Valero Energy Partners LP Reports Third Quarter 2014 Results

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014

2013

2014

2013

Statement of income data (a):

Operating revenues – related party

$

33,666

$

32,012

$

94,998

$

91,916

Costs and expenses:

  Operating expenses (b)

8,553

9,085

24,027

22,611

  General and administrative expenses (c)

3,065

1,797

9,392

5,026

  Depreciation expense (d)

4,318

4,028

12,087

12,032

  Total costs and expenses

15,936

14,910

45,506

39,669

Operating income

17,730

17,102

49,492

52,247

Other income, net (e)

156

61

1,315

111

Interest expense (f)

(214)

(37)

(663)

(139)

Income before income taxes

17,672

17,126

50,144

52,219

Income tax expense (g)

129

156

436

1,734

Net income

17,543

16,970

49,708

50,485

  Less:  Net income attributable to Predecessor

—

16,970

9,483

50,485

Net income attributable to partners

17,543

$

—

40,225

$

—

  Less:  General partner's interest in net income

351

805

Limited partners' interest in net income

$

17,192

$

39,420

Net income per limited partner unit (basic and diluted):

  Common units

$

0.30

$

0.68

  Subordinated units

$

0.30

$

0.68

Weighted-average limited partner units outstanding:

  Common units – public (basic)

17,250

17,250

  Common units – public (diluted)

17,251

17,251

  Common units – Valero (basic and diluted)

11,540

11,540

  Subordinated units – Valero (basic and diluted)

28,790

28,790

See Notes to Earnings Release. 

VALERO ENERGY PARTNERS LP
EARNINGS RELEASE
(In Thousands, Except per Unit Amounts, per Barrel Amounts, and Ratios)
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014

2013

2014

2013

Operating highlights (a):

Pipeline transportation:

  Pipeline transportation revenues

$

20,602

$

20,182

$

51,842

$

55,944

  Pipeline transportation throughput (BPD) (h)

955,285

830,885

879,192

806,533

  Average pipeline transportation revenue per barrel (i)

$

0.23

$

0.26

$

0.22

$

0.25

Terminaling:

  Terminaling revenues

$

12,827

$

7,045

$

42,343

$

20,557

  Terminaling throughput (BPD)

479,923

247,030

560,139

241,482

  Average terminaling revenue per barrel (i)

$

0.29

$

0.31

$

0.28

$

0.31

Storage revenues (j)

$

237

$

4,785

$

813

$

15,415

  Total operating revenues – related party

$

33,666

$

32,012

$

94,998

$

91,916

Capital expenditures (a):

Maintenance

$

1,035

$

431

$

3,030

$

1,752

Expansion

1,990

3,419

4,252

8,736

  Total capital expenditures

3,025

3,850

7,282

10,488

  Less: Capital expenditures attributable to Predecessor (a)

—

3,850

1,033

10,488

Capital expenditures attributable to Partnership

$

3,025

$

—

$

6,249

$

—

Other financial information:

Distribution declared per unit

$

0.2400

n/a

$

0.6750

n/a

EBITDA attributable to Partnership (k)

$

22,204

n/a

$

51,627

n/a

Distributable cash flow (k)

$

21,131

n/a

$

50,346

n/a

Distribution declared:

  Limited partner units – public

$

4,141

n/a

$

11,647

n/a

  Limited partner units – Valero

9,679

n/a

27,223

n/a

  General partner units – Valero

282

n/a

793

n/a

  Total distribution declared

$

14,102

n/a

$

39,663

n/a

Coverage ratio (k)

1.50x

n/a

1.27x

n/a

September 30, 2014

December 31, 2013

Balance sheet data (a):

Cash and cash equivalents

$

230,834

$

375,118

Total assets

593,113

737,590

Total capital lease obligations

3,085

4,127

Partners' capital

580,248

722,164

Working capital

232,004

372,230

See Notes to Earnings Release. 

VALERO ENERGY PARTNERS LP
EARNINGS RELEASE
(In Thousands, Except per Unit Amounts, per Barrel Amounts, and Ratios)
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014

2013

2014

2013

Reconciliation of net income to EBITDA and distributable cash flow (a)(k):

Net income

$

17,543

$

16,970

$

49,708

$

50,485

  Plus:

  Depreciation expense

4,318

4,028

12,087

12,032

  Interest expense

214

37

663

139

  Income tax expense

129

156

436

1,734

EBITDA

22,204

21,191

62,894

64,390

  Less:  EBITDA attributable to Predecessor

—

21,191

11,267

64,390

EBITDA attributable to Partnership

22,204

$

—

51,627

$

—

  Plus:

  Adjustments related to minimum throughput commitments

(235)

272

  Projects prefunded by Valero

418

2,046

  Less:

  Cash interest paid

221

686

  Income taxes paid

—

9

  Maintenance capital expenditures

1,035

2,904

Distributable cash flow

$

21,131

$

50,346

Reconciliation of net cash provided by operating activities to EBITDA and distributable cash flow (a)(k):

Net cash provided by operating activities

$

19,351

$

20,938

$

59,859

$

63,494

  Plus:

  Change in current assets and current liabilities

2,515

(25)

1,935

44

  Change in deferred charges and credits and other operating activities, net

(2)

1

72

3

  Amortization of fair value adjustment to capital lease obligations

90

109

270

327

  Amortization of debt issuance costs

(83)

—

(247)

—

  Unit-based compensation expense

(15)

—

(51)

—

  Interest expense

214

37

663

139

  Current income tax expense

134

131

393

383

EBITDA

22,204

21,191

62,894

64,390

Less:  EBITDA attributable to Predecessor

—

21,191

11,267

64,390

EBITDA attributable to Partnership

22,204

$

—

51,627

$

—

  Plus:

  Adjustments related to minimum throughput commitments

(235)

272

  Projects prefunded by Valero

418

2,046

Less:

  Cash interest paid

221

686

  Income taxes paid

—

9

  Maintenance capital expenditures

1,035

2,904

Distributable cash flow

$

21,131

$

50,346

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014

2013

2014

2013

Comparison of ratio of net income attributable to partners divided by total distribution declared to coverage ratio (k):

Net income attributable to partners

$

17,543

n/a

$

40,225

n/a

Total distribution declared

$

14,102

n/a

$

39,663

n/a

Ratio of net income attributable to partners divided by total distribution declared

1.24x

n/a

1.01x

n/a

Coverage ratio: Distributable cash flow divided by total distribution declared

1.50x

n/a

1.27x

n/a

See Notes to Earnings Release.

VALERO ENERGY PARTNERS LP
NOTES TO EARNINGS RELEASE

(a)

References in these notes to the "Partnership," "we," "us," or "our" refer to Valero Energy Partners LP, one or more of its subsidiaries, or all of them taken as a whole for periods after December 16, 2013, the date the Partnership completed its initial public offering (IPO) of 17,250,000 common units representing limited partner interests. For periods prior to the IPO and periods prior to the Acquisition (defined below), those terms refer to Valero Energy Partners LP Predecessor, our Predecessor for accounting purposes. References in these notes to "Valero" may refer to Valero Energy Corporation, one or more of its subsidiaries, or all of them taken as a whole, other than Valero Energy Partners LP, any of its subsidiaries, or its general partner.

On December 16, 2013, Valero contributed certain crude oil and refined petroleum products pipelines, terminals, and other logistics assets (the Contributed Assets) to us, and we completed the IPO of our common units, which  represented a 29.4 percent limited partner interest in us. Valero owns the remaining 68.6 percent limited partner interest in us and the 2 percent general partner interest.

On July 1, 2014, we acquired the Texas Crude Systems Business from Valero (the Acquisition). The Acquisition was accounted for as a transfer of a business between entities under common control. As entities under the common control of Valero, we recorded the Acquisition on our balance sheet at Valero's carrying value rather than fair value. Transfers between entities under common control are accounted for as though the transfer occurred as of the beginning of the period of transfer, and prior period financial statements and financial information are retrospectively adjusted to furnish comparative information. Accordingly, the statement of income data, operating highlights, and balance sheet data have been retrospectively adjusted to include the historical results of the Texas Crude Systems Business for all periods presented prior to July 1, 2014.

The Partnership's results of operations may not be comparable to our Predecessor's historical results of operations for the reasons described below:

• Revenues. Our Predecessor generated revenues by providing fee-based transportation and terminaling services to Valero and by leasing certain crude oil and refined petroleum products storage capacity to Valero. Subsequent to the IPO and Acquisition, we entered into new commercial agreements with Valero. Under these new agreements, certain of the historical storage capacity lease arrangements were replaced with terminaling throughput fees. In addition, we began charging a terminaling throughput fee for crude oil delivered to our Lucas terminal for which we did not historically charge a throughput fee, and we revised the rates charged for transportation services provided by certain of our pipelines.
• General and administrative expenses. Our Predecessor's general and administrative expenses included direct charges for the management and operation of our logistics assets and certain expenses allocated by Valero for general corporate services, such as treasury, accounting, and legal services. These expenses were charged, or allocated, to our Predecessor based on the nature of the expenses. Effective with the IPO, the Partnership pays a fee to Valero for the management of our operations and general corporate services and this fee was increased effective July 1, 2014, in connection with the Acquisition.  In addition, the Partnership incurs additional incremental general and administrative expenses as a result of being a separate publicly traded limited partnership.

(b)

The decrease in operating expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was due primarily to lower maintenance expense of $1.2 million at our Memphis, Port Arthur, and McKee logistics systems. The decrease in maintenance expense was partially offset by an increase of $721,000 in insurance expense as a result of us acquiring our own insurance policies. Prior to being a separate publicly traded limited partnership, we were allocated a portion of Valero's insurance costs.

The increase in operating expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was due primarily to an increase of $1.8 million in insurance expense as a result of us acquiring our own insurance policies as described above. The increase in insurance expense was partially offset by lower maintenance expense of $193,000 at our Wynnewood products system and McKee logistics system.

(c)

The increase in general and administrative expenses for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 was due primarily to $516,000 and $2.1 million, respectively, in incremental costs related to the management fee charged to us by Valero effective with the IPO; and $603,000 and $1.8 million, respectively, of additional incremental costs of being a separate publicly traded limited partnership. During the three and nine months ended September 30, 2014, we also incurred $149,000 and $457,000, respectively, in costs related to the Acquisition.

(d)

The increase in depreciation expense for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was due to the retirement of $280,000 in net book value of assets primarily at the West Memphis terminal that were replaced during the third quarter of 2014.

(e)

The increase in "other income, net" for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 was due primarily to interest income (net of bank fees) of $154,000 and $710,000, respectively, earned on our cash and cash equivalents. Prior to the IPO, our Predecessor participated in Valero's centralized cash management system; therefore, it held no cash or cash equivalents, and no interest income was allocated to our Predecessor by Valero. Incremental income of $296,000 from the sale of scrap metal and $143,000 related to right-of-way fees collected during the nine months ended September 30, 2014 also contributed to the increase.

(f)

The increase in interest expense for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013 was due primarily to commitment fees and amortization of the debt issuance costs related to the Partnership's revolving credit facility, which was entered into in connection with the IPO.

(g)

Our income tax expense is associated with the Texas margin tax. Our effective tax rate was 1 percent during the nine months ended September 30, 2014 compared to 3 percent during the nine months ended September 30, 2013. The decrease was due primarily to deferred tax expense recorded during the second quarter of 2013 in connection with the initial recognition of a deferred tax liability associated with a change in the law with respect to the Texas margin tax.

(h)

Represents the sum of volumes transported through each separately tariffed pipeline segment.

(i)

Management uses average revenue per barrel to evaluate performance and compare profitability to other companies in the industry. There are a variety of ways to calculate average revenue per barrel; different companies may calculate it in different ways. We calculate average revenue per barrel as revenue divided by throughput for the period. Throughput can be derived by multiplying the throughput barrels per day (BPD) by the number of days in the period. Investors and analysts use this financial measure to help analyze and compare companies in the industry on the basis of operating performance. This financial measure should not be considered as an alternative to revenues presented in accordance with U.S. generally accepted accounting principles (GAAP).

(j)

Prior to the IPO, our Predecessor leased some of our refined petroleum products and crude oil storage capacity to Valero. Subsequent to the IPO, under our commercial agreements with Valero, certain of these storage capacity lease agreements were replaced with terminaling fees.

(k)

We define EBITDA as net income before income tax expense, interest expense, and depreciation expense. We define distributable cash flow as EBITDA less cash payments during the period for interest, income taxes, and maintenance capital expenditures, plus adjustments related to minimum throughput commitments and capital projects prefunded by Valero. We define coverage ratio as the ratio of distributable cash flow to the total distribution declared.

EBITDA, distributable cash flow, and coverage ratio are supplemental financial measures that are not defined under GAAP; they may be used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies, to assess:

• our operating performance as compared to other publicly traded limited partnerships in the transportation and logistics industry, without regard to historical cost basis or, in the case of EBITDA, financing methods;
• the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
• our ability to incur and service debt and fund capital expenditures; and
• the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of EBITDA provides useful information to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to EBITDA are net income and net cash provided by operating activities. EBITDA should not be considered an alternative to net income or net cash provided by operating activities presented in accordance with GAAP. EBITDA has important limitations as an analytical tool because it excludes some, but not all, items that affect net income or net cash provided by operating activities. EBITDA should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because EBITDA may be defined differently by other companies in our industry, our definition of EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

We use distributable cash flow to measure whether we have generated from our operations, or "earned," an amount of cash sufficient to support the payment of the minimum quarterly distributions. Our partnership agreement contains the concept of "operating surplus" to determine whether our operations are generating sufficient cash to support the distributions that we are paying, as opposed to returning capital to our partners. Because operating surplus is a cumulative concept (measured from the IPO date and compared to cumulative distributions from the IPO date), we use the term distributable cash flow to approximate operating surplus on a quarterly or annual, rather than a cumulative, basis. As a result, distributable cash flow is not necessarily indicative of the actual cash we have on hand to distribute or that we are required to distribute.

We use the coverage ratio to reflect the relationship between our distributable cash flow and the total distribution declared. We have also provided the ratio of net income attributable to partners, the most directly comparable GAAP measure to distributable cash flow, to the total distribution declared.