Valero Energy Partners LP Reports 2014 Fourth Quarter and Full Year Results

Three Months Ended December 31,

Year Ended December 31,

2014

2013

2014

2013

Statement of income data (a):

Operating revenues – related party (b)

$

34,182

$

33,069

$

129,180

$

124,985

Costs and expenses:

  Operating expenses (c)

7,692

9,594

31,719

32,205

  General and administrative expenses (d)

2,938

2,169

12,330

7,195

  Depreciation expense

4,364

4,224

16,451

16,256

Total costs and expenses

14,994

15,987

60,500

55,656

Operating income

19,188

17,082

68,680

69,329

Other income, net (e)

189

198

1,504

309

Interest expense (f)

(209)

(59)

(872)

(198)

Income before income taxes

19,168

17,221

69,312

69,440

Income tax expense (benefit) (g)

112

(300)

548

1,434

Net income

19,056

17,521

68,764

68,006

  Less:  Net income attributable to Predecessor

—

15,480

9,483

65,965

Net income attributable to partners

19,056

2,041

59,281

2,041

  Less:  General partner's interest in net income

381

41

1,186

41

Limited partners' interest in net income

$

18,675

$

2,000

$

58,095

$

2,000

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

  Common units

$

0.32

$

0.03

$

1.01

$

0.03

  Subordinated units

$

0.32

$

0.03

$

1.01

$

0.03

Weighted-average limited partner units outstanding:

  Common units – public (basic)

17,250

17,250

17,250

17,250

  Common units – public (diluted)

17,251

17,250

17,251

17,250

  Common units – Valero (basic and diluted)

11,540

11,540

11,540

11,540

  Subordinated units – Valero (basic and diluted)

28,790

28,790

28,790

28,790

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

Three Months Ended December 31,

Year Ended December 31,

2014

2013

2014

2013

Operating highlights (a):

Pipeline transportation:

  Pipeline transportation revenues

$

20,895

$

19,964

$

72,737

$

75,908

  Pipeline transportation throughput (BPD) (h)

993,861

836,295

908,095

814,103

  Average pipeline transportation revenue per barrel (i)

$

0.23

$

0.26

$

0.22

$

0.26

Terminaling:

  Terminaling revenues

$

13,152

$

9,085

$

55,495

$

29,642

  Terminaling throughput (BPD)

500,612

317,750

545,135

260,704

  Average terminaling revenue per barrel (i)

$

0.29

$

0.31

$

0.28

$

0.31

Storage revenues (j)

$

135

$

4,020

$

948

$

19,435

  Total operating revenues – related party

$

34,182

$

33,069

$

129,180

$

124,985

Capital expenditures (a):

Maintenance

$

1,623

$

4,968

$

4,653

$

6,720

Expansion

2,322

6,438

6,574

15,174

  Total capital expenditures

3,945

11,406

11,227

21,894

  Less: Capital expenditures attributable to Predecessor

—

11,406

1,033

21,894

Capital expenditures attributable to Partnership

$

3,945

$

—

$

10,194

$

—

Other financial information:

Distribution declared per unit

$

0.266

$

0.037

$

0.941

$

0.037

EBITDA attributable to Partnership (k)

$

23,741

$

2,603

$

75,368

$

2,603

Distributable cash flow (k)

$

22,606

$

2,581

$

72,952

$

2,581

Distribution declared:

  Limited partner units – public

$

4,591

$

638

$

16,238

$

638

  Limited partner units – Valero

10,727

1,492

37,950

1,492

  General partner units – Valero

511

44

1,304

44

Total distribution declared

$

15,829

$

2,174

$

55,492

$

2,174

Coverage ratio (k)

1.43x

1.19x

1.31x

1.19x

December 31,

2014

2013

Balance sheet data (a):

Cash and cash equivalents

$

236,579

$

375,118

Total assets

596,073

737,590

Total capital lease obligations

2,719

4,127

Partners' capital

585,219

722,164

Working capital

238,365

372,230

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

Three Months Ended December 31,

Year Ended December 31,

2014

2013

2014

2013

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

Net income

$

19,056

$

17,521

$

68,764

$

68,006

  Plus:

Depreciation expense

4,364

4,224

16,451

16,256

Interest expense

209

59

872

198

Income tax expense (benefit)

112

(300)

548

1,434

EBITDA

23,741

21,504

86,635

85,894

  Less:  EBITDA attributable to Predecessor

—

18,901

11,267

83,291

EBITDA attributable to Partnership

23,741

2,603

75,368

2,603

  Plus:

Adjustments related to minimum throughput commitments

(164)

—

108

—

Projects prefunded by Valero

865

—

2,911

—

  Less:

Cash interest paid

213

22

899

22

Income taxes paid

—

—

9

—

Maintenance capital expenditures

1,623

—

4,527

—

Distributable cash flow

$

22,606

$

2,581

$

72,952

$

2,581

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

Net cash provided by operating activities

$

24,047

$

18,341

$

83,906

$

81,835

  Plus:

Change in current assets and current liabilities

(617)

2,903

1,318

2,947

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

(1)

14

71

17

Amortization of fair value adjustment to capital lease obligations

90

90

360

417

Amortization of debt issuance costs

(82)

(13)

(329)

(13)

Unit-based compensation expense

(17)

—

(68)

—

Interest expense

209

59

872

198

Current income tax expense

112

110

505

493

EBITDA

23,741

21,504

86,635

85,894

Less:  EBITDA attributable to Predecessor

—

18,901

11,267

83,291

EBITDA attributable to Partnership

23,741

2,603

75,368

2,603

  Plus:

Adjustments related to minimum throughput commitments

(164)

—

108

—

Projects prefunded by Valero

865

—

2,911

—

  Less:

Cash interest paid

213

22

899

22

Income taxes paid

—

—

9

—

Maintenance capital expenditures

1,623

—

4,527

—

Distributable cash flow

$

22,606

$

2,581

$

72,952

$

2,581

Three Months Ended December 31,

Year Ended December 31,

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

$

19,056

$

2,041

$

59,281

$

2,041

Total distribution declared

$

15,829

$

2,174

$

55,492

$

2,174

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

1.20x

0.94x

1.07x

0.94x

Coverage ratio: Distributable cash flow divided by total distribution declared

1.43x

1.19x

1.31x

1.19x

Three Months Ended
December 31, 2014

Three Months Ended
December 31, 2015

As Reported

Annualized (x4)

Forecasted

Annualized (x4)

Reconciliation of net income to EBITDA (k)(l):

Net income

$

19,056

$

76,224

$

32,000

$

128,000

  Plus:

Depreciation expense

4,364

17,456

10,900

43,600

Interest expense

209

836

7,000

28,000

Income tax expense

112

448

200

800

EBITDA

$

23,741

$

94,964

$

50,100

$

200,400

See Notes to Earnings Release on Table Page 5.

VALERO ENERGY PARTNERS LP
NOTES TO EARNINGS RELEASE

(a)

References 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.

(b)

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.

(c)

The decrease in operating expenses for the three months ended December 31, 2014 compared to the three months ended December 31, 2013 was due primarily to lower maintenance expense of $2.6 million at our Memphis and Port Arthur logistics systems. The decrease in maintenance expense was partially offset by an increase of $624,000 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 decrease in operating expenses for the year ended December 31, 2014 compared to the year ended December 31, 2013 was due primarily to lower maintenance expense of $2.8 million at our Memphis, Port Arthur, and McKee logistics systems. The decrease in maintenance expense was partially offset by an increase of $2.4 million in insurance expense as a result of us acquiring our own insurance policies as described above.

(d)

The increase in general and administrative expenses for the three months and year ended December 31, 2014 compared to the three months and year ended December 31, 2013 was due primarily to $526,000 and $2.3 million, respectively, of additional incremental costs of being a separate publicly traded limited partnership; and $243,000 and $2.4 million, respectively, in incremental costs related to the management fee charged to us by Valero effective with the IPO. During the year ended December 31, 2014, we also incurred $457,000 in costs related to the Acquisition.

(e)

The increase in "other income, net" for the year ended December 31, 2014 compared to the year ended December 31, 2013 was due primarily to interest income (net of bank fees) of $870,000 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 $214,000 from the sale of scrap metal and $143,000 related to right-of-way fees collected during the year ended December 31, 2014 also contributed to the increase.

(f)

The increase in interest expense for the three months and year ended December 31, 2014 compared to the three months and year ended December 31, 2013 was due primarily to commitment fees and amortization of 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 year ended December 31, 2014 compared to 2 percent during the year ended December 31, 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. During the three months ended December 31, 2013, we made an adjustment to reduce our deferred tax liability resulting in an income tax benefit for the period.

(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:

• describe our expectation of forecasted earnings;
• 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;
• assess the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;
• assess our ability to incur and service debt and fund capital expenditures; and
• assess 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.

(l)

Forecasted amount is based on Valero's expectations of future drops in the Partnership during 2015. However, there is no certainty that such drops will occur as expected by Valero.