Valero Energy Partners LP Reports 2015 First Quarter Results

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). For periods prior to the IPO and periods prior to the Acquisitions (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.

Effective March 1, 2015, we acquired the Houston and St. Charles Terminal Services Business from Valero (the Houston and St. Charles Terminal Acquisition) for total consideration of $671.2 million consisting of (i) cash of $571.2 million and (ii) the issuance of 1,908,100 common units representing limited partner interests in us and 38,941 general partner units representing general partner interests in us to our general partner having an aggregate value, collectively, of $100.0 million. We funded the cash distribution to Valero with $211.2 million of our cash on hand, $200.0 million of borrowings under our revolving credit facility, and $160.0 million of proceeds from a subordinated credit agreement with Valero. We began receiving fees for services provided by this business commencing on March 1, 2015.

Effective July 1, 2014, we acquired the Texas Crude Systems Business from Valero (the Texas Crude Systems Acquisition) for total cash consideration of $154.0 million, and we began receiving fees for services provided by this business commencing on July 1, 2014.

The Texas Crude Systems Acquisition and the Houston and St. Charles Terminal Acquisition (collectively, the Acquisitions) were each accounted for as transfers of a business between entities under the common control of Valero. As entities under the common control of Valero, we recorded the Acquisitions 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 and operating highlights and capital expenditures data have been retrospectively adjusted to include the historical results of operations of the Texas Crude Systems Business for periods presented prior to July 1, 2014 and the historical results of operations of the Houston and St. Charles Terminal Services Business for periods presented prior to March 1, 2015. In addition, the balance sheet data as of December 31, 2014 has been retrospectively adjusted to include the assets and liabilities of the Houston and St. Charles Terminal Services Business.

(b)

Operating revenues include amounts attributable to our Predecessor. Prior to being acquired by us, the Texas Crude Systems Business generated revenues by providing fee-based transportation and terminaling services to Valero, but the Houston and St. Charles Terminal Services Business did not charge Valero for services provided and did not generate revenues. Effective with the date of each of the Acquisitions, we entered into additional schedules to our commercial agreements with Valero with respect to the services we provide to Valero using the assets of the acquired businesses. This resulted in (i) changes to pipeline and terminaling throughput fees previously charged to Valero by the Texas Crude Systems Business and (ii) the recognition of terminaling revenues by the Houston and St. Charles Terminal Services Business.

(c)

The increase in operating expenses for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due primarily to an increase in waste handling costs of $802,000 at the St. Charles terminal. In addition, insurance expense increased $331,000 as a result of the assets of the acquired businesses being covered under our own insurance policies. Prior to the Acquisitions, our Predecessor was allocated a portion of Valero's insurance costs.

(d)

The increase in general and administrative expenses for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due primarily to $546,000 in costs related to the acquisition of the Houston and St. Charles Terminal Services Business.

(e)

The increase in depreciation expense for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due primarily to the effect of assets placed in service during 2014, including the expansion of the St. Charles terminal, the interconnection with TransCanada's Cushing Marketlink pipeline, and the expansion of the Three Rivers crude system.

(f)

The decrease in "other income, net" for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due primarily to a decrease in scrap metal sales of $365,000 and a decrease in interest income (net of bank fees) of $190,000 attributable to a reduced cash balance during the three months ended March 31, 2015.

(g)

The increase in "interest and debt expense, net of capitalized interest" for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due primarily to $240,000 and $190,000 in interest expense incurred on borrowings of $200.0 million under our revolving credit facility and $160.0 million under a subordinated credit agreement with Valero, respectively, in connection with the acquisition of the Houston and St. Charles Terminal Services Business.

(h)

Our income tax expense (benefit) is associated with the Texas margin tax. During the three months ended March 31, 2015, we reduced our deferred income tax liabilities due to a reduction in the relative amount of revenue we generate in Texas compared to our total revenue. This reduction was a result of the acquisition of the Houston and St. Charles Terminal Services Business (which includes operations in Louisiana).

(i)

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

(j)

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).

(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, capital projects prefunded by Valero, and certain other items. 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:

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describe our expectation of forecasted earnings;

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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;

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assess the ability of our business to generate sufficient cash to support our decision to make distributions to our unitholders;

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assess our ability to incur and service debt and fund capital expenditures; and

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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.