UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2005

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

Commission File Number 1-16417

 

VALERO L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-2956831

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

One Valero Way
San Antonio, Texas
(Address of principal executive offices)

 

78249

(Zip Code)

 

Telephone number: (210) 345-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act).
Yes  
ý  No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No  ý

 

The number of common and subordinated units outstanding as of October 31, 2005 was 37,210,427 and 9,599,322, respectively.

 

 



 

VALERO L.P. AND SUBSIDIARIES

FORM 10-Q

 

TABLE OF CONTENTS

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

3

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004

5

 

 

 

 

Condensed Notes to Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

30

 

 

 

SIGNATURES

31

 

2



 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

VALERO L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of Dollars, Except Unit Data)

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

41,678

 

$

16,147

 

Receivable from Valero Energy

 

20,538

 

19,195

 

Accounts receivable, net

 

85,864

 

3,395

 

Finished goods inventories

 

13,358

 

 

Other current assets

 

13,108

 

1,242

 

Total current assets

 

174,546

 

39,979

 

 

 

 

 

 

 

Property and equipment

 

2,447,096

 

981,360

 

Accumulated depreciation and amortization

 

(237,181

)

(196,361

)

Property and equipment, net

 

2,209,915

 

784,999

 

 

 

 

 

 

 

Goodwill

 

875,428

 

4,715

 

Investment in joint ventures

 

41,183

 

15,674

 

Other noncurrent assets, net

 

11,469

 

12,140

 

Total assets

 

$

3,312,541

 

$

857,507

 

 

 

 

 

 

 

Liabilities and Partners’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

524

 

$

990

 

Payable to Valero Energy

 

11,694

 

4,166

 

Accounts payable and other accrued liabilities

 

101,612

 

16,055

 

Accrued interest payable

 

9,488

 

7,693

 

Taxes other than income taxes

 

13,333

 

4,705

 

Income taxes payable

 

1,936

 

 

Total current liabilities

 

138,587

 

33,609

 

 

 

 

 

 

 

Long-term debt, less current portion

 

1,174,949

 

384,171

 

Deferred income taxes

 

8,692

 

 

Other long-term liabilities

 

71,380

 

1,416

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

Partners’ equity:

 

 

 

 

 

Common units (37,210,427 and 13,442,072 outstanding as of September 30, 2005 and December 31, 2004, respectively)

 

1,761,620

 

310,507

 

Subordinated units (9,599,322 outstanding as of September 30, 2005 and December 31, 2004)

 

117,374

 

117,968

 

General partner’s equity

 

39,298

 

9,836

 

Accumulated other comprehensive income

 

641

 

 

Total partners’ equity

 

1,918,933

 

438,311

 

Total liabilities and partners’ equity

 

$

3,312,541

 

$

857,507

 

 

See Condensed Notes to Consolidated Financial Statements.

 

3



 

VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Services

 

$

153,371

 

$

58,075

 

$

268,312

 

$

166,106

 

Product

 

110,175

 

 

110,175

 

 

Total revenues

 

263,546

 

58,075

 

378,487

 

166,106

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales

 

101,217

 

 

101,217

 

 

Operating expenses

 

71,358

 

21,626

 

112,688

 

59,746

 

General and administrative expenses

 

10,391

 

3,588

 

17,455

 

8,233

 

Depreciation and amortization expense

 

23,902

 

8,413

 

41,425

 

24,536

 

Total costs and expenses

 

206,868

 

33,627

 

272,785

 

92,515

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

56,678

 

24,448

 

105,702

 

73,591

 

Equity earnings in joint ventures

 

1,541

 

372

 

2,340

 

1,102

 

Interest and other expense, net

 

(15,315

)

(5,433

)

(27,022

)

(15,630

)

Income from continuing operations before income tax expense

 

42,904

 

19,387

 

81,020

 

59,063

 

Income tax expense

 

2,147

 

 

2,147

 

 

Income from continuing operations

 

40,757

 

19,387

 

78,873

 

59,063

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

4,410

 

 

4,410

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

45,167

 

19,387

 

83,283

 

59,063

 

Less general partner’s interest and incentive distributions

 

(3,892

)

(1,478

)

(7,215

)

(4,451

)

Limited partners’ interest in net income

 

$

41,275

 

$

17,909

 

$

76,068

 

$

54,612

 

 

 

 

 

 

 

 

 

 

 

Weighted-average units outstanding

 

46,809,749

 

23,041,394

 

31,051,243

 

23,041,394

 

 

 

 

 

 

 

 

 

 

 

Net income per unit applicable to limited partners:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.79

 

$

0.78

 

$

2.31

 

$

2.37

 

Discontinued operations

 

0.09

 

 

0.14

 

 

Net income

 

$

0.88

 

$

0.78

 

$

2.45

 

$

2.37

 

 

 

 

 

 

 

 

 

 

 

Cash distributions per unit applicable to limited partners

 

$

0.855

 

$

0.800

 

$

2.510

 

$

2.400

 

 

See Condensed Notes to Consolidated Financial Statements.

 

4



 

VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, Thousands of Dollars)

 

 

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

83,283

 

$

59,063

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

41,425

 

24,536

 

Equity income from joint ventures

 

(2,340

)

(1,102

)

Distributions from joint ventures

 

2,488

 

1,102

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase in receivable from Valero Energy

 

(1,343

)

(2,793

)

(Increase) decrease in accounts receivable

 

(10,680

)

1,905

 

Increase in finished goods inventories

 

(1,928

)

 

Increase in other current assets

 

(1,334

)

(588

)

Increase (decrease) in accounts payable, accrued interest payable and other accrued liabilities

 

12,809

 

(1,987

)

Increase (decrease) in payable to Valero Energy

 

7,528

 

(6,066

)

Increase in taxes other than income taxes

 

2,019

 

971

 

Other, net

 

3,471

 

550

 

Net cash provided by operating activities

 

135,398

 

75,591

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Reliability capital expenditures

 

(12,369

)

(7,030

)

Expansion capital expenditures

 

(28,926

)

(17,942

)

Kaneb acquisition, net of cash acquired

 

(505,669

)

 

Other acquisitions

 

 

(28,085

)

Investment in other noncurrent assets

 

(999

)

 

Proceeds from sale of Held Separate Businesses, net

 

454,109

 

 

Proceeds from sales of other assets

 

26,788

 

33

 

Distributions in excess of equity income from joint ventures

 

 

121

 

Net cash used in investing activities

 

(67,066

)

(52,903

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Long-term borrowings, net of issuance costs

 

713,194

 

43,000

 

Long-term debt repayments

 

(700,520

)

(5,450

)

Contributions from general partner

 

29,197

 

 

Distributions to unitholders and general partner

 

(83,839

)

(58,296

)

Net cash used in financing activities

 

(41,968

)

(20,746

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

(833

)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

25,531

 

1,942

 

Cash and cash equivalents at the beginning of the period

 

16,147

 

15,745

 

Cash and cash equivalents at the end of the period

 

$

41,678

 

$

17,687

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

37,013

 

$

23,564

 

Cash paid during the period for income taxes

 

$

47

 

$

 

 

See Condensed Notes to Consolidated Financial Statements.

 

5



 

VALERO L.P. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.  BASIS OF PRESENTATION, PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES

 

As used in this report, references to “we,” “us,” “our” or the “Partnership” collectively refer, depending on the context, to Valero L.P. or a wholly owned subsidiary of Valero L.P.

 

These unaudited consolidated financial statements include the accounts of the Partnership and subsidiaries in which the Partnership has a controlling interest.  Intercompany balances and transactions have been eliminated in consolidation.  Investments in 50% or less owned entities are accounted for using the equity method of accounting.

 

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934.  Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal recurring nature unless disclosed otherwise.  Financial information for the three and nine months ended September 30, 2005 and 2004 included in these Condensed Notes to Consolidated Financial Statements is derived from Valero L.P.’s unaudited consolidated financial statements.  Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

The consolidated balance sheet as of December 31, 2004 has been derived from the audited consolidated financial statements as of that date.  You should read these consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

 

FASB Interpretation No. 47

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47).  FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.  Since the obligation to perform the asset retirement activity is unconditional, FIN 47 provides that a liability for the fair value of a conditional asset retirement obligation should be recognized if that fair value can be reasonably estimated, even though uncertainty exists about the timing and/or method of settlement.  FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of a conditional asset retirement obligation under FASB Statement No. 143.  FIN 47 is effective for fiscal years ending after December 15, 2005, and is not expected to affect our financial position or results of operations.

 

Effective July 1, 2005 with the Kaneb Acquisition (See Note 2), we adopted the following accounting policies:

 

Inventories

Finished goods inventories consist of petroleum products purchased for resale and are valued at the lower of cost or market.  Cost is determined by using the weighted-average cost method.

 

Revenue Recognition

Revenues for the product sales business are recognized when product is sold and title and risk pass to the customer.

 

Income Taxes

Partnership operations are not subject to federal or state income taxes. However, certain of our operations are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes consists of U.S. and foreign income taxes related to our corporate subsidiaries.

 

6



 

Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If any such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly.

 

2.  KANEB ACQUISITION

 

On July 1, 2005, we completed our acquisition of Kaneb Services LLC (“KSL”) and Kaneb Pipe Line Partners, L.P. (“KPP”) (collectively, the Kaneb Acquisition).

 

We acquired all of KSL’s outstanding equity securities for approximately $509 million of cash which was primarily funded by borrowings under a $525 million term credit agreement.  Additionally, we issued approximately 23.8 million of our common units valued at approximately $1,451 million in exchange for all of the outstanding common units of KPP.

 

The Kaneb Acquisition expands our geographic presence and creates one of the largest terminal and pipeline operations in the United States.  The Kaneb Acquisition also provides us with a more diversified customer base, which minimizes our dependence on one customer.

 

Purchase Price Allocation

The Kaneb Acquisition was accounted for using the purchase method.  The purchase price has been preliminarily allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition pending completion of an independent appraisal and other evaluations.

 

As of September 30, 2005, the preliminary purchase price allocation was as follows (in thousands):

 

Current assets

 

$

591,553

 

Property and equipment

 

1,423,602

 

Goodwill

 

870,713

 

Other noncurrent assets

 

27,440

 

Current liabilities

 

(253,740

)

Long-term liabilities

 

(684,646

)

Total

 

$

1,974,922

 

 

Unaudited Pro Forma Information

The condensed statements of income include the results of operations of the Kaneb Acquisition commencing on July 1, 2005.  As a result, information for the three months ended September 30, 2005 presented below represents actual results of operations.  The following unaudited pro forma financial information assumes that the Kaneb Acquisition occurred on January 1, 2005 and 2004.  This pro forma information assumes:

      $525 million borrowed to purchase KSL,

      23.8 million common units issued in exchange for all of the outstanding common units of KPP, and

      the results of the Held Separate Businesses and the results of Martin Oil LLC, (a marketing subsidiary of KSL) are reported as discontinued operations (See Note 3).

 

7



 

The unaudited pro forma information is not necessarily indicative of the results of future operations (in thousands, except per unit data):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

263,546

 

$

211,245

 

$

737,247

 

$

592,304

 

Operating income

 

56,678

 

47,667

 

87,297

 

145,041

 

Income from continuing operations

 

40,757

 

33,474

 

55,564

 

104,422

 

Income from discontinued operations

 

4,410

 

4,083

 

11,322

 

9,802

 

Net income

 

$

45,167

 

$

37,557

 

$

66,886

 

$

114,224

 

Net income per unit applicable to limited partners:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.79

 

$

0.63

 

$

0.97

 

$

1.99

 

Discontinued operations

 

0.09

 

0.09

 

0.24

 

0.21

 

Net income

 

$

0.88

 

$

0.72

 

$

1.21

 

$

2.20

 

 

3.  DISPOSITIONS

 

Sale of Held Separate Businesses

In conjunction with the Kaneb Acquisition, we agreed with the United States Federal Trade Commission to divest certain assets.  These assets consisted of two California terminals handling refined products, blendstocks, and crude oil, three East Coast refined product terminals, and a 550-mile refined products pipeline with four truck terminals and storage in the U.S. Rocky Mountains collectively, the “Held Separate Businesses.”

 

On September 30, 2005, we sold the Held Separate Businesses to Pacific Energy Partners, L.P. (“Pacific”) for approximately $455 million.  Results of operations related to the Held Separate Businesses are classified as discontinued operations in the consolidated statements of income for the three and nine months ended September 30, 2005.  Revenues and net income for the Held Separate Businesses were $14.2 million and $4.4 million, respectively for the three and nine months ended September 30, 2005. Additionally, income from discontinued operations includes interest expense of approximately $4.9 million.  Interest expense was allocated to the discontinued operations as certain of our debt agreements required us to use the proceeds from the sale of the Held Separate Businesses to repay outstanding debt.

 

Sale of Martin Oil LLC

On July 1, 2005, we sold all of our equity interest in Martin Oil LLC, previously a wholly owned subsidiary of KSL, to Valero Marketing and Supply Company (“Valero Marketing”) for approximately $26.8 million.  Valero Marketing is a wholly owned subsidiary of Valero Energy Corporation (Valero Energy).

 

4.  LONG-TERM DEBT

 

$525 Million Term Credit Agreement

On July 1, 2005, we borrowed $525 million under a 2005 term credit agreement dated July 1, 2005 (“2005 Term Credit Agreement”), the majority of which was used to purchase KSL.  The 2005 Term Credit Agreement expires on July 1, 2010 and bears interest based on either an alternative base rate or LIBOR, which was 4.6% as of September 30, 2005.  With a portion of the proceeds received from the sale of the Held Separate Businesses, we repaid $295 million of the outstanding balance on September 30, 2005.  Our outstanding balance at September 30, 2005 was $230 million.  No additional funds may be borrowed under the 2005 Term Credit Agreement.

 

$400 Million Revolving Credit Agreement

On July 1, 2005, we borrowed $180 million under our $400 million 2005 revolving credit agreement (“2005 Revolving Credit Agreement”), which expires on July 1, 2010 and bears interest based on either an alternative base

 

8



 

rate or LIBOR, which was 4.6% as of September 30, 2005. Also on July 1, 2005, the $180 million of proceeds were used in conjunction with other proceeds and cash on hand to retire approximately $191.5 million of the outstanding indebtedness of KPP and KSL and to repay $38.0 million of indebtedness outstanding on our prior $175 million revolving credit facility.  During the quarter ended September 30, 2005, we repaid the full amount outstanding, including $160 million using a portion of the proceeds from the sale of the Held Separate Businesses on September 30, 2005.  As of September 30, 2005, we had $399.1 million available for borrowing.

 

Senior Notes

As part of the Kaneb Acquisition, we assumed the outstanding senior notes issued by Kaneb Pipe Line Operating Partnership, L.P. (“KPOP”), a subsidiary of KPP, having an aggregate face value of $500 million, and an aggregate fair value of $555 million.  The difference between the fair value and the face value of the senior notes is being amortized as a reduction of interest expense over the remaining lives of the senior notes using the effective interest method.  The senior notes were issued in two series, the first of which bears interest at 7.75% annually (due semi-annually on February 15 and August 15) and matures February 15, 2012.  The second series bears interest at 5.875% annually (due on June 1 and December 1) and matures June 1, 2013.

 

UK Term Loan

As part of the Kaneb Acquisition, we assumed the outstanding term loan of 21,000,000 Sterling (“UK Term Loan”) with a face value of $37 million as of September 30, 2005.  The UK Term Loan bears interest at 6.65% annually and matures June 30, 2010.

 

$175 Million Revolving Credit Facility

We terminated our $175 million credit facility on July 1, 2005 by repaying the $38 million outstanding amount using proceeds from our new five-year $400 million 2005 Revolving Credit Agreement.

 

Interest Rate Swaps

As of September 30, 2005, the weighted-average interest rate for our interest rate swaps was 6.3%.  As of September 30, 2005 and December 31, 2004, the aggregate estimated fair value of the interest rate swaps included in other long-term liabilities in our consolidated balance sheets was $2.6 million and $1.2 million, respectively.

 

5.  COMMITMENTS AND CONTINGENCIES

 

Litigation and Environmental Matters

We have contingent liabilities resulting from various litigation, claims and commitments, some of which are discussed below. We have recorded estimated reserves in compliance with generally accepted accounting principles related to certain matters for which losses are considered probable and can be reasonably estimated. The actual payment of any amounts reserved and the timing of such payments ultimately made is uncertain. We believe that should we be unable to successfully defend ourselves in any of these matters, the ultimate payment of any or all of the amounts reserved would not have a material adverse effect on our financial position.

 

We are also a party to additional claims and legal proceedings arising in the ordinary course of business.  We believe it is unlikely that the final outcome of any of the claims or proceedings to which we are a party would have a material adverse effect on our financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on our results of operations, financial position or liquidity.

 

Grace Matter

In 1997, Grace Energy Corporation (“Grace”) sued subsidiaries of KPP (hereafter, collectively or individually, “KPP”) in Texas state court. The complaint sought recovery of the cost of remediation of fuel leaks in the 1970s from a pipeline that had once connected a former Grace terminal with Otis Air Force Base in Massachusetts (the “Otis pipeline”).  Grace alleges the Otis pipeline and related environmental liabilities had been transferred in 1978 to an entity that was part of KPP’s acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace in 1993.  KPP contends that it did not acquire the Otis pipeline and never assumed any responsibility for any associated environmental damage.

 

In 2000, the court entered final judgment that: (i) Grace could not recover its own remediation costs of $3.5 million, (ii) KPP owns the Otis pipeline and its related environmental liabilities and (iii) Grace was awarded $1.8 million in attorney costs.  Both KPP and Grace appealed the trial court’s final judgment to the Texas Court of Appeals in Dallas.  In 2001, Grace filed a petition in bankruptcy, which created an automatic stay of actions against Grace.  Once that stay is lifted, we intend to resume vigorous prosecution of the appeal.

 

The Otis Air Force Base is a part of a Superfund Site (pursuant to CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis pipeline. Relying on the Texas state court’s final judgment assigning ownership of the Otis pipeline to KPP, the U.S. Department of Justice (“DOJ”) advised KPP in 2001 that it intends to seek reimbursement from KPP for the remediation costs associated with the two spill areas.  In 2002, the DOJ asserted that it had incurred over $49 million in costs and expected to incur additional costs of approximately $19 million for remediation of the two spill areas.  The DOJ has not filed a

 

9



 

lawsuit against KPP on this matter.  We do not believe this matter will have a material adverse effect on our financial condition, although there can be no assurances as to the ultimate outcome.

 

PEPCO Matter

On December 14, 2002, PEPCO sued KPP in the U.S. District Court for the District of Maryland, seeking recovery of all its costs associated with an oil spill in 2000 resulting from a rupture in a fuel oil pipeline in Maryland owned by Potomac Electric Power Company (“PEPCO”) and operated by KPP.  PEPCO alleges that it has incurred costs of approximately $80 million as a result of the spill.

 

At the time of filing of this report, KPP and PEPCO have been participating in voluntary mediation to settle this litigation.  KPP expects that a settlement will be reached and finalized by the end of 2005.  We believe that the majority of costs or damages resulting from these matters will be covered by insurance and therefore will not materially adversely affect our financial condition.

 

Port of Vancouver

We own a refined products terminal on property owned by the Port of Vancouver (“Port”), and we lease the land under the terminal from the Port.  Under an Agreed Order entered into with the Washington Department of Ecology (“WDE”) when KPP purchased the terminal in 1998, KPP agreed to investigate and remediate a groundwater plume contaminated by the terminal’s previous owner and operator.  KPP has submitted a final remedial action plan to WDE, and is waiting for WDE to approve that plan.  The Port also owns property near the terminal site that has been contaminated by other parties, some of which are in bankruptcy.  Estimated costs to remediate the terminal site depend on a number of factors, including the outcome of litigation involving the other properties owned by the Port that are near the terminal site.  No lawsuits have been filed against KPP in this matter, and our liability for any portion of total future remediation costs is not reasonably estimable at this time.

 

6.  RELATED PARTY TRANSACTIONS

 

We have related party transactions with Valero Energy for pipeline tariff, terminalling fee, crude oil storage tank rent and fee revenues, certain employee costs, insurance costs, operating expenses, administrative costs and rent expense.  Under the terms of a services agreement with Valero Energy (“Services Agreement”), we reimburse Valero Energy for payroll costs of employees working on our behalf.  Additionally, Valero Energy charges us an administrative services fee.

 

Our share of allocated Valero Energy employee benefit plan expenses, excluding compensation expense related to restricted common units and unit options, was $8.9 million and $3.2 million for the three months ended September 30, 2005 and 2004, respectively, and was $15.0 and $8.4 million for the nine months ended September 30, 2005 and 2004, respectively.  These employee benefit plan expenses and the related payroll costs are included in operating expenses and general and administrative expenses.

 

Effective July 1, 2005, the Services Agreement was amended to account for significant growth of the Partnership following the closing of the Kaneb Acquisition.  The amended agreement provides that the annual service fee will be $13.8 million for the first year from July 1, 2005 to June 30, 2006, $14.8 million for the second year and $15.8 million for each of the three years thereafter.  Under the amended agreement, the annual service fee will be adjusted to account for Valero Energy’s annual salary increase and may also be adjusted for changed service levels due to our acquisition, sale or construction of assets.  In addition, the Partnership agreed to perform certain services for Valero Energy, including control room services, terminal operations oversight, mapping support and integrity management program planning in exchange for an annual fee.

 

10



 

Summarized results of transactions with Valero Energy were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

63,999

 

$

57,261

 

$

176,694

 

$

163,492

 

Operating expenses

 

22,246

 

8,615

 

38,907

 

24,128

 

General and administrative expenses

 

6,908

 

3,202

 

12,708

 

7,131

 

 

7.  PARTNERS’ EQUITY

 

Outstanding Equity

We have identified our general partner interest and subordinated units as participating securities and we use the two-class method when calculating “net income per unit applicable to limited partners,” which is based on the weighted-average number of common and subordinated units outstanding during the period.  Net income per unit applicable to limited partners is computed by dividing net income applicable to limited partners, after deducting the general partner’s 2% interest and incentive distributions, by the weighted-average number of limited partnership units outstanding.  Basic and diluted net income per unit applicable to limited partners is the same because we have no potentially dilutive securities outstanding.

 

Cash Distributions

On July 21, 2005, we declared a quarterly cash distribution of $0.855 per unit paid on August 12, 2005 to unitholders of record on August 5, 2005.  On October 26, 2005, we declared a quarterly cash distribution of $0.855 per unit to be paid on November 14, 2005 to unitholders of record on November 7, 2005, which totaled $43.9 million.

 

Allocations of total cash distributions to the general and limited partners applicable to the period in which the distributions were earned were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Thousands of Dollars, Except Per Unit Data)

 

 

 

 

 

 

 

 

 

 

 

General partner interest

 

$

879

 

$

399

 

$

1,711

 

$

1,197

 

General partner incentive distribution

 

3,049

 

1,112

 

5,662

 

3,336

 

Total general partner distribution

 

3,928

 

1,511

 

7,373

 

4,533

 

Limited partners’ distribution

 

40,022

 

18,433

 

78,155

 

55,299

 

Total cash distributions

 

$

43,950

 

$

19,944

 

$

85,528

 

$

59,832

 

 

 

 

 

 

 

 

 

 

 

Cash distributions per unit applicable to limited partners

 

$

0.855

 

$

0.800

 

$

2.510

 

$

2.400

 

 

11



 

Comprehensive Income

For the three and nine months ended September 30, 2005, the difference between our net income and our comprehensive income resulted from foreign currency translation adjustments.  Our total comprehensive income was as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

45,167

 

$

19,387

 

$

83,283

 

$

59,063

 

Foreign currency translation adjustment

 

641

 

 

641

 

 

Comprehensive income

 

$

45,808

 

$

19,387

 

$

83,924

 

$

59,063

 

 

12



 

8.  SEGMENT INFORMATION

 

We have four reportable business segments:  crude oil pipelines, refined product pipelines, refined product terminals and crude oil storage tanks.  The operations related to the Kaneb Acquisition principally involve transporting refined petroleum products and fertilizer as a common carrier, the storage of petroleum products, specialty chemicals, and other liquids, and delivery and sale of bunker fuel to ships at St. Eustatius in the Caribbean and Point Tupper in Nova Scotia, Canada.  The results of Kaneb’s transportation operations are included in our refined product pipelines segment.  The results of Kaneb’s storage and bunker sales operations are included in our refined product terminals segment.

 

Segment information for our four reportable segments was as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Thousands of Dollars)

 

Revenues:

 

 

 

 

 

 

 

 

 

Crude oil pipelines

 

$

14,041

 

$

13,231

 

$

39,601

 

$

39,462

 

Refined product pipelines

 

53,749

 

22,324

 

98,609

 

63,764

 

Refined product terminals

 

184,134

 

11,150

 

205,555

 

30,259

 

Crude oil storage tanks

 

11,622

 

11,370

 

34,722

 

32,621

 

Total revenues

 

$

263,546

 

$

58,075

 

$

378,487

 

$

166,106

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Crude oil pipelines

 

$

8,431

 

$

7,870

 

$

23,680

 

$

24,269

 

Refined product pipelines

 

23,470

 

8,141

 

41,714

 

24,426

 

Refined product terminals

 

27,432

 

4,753

 

34,912

 

11,736

 

Crude oil storage tanks

 

7,736

 

7,272

 

22,851

 

21,393

 

Total segment operating income

 

67,069

 

28,036

 

123,157

 

81,824

 

Less general and administrative expenses

 

10,391

 

3,588

 

17,455

 

8,233

 

Total operating income

 

$

56,678

 

$

24,448

 

$

105,702

 

$

73,591

 

 

Total assets by reportable segment were as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Thousands of Dollars)

 

 

 

 

 

 

 

Crude oil pipelines

 

$

124,609

 

$

127,668

 

Refined product pipelines

 

1,105,703

 

347,008

 

Refined product terminals

 

1,822,969

 

145,966

 

Crude oil storage tanks

 

206,216

 

209,919

 

Total segment assets

 

3,259,497

 

830,561

 

General partnership assets

 

53,044

 

26,946

 

Total consolidated assets

 

$

3,312,541

 

$

857,507

 

 

13



 

9.  CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

 

Valero L.P. has no operations and its assets consist mainly of its investments in Valero Logistics Operations, L.P. (“Valero Logistics”), KSL and KPP.  KPP is the majority owner of KPOP.  Valero Logistics and KPOP own and operate pipelines, terminals and storage tanks and are issuers of publicly traded senior notes.  The senior notes issued by Valero Logistics were and continue to be fully and unconditionally guaranteed by Valero L.P.  In connection with the Kaneb Acquisition, effective July 1, 2005, Valero L.P. fully and unconditionally guaranteed the outstanding senior notes issued by KPOP.  Additionally, effective July 1, 2005, both Valero Logistics and KPOP fully and unconditionally guaranteed the outstanding senior notes of the other.

 

As a result, the following condensed consolidating financial statements are being presented for the current year periods as an alternative to providing separate financial statements for Valero Logistics and KPOP.  Condensed consolidating financial statements for the comparable periods of 2004 are not presented as the guarantees of KPOP’s senior notes by Valero L.P. and Valero Logistics were not in effect for those periods of 2004, nor were KSL, KPP or KPOP included in the consolidated financial statements of Valero L.P.

 

Condensed Consolidating Balance Sheet

September 30, 2005

(Thousands of Dollars)

 

 

 

Valero L.P.

 

Valero
Logistics
Operations,
L.P.

 

Kaneb Pipe
Line
Operating
Partnership
L.P.

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Valero L.P.
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

70

 

$

24,693

 

$

22,546

 

$

127,237

 

$

 

$

174,546

 

Intercompany notes receivable

 

 

187,162

 

750,232

 

 

(937,394

)

 

Property and equipment, net

 

 

780,686

 

461,939

 

967,290

 

 

2,209,915

 

Goodwill

 

 

4,715

 

264,165

 

606,548

 

 

875,428

 

Equity investments

 

2,418,743

 

30,809

 

586,925

 

1,534,149

 

(4,529,443

)

41,183

 

Other noncurrent assets, net

 

228

 

8,703

 

16

 

2,522

 

 

11,469

 

Total assets

 

$

2,419,041

 

$

1,036,768

 

$

2,085,823

 

$

3,237,746

 

$

(5,466,837

)

$

3,312,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

3,606

 

$

29,970

 

$

21,353

 

$

83,658

 

$

 

$

138,587

 

Intercompany notes payable

 

497,143

 

 

 

440,251

 

(937,394

)

 

Long-term debt, less current portion

 

 

584,882

 

553,023

 

37,044

 

 

1,174,949

 

Deferred income taxes

 

 

 

 

8,692

 

 

8,692

 

Other long-term liabilities

 

 

3,225

 

2,189

 

65,966

 

 

71,380

 

Total partners’ equity

 

1,918,292

 

418,691

 

1,509,258

 

2,602,135

 

(4,529,443

)

1,918,933

 

Total liabilities and partners’ equity

 

$

2,419,041

 

$

1,036,768

 

$

2,085,823

 

$

3,237,746

 

$

(5,466,837

)

$

3,312,541

 

 

14



 

Condensed Consolidating Statements of Income

For the Three Months Ended September 30, 2005

(Thousands of Dollars)

 

 

 

Valero
L.P.

 

Valero
Logistics
Operations,
L.P.

 

Kaneb Pipe
Line
Operating
Partnership
L.P.

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Valero L.P.
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

62,237

 

$

29,560

 

$

171,965

 

$

(216

)

$

263,546

 

Costs and expenses

 

672

 

34,268

 

18,772

 

153,372

 

(216

)

206,868

 

Operating income

 

(672

)

27,969

 

10,788

 

18,593

 

 

56,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings

 

45,839

 

190

 

21,913

 

30,630

 

(97,031

)

1,541

 

Interest and other expense, net

 

 

(7,536

)

(6,534

)

(1,245

)

 

(15,315

)

Income from continuing operations before income tax expense

 

45,167

 

20,623

 

26,167

 

47,978

 

(97,031

)

42,904

 

Income tax expense

 

 

 

 

2,147

 

 

2,147

 

Income from continuing operations

 

45,167

 

20,623

 

26,167

 

45,831

 

(97,031

)

40,757

 

Income from discontinued operations

 

 

 

3,133

 

1,277

 

 

4,410

 

Net income

 

$

45,167

 

$

20,623

 

$

29,300

 

$

47,108

 

$

(97,031

)

$

45,167

 

 

Condensed Consolidating Statements of Income

For the Nine Months Ended September 30, 2005

(Thousands of Dollars)

 

 

 

Valero
L.P.

 

Valero
Logistics
Operations,
L.P.

 

Kaneb Pipe
Line
Operating
Partnership
L.P.

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Valero L.P.
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

 

$

177,179

 

$

29,560

 

$

172,303

 

$

(555

)

$

378,487

 

Costs and expenses

 

1,304

 

99,415

 

18,772

 

153,849

 

(555

)

272,785

 

Operating income

 

(1,304

)

77,764

 

10,788

 

18,454

 

 

105,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings

 

84,587

 

836

 

21,913

 

30,633

 

(135,629

)

2,340

 

Interest and other expense, net

 

 

(19,229

)

(6,534

)

(1,259

)

 

(27,022

)

Income from continuing operations before income tax expense

 

83,283

 

59,371

 

26,167

 

47,828

 

(135,629

)

81,020

 

Income tax expense

 

 

 

 

2,147

 

 

2,147

 

Income from continuing operations

 

83,283

 

59,371

 

26,167

 

45,681

 

(135,629

)

78,873

 

Income from discontinued operations

 

 

 

3,133

 

1,277

 

 

4,410

 

Net income

 

$

83,283

 

$

59,371

 

$

29,300

 

$

46,958

 

$

(135,629

)

$

83,283

 

 

15



 

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2005

(Thousands of Dollars)

 

 

 

Valero
L.P.

 

Valero
Logistics
Operations,
L.P.

 

Kaneb Pipe
Line
Operating
Partnership L.P.

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Valero L.P.
Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

83,283

 

$

59,371

 

$

29,300

 

$

46,958

 

$

(135,629

)

$

83,283

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

26,033

 

3,828

 

11,564

 

 

41,425

 

Equity income, net of distributions

 

(748

)

176

 

(21,913

)

(29,305

)

51,790

 

 

Equity income from joint ventures, net of distributions

 

 

(674

)

 

822

 

 

148

 

Changes in operating assets and liabilities and other

 

3,835

 

41

 

1,119

 

5,547

 

 

10,542

 

Net cash provided by operating activities

 

86,370

 

84,947

 

12,334

 

35,586

 

(83,839

)

135,398

 

Cash flows from investing activities

 

(522,433

)

(35,055

)

85,052

 

403,883

 

1,487

 

(67,066

)

Cash flows from financing activities

 

436,064

 

(64,872

)

(92,450

)

(403,062

)

82,352

 

(41,968

)

Effect of foreign exchange rate changes on cash

 

 

 

 

(833

)

 

(833

)

Net increase in cash and cash equivalents

 

1

 

(14,980

)

4,936

 

35,574

 

 

25,531

 

Cash and cash equivalents at the beginning of the period

 

10

 

16,041

 

 

96

 

 

16,147

 

Cash and cash equivalents at the end of the period

 

$

11

 

$

1,061

 

$

4,936

 

$

35,670

 

$

 

$

41,678

 

 

16



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report.  These forward-looking statements can generally be identified by the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “forecasts,” “budgets,” “projects,” “will,” “could,” “should,” “may” and similar expressions.  These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions including:

 

      A failure to realize all of the anticipated benefits of the Kaneb Acquisition, including expected cost savings and anticipated revenues.

      Any reduction in the quantities of crude oil and refined products transported in our pipelines or handled at our terminals and storage tanks;

      Any significant decrease in the demand for refined products in the markets served by our pipelines and terminals;

      Any material decline in production by any refineries served by our assets;

      Any downward pressure on market prices caused by new competing refined product pipelines that could cause decreases to the volumes transported in our pipelines;

      Any challenges to our tariffs or changes in state or federal ratemaking methodology;

      Any changes in laws and regulations to which we are subject, including federal, state and local tax laws, safety, environmental and employment laws;

      Overall economic conditions;

      Any material decrease in the supply of or material increase in the price of crude oil available for transport through our pipelines and storage in our storage tanks;

      Inability to expand our business and acquire new assets as well as to attract third-party shippers;

      Conflicts of interest with Valero Energy;

      The loss of Valero Energy or other major customers or a significant reduction in their current levels of throughput and storage with us;

      Any inability to borrow additional funds or raise capital;

      Significant increases in interest rates;

      Significant costs attributable to environmental liabilities;

      Any substantial costs related to environmental compliance;

      Any change in the credit ratings assigned to our indebtedness;

      Any change in the credit rating assigned to Valero Energy’s indebtedness;

      Any reductions in space allocated to us in interconnecting third-party pipelines;

      Any material increase in the price of natural gas;

      Terrorist attacks, threats of war or political or other disruptions that limit crude oil production; and

      Accidents, terrorist attacks or unscheduled shutdowns affecting our pipelines, terminals, machinery, or equipment, or those of Valero Energy.

 

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those described in any forward-looking statement.  Readers are cautioned not to place undue reliance on this forward-looking information, which is as of the date of the Form 10-Q.  We do not intend to update these statements unless it is required by the securities laws to do so, and we undertake no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

17



 

Overview

On July 1, 2005, we completed our acquisition of Kaneb Services LLC (“KSL”) and Kaneb Pipe Line Partners, L.P. (“KPP”) (collectively, the Kaneb Acquisition).  As of September 30, 2005, we own and operate a diversified portfolio of logistical assets, including 9,100 miles of crude and refined product pipelines, 94 terminal facilities and 60 crude oil storage tanks providing approximately 77 million barrels of storage capacity.  We provide transportation and storage services to our customers, which includes Valero Energy, our general partner.  Our operations are affected by:

      company-specific factors, such as integrity issues and maintenance requirements that impact the throughput rates of our assets;

      seasonal factors that affect the demand for refined products and fertilizers transported by and/or stored in our assets;

      industry factors, such as changes in the prices of petroleum products that affect demand and operations of our competitors; and

      other factors such as refinery utilization rates and maintenance turnaround schedules that impact the operations of refineries served by our assets.

 

On September 30, 2005, we sold certain assets that we acquired as part of the Kaneb Acquisition in accordance with our agreement with the Federal Trade Commission for approximately $455 million.  These assets consisted of two California terminals handling refined products, blendstocks, and crude oil, three East Coast refined product terminals, and a 550-mile refined products pipeline with four truck terminals and storage in the U.S. Rocky Mountains collectively, the “Held Separate Businesses.”

 

18



 

Results of Operations

 

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

 

Financial Highlights

(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data)

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

2005

 

2004

 

Change

 

Statement of Income Data:

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

Services

 

$

153,371

 

$

58,075

 

$

95,296

 

Product

 

110,175

 

 

110,175

 

Total revenues

 

263,546

 

58,075

 

205,471

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales

 

101,217

 

 

101,217

 

Operating expenses

 

71,358

 

21,626

 

49,732

 

General and administrative expenses

 

10,391

 

3,588

 

6,803

 

Depreciation and amortization

 

23,902

 

8,413

 

15,489

 

Total costs and expenses

 

206,868

 

33,627

 

173,241

 

 

 

 

 

 

 

 

 

Operating income

 

56,678

 

24,448

 

32,230

 

Equity income from joint ventures

 

1,541

 

372

 

1,169

 

Interest and other expense, net

 

(15,315

)

(5,433

)

(9,882

)

Income from continuing operations before income tax expense

 

42,904

 

19,387

 

23,517

 

Income tax expense

 

2,147

 

 

2,147

 

Income from continuing operations

 

40,757

 

19,387

 

21,370

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

4,410

 

 

4,410

 

 

 

 

 

 

 

 

 

Net income

 

45,167

 

19,387

 

25,780

 

Less general partner’s interest and incentive distributions

 

(3,892

)

(1,478

)

(2,414

)

Limited partners’ interest in net income

 

$

41,275

 

$

17,909

 

$

23,366

 

 

 

 

 

 

 

 

 

Weighted-average units outstanding

 

46,809,749

 

23,041,394

 

 

 

 

 

 

 

 

 

 

 

Net income per unit applicable to limited partners:

 

 

 

 

 

 

 

Continuing operations

 

$

0.79

 

$

0.78

 

$

(0.01

)

Discontinued operations

 

0.09

 

 

0.09

 

Net income

 

$

0.88

 

$

0.78

 

$

0.08

 

 

19



 

Segment Operating Highlights

(Thousands of Dollars, Except Barrel/Day Information)

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2005

 

2004

 

Change

 

Crude Oil Pipelines:

 

 

 

 

 

 

 

Throughput (barrels/day)

 

382,615

 

380,395

 

2,220

 

Revenues

 

$

14,041

 

$

13,231

 

$

810

 

Operating expenses

 

4,455

 

4,225

 

230

 

Depreciation and amortization

 

1,155

 

1,136

 

19

 

Segment operating income

 

$

8,431

 

$

7,870

 

$

561

 

 

 

 

 

 

 

 

 

Refined Product Pipelines:

 

 

 

 

 

 

 

Throughput (barrels/day)

 

688,126

 

433,695

 

254,431

 

Revenues

 

$

53,749

 

$

22,324

 

$

31,425

 

Operating expenses

 

22,507

 

10,493

 

12,014

 

Depreciation and amortization

 

7,772

 

3,690

 

4,082

 

Segment operating income

 

$

23,470

 

$

8,141

 

$

15,329

 

 

 

 

 

 

 

 

 

Refined Product Terminals:

 

 

 

 

 

 

 

Throughput (barrels/day) (a)

 

253,415

 

260,440

 

(7,025

)

Throughput revenues

 

$

12,387

 

$

11,150

 

$

1,237

 

Storage lease revenues

 

61,572

 

 

61,572

 

Bunkering revenues

 

110,175

 

 

110,175

 

Cost of sales

 

101,217

 

 

101,217

 

Operating expenses

 

42,379

 

4,677

 

37,702

 

Depreciation and amortization

 

13,106

 

1,720

 

11,386

 

Segment operating income

 

$

27,432

 

$

4,753

 

$

22,679

 

 

 

 

 

 

 

 

 

Crude Oil Storage Tanks:

 

 

 

 

 

 

 

Throughput (barrels/day)

 

504,060

 

517,135

 

(13,075

)

Revenues

 

$

11,622

 

$

11,370

 

$

252

 

Operating expenses

 

2,017

 

2,231

 

(214

)

Depreciation and amortization

 

1,869

 

1,867

 

2

 

Segment operating income

 

$

7,736

 

$

7,272

 

$

464

 

 

 

 

 

 

 

 

 

Consolidated Information:

 

 

 

 

 

 

 

Revenues

 

$

263,546

 

$

58,075

 

$

205,471

 

Cost of sales

 

101,217

 

 

101,217

 

Operating expenses

 

71,358

 

21,626

 

49,732

 

Depreciation and amortization

 

23,902

 

8,413

 

15,489

 

Total segment operating income

 

67,069

 

28,036

 

39,033

 

Less general and administrative expenses

 

10,391

 

3,588

 

6,803

 

Consolidated operating income

 

$

56,678

 

$

24,448

 

$

32,230

 

 


(a)   Excludes throughputs related to the storage lease and bunkering operations acquired in the Kaneb Acquisition.

 

20



 

General

Revenues for the third quarter of 2005 increased $205.5 million compared to the third quarter of 2004 primarily due to the Kaneb Acquisition, which contributed approximately $201.3 million of revenues to the refined product pipelines and refined product terminals segments.  Higher revenues were partially offset by higher cost of sales, operating expenses, general and administrative expenses, and depreciation and amortization expenses due to the Kaneb Acquisition.  As a result, consolidated operating income increased $32.2 million.  Interest expense increased $9.9 million due to higher outstanding debt balances and higher interest rates.  As a result, net income for the third quarter of 2005 was $45.2 million, an increase of $25.8 million compared to the third quarter of 2004. Net income for the third quarter of 2005 includes $4.4 million from discontinued operations, which reflects the results of the Held Separate Businesses sold on September 30, 2005.

 

Crude Oil Pipelines Segment

Revenues increased 6% mainly due to higher throughputs in the crude oil pipelines feeding Valero Energy’s McKee refinery.  Throughputs for third quarter 2005 are higher than throughputs for the third quarter of 2004 because of an unplanned outage at the McKee refinery in the third quarter of 2004, which lowered throughputs in that quarter.

 

Operating expenses increased 5% primarily due to increased chemical costs related to our power optimization program and increased internal overhead resulting from increased headcount.

 

Refined Product Pipelines Segment

Throughput increased 238,936 barrels per day and revenues increased $29.6 million as a result of the Kaneb Acquisition.  Additionally, throughputs and revenues on our pipelines connecting Valero Energy’s McKee refinery to the Denver market increased as Valero Energy shipped additional product to that market.

 

The Kaneb Acquisition caused operating expenses to increase $13 million for the third quarter 2005.  Partially offsetting those increases were decreases in regulatory and maintenance expenses and lower compensation expense.

 

Depreciation and amortization increased $3.8 million due to the Kaneb Acquisition and additional depreciation relating to the expansion of the Corpus Christi to Edinburg refined product pipeline in the fourth quarter of 2004.

 

Refined Product Terminals Segment

Revenues increased $171.7 million due to the Kaneb Acquisition.  In addition, higher asphalt demand increased throughputs at our asphalt terminals, resulting in increased revenues.

 

Third quarter 2005 cost of sales increased $101.2 million due to the Kaneb Acquisition.  Cost of sales reflects the cost of bunker fuel sold to ships at St. Eustatius in the Caribbean and Point Tupper in Nova Scotia, Canada.

 

Operating expenses increased $36.9 million due to the Kaneb Acquisition.  Operating expenses also increased because of higher regulatory and maintenance expense, primarily related to tank repairs at the Pittsburg asphalt terminal, and increased internal overhead due to increased headcount.

 

Depreciation and amortization increased $11.3 million due to the Kaneb Acquisition.

 

Crude Oil Storage Tanks Segment

Revenues increased 2% due to higher throughputs at Valero Energy’s Benicia refinery, offset by lower throughputs at Valero Energy’s Corpus Christi refinery, which operated at reduced rates due to severe weather.

 

Operating expenses decreased 10% primarily due to decreased regulatory and maintenance expense on the Corpus Christi crude oil storage tanks.

 

21



 

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

 

Financial Highlights

(Unaudited, Thousands of Dollars, Except Unit and Per Unit Data and Percentages)

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

2005

 

2004

 

Change

 

Statement of Income Data:

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

Services

 

$

268,312

 

$

166,106

 

$

102,206

 

Product

 

110,175

 

 

110,175

 

Total revenues

 

378,487

 

166,106

 

212,381

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales

 

101,217

 

 

101,217

 

Operating expenses

 

112,688

 

59,746

 

52,942

 

General and administrative expenses

 

17,455

 

8,233

 

9,222

 

Depreciation and amortization

 

41,425

 

24,536

 

16,889

 

Total costs and expenses

 

272,785

 

92,515

 

180,270

 

 

 

 

 

 

 

 

 

Operating income

 

105,702

 

73,591

 

32,111

 

Equity income from joint ventures

 

2,340

 

1,102

 

1,238

 

Interest and other expense, net

 

(27,022

)

(15,630

)

(11,392

)

Income from continuing operations before income tax expense

 

81,020

 

59,063

 

21,957

 

Income tax expense

 

2,147

 

 

2,147

 

Income from continuing operations

 

78,873

 

59,063

 

19,810

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

4,410

 

 

4,410

 

 

 

 

 

 

 

 

 

Net income

 

83,283

 

59,063

 

24,220

 

Less general partner’s interest and incentive distributions

 

(7,215

)

(4,451

)

(2,764

)

Limited partners’ interest in net income

 

$

76,068

 

$

54,612

 

$

21,456

 

 

 

 

 

 

 

 

 

Weighted-average units outstanding

 

31,051,243

 

23,041,394

 

 

 

 

 

 

 

 

 

 

 

Net income per unit applicable to limited partners:

 

 

 

 

 

 

 

Continuing operations

 

$

2.31

 

$

2.37

 

$

(0.06

)

Discontinued operations

 

0.14

 

 

0.14

 

Net income

 

$

2.45

 

$

2.37

 

$

0.08

 

 

 

 

September 30,
2005

 

December 31,
2004

 

Change

 

Balance Sheet Data:

 

 

 

 

 

 

 

Long-term debt, including current portion (1)

 

$

1,175,473

 

$

385,161

 

$

790,312

 

Partners’ equity (2)

 

$

1,918,933

 

$

438,311

 

$

1,480,622

 

Debt-to-capitalization ratio (1) / ((1)+(2))

 

38.0

%

46.8

%

(8.8

)%

 

22



 

Segment Operating Highlights

(Thousands of Dollars, Except Barrel/Day Information)

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2005

 

2004

 

Change

 

Crude Oil Pipelines:

 

 

 

 

 

 

 

Throughput (barrels/day)

 

362,574

 

384,643

 

(22,069

)

Revenues

 

$

39,601

 

$

39,462

 

$

139

 

Operating expenses

 

12,464

 

11,825

 

639

 

Depreciation and amortization

 

3,457

 

3,368