UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 18, 2003
VALERO L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 1-16417 74-2956831
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
ONE VALERO PLACE 78212
SAN ANTONIO, TEXAS (Zip Code)
(Address of principal executive offices)
(210) 370-2000
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 18, 2003, Valero Energy Corporation contributed to Valero
Logistics Operations, L.P., a 100%-owned operating subsidiary of Valero L.P.,
(i) 58 crude oil and intermediate feedstock storage tanks and related assets
with an aggregate storage capacity of approximately 11.0 million barrels (the
"Tank Assets") for $200 million in cash and (ii) Valero Energy's South Texas
pipeline system and related terminals (the "South Texas Pipeline System") for
$150 million in cash.
The Tank Assets consist of all of the tank shells, foundations, tank
valves, tank gauges, pressure equipment, temperature equipment, corrosion
protection, leak detection, tank lighting and related equipment and
appurtenances associated with the specified crude oil storage tanks and
intermediate feedstock storage tanks located at Valero Energy's West plant of
the Corpus Christi refinery in Corpus Christi, Texas, Texas City refinery in
Texas City, Texas, and Benicia refinery in Benicia, California.
The South Texas Pipeline System includes three intrastate pipeline
systems -- the Houston pipeline system with 105,000 barrels per day of capacity,
the Valley pipeline system with 27,100 barrels per day of capacity and the San
Antonio pipeline system with 24,000 barrels per day of capacity in its north
segment and 15,000 barrels per day in its south segment. These common carrier
refined product pipelines connect Valero Energy's Corpus Christi and Three
Rivers refineries to the Houston, San Antonio and Rio Grande Valley, Texas
markets. There are also five refined product terminals along these pipeline
systems and one asphalt terminal.
Valero L.P. intends to use the Tank Assets and the South Texas Pipeline
System for the same purposes they were used prior to their acquisition.
Valero Energy, through its wholly owned subsidiaries, currently owns an
aggregate 47.5% limited partner interest in Valero L.P. In addition, Valero
Energy owns and controls Valero L.P.'s general partner, Riverwalk Logistics,
L.P., which owns the 2% general partner interest in Valero L.P. and has
incentive distribution rights giving it higher percentages of Valero L.P.'s
quarterly cash distributions as various target distribution levels are met. Four
of the seven members of the board of directors of Valero GP, LLC, the general
partner of Riverwalk Logistics, L.P., are also officers and/or directors of
Valero Energy. The executive officers of Valero GP, LLC are also officers and/or
employees of Valero Energy. Valero Energy is also Valero L.P.'s primary customer
for its pipelines and its terminalling operations and accounted for 99% of
Valero L.P.'s revenues for the year ended December 31, 2002.
The terms of the Tank Assets and South Texas Pipeline System
contributions were determined through negotiations between representatives of
Valero Energy, acting on its own behalf, and the independent conflicts committee
of the board of directors of Valero GP, LLC, the general partner of Valero
L.P.'s general partner, acting on behalf of Valero L.P. The independent
conflicts committee, which was represented by its own independent legal and
financial advisors, approved the Tank Assets and South Texas Pipeline System
contributions based in part on an opinion from its financial advisor that the
consideration to be paid by Valero L.P. pursuant to the transaction agreements
related to each of the contributions was fair, from a financial point of view,
to Valero L.P. and its public unitholders.
Valero L.P. financed the contributions with the proceeds from a public
offering of 5,750,000 common units (the "Common Unit Offering"), which resulted
in net proceeds to Valero L.P. of approximately $202.3 million, and a portion of
the proceeds from a private placement of $250 million aggregate principal amount
of Valero Logistics' 6.05% senior notes due 2013, as well as $7.3 million of
cash on hand and $25.0 million of borrowings under Valero Logistics' revolving
credit facility. With the remainder of the proceeds, and immediately prior to
the consummation of the contributions, Valero L.P. redeemed 3,809,750 of its
common units representing limited partner interests from a wholly owned
subsidiary of Valero Energy for approximately $134.1 million, or $35.19 per
common unit, which was equal to the net proceeds per common unit Valero L.P.
received in the Common Unit Offering, before expenses.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of the business acquired.
Audited financial statements for the Valero South Texas Pipeline and
Terminal Business as of December 31, 2002 and for the year ended
December 31, 2002, are filed herewith as Exhibit 99.1 and incorporated
herein by reference.
(b) Pro forma financial information.
Pro Forma combined financial statements for Valero L.P. and
subsidiaries as of December 31, 2002 and for the year ended December
31, 2002 is filed herewith as Exhibit 99.2 and incorporated herein by
reference.
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Contribution Agreement, dated as of March 6, 2003,
among Valero Refining Company - California, UDS
Logistics, LLC, Valero L.P., Valero GP, Inc. and
Valero Logistics Operations, L.P. (Incorporated by
reference from Exhibit 10.13 of Valero L.P.'s Annual
Report on Form 10-K for the Year ended December 31,
2002 (File No. 001-16417) filed on March 10, 2003).
2.2 First Amendment to Contribution Agreement, dated as
of March 14, 2003, among Valero Refining Company -
California, UDS Logistics, LLC, Valero L.P., Valero
GP, Inc. and Valero Logistics Operations, L.P. (filed
herewith).
2.3 Contribution Agreement, dated as of March 6, 2003,
among Valero Refining - Texas, L.P., UDS Logistics,
LLC, Valero L.P., Valero GP, Inc. and Valero
Logistics Operations, L.P. (Incorporated by reference
from Exhibit 10.14 of Valero L.P.'s Annual Report on
Form 10-K for the Year ended December 31, 2002 (File
No. 001-16417) filed on March 10, 2003).
2.4 First Amendment to Contribution Agreement, dated as
of March 14, 2003, among Valero Refining - Texas,
L.P., UDS Logistics, LLC, Valero L.P., Valero GP,
Inc. and Valero Logistics Operations, L.P. (filed
herewith).
2.5 Contribution Agreement, dated as of March 6, 2003,
among Valero Pipeline Company, UDS Logistics, LLC,
Valero L.P., Valero GP, Inc. and Valero Logistics
Operations, L.P. (Incorporated by reference from
Exhibit 10.15 of Valero L.P.'s Annual Report on Form
10-K for the Year ended December 31, 2002 (File No.
001-16417) filed on March 10, 2003).
23.1 Consent of Ernst & Young LLP. (filed herewith).
99.1 Financial Statements of Valero South Texas Pipeline
and Terminal Business as of and for the year ended
December 31, 2002. (filed herewith).
99.2 Pro Forma Combined Financial Statements as of and for
the year ended December 31, 2002. (filed herewith).
SIGNATURES
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.
By: Riverwalk Logistics, L.P.
its general partner
By: Valero GP, LLC
its general partner
Dated: April 2, 2003 By: /s/ Bradley C. Barron
---------------------------
Name: Bradley C. Barron
Title: Corporate Secretary
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
2.1 Contribution Agreement, dated as of March 6, 2003,
among Valero Refining Company - California, UDS
Logistics, LLC, Valero L.P., Valero GP, Inc. and
Valero Logistics Operations, L.P. (Incorporated by
reference from Exhibit 10.13 of Valero L.P.'s Annual
Report on Form 10-K for the Year ended December 31,
2002 (File No. 001-16417) filed on March 10, 2003).
2.2 First Amendment to Contribution Agreement, dated as
of March 14, 2003, among Valero Refining Company -
California, UDS Logistics, LLC, Valero L.P., Valero
GP, Inc. and Valero Logistics Operations, L.P. (filed
herewith).
2.3 Contribution Agreement, dated as of March 6, 2003,
among Valero Refining - Texas, L.P., UDS Logistics,
LLC, Valero L.P., Valero GP, Inc. and Valero
Logistics Operations, L.P. (Incorporated by reference
from Exhibit 10.14 of Valero L.P.'s Annual Report on
Form 10-K for the Year ended December 31, 2002 (File
No. 001-16417) filed on March 10, 2003).
2.4 First Amendment to Contribution Agreement, dated as
of March 14, 2003, among Valero Refining - Texas,
L.P., UDS Logistics, LLC, Valero L.P., Valero GP,
Inc. and Valero Logistics Operations, L.P. (filed
herewith).
2.5 Contribution Agreement, dated as of March 6, 2003,
among Valero Pipeline Company, UDS Logistics, LLC,
Valero L.P., Valero GP, Inc. and Valero Logistics
Operations, L.P. (Incorporated by reference from
Exhibit 10.15 of Valero L.P.'s Annual Report on Form
10-K for the Year ended December 31, 2002 (File No.
001-16417) filed on March 10, 2003).
23.1 Consent of Ernst & Young LLP. (filed herewith).
99.1 Financial Statements of Valero South Texas Pipeline
and Terminal Business as of and for the year ended
December 31, 2002. (filed herewith).
99.2 Pro Forma Combined Financial Statements as of and for
the year ended December 31, 2002. (filed herewith).
EXHIBIT 2.2
FIRST AMENDMENT TO CONTRIBUTION AGREEMENT
This First Amendment to Contribution Agreement (the "Amendment") is
made and entered into on this 14th day of March, 2003, to be effective as of
March 6, 2003, by and among Valero Refining Company - California, a Delaware
corporation ("VRC"), UDS Logistics, LLC, a Delaware limited liability company
("UDS Logistics"), Valero L.P., a Delaware limited partnership (the "MLP"),
Valero Logistics Operations, L.P., a Delaware limited partnership (the "OLP"),
and Valero GP, Inc., a Delaware corporation and the general partner of OLP
("OLP-GP"). VRC, UDS Logistics, the MLP, the OLP and the OLP-GP are sometimes
referred to collectively herein as the "Parties" and individually as a "Party."
RECITALS:
Whereas, the Parties are all of the parties to that one certain
Contribution Agreement dated effective March 6, 2003 (the "Contribution
Agreement"); and
Whereas, pursuant to the terms of the Contribution Agreement, VRC has
agreed to contribute the Tank Assets to the OLP in exchange for the OLP Limited
Partner Interest; and
Whereas, upon receipt of the OLP Limited Partner Interest, VRC has
agreed to contribute the OLP Limited Partner Interest to UDS Logistics in
exchange for the UDS Membership Interest having a value equivalent to the Cash
Amount or, in the alternative, cash in an amount equivalent to the Cash Amount;
and
Whereas, upon receipt of the right to receive the OLP Limited Partner
Interest, UDS Logistics has agreed to contribute the OLP Limited Partner
Interest to MLP in exchange for the payment of the Cash Amount; and
Whereas, notwithstanding that the Parties agreed that the Cash Amount
shall be payable to UDS Logistics directly by the MLP, the Contribution
Agreement contains a scrivener's error that reflects that the Cash Amount
instead would be paid by the OLP on behalf of the MLP; and
Whereas, the Parties desire to enter into this Amendment to correct the
payment provisions of the Contribution Agreement as described above;
Now, therefore, for good and adequate consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Capitalized Terms. Capitalized terms not otherwise defined in this
Amendment shall have the meanings set forth in the Contribution Agreement.
2. Amendment to Section 2(a). In order to correct the payment
provisions of Section 2(a) of the Contribution, Sections 2(a)(vi) and 2(a)(vii)
shall be amended and restated in their entirety to read as follows:
"2(a)(vi) the MLP will pay the Cash Amount to UDS Logistics in
exchange for the right to be assigned the OLP Limited Partner Interest
from UDS Logistics;
2(a)(vii) UDS Logistics will contribute to the MLP, in
exchange for the payment of the Cash Amount from the MLP, the OLP
Limited Partner Interest, free and clear of any Encumbrances;"
3. Ratification. The Parties hereby ratify and confirm the Contribution
Agreement, as amended by this Amendment.
4. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed and original but which together shall constitute one
and the same instrument.
5. Governing Law and Venue. THIS AMENDMENT SHALL BE BOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF TEXAS WITHOUT
GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF TEXAS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICATION OTHER THAN THE STATE OF TEXAS. VENUE FOR ANY
ACTION ARISING UNDER THIS AMENDMENT SHALL LIE EXCLUSIVELY IN ANY STATE OR
FEDERAL COURT IN BEXAR COUNTY, TEXAS.
6. Entire Agreement. This Amendment constitutes the entire agreement
among the Parties regarding the subject matter hereof and supersedes any prior
understandings, agreements, or representations by or among the Parties, written
or oral, to the extent they have related in any way to the subject matter
hereof.
[Signature Page Follows]
2
In witness whereof, the Parties have executed this Amendment to be
effective as of the effective date first written above.
VALERO REFINING COMPANY -
CALIFORNIA
By: /s/ Michael S. Ciskowski
--------------------------------------
Name: Michael S. Ciskowski
--------------------------------
Title: Senior Vice President
--------------------------------
UDS LOGISTICS, LLC
By: /s/ Raymond Gaddy
--------------------------------------
Name: Raymond Gaddy
---------------------------------
Title: President
--------------------------------
VALERO L.P.
By: Riverwalk Logistics, L.P.,
its General Partner
By: Valero GP, LLC, its General
Partner
By: /s/ Curtis V. Anastasio
--------------------------
Name: Curtis V. Anastasio
---------------------
Title: President
--------------------
VALERO GP, INC.
By: /s/ Curtis V. Anastasio
--------------------------------------
Name: Curtis V. Anastasio
---------------------------------
Title: President
--------------------------------
3
VALERO LOGISTICS OPERATIONS, L.P.
By: Valero GP, Inc., its General Partner
By: /s/ Curtis V. Anastasio
-----------------------------------
Name: Curtis V. Anastasio
-----------------------------
Title: President
-----------------------------
4
EXHIBIT 2.4
FIRST AMENDMENT TO CONTRIBUTION AGREEMENT
This First Amendment to Contribution Agreement (the "Amendment") is
made and entered into on this 14th day of March, 2003, to be effective as of
March 6, 2003, by and among Valero Refining - Texas, L.P., a Texas limited
partnership ("VRLP"), UDS Logistics, LLC, a Delaware limited liability company
("UDS Logistics"), Valero L.P., a Delaware limited partnership (the "MLP"),
Valero Logistics Operations, L.P., a Delaware limited partnership (the "OLP"),
and Valero GP, Inc., a Delaware corporation and the general partner of OLP
("OLP-GP"). VRLP, UDS Logistics, the MLP, the OLP and the OLP-GP are sometimes
referred to collectively herein as the "Parties" and individually as a "Party."
RECITALS:
Whereas, the Parties are all of the parties to that one certain
Contribution Agreement dated effective March 6, 2003 (the "Contribution
Agreement"); and
Whereas, pursuant to the terms of the Contribution Agreement, VRLP has
agreed to contribute the Tank Assets to the OLP in exchange for the OLP Limited
Partner Interest; and
Whereas, upon receipt of the OLP Limited Partner Interest, VRLP has
agreed to contribute the OLP Limited Partner Interest to UDS Logistics in
exchange for the UDS Membership Interest having a value equivalent to the Cash
Amount or, in the alternative, cash in an amount equivalent to the Cash Amount;
and
Whereas, upon receipt of the right to receive the OLP Limited Partner
Interest, UDS Logistics has agreed to contribute the OLP Limited Partner
Interest to MLP in exchange for the payment of the Cash Amount; and
Whereas, notwithstanding that the Parties agreed that the Cash Amount
shall be payable to UDS Logistics directly by the MLP, the Contribution
Agreement contains a scrivener's error that reflects that the Cash Amount
instead would be paid by the OLP on behalf of the MLP; and
Whereas, the Parties desire to enter into this Amendment to correct the
payment provisions of the Contribution Agreement as described above;
Now, therefore, for good and adequate consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Capitalized Terms. Capitalized terms not otherwise defined in this
Amendment shall have the meanings set forth in the Contribution Agreement.
2. Amendment to Section 2(a). In order to correct the payment
provisions of Section 2(a) of the Contribution, Sections 2(a)(vi) and 2(a)(vii)
shall be amended and restated in their entirety to read as follows:
"2(a)(vi) the MLP will pay the Cash Amount to UDS Logistics in
exchange for the right to be assigned the OLP Limited Partner Interest
from UDS Logistics;
2(a)(vii) UDS Logistics will contribute to the MLP, in
exchange for the payment of the Cash Amount from the MLP, the OLP
Limited Partner Interest, free and clear of any Encumbrances;"
3. Ratification. The Parties hereby ratify and confirm the Contribution
Agreement, as amended by this Amendment.
4. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed and original but which together shall constitute one
and the same instrument.
5. Governing Law and Venue. THIS AMENDMENT SHALL BE BOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF TEXAS WITHOUT
GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF TEXAS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICATION OTHER THAN THE STATE OF TEXAS. VENUE FOR ANY
ACTION ARISING UNDER THIS AMENDMENT SHALL LIE EXCLUSIVELY IN ANY STATE OR
FEDERAL COURT IN BEXAR COUNTY, TEXAS.
6. Entire Agreement. This Amendment constitutes the entire agreement
among the Parties regarding the subject matter hereof and supersedes any prior
understandings, agreements, or representations by or among the Parties, written
or oral, to the extent they have related in any way to the subject matter
hereof.
[Signature Page Follows]
2
In witness whereof, the Parties have executed this Amendment to be
effective as of the effective date first written above.
VALERO REFINING - TEXAS, L.P.
By: Valero Corporate Services Company, its
General Partner
By: /s/ Michael S. Ciskowski
------------------------------
Name: Michael S. Ciskowski
---------------------
Title: Sr. Vice President
---------------------
UDS LOGISTICS, LLC
By: /s/ Raymond Gaddy
---------------------------------------
Name: Raymond Gaddy
------------------------------
Title: President
------------------------------
VALERO L.P.
By: Riverwalk Logistics, L.P., its General
Partner
By: Valero GP, LLC, its General Partner
By: /s/ Curtis V. Anastasio
-------------------------
Name: Curtis V. Anastasio
--------------------
Title: President
-------------------
VALERO GP, INC.
By: /s/ Curtis V. Anastasio
---------------------------------------
Name: Curtis V. Anastasio
------------------------------
Title: President
------------------------------
3
VALERO LOGISTICS OPERATIONS, L.P.
By: Valero GP, Inc., its General Partner
By: Valero GP, Inc., its General
Partner
By: /s/ Curtis V. Anastasio
------------------------------
Name: Curtis V. Anastasio
---------------------
Title: President
---------------------
4
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Valero L.P.'s Registration
Statement (Form S-3 No. 333-89978) of our report dated March 6, 2003 on the
Valero South Texas Pipeline and Terminal Business financial statements for the
year ended December 31, 2002 included in this Form 8-K.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
April 2, 2003
EXHIBIT 99.1
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
FINANCIAL STATEMENTS
DECEMBER 31, 2002
..
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Valero Energy Corporation
We have audited the accompanying balance sheet of the Valero South Texas
Pipeline and Terminal Business as of December 31, 2002, and the related
statements of income, cash flows, and changes in net parent investment for the
year then ended. These financial statements are the responsibility of Valero
Energy Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Valero South Texas Pipeline
and Terminal Business as of December 31, 2002 and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Antonio, Texas
March 6, 2003
1
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
BALANCE SHEET
(in thousands)
DECEMBER 31,
2002
------------
ASSETS
CURRENT ASSETS:
Accounts receivable ......................................... $ 300
Other current assets ........................................ 1,370
------------
TOTAL CURRENT ASSETS ..................................... 1,670
------------
Property, plant and equipment .................................. 112,873
Less accumulated depreciation and amortization ................. (5,367)
------------
Property, plant and equipment, net .......................... 107,506
------------
TOTAL ASSETS ............................................. $ 109,176
============
LIABILITIES AND NET PARENT INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................... $ 3,243
Taxes other than income taxes ............................... 322
------------
TOTAL CURRENT LIABILITIES ................................ 3,565
Long-term capital lease obligation ............................. 99,280
Deferred income tax liabilities ................................ 16,703
Net parent investment .......................................... (10,372)
------------
TOTAL LIABILITIES AND NET PARENT INVESTMENT ............... $ 109,176
============
See accompanying notes to the financial statements.
2
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
STATEMENT OF INCOME
(in thousands)
YEAR ENDED
DECEMBER 31,
2002
------------
REVENUES .................................... $ 27,897
------------
COSTS AND EXPENSES:
Operating expenses ....................... 15,780
General and administrative expenses ...... 820
Depreciation and amortization ............ 3,390
------------
TOTAL COSTS AND EXPENSES .............. 19,990
------------
OPERATING INCOME ............................ 7,907
Interest expense ......................... (7,743)
------------
INCOME BEFORE INCOME TAX EXPENSE ............ 164
Income tax expense ....................... 66
------------
NET INCOME .................................. $ 98
============
See accompanying notes to the financial statements.
3
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED
DECEMBER 31,
2002
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 98
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............................. 3,390
Accretion of capital lease obligation ..................... 1,457
Deferred income taxes ...................................... 66
Changes in operating assets and liabilities:
Decrease in accounts receivable ........................... 642
Decrease in other current assets ......................... 104
Increase in accounts payable and accrued liabilities ..... 1,015
Increase in taxes other than income taxes ................. 243
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 7,015
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maintenance capital expenditures ............................... (843)
Expansion capital expenditures ................................. (1,235)
------------
NET CASH USED IN INVESTING ACTIVITIES ................. (2,078)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash repayments to parent .................................. (4,937)
------------
NET CASH USED IN FINANCING ACTIVITIES ................. (4,937)
------------
NET INCREASE IN CASH ........................................... --
CASH AT BEGINNING OF YEAR ...................................... --
------------
CASH AT END OF YEAR ............................................ $ --
============
INTEREST PAID .................................................. $ 6,286
============
See accompanying notes to the financial statements.
4
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
STATEMENT OF CHANGES IN NET PARENT INVESTMENT
(in thousands)
YEAR ENDED
DECEMBER 31,
2002
------------
BALANCE AS OF JANUARY 1, 2002 ............. $ (5,533)
Net income ............................. 98
Net cash repayments to parent .......... (4,937)
------------
BALANCE AS OF DECEMBER 31, 2002 ........... $ (10,372)
============
See accompanying notes to the financial statements.
5
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1: BUSINESS DESCRIPTION
Valero Energy Corporation (Valero Energy), through capital lease agreements
entered into with certain wholly owned subsidiaries of El Paso Corporation (El
Paso) effective June 1, 2001, leases and operates certain pipeline and terminal
assets in south Texas, referred to herein as the South Texas Pipeline and
Terminal Business (the Business). The Business is comprised of three intrastate
common carrier pipelines and related terminalling assets. The three pipeline
systems connect Valero Energy's refineries in Corpus Christi and Three Rivers,
Texas to the Houston, San Antonio and Rio Grande Valley, Texas markets. Each of
the three pipelines are subject to regulation by the Texas Railroad Commission.
These regulations include rate regulations, which govern the tariff rates
charged to pipeline customers for transportation through a pipeline. Tariff
rates for each pipeline are required to be filed with the Texas Railroad
Commission upon completion of a pipeline and when a tariff is being revised. In
addition, the regulations include annual reporting requirements for each
pipeline.
The Business consists of the following assets:
o The Houston Pipeline, a 204-mile pipeline originating in Corpus Christi,
Texas and ending in the Houston ship channel area of Pasadena, Texas. The
pipeline has the capacity to transport 105,000 barrels per day of refined
product produced at Valero Energy's Corpus Christi refinery and third party
refineries located in Corpus Christi.
o The San Antonio Pipeline which is comprised of two segments: the north
segment, which runs from Pettus, Texas to San Antonio and the south segment
which runs from Pettus, Texas to Corpus Christi. The north segment is 74
miles long and has a capacity of 24,000 barrels per day. This segment ends
in San Antonio at the San Antonio terminal. The south segment is 60 miles
long and has a capacity of 15,000 barrels per day.
o The Valley Pipeline, a 130-mile pipeline originating in Corpus Christi and
ending at Edinburg, Texas. The pipeline has the capacity to transport
27,100 barrels per day of refined products produced at Valero Energy's
Corpus Christi refinery.
o A terminal located near Victoria, Texas with a storage capacity of 98,000
barrels.
o A terminal located in San Antonio, Texas with a storage capacity of
148,200 barrels.
o A terminal located in Edinburg, Texas with a storage capacity
of 184,600 barrels.
o Three terminals located in Houston, Texas with a total capacity of 212,900
barrels of refined product storage and 75,000 barrels of asphalt storage.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These audited financial statements have been prepared in
accordance with United States generally accepted accounting principles and
include all adjustments considered necessary for a fair presentation. The
financial statements represent a carve-out financial statement presentation of
the operations of the Business and reflect Valero Energy's historical cost basis
as of and for the year ended December 31, 2002.
On Feburary 27, 2003, Valero Energy's Board of Directors approved the
contribution of certain assets and liabilities of the Business to Valero L.P., a
publicly traded limited partnership in which Valero Energy currently owns an
approximate 73.6% interest, in exchange for a cash amount of $150 million. These
financial statements do not include any adjustments that might result from the
transfer of the Business.
The financial statements include allocations and estimates of direct and
indirect Valero Energy general and administrative costs attributable to the
operations of the Business. In addition, the majority of the Business' revenues
are derived from transportation services provided to Valero Energy, the
Business'
6
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
primary customer. Management believes that the assumptions, estimates and
allocations used to prepare these financial statements are reasonable. However,
the allocations may not necessarily be indicative of the costs and expenses that
would have resulted if the Business had been operated as a separate entity.
The Business' results of operations may be affected by seasonal factors, such as
the demand for petroleum products, which vary during the year, or industry
factors that may be specific to a particular period, such as industry supply
capacity and refinery turnarounds.
USE OF ESTIMATES: 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 financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews their estimates based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost.
Additions to property, plant and equipment, including maintenance and expansion
capital expenditures and capitalized interest, are recorded at cost. Maintenance
capital expenditures represent capital expenditures to replace partially or
fully depreciated assets to maintain the existing operating capacity of existing
assets and extend their useful lives. Expansion capital expenditures represent
capital expenditures to expand the operating capacity of existing assets,
whether through construction or acquisition. Repair and maintenance expenses
associated with existing assets that are minor in nature and do not extend the
useful life of existing assets are charged to operating expenses as incurred.
Depreciation and amortization is provided principally using the straight-line
method over the estimated useful lives of the related assets.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The evaluation of recoverability is performed using
undiscounted estimated net cash flows generated by the related asset. If an
asset is deemed to be impaired, the amount of impairment is determined as the
amount by which the net carrying value exceeds discounted estimated net cash
flows.
ENVIRONMENTAL REMEDIATION COSTS: Environmental remediation costs are expensed
and an associated accrual established when site restoration and environmental
remediation and cleanup obligations are either known or considered probable and
can be reasonably estimated. Accrued liabilities are not discounted to present
value and are not reduced by possible recoveries from third parties.
Environmental costs include initial site surveys, costs for remediation and
restoration, and ongoing monitoring costs, as well as fines, damages and other
costs, when estimable. Adjustments to initial estimates are recorded, from time
to time, to reflect changing circumstances and estimates based upon additional
information developed in subsequent periods. See Note 8 regarding certain
environmental liabilities retained by El Paso and Valero Energy.
NET PARENT INVESTMENT: The net parent investment represents a net balance as the
result of various transactions between the Business and Valero Energy. The
balance is the result of the Business' participation in Valero Energy's
centralized cash management program under which all of the Business' cash
receipts were remitted to and all cash disbursements were funded by Valero
Energy. Other transactions affecting the net parent investment include
intercompany transportation and terminalling revenues and related expenses,
administrative and support expenses incurred by Valero Energy and allocated to
the Business, and income taxes. There are no terms of settlement or interest
charges associated with the net parent investment balance.
REVENUE RECOGNITION: Revenues are derived from pipeline transportation and
terminalling of refined products. Transportation revenues (based on pipeline
tariff rates) are recognized as refined products are transported through the
pipeline. Rate regulations govern the tariff rates charged to pipeline
customers.
7
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Terminalling revenues are recognized as refined products are moved out of the
terminal and as additives are blended with refined products.
OPERATING EXPENSES: Operating expenses consist primarily of fuel and power
costs, telecommunication costs, labor costs of pipeline field and support
personnel, maintenance, utilities and insurance. Such expenses are recognized as
incurred.
FEDERAL AND STATE INCOME TAXES: Income taxes are accounted for under the asset
and liability method. Under this method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred amounts are measured
using enacted tax rates expected to apply to taxable income in the year those
temporary differences are expected to be recovered or settled.
Historically, the Business' results have been included in the consolidated
federal income tax returns filed by Valero Energy and have been included in
state income tax returns of subsidiaries of Valero Energy. The income tax
provision in the statement of income represents the current and deferred income
taxes that would have resulted if the Business were a stand-alone taxable entity
filing its own income tax returns. Accordingly, the calculations of the income
tax provision and deferred income taxes necessarily require certain assumptions,
allocations and estimates which management believes are reasonable to reflect
the tax reporting for the Business as a stand-alone taxpayer.
INTEREST EXPENSE: Interest expense consists of interest incurred on capital
lease obligations.
COMPREHENSIVE INCOME: The Business has reported no comprehensive income due to
the absence of items of other comprehensive income in the period presented.
SEGMENT DISCLOSURES: The Business operates in only one segment, the petroleum
pipeline segment of the oil and gas industry.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Business currently does not
hold or trade derivative instruments.
NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations." This statement establishes
standards for accounting for an obligation associated with the retirement of a
tangible long-lived asset. An asset retirement obligation should be recognized
in the financial statements in the period in which it meets the definition of a
liability as defined in FASB Concepts Statement No. 6, "Elements of Financial
Statements." The amount of the liability would initially be measured at fair
value. Subsequent to initial measurement, an entity would recognize changes in
the amount of the liability resulting from (a) the passage of time and (b)
revisions to either the timing or amount of estimated cash flows. Statement No.
143 also establishes standards for accounting for the cost associated with an
asset retirement obligation. It requires that, upon initial recognition of a
liability for an asset retirement obligation, an entity capitalize that cost by
recognizing an increase in the carrying amount of the related long-lived asset.
The capitalized asset retirement cost would then be allocated to expense using a
systematic and rational method. Statement No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Business is currently evaluating the impact
of adopting this new statement, however, at the present time does not believe
the statement will have a material impact on its financial position or results
of operations.
8
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which primarily represents assets leased from El
Paso under capital leases, consisted of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES 2002
------------ ------------
(years) (in thousands)
Land ................................................... -- $ 1,146
Pipelines, terminals and related buildings and
equipment ............................................ 16-33 97,419
Rights of way .......................................... 33 11,708
Construction in progress ............................... -- 2,600
------------
Total .............................................. 112,873
Accumulated depreciation and amortization .............. (5,367)
------------
Property, plant and equipment, net ................. $ 107,506
============
As of December 31, 2002, assets held under capital lease had a net book value of
$104.9 million, net of accumulated amortization of $5.4 million.
NOTE 4: INCOME TAXES
The amounts presented below relate only to the Business and were calculated as
if the Business filed separate federal and state income tax returns.
The provision for income taxes consisted of the following:
YEAR ENDED
DECEMBER 31,
2002
------------
(in thousands)
Deferred:
Federal....................................................... $ 57
State......................................................... 9
-------
Total deferred.............................................. 66
-------
Income tax expense.............................................. $ 66
=======
9
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the Business' financial
statements. The components of the Business' net deferred income tax liabilities
consisted of the following:
DECEMBER 31,
2002
------------
(in thousands)
Deferred income tax assets:
Net operating loss carry-forward......................... $ 1,633
---------
Total deferred income tax assets.................... 1,633
---------
Deferred income tax liabilities:
Property, plant and equipment............................. 18,298
Other liabilities........................................ 38
---------
Total deferred income tax liabilities............... 18,336
---------
Net deferred income tax liabilities........................... $ 16,703
=========
The differences between the Business' effective income tax rate and the U.S.
federal statutory rate is reconciled as follows:
YEAR ENDED
DECEMBER 31,
2002
------------
(in thousands)
U. S. federal statutory rate.................................. 35.00%
State income taxes (net of federal tax benefit)............... 5.24
------
Effective income tax rate................................. 40.24%
======
NOTE 5: RELATED-PARTY TRANSACTIONS
Transactions between the Business and Valero Energy included pipeline tariff and
terminal throughput revenues received by the Business from Valero Energy and the
allocation of salary and employee benefit costs, insurance costs and
administrative fees from Valero Energy to the Business. Such transactions cannot
be presumed to be carried out on an arm's length basis as the requisite
conditions of competitive, free-market dealings may not exist. For purposes of
these financial statements, payables and receivables related to transactions
between the Business and Valero Energy are included as a component of the net
parent investment.
The Business participated in Valero Energy's centralized cash management program
under which cash receipts and cash disbursements were processed through Valero
Energy's cash accounts with a corresponding credit or charge to an intercompany
account. This intercompany account is included in the net parent investment
balance.
During the year ended December 31, 2002, Valero Energy provided the Business
with certain general and administrative services, including the centralized
corporate functions of legal, accounting, treasury, environmental, engineering,
information technology, and human resources. For these services, Valero Energy
charged the Business approximately 0.5% of its total general and administrative
expenses incurred in the United States, with this allocation based on
investments in property and personnel headcount.
10
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Management believes that the amount of general and administrative expenses
allocated to the Business is a reasonable approximation of the costs related to
the Business.
The following table summarizes transactions between the Business and
Valero Energy:
YEAR ENDED
DECEMBER 31,
2002
-------------
(in thousands)
Revenues..................................................... $25,801
Operating expenses........................................... 3,606
General and administrative expenses.......................... 820
NOTE 6: EMPLOYEE BENEFIT PLANS
Employees who work in the Business are included in the various employee benefit
plans of Valero Energy. These plans include qualified, non-contributory defined
benefit retirement plans, defined contribution 401(k) plans, employee and
retiree medical, dental and life insurance plans, long-term incentive plans
(i.e., stock options and bonuses) and other such benefits. For the purposes of
these carve-out financial statements, the Business is considered to be
participating in multi-employer benefit plans of Valero Energy.
The Business' allocated share of Valero Energy employee benefit plan expenses
were $501,000 for the year ended December 31, 2002. These employee benefit plan
expenses are included in operating expenses with the related payroll costs.
NOTE 7: LEASES
In connection with the capital lease agreements with El Paso discussed in Note
1, approximately $97,024,000 of capital lease obligation was attributed to the
Business as of June 1, 2001. The lease agreements are for a term of 20 years and
require Valero Energy to make total annual lease payments of $18.5 million for
each of the first two years and increasing amounts thereafter. Approximately
$6.3 million of those annual lease payments are attributable to the Business. As
payments during the first two years of the capital lease term were less than
interest incurred during that period, the capital lease obligation has increased
since June 1, 2001. Accretion for the year ended December 31, 2002 and since the
inception of the lease was $1,457,000 and $2,143,000, respectively. The
Business' future minimum lease payments under the capital lease with El Paso are
as follows (in thousands):
Minimum lease payments....................................... $ 102,537
Less interest expense..................................... (3,257)
---------
Capital lease obligation..................................... $ 99,280
=========
Valero Energy has the option to purchase the facilities at the end of the second
year of the lease and for increasing amounts each succeeding year through the
end of the lease term. The minimum lease payments above represent payments from
January 1, 2003 through June 1, 2003 (the purchase option date) plus the amount
of the purchase option. See the discussion regarding the exercise of that option
in Note 10, "Subsequent Events".
11
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In addition, the Business leases certain equipment and vehicles under operating
lease agreements expiring through 2007. Future minimum rental payments
applicable to noncancellable operating leases as of December 31, 2002, are as
follows (in thousands):
2003.......................................................... $ 91
2004.......................................................... 90
2005.......................................................... 89
2006.......................................................... 54
2007.......................................................... 9
-------
Future minimum lease payments.............................. $ 333
=======
Rental expense for all operating leases totaled $80,000 for the year ended
December 31, 2002.
NOTE 8: ENVIRONMENTAL MATTERS
The operations of the Business are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although management believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in the petroleum pipeline
industry, and there can be no assurance that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
increasingly stringent environmental laws and regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from the operations, could result in substantial costs and liabilities.
Accordingly, the Business has adopted policies, practices and procedures in the
areas of pollution control, product safety, occupational health and the
handling, storage, use and disposal of hazardous materials to prevent material
environmental or other damage, and to limit the financial liability which could
result from those events. However, some risk of environmental or other damage is
inherent in the Business, as it is with other companies engaged in similar
businesses.
In connection with Valero Energy's lease of the El Paso assets, Valero Energy
assumed all environmental liabilities related to the facilities with certain
exceptions. El Paso retained liabilities for, and agreed to indemnify Valero
Energy against (a) all environmental claims and costs related to offsite
hazardous materials on or under certain adjacent properties, and all claims and
costs pertaining to offsite environmental conditions arising under the
requirements of an agreed final judgment dated April 1, 1998 between the State
of Texas and Coastal Refining and Marketing, Inc. (a subsidiary of El Paso), (b)
any environmental claim or cost related to the transportation or offsite
disposal of any hazardous substance related to the facilities prior to June 1,
2001, (c) bodily injury and property damage resulting from exposure to or
contamination by hazardous materials arising from El Paso's operation and use of
the facilities prior to June 1, 2001, and (d) environmental claims and costs
relating to the presence of hazardous materials resulting from El Paso's
continued use of its assets that are located at or adjacent to the site of the
facilities leased by Valero Energy. El Paso also retained liabilities for any
pre-existing orders, judgments or citations that El Paso failed to disclose
prior to June 1, 2001. Valero Energy's assumed liabilities include certain
environmental remediation obligations relating primarily to soil and groundwater
contamination at the leased facilities. These assumed liabilities are monitored
by a corporate environmental area which is responsible for determining the
propriety of any payments or adjustments to accruals related to the liabilities
that arose prior to the inception of the lease with El Paso. These assumed
environmental liabilities are considered the responsibility of Valero Energy,
rather than the Business, and thus are not included in these financial
statements. Liabilities pertaining to the Business arising subsequent to the
inception of the lease are the responsibility of the Business and such costs are
charged to the Business. However, no liabilities have arisen since the inception
of the lease, and thus no environmental liability is reflected in the balance
sheet as of December 31, 2002.
12
VALERO SOUTH TEXAS PIPELINE AND TERMINAL BUSINESS
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: CONTINGENCIES AND COMMITMENTS
There are various legal proceedings and claims pending against the Business
which arise in the ordinary course of business. It is management's opinion,
based upon advice of counsel, that these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
or financial position of the Business.
NOTE 10: SUBSEQUENT EVENTS
On February 28, 2003, Valero Energy exercised its option to purchase from El
Paso the refinery in Corpus Christi and the related South Texas pipeline and
terminalling assets that it had been leasing and operating since June 1, 2001.
These assets were purchased for an aggregate consideration of approximately
$289.3 million.
Effective March 1, 2003, the impact of volumetric variances in the pipelines
will be borne by the shippers in the Business' pipelines. The net reduction to
income before income tax expense of volumetric variances in the pipelines was
$636,000 for the year ended December 31, 2002.
13
EXHIBIT 99.2
VALERO L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements combine
the historical consolidated balance sheets and statements of income of Valero
L.P. and subsidiaries (Valero L.P.) and the Valero South Texas Pipeline and
Terminal Business (the Business), because of Valero L.P.'s acquisition of the
Business which occurred on March 18, 2003 using the purchase method of
accounting.
The following information is to aid in the analysis of the financial
aspects of the acquisition. The balance sheet information as of December 31,
2002 and the statement of income information for the year ended December 31,
2002 for Valero L.P. were derived from the audited consolidated financial
statements of Valero L.P. The information for Valero L.P. should be read
together with the historical consolidated financial statements and related notes
contained in its annual report on Form 10-K for the year ended December 31, 2002
and other information that has been filed with the SEC. The balance sheet
information as of December 31, 2002 and the statement of income information for
the year ended December 31, 2002 for the Business were derived from the audited
financial statements of the Business included in this Form 8-K.
The unaudited pro forma combined statement of income assumes the
acquisition was effective on January 1, 2002. The unaudited pro forma combined
balance sheet gives effect to the acquisition as if it had occurred on December
31, 2002. The accounting policies of Valero L.P. and the Business are
substantially comparable.
The unaudited pro forma combined financial information is for
illustrative purposes only. The pro forma adjustments, as described in the Notes
to Pro Forma Combined Financial Statements, are based upon available information
and upon certain assumptions that Valero L.P.'s management believes are
reasonable. The unaudited pro forma combined financial statements do not reflect
the effect of anticipated synergies, if any, that may result from the
acquisition. In addition, the pro forma combined financial information may not
be indicative of the historical results that would have been achieved had the
Business and Valero L.P. always been combined or the future results that Valero
L.P. will experience.
VALERO L.P. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
VALERO L.P.
THE AND THE
VALERO L.P. BUSINESS PRO FORMA BUSINESS
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 33,533 $ -- $ 111,629 (A) $ 26,213
25,000 (B)
6,655 (C)
(604) (D)
(150,000) (E)
Receivable from parent .............................. 8,482 -- -- 8,482
Accounts receivable ................................. 1,502 300 (300) (F) 1,502
Other current assets ................................ 177 1,370 (1,370) (F) 177
----------- ---------- ----------- -----------
Total current assets .............................. 43,694 1,670 (8,990) 36,374
----------- ---------- ----------- -----------
Property, plant and equipment .......................... 486,939 112,873 150,000 (E) 636,939
(112,873) (F)
Less accumulated depreciation and amortization ......... (137,663) (5,367) 5,367 (F) (137,663)
----------- ---------- ----------- -----------
Property, plant and equipment, net ................. 349,276 107,506 42,494 499,276
Goodwill ............................................... 4,715 -- -- 4,715
Investment in Skelly-Belvieu Pipeline Company .......... 16,090 -- -- 16,090
Other noncurrent assets ................................ 1,733 -- 604 (D) 2,337
----------- ---------- ----------- -----------
Total assets ...................................... $ 415,508 $ 109,176 $ 34,108 $ 558,792
=========== ========== =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt ................... $ 747 $ -- $ -- $ 747
Accounts payable and accrued liabilities ............ 8,133 3,243 (3,243) (F) 8,133
Taxes other than income taxes ....................... 3,797 322 (322) (F) 3,797
----------- ---------- ----------- -----------
Total current liabilities ......................... 12,677 3,565 (3,565) 12,677
Long-term debt, less current portion ................... 108,911 99,280 111,629 (A) 245,540
25,000 (B)
(99,280) (F)
Other long-term liabilities ............................ 25 -- -- 25
Deferred income tax liabilities ........................ -- 16,703 (16,703) (F) --
Partners' equity:
Common units ......................................... 170,655 -- 6,525 (C) 177,180
Subordinated units ................................... 117,042 -- -- 117,042
General partner's equity ............................. 6,198 -- 130 (C) 6,328
Net parent investment ................................ -- (10,372) 10,372 (F) --
----------- ---------- ----------- -----------
Total partners' equity ............................ 293,895 (10,372) 17,027 300,550
----------- ---------- ----------- -----------
Total liabilities and partners' equity ............ $ 415,508 $ 109,176 $ 34,108 $ 558,792
=========== ========== =========== ===========
See accompanying notes to pro forma combined financial statements.
VALERO L.P. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT AMOUNTS)
VALERO L.P.
THE AND THE
VALERO L.P. BUSINESS PRO FORMA BUSINESS
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
(unaudited) (unaudited)
REVENUES........................................... $ 118,458 $ 27,897 $ -- $ 146,355
----------- ---------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses............................... 37,838 15,780 -- 53,618
General and administrative expenses.............. 6,950 820 -- 7,770
Depreciation and amortization.................... 16,440 3,390 2,065 (G) 21,895
----------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES..................... 61,228 19,990 2,065 83,283
----------- ---------- ----------- -----------
OPERATING INCOME................................... 57,230 7,907 (2,065) 63,072
Equity income from Skelly-Belvieu Pipeline
Company....................................... 3,188 -- -- 3,188
Interest expense, net............................ (4,880) (7,743) 239 (H) (12,475)
----------- ---------- -----------
(60) (I)
(31) (J)
-----------
INCOME BEFORE INCOME TAX EXPENSE................... 55,538 164 (1,917) 53,785
Income tax expense............................... 395 66 (66) (K) 395
----------- ---------- ----------- -----------
NET INCOME......................................... $ 55,143 $ 98 $ (1,851) $ 53,390
=========== ========== =========== ===========
ALLOCATION OF NET INCOME:
Net income......................................... $ 55,143 $ 53,390
Less net income applicable to the Wichita Falls
Business for the month ended January 31, 2002... (650) (650)
---------- -----------
Net income applicable to the general and limited
partners' interest.............................. 54,493 52,740
General partner's interest in net income........... (2,187) (2,152) (L)
---------- -----------
Limited partners' interest in net income........... $ 52,306 $ 50,588
========== ===========
PRO FORMA NET INCOME PER UNIT APPLICABLE TO
LIMITED PARTNERS................................ $ 2.72 $ 2.60 (M)
========== ===========
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING....... 19,250,867 19,436,289
========== ===========
See accompanying notes to pro forma combined financial statements.
VALERO L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
Valero L.P. (a Delaware limited partnership), through its wholly owned
subsidiary, Valero Logistics Operations, L.P. (Valero Logistics), owns and
operates most of the crude oil and refined product pipeline, terminalling and
storage assets that service three of Valero Energy Corporation's (Valero Energy)
refineries. These refineries consist of the McKee and Three Rivers refineries
located in Texas and the Ardmore refinery located in Oklahoma. The pipeline,
terminalling and storage assets provide for the transportation of crude oil and
other feedstocks to the refineries and the transportation of refined products
from the refineries to terminals or third-party pipelines for further
distribution.
Effective June 1, 2001, Valero Energy began leasing, under capital lease
agreements, certain pipelines and terminals in south Texas from subsidiaries of
El Paso Corporation. On February 28, 2003, Valero Energy exercised the purchase
options contained in the lease agreements. These pipeline and terminal assets
and operations are referred to as the Valero South Texas Pipeline and Terminal
Business (the Business). The Business consists of the following assets:
o The Houston Pipeline, a 204-mile pipeline originating in Corpus Christi,
Texas and ending in the Houston ship channel area of Pasadena, Texas. The
pipeline has the capacity to transport 105,000 barrels per day of refined
product produced at Valero Energy's Corpus Christi refinery and third party
refineries in Corpus Christi.
o The San Antonio Pipeline, which is comprised of two segments: the north
segment which runs from Pettus, Texas to San Antonio, Texas and the south
segment which runs from Pettus, Texas to Corpus Christi. The north segment
is 74 miles long and has a capacity of 24,000 barrels per day. This segment
ends in San Antonio at the San Antonio terminal. The south segment is 60
miles long and has a capacity of 15,000 barrels per day and ends at Valero
Energy's Corpus Christi refinery.
o The Valley Pipeline, a 130-mile pipeline originating in Corpus Christi and
ending in Edinburg, Texas. The pipeline has the capacity to transport
27,100 barrels per day of refined product produced at Valero Energy's
Corpus Christi refinery.
o Refined Product Terminals located near Victoria, Texas (98,000 barrels of
refined product storage capacity), in San Antonio (148,200 barrels of
refined product storage capacity), in Edinburg (184,600 barrels of refined
product storage capacity) and in Houston, Texas (212,900 barrels of refined
product storage capacity and 75,000 barrels of asphalt storage capacity).
Effective March 18, 2003, Valero Energy contributed the Business to Valero L.P.
for an aggregate amount of $150,000,000 in cash.
The pro forma combined financial statements are based on the historical
consolidated financial position and results of operations of Valero L.P. and its
wholly owned subsidiaries combined with the historical financial position and
results of operations of the Valero South Texas Pipeline and Terminal Business.
The pro forma combined financial statements reflect the acquisition of the
Business by Valero L.P.
NOTE 2: DEBT AND EQUITY TRANSACTIONS AND TANK ASSET CONTRIBUTION
In conjunction with the acquisition of the Business from Valero Energy for
$150,000,000, Valero L.P. and Valero Logistics entered into the following
transactions on March 18, 2003:
Valero Logistics issued $250,000,000 of 6.05% senior notes due 2013 in a private
placement for total proceeds of $249,298,000 after deducting debt discounts of
$702,000. In addition, debt issuance costs totaled $1,350,000. A portion of the
6.05% senior note proceeds was used as payment for the redemption of common
units and general partner interest discussed below and the remaining net
proceeds of $111,025,000 ($111,629,000 proceeds less $604,000 of debt issuance
costs) were used to partially fund the acquisition of the Business.
VALERO L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Valero L.P. redeemed 3,809,750 common units held by UDS Logistics, LLC, a wholly
owned subsidiary of Valero Energy, for $134,066,000 and redeemed a proportionate
amount of general partner interest held by Riverwalk Logistics, L.P., a wholly
owned subsidiary of Valero Energy, for $2,857,000.
Valero L.P. issued 5,750,000 common units in a public offering under its shelf
registration statement, which resulted in net proceeds of $202,343,000 after
underwriting discounts and commissions. In order to maintain its 2% general
partner interest, Riverwalk Logistics, L.P. made a $4,312,000 capital
contribution to Valero L.P. Most of the proceeds from the common unit offering
and the general partner interest capital contribution were used as payment for
the tank asset acquisition discussed below, with the remaining net proceeds of
$6,655,000 ($6,525,000 related to the common unit offering and $130,000 related
to the general partner interest capital contribution) used to partially fund the
acquisition of the Business. Based on net proceeds per common unit of $35.19
from the public offering, the $6,525,000 of common unit proceeds equates to
185,422 newly issued common units.
Valero Energy contributed 58 crude oil and intermediate feedstock storage tanks
located at its Texas City refinery, Benicia refinery and West plant of the
Corpus Christi refinery in exchange for $200,000,000 in cash. The tank asset
acquisition was funded with proceeds from the public offering of common units
and the related general partner interest capital contribution. Because the tank
asset acquisition was the acquisition of assets and not a business, the tank
asset acquisition was not included in the accompanying pro forma combined
financial statements.
The pro forma combined financial statements reflect the funding of the
contribution of the Business' refined product pipeline and terminal assets by
Valero Energy with $111,025,000 of net proceeds from the issuance of the 6.05%
senior notes, $25,000,000 of borrowings under Valero Logistics' revolving credit
facility, $6,655,000 of net proceeds from the issuance by Valero L.P. of common
units and the related general partner interest capital contribution and
$7,320,000 of available cash.
NOTE 3: AGREEMENTS BETWEEN VALERO L.P. AND VALERO ENERGY
In conjunction with the acquisition of the Business, Valero L.P. and Valero
Energy entered into the following agreements.
THROUGHPUT COMMITMENT AGREEMENT - In connection with the acquisition of the
Business, Valero Logistics and Valero Energy entered into a throughput
commitment agreement, for an initial period of 7 years, pursuant to which Valero
Energy has committed to:
o transport in the Houston and Valley pipelines an aggregate of 40% of the
Corpus Christi refinery gasoline and distillate production if combined
throughput in these pipelines is less than 110,000 barrels per day;
o transport in the Pettus to San Antonio refined product pipeline 25% of the
Three Rivers refinery gasoline and distillate production and in the Pettus
to Corpus Christi refined product pipeline 90% of the Three Rivers refinery
raffinate production;
o use the Houston asphalt terminal for an aggregate of 7% of the Corpus
Christ refinery asphalt production;
o use the Edinburg refined product terminal for an aggregate of 7% of the
Corpus Christi refinery gasoline and distillate production, if the
throughput at that terminal is less than 20,000 barrels per day; and
o use the San Antonio refined product terminal for 75% of the throughput in
the Pettus to San Antonio refined product pipeline.
In the event Valero Energy does not transport in the pipelines or use the
terminals for the required minimum volumes and if its obligation has not been
suspended under the terms of the agreement, Valero Energy will be required to
make a cash payment based on the shortfall in volume multiplied by the
applicable weighted average tariff rate or terminal fee. In addition, Valero
Energy has agreed, for a period of 7 years, (i) to remain the shipper for its
refined products transported through the pipelines, and (ii) to neither
challenge, nor cause others to challenge, the tariff rates or terminalling fees
associated with the pipelines and terminals.
VALERO L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
TERMINALLING AGREEMENTS - In connection with the acquisition of the Business,
Valero Logistics and Valero Energy entered into terminalling agreements pursuant
to which Valero Energy has agreed to pay terminalling fees, for an initial
period of 5 years, for each barrel of refined product terminalled or stored at
each of the refined product terminals associated with the Business. In addition
to the terminalling fee, Valero Energy will pay an additive blending fee for
gasoline additives blended into refined products at the various refined product
terminals, except the Hobby Airport terminal. Valero Energy will pay a filtering
fee for each barrel of refined product terminalled at the Hobby Airport
terminal. The terminal agreements are subject to automatic renewal for
successive one-year periods following the initial term and either party may
terminate the terminalling agreements after the initial term upon 30 days
notice.
NOTE 4: PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(A) Reflects the portion of the proceeds from Valero Logistics' private
placement of $250,000,000 of 6.05% senior notes which was used to acquire
the Business (see Note 2).
(B) Reflects the proceeds from a $25,000,000 borrowing made under Valero
Logistics' $175,000,000 revolving credit facility, which were used to
acquire the Business.
(C) Reflects the portion of the proceeds from Valero L.P.'s public offering of
5,750,000 common units and related general partner interest capital
contribution which was used to acquire the Business (see Note 2).
(D) Reflects the portion of the payment of debt issuance costs (at a rate of
0.54%) related to Valero Logistics' private placement of 6.05% senior notes
that pertains to the proceeds used to acquire the Business. The debt
issuance costs, which totaled $1,350,000, are deferred and amortized over
the ten-year life of the 6.05% senior notes (see Note 2).
(E) Represents the contribution by Valero Energy of the Business' for
$150,000,000 in cash, including $7,320,000 of available cash.
(F) Represents the reversal of the historical cost of the Business' assets,
liabilities and net parent investment.
(G) Reflects depreciation expense on the $150,000,000 addition to property,
plant and equipment based on an estimated useful life of 27.5 years, less
the amount previously recorded by the Business for the year ended December
31, 2002.
(H) Reflects interest expense as if the 6.05% senior notes and additional
borrowings under the revolving credit facility were issued and drawn on
January 1, 2002, respectively. This pro forma adjustment to interest
expense is calculated as follows (in thousands):
Interest expense related to $111,629,000 portion of the
6.05% senior notes used to acquire the Business.......... $ (6,754)
Interest expense on the additional $25,000,000 of
borrowings under the revolving credit facility at an
assumed annual interest rate of 3.0%..................... (750)
Interest expense recorded by the Business for the year
ended December 31, 2002 related to its capital leases,
which were not assumed by Valero L.P..................... 7,743
--------
Pro forma adjustment to interest expense.................... $ 239
========
(I) Reflects the amortization of deferred debt issuance costs for the year
ended December 31, 2002, as if the portion of the 6.05% senior notes that
was used to acquire the Business were issued on January 1, 2002.
VALERO L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(J) Reflects the amortization of a portion of the debt discount on the 6.05%
senior notes for the year ended December 31, 2002, as if the portion of the
6.05% senior notes that was used to acquire the Business were issued on
January 1, 2002. Debt discount totaled $702,000, of which $314,000 related
to the $111,629,000 associated with the acquisition of the Business.
(K) Reflects the elimination of historical federal and state income taxes of
the Business as income taxes will be the responsibility of the partners and
not Valero L.P.
(L) Pro forma net income allocated to the general partner includes incentive
distributions of $1,103,000.
(M) Pro forma net income per unit applicable to limited partners is based on
$50,588,000 of limited partners' interest in net income divided by the
weighted average number of limited partner units outstanding of 19,436,289.
The weighted average number of limited partner units outstanding includes
185,422 of newly issued common units from the public offering.
