof to the laws of another jurisdiction.
Section 3.10 Binding Effect; Assignment. Except for the ability of Valero GP to cause one or more of the Administrative Services to be performed by a third party provider or an Affiliate of Valero GP, no party shall have the right to assign its rights or obligations under this Agreement (by operation of law or otherwise) without the consent of the other parties.
Section 3.11 Invalidity of Provisions. In the event that one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality or enforceability of the remaining provisions hereof shall not be affected or impaired thereby.
Section 3.12 Modification; Amendment. This Agreement may be amended or modified from time to time only by a written amendment signed by both parties hereto; provided however, that Valero GP may not, without the prior approval of the Conflicts Committee, agree to any amendment or modification to this Agreement that, in the reasonable discretion of Valero GP, will adversely affect the holders of common units of the Partnership.
Section 3.13 Entire Agreement. This Agreement constitutes the whole and entire agreement between the parties hereto and supersedes any prior agreement, undertaking, declarations, commitments or representations, verbal or oral, in respect of the subject matter hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement with effect as of the date first above written.
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President and Chief Executive Officer |
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VALERO GP HOLDINGS, LLC |
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Steven A. Blank |
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Senior Vice President, Chief Financial Officer and Treasurer |
Exhibit 10.05
CHANGE OF CONTROL
SEVERANCE AGREEMENT
AGREEMENT, dated as of the 6th day of November, 2006 (this Agreement), by and among Valero L.P. , a Delaware limited partnership (the Partnership), Valero GP, LLC , a Delaware limited liability company (the Employer), and Curtis V. Anastasio (the Executive).
WHEREAS, each of the Board of Directors of the Employer (the Board) and the Board of Directors of Valero GP Holdings, LLC (the VEH Board), has determined that it is in the best interests of the Partnership and its unitholders to assure that the Partnership will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). Each of the Board and the VEH Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executives full attention and dedication to the current Company, the Partnership and the Affiliated Companies in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that provide the Executive with compensation and benefits arrangements that are competitive with those of other companies. Therefore, in order to accomplish these objectives, each of the Board and the VEH Board has caused the Partnership and the Employer to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
(d) Change of Control means, and shall be deemed to have occurred upon, the first to occur of one or more of the following events after the date hereof:
(i) a person or group (within the meaning of Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act)) (a Person), other than any Affiliated Company becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 40% of all voting interests of Valero GP Holdings, LLC, a Delaware limited liability company, then outstanding;
(ii) the failure of Valero GP Holdings, LLC to control (as such term is defined in Rule 405 promulgated under the Securities Act of 1933) the Employer, Riverwalk Logistics, L.P. or all of the general partner interests in the Partnership;
(iii) Riverwalk Logistics, L.P. ceases to be the general partner of the Partnership or Riverwalk Logistics, L.P. ceases to be controlled by either the Employer or one of the Affiliated Companies of the Employer (other than Valero Energy Corporation (VLO) or a direct or indirect wholly owned subsidiary of VLO as the result of the sale by one or more of the foregoing of limited liability company interests in Valero GP Holdings LLC);
(iv) a Person other than any Affiliated Company becomes the beneficial owner of more than 50% of all voting interests of the Partnership then outstanding;
(v) the consolidation or merger of Valero GP Holdings, LLC with or into another Person pursuant to a transaction in which the outstanding voting interests of Valero GP Holdings, LLC are changed into or exchanged for cash, securities or other property, other than any such transaction where:
(a) all outstanding voting interests of Valero GP Holdings, LLC are changed into or exchanged for voting stock or interests of the surviving corporation or entity or its parent, and
(b) the holders of the voting interests of Valero GP Holdings, LLC immediately prior to such transaction own, directly or indirectly, not less than a majority of the voting stock or interests of the surviving corporation or entity or its parent immediately after such transaction;
(vi) the consolidation or merger of the Partnership with or into another Person pursuant to a transaction in which the outstanding voting interests of the Partnership are changed into or exchanged for cash, securities or other property, other than any such transaction where Valero GP Holdings, LLC or any of its Affiliated Companies retains control (as defined in Rule 405 promulgated under the Securities Act of 1933), whether by way of holding the general partner interest, managing member interest or a majority of the outstanding voting interests of the surviving entity or its parent;
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(vii) the sale, lease, exchange, disposition or other transfer (in one or a series of related transactions) of all or substantially all of the assets of Valero GP Holdings, LLC to any Person other than one or more Affiliated Companies of Valero GP Holdings, LLC;
(viii) the sale, lease, exchange, disposition or other transfer (in one or a series of related transactions) by the Partnership of all or substantially all of the assets of the Partnership to any Person other than one or more of the Affiliated Companies of the Partnership; or
(ix) a change in the composition of the VEH Board, as a result of which fewer than a majority of the directors of the VEH Board are Incumbent Directors. Incumbent Directors shall mean directors who either (A) are directors of Valero GP Holdings, LLC as of the date hereof, (B) are elected after the date hereof to the VEH Board by the Incumbent Directors, or (C) are elected, or nominated for election, thereafter to the VEH Board with the affirmative votes of at least a majority of Incumbent Directors at the time of such election or nomination, but Incumbent Director shall not include an individual whose election or nomination is in connection with (i) an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the VEH Board or (ii) a plan or agreement to replace a majority of the then Incumbent Directors (other than any such plan or agreement approved by a majority of the then Incumbent Directors).
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For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered willful unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executives action or omission was in the best interests of the Partnership, the Employer or the Affiliated Companies. Any act, or failure to act, based upon authority (A) given pursuant to a resolution duly adopted by the Board, the VEH Board, or if Valero GP Holdings, LLC is not the ultimate parent corporation of the Affiliated Companies and is not publicly traded, the board of directors of the ultimate parent of the Partnership (the Applicable Board), (B) upon the instructions of the Chief Executive Officer of the Employer or a senior officer of the Employer or (C) based upon the advice of counsel for the Partnership or the Employer shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Partnership, the Employer or the Affiliated Companies. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail.
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For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executives mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executives ability to terminate employment for Good Reason.
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(A) the sum of (i) the Executives Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the Highest Annual Bonus) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365, and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the Accrued Obligations);
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Notwithstanding the foregoing provisions of this Section 5(a), to the extent required in order to comply with Section 409A of the Code, cash amounts that would otherwise be payable under this Section 5(a) during the six-month period immediately following the Date of Termination shall instead be paid, with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code (Interest), on the first business day after the date that is six months following the Executives separation from service within the meaning of Section 409A of the Code.
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Section 8. Certain Additional Payments by the Partnership or the Employer.
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provided , however , that the Partnership or the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Partnership shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Partnership shall determine; provided , however , that, if the Partnership or the Employer pays such claim and directs the Executive to sue for a refund, the Partnership and the Employer shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided , further , that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Partnerships control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
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or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executives hand and, pursuant to the authorization from the Board and the VEH Board, the Partnership and the Employer have caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
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Exhibit 10.06
CHANGE OF CONTROL
SEVERANCE AGREEMENT
AGREEMENT, dated as of the 6th day of November, 2006 (this Agreement), by and among Valero L.P. , a Delaware limited partnership (the Partnership), Valero GP, LLC , a Delaware limited liability company (the Employer), and [___] (the Executive).
WHEREAS, each of the Board of Directors of the Employer (the Board) and the Board of Directors of Valero GP Holdings, LLC (the VEH Board), has determined that it is in the best interests of the Partnership and its unitholders to assure that the Partnership will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). Each of the Board and the VEH Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executives full attention and dedication to the current Company, the Partnership and the Affiliated Companies in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that provide the Executive with compensation and benefits arrangements that are competitive with those of other companies. Therefore, in order to accomplish these objectives, each of the Board and the VEH Board has caused the Partnership and the Employer to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
(d) Change of Control means, and shall be deemed to have occurred upon, the first to occur of one or more of the following events after the date hereof:
(i) a person or group (within the meaning of Sections 13(d) or 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act)) (a Person), other than any Affiliated Company becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 40% of all voting interests of Valero GP Holdings, LLC, a Delaware limited liability company, then outstanding;
(ii) the failure of Valero GP Holdings, LLC to control (as such term is defined in Rule 405 promulgated under the Securities Act of 1933) the Employer, Riverwalk Logistics, L.P. or all of the general partner interests in the Partnership;
(iii) Riverwalk Logistics, L.P. ceases to be the general partner of the Partnership or Riverwalk Logistics, L.P. ceases to be controlled by either the Employer or one of the Affiliated Companies of the Employer (other than Valero Energy Corporation (VLO) or a direct or indirect wholly owned subsidiary of VLO as the result of the sale by one or more of the foregoing of limited liability company interests in Valero GP Holdings LLC);
(iv) a Person other than any Affiliated Company becomes the beneficial owner of more than 50% of all voting interests of the Partnership then outstanding;
(v) the consolidation or merger of Valero GP Holdings, LLC with or into another Person pursuant to a transaction in which the outstanding voting interests of Valero GP Holdings, LLC are changed into or exchanged for cash, securities or other property, other than any such transaction where:
(a) all outstanding voting interests of Valero GP Holdings, LLC are changed into or exchanged for voting stock or interests of the surviving corporation or entity or its parent, and
(b) the holders of the voting interests of Valero GP Holdings, LLC immediately prior to such transaction own, directly or indirectly, not less than a majority of the voting stock or interests of the surviving corporation or entity or its parent immediately after such transaction;
(vi) the consolidation or merger of the Partnership with or into another Person pursuant to a transaction in which the outstanding voting interests of the Partnership are changed into or exchanged for cash, securities or other property, other than any such transaction where Valero GP Holdings, LLC or any of its Affiliated Companies retains control (as defined in Rule 405 promulgated under the Securities Act of 1933), whether by way of holding the general partner interest, managing member interest or a majority of the outstanding voting interests of the surviving entity or its parent;
2
(vii) the sale, lease, exchange, disposition or other transfer (in one or a series of related transactions) of all or substantially all of the assets of Valero GP Holdings, LLC to any Person other than one or more Affiliated Companies of Valero GP Holdings, LLC;
(viii) the sale, lease, exchange, disposition or other transfer (in one or a series of related transactions) by the Partnership of all or substantially all of the assets of the Partnership to any Person other than one or more of the Affiliated Companies of the Partnership; or
(ix) a change in the composition of the VEH Board, as a result of which fewer than a majority of the directors of the VEH Board are Incumbent Directors. Incumbent Directors shall mean directors who either (A) are directors of Valero GP Holdings, LLC as of the date hereof, (B) are elected after the date hereof to the VEH Board by the Incumbent Directors, or (C) are elected, or nominated for election, thereafter to the VEH Board with the affirmative votes of at least a majority of Incumbent Directors at the time of such election or nomination, but Incumbent Director shall not include an individual whose election or nomination is in connection with (i) an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the VEH Board or (ii) a plan or agreement to replace a majority of the then Incumbent Directors (other than any such plan or agreement approved by a majority of the then Incumbent Directors).
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For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered willful unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executives action or omission was in the best interests of the Partnership, the Employer or the Affiliated Companies. Any act, or failure to act, based upon authority (A) given pursuant to a resolution duly adopted by the Board, the VEH Board, or if Valero GP Holdings, LLC is not the ultimate parent corporation of the Affiliated Companies and is not publicly traded, the board of directors of the ultimate parent of the Partnership (the Applicable Board), (B) upon the instructions of the Chief Executive Officer of the Employer or a senior officer of the Employer or (C) based upon the advice of counsel for the Partnership or the Employer shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Partnership, the Employer or the Affiliated Companies. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail.
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For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executives mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executives ability to terminate employment for Good Reason.
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(A) the sum of (i) the Executives Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof that has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount, the Highest Annual Bonus) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365, and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the Accrued Obligations);
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10
Notwithstanding the foregoing provisions of this Section 5(a), to the extent required in order to comply with Section 409A of the Code, cash amounts that would otherwise be payable under this Section 5(a) during the six-month period immediately following the Date of Termination shall instead be paid, with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code (Interest), on the first business day after the date that is six months following the Executives separation from service within the meaning of Section 409A of the Code.
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provided , however , that the Partnership or the Employer shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Partnership shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Partnership shall determine; provided , however , that, if the Partnership or the Employer pays such claim and directs the Executive to sue for a refund, the Partnership and the Employer shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided , further , that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Partnerships control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
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if to the Executive: |
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At the most recent address |
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on file in the Employers records |
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if to the Partnership or the Employer: |
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Valero L.P. |
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One Valero Way |
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San Antonio, Texas 78249 |
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Attention: Corporate Secretary |
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executives hand and, pursuant to the authorization from the Board and the VEH Board, the Partnership and the Employer have caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
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[Executive] |
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VALERO L.P. |
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By: |
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Riverwalk Logistics, L.P., its general partner, by Valero GP, LLC, its general partner |
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By: |
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Name: |
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Title: |
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VALERO GP, LLC |
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By: |
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Name: |
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Title: |
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20
Exhibit 12.01
VALERO L.P.
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars, Except Ratio)
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Nine Months Ended September 30, |
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Year Ended December 31, |
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2006 |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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Earnings: |
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Income from continuing operations before provision for income taxes and income from equity investees |
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$ |
110,033 |
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$ |
110,069 |
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$ |
77,074 |
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$ |
67,177 |
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$ |
52,350 |
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$ |
42,694 |
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Add: |
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Fixed charges |
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55,844 |
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46,211 |
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21,625 |
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16,443 |
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5,492 |
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4,203 |
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Amortization of capitalized interest |
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86 |
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80 |
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60 |
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55 |
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48 |
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39 |
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Distributions from joint ventures |
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4,524 |
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4,657 |
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1,373 |
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2,803 |
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3,590 |
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2,874 |
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Less: Interest capitalized |
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(1,100 |
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(1,008 |
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(192 |
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(123 |
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(255 |
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(298 |
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Total earnings |
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$ |
169,387 |
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$ |
160,009 |
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$ |
99,940 |
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$ |
86,355 |
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$ |
61,225 |
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$ |
49,512 |
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Fixed charges: |
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Interest expense (1) |
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$ |
50,425 |
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$ |
41,616 |
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$ |
20,630 |
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$ |
15,291 |
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$ |
4,968 |
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$ |
3,721 |
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Amortization of debt issuance costs |
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542 |
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622 |
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407 |
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740 |
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160 |
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90 |
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Interest capitalized |
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1,100 |
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1,008 |
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192 |
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123 |
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255 |
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298 |
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Rental expense interest factor (2) |
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3,777 |
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2,965 |
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396 |
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289 |
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109 |
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94 |
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Total fixed charges |
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$ |
55,844 |
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$ |
46,211 |
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$ |
21,625 |
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$ |
16,443 |
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$ |
5,492 |
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$ |
4,203 |
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Ratio of earnings to fixed charges |
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3.0 |
x |
3.5 |
x |
4.6 |
x |
5.3 |
x |
11.1 |
x |
11.8 |
x |
(1) The interest and other expense, net reported in Valero L.P.s consolidated statements of income for the nine months ended September 30, 2006 and the year ended December 31, 2005 includes investment income of $2,061,000 and $850,000, respectively and includes other income (expense) of $1,276,000 and ($2,237,000), respectively.
(2) The interest portion of rental expense represents one-third of rents, which is deemed representative of the interest portion of rental expense.
Exhibit 31.01
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Curtis V. Anastasio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P. (the registrant);
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 registrants 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants 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
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(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 registrants 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 registrants internal control over financial reporting.
Date: November 8, 2006
/s/ Curtis V. Anastasio
Curtis V. Anastasio
President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Steven A. Blank, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valero L.P. (the registrant);
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 registrants 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants 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
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(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 registrants 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 registrants internal control over financial reporting.
Date: November 8, 2006
/s/ Steven A. Blank
Steven A. Blank
Senior Vice President, Chief Financial Officer and Treasurer
Exhibit 32.01
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. (the Partnership) on Form 10-Q for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Curtis V. Anastasio, President and Chief Executive Officer of Valero GP, LLC, the general partner of the general partner of the Partnership, 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 the Partnership.
/s/ Curtis V. Anastasio |
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Curtis V. Anastasio |
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President and Chief Executive Officer |
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November 8, 2006 |
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.
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. (the Partnership) on Form 10-Q for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven A. Blank, Senior Vice President, Chief Financial Officer and Treasurer of Valero GP, LLC, the general partner of the general partner of the Partnership, 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 the Partnership.
/s/ Steven A. Blank |
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Steven A. Blank |
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Senior Vice President, Chief Financial Officer and Treasurer |
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November 8, 2006 |
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.