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: June 12, 2002
VALERO L.P.
Organized under the laws of the State of Delaware
Commission File Number 1-16417
IRS Employer Identification No.74-2958817
One Valero Place
San Antonio, Texas 78212
Telephone number (210) 370-2000
ITEM 5. Other Events
We are filing the consolidated balance sheet of Riverwalk Logistics, L.P. and
subsidiaries as of December 31, 2001, which is included herein as Exhibit 99.1
to this Form 8-K. Riverwalk Logistics, L.P. is the general partner of Valero
L.P.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial information and financial statements.
The following financial statement is filed herewith as Exhibit 99.1 and
incorporated herein by reference.
Audited Consolidated and Combined Balance Sheet of Riverwalk Logistics, L.P. and
subsidiaries as of December 31, 2001 and related notes.
(b) Pro forma financial information.
None
(c) Exhibits.
Exhibit No. and Description of Exhibit
23.1 Consent of Independent Public Accountants, dated June 11, 2002.
99.1 Financial Statements of Riverwalk Logistics, L.P. and
subsidiaries as of December 31, 2001
99.2 Required letter to Securities and Exchange Commission under
Temporary Note 3T.
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Valero L.P.
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Valero L.P.
By: Riverwalk Logistics, L.P., its general partner
By: Valero GP, LLC, its general partner
By: /s/ Todd Walker
----------------------------------------------
Todd Walker
Secretary
Dated: June 12, 2002
3
EXHIBIT INDEX
23.1 Consent of Independent Public Accountants, dated June 11, 2002.
99.1 The following financial information of Riverwalk Logistics, L.P. and
subsidiaries is included in Exhibit 99.1 of this Form 8-K dated June
12, 2002:
o Report of Independent Public Accountants
o Consolidated and Combined Balance Sheet as of December 31, 2001
o Notes to Consolidated and Combined Balance Sheet
99.2 Required Letter to Securities and Exchange Commission under Temporary
Note 3T.
4
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Valero L.P. and Valero Logistics
Operations, L.P. previously filed Registration Statement on Form S-3 (File No.
333-89978) and Valero L.P.'s previously filed Registration Statements on Form
S-8 (File Nos. 333-81806 and 333-88264).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
June 11, 2002
5
EXHIBIT 99.1
Report of Independent Public Accountants
To the Board of Directors of Valero GP, LLC:
We have audited the accompanying consolidated and combined balance sheet of
Riverwalk Logistics, L.P. and subsidiaries (a Delaware limited partnership) as
of December 31, 2001. The consolidated and combined balance sheet is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on the consolidated and combined balance sheet 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 consolidated and combined
balance sheet is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated and combined balance sheet. 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 consolidated and combined balance sheet referred to above
presents fairly, in all material respects, the financial position of Riverwalk
Logistics, L.P. and subsidiaries as of December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
May 14, 2002 (except with respect to
the matter discussed in the third
item of Note 17, as to which the
date is June 7, 2002)
6
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEET
(in thousands)
December 31,
2001
----
Assets
Current assets:
Cash and cash equivalents.................................... $ 7,797
Receivable from parent....................................... 6,292
Accounts receivable.......................................... 2,855
-------
Total current assets...................................... 16,944
-------
Property, plant and equipment................................... 470,401
Less accumulated depreciation and amortization.................. (121,389)
-------
Property, plant and equipment, net........................... 349,012
Goodwill, net................................................... 4,715
Investment in affiliate......................................... 16,492
Other noncurrent assets, net.................................... 384
-------
Total assets................................................ $ 387,547
=======
Liabilities and Partners' Equity
Current liabilities:
Current portion of long-term debt............................ $ 462
Accounts payable and accrued liabilities..................... 4,215
Taxes other than income taxes................................ 1,894
-------
Total current liabilities................................. 6,571
Long-term debt, less current portion............................ 25,660
Other long-term liabilities..................................... 2
Deferred income tax liabilities................................. 13,147
Commitments and contingencies
Minority interest in Valero L.P. held by the public............. 115,657
Minority interest in Valero L.P. held by UDS Logistics, LLC
and net parent investment in the Wichita Falls Business....... 220,678
Partners' equity:
Limited partner equity held by UDS Logistics, LLC............ 5,826
General partner equity held by Valero GP, LLC................ 6
-------
Total partners' equity..................................... 5,832
-------
Total liabilities and partners' equity..................... $ 387,547
=======
See accompanying notes to consolidated and combined balance sheet.
7
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET
NOTE 1: Organization
Riverwalk Logistics, L.P. (Riverwalk Logistics) is a Delaware limited
partnership formed on June 5, 2000 to become the general partner of Valero L.P.
(formerly Shamrock Logistics, L.P.) and Valero Logistics Operations, L.P.
(formerly Shamrock Logistics Operations, L.P.). The general partner of Riverwalk
Logistics is Valero GP, LLC (formerly Shamrock Logistics GP, LLC) and the
limited partner is UDS Logistics, LLC. Both Valero GP, LLC and UDS Logistics,
LLC are indirect wholly owned subsidiaries of Valero Energy Corporation (Valero
Energy).
Valero L.P., a Delaware limited partnership and majority-owned subsidiary of
Valero Energy, was formed to ultimately acquire Valero Logistics Operations,
L.P. (Valero Logistics Operations).
Valero Logistics Operations, a Delaware limited partnership and a subsidiary of
Valero L.P., was formed to operate the crude oil and refined product pipeline,
terminalling and storage assets of the Ultramar Diamond Shamrock Logistics
Business.
Valero L.P. owns and operates most of the crude oil and refined product
pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico
and Colorado that support Valero Energy's McKee, Three Rivers and Ardmore
refineries located in Texas and Oklahoma.
Valero Energy is an independent refining and marketing company. Prior to the
acquisition of Ultramar Diamond Shamrock Corporation (UDS) on December 31, 2001,
Valero Energy owned and operated six refineries in Texas (3), California,
Louisiana and New Jersey with a combined throughput capacity of more than
1,100,000 barrels per day. Valero Energy produces premium, environmentally clean
products such as reformulated gasoline, low-sulfur diesel fuel and oxygenates
and gasoline meeting specifications of the California Air Resources Board
(CARB). Valero Energy also produces conventional gasoline, distillates, jet
fuel, asphalt and petrochemicals and markets its products through an extensive
wholesale bulk and rack marketing network, and through branded retail and other
retail distributor locations.
UDS was an independent refiner and retailer of refined products and convenience
store merchandise in the central, southwest and northeast regions of the United
States and eastern Canada. UDS owned and operated seven refineries located in
Texas (2), California (2), Oklahoma, Colorado and Quebec, Canada and marketed
its products through a network of approximately 4,500 convenience stores and 86
cardlock stations. In the northeast United States and in eastern Canada, UDS
sold, on a retail basis, home heating oil to approximately 250,000 households.
Valero Energy's refining operations include various logistics assets (pipelines,
terminals, marine dock facilities, bulk storage facilities, refinery delivery
racks, rail car loading equipment and shipping and trucking operations) that
support the refining and retail operations. A portion of the logistics assets
consists of crude oil and refined product pipelines, refined product terminals
and crude oil storage facilities located in Texas, Oklahoma, New Mexico and
Colorado that support the McKee, Three Rivers and Ardmore refineries located in
Texas and Oklahoma. These pipeline, terminalling and storage assets transport
crude oil and other feedstocks to the refineries and transport refined products
from the refineries to terminals for further distribution. Valero Energy markets
the refined products produced by these refineries primarily in Texas, Oklahoma,
Colorado, New Mexico and Arizona through a network of approximately 2,700
company-operated and dealer-operated convenience stores, as well as through
other wholesale and spot market sales and exchange agreements.
As used in this financial statement, the term "Partnership" may refer, depending
on the context, to Riverwalk Logistics, Valero L.P. or Valero Logistics
Operations or a combination of them.
8
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Reorganization Related to the Wichita Falls Business
On February 1, 2002, Valero L.P. acquired the Wichita Falls Crude Oil Pipeline
and Storage Business (the Wichita Falls Business) (except for certain retained
liabilities) from Valero Energy for $64,000,000. The Wichita Falls Business owns
and operates the Wichita Falls to McKee crude oil pipeline and the Wichita Falls
crude oil storage facility, which Valero L.P. had an option to purchase pursuant
to the Omnibus Agreement between Valero L.P. and UDS.
On December 31, 2001, Valero Energy acquired UDS, including the Wichita Falls
Business and the 73.6% ownership interest in Valero L.P. held by subsidiaries of
UDS, including Riverwalk Logistics, in a purchase business combination. As a
result of Valero Energy's acquisition of UDS, Valero Energy became the
controlling owner of the Wichita Falls Business, Valero L.P. and Riverwalk
Logistics on December 31, 2001.
Because of Valero L.P.'s affiliate relationship with the Wichita Falls Business,
the acquisition of the Wichita Falls Business by Valero L.P. on February 1, 2002
constituted a transaction between entities under common control and, as such,
was accounted for as a reorganization of entities under common control.
Accordingly, the acquisition was recorded at Valero Energy's historical net book
value related to the Wichita Falls Business, which approximated fair value as a
result of Valero Energy's acquisition of UDS on December 31, 2001. The
consolidated and combined balance sheet and notes thereto of Riverwalk Logistics
and subsidiaries as of December 31, 2001 include the Wichita Falls Business
effective December 31, 2001.
Acquisition of UDS by Valero Energy
On May 7, 2001, UDS announced that it had entered into an Agreement and Plan of
Merger (the acquisition agreement) with Valero Energy whereby UDS agreed to be
acquired by Valero Energy for total consideration of approximately $4.3 billion.
In September 2001, the board of directors and shareholders of both UDS and
Valero Energy approved the acquisition and, on December 31, 2001, Valero Energy
completed its acquisition of UDS. Under the acquisition agreement, UDS
shareholders received, for each share of UDS common stock they held, at their
election, cash, Valero Energy common stock or a combination of cash and Valero
Energy common stock, having a value equal to the sum of $27.50 plus 0.614 shares
of Valero Energy common stock valued at $35.78 per share (based on the average
closing Valero Energy common stock price over a ten trading-day period ending
three days prior to December 31, 2001).
Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) were both subsidiaries of UDS. On December
31, 2001, upon Valero Energy's acquisition of UDS, Valero Energy assumed UDS'
ownership of Riverwalk Logistics, Shamrock Logistics and Shamrock Logistics
Operations. Effective January 1, 2002, Shamrock Logistics was renamed Valero
L.P. and its trading symbol on the NYSE was changed from "UDL" to "VLI." Also,
effective January 1, 2002, Shamrock Logistics Operations was renamed Valero
Logistics Operations. In addition, Valero Energy became the obligor under the
various agreements between UDS and the Partnership, including the Services
Agreement, the Pipelines and Terminals Usage Agreement and the environmental
indemnification.
Reorganizations and Initial Public Offering
Prior to July 1, 2000, the pipeline, terminalling and storage assets included in
this consolidated and combined balance sheet were referred to as the Ultramar
Diamond Shamrock Logistics Business as if it had existed as a single separate
entity from UDS. UDS formed Valero Logistics Operations to assume ownership of
and to operate the assets of the Ultramar Diamond Shamrock Logistics Business.
Effective July 1, 2000, UDS transferred the crude oil and refined product
pipelines, terminalling and storage assets and certain liabilities of the
Ultramar Diamond Shamrock Logistics Business to Valero Logistics Operations. The
transfer of assets and certain liabilities to Valero Logistics Operations
represented a reorganization of entities under common control and was recorded
at historical cost.
9
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Effective with the closing of an initial public offering of common units of
Valero L.P. on April 16, 2001, the ownership of Valero Logistics Operations held
by various subsidiaries of UDS was transferred to Valero L.P. in exchange for
ownership interests (common and subordinated units) in Valero L.P. This transfer
also represented a reorganization of entities under common control and was
recorded at historical cost.
The financial statement presented herein represents the consolidated and
combined balance sheet of Riverwalk Logistics, Valero L.P., Valero Logistics
Operations, and the Wichita Falls Business. This consolidated and combined
financial statement presentation more clearly reflects the Partnership's
financial position as a result of the recent reorganizations of entities under
common control.
Operations
The Partnership's operations include interstate pipelines, which are subject to
regulation by the Federal Energy Regulatory Commission (FERC) and intrastate
pipelines, which are subject to regulation by either the Texas Railroad
Commission, the Oklahoma Public Utility Commission or the Colorado Public
Utility Commission, depending on the location of the pipeline. 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 respective commission upon completion of a
pipeline and when a tariff rate is being revised. In addition, the regulations
include annual reporting requirements for each pipeline. The following is a
listing of the Partnership's principal assets:
Crude Oil Pipelines
-------------------
Corpus Christi to Three Rivers
Wasson to Ardmore (both pipelines)
Ringgold to Wasson
Dixon to McKee
Wichita Falls to McKee
Various other crude oil pipelines
Refined Product Pipelines
-------------------------
McKee to El Paso
McKee to Denver (operated by Phillips Pipeline Company)
McKee to Colorado Springs to Denver
McKee to Amarillo (both pipelines) to Abernathy
Amarillo to Albuquerque
Three Rivers to San Antonio
Three Rivers to Laredo
Ardmore to Wynnewood
Various other refined product pipelines
Crude Oil Storage Facilities and Refined Product Terminals
----------------------------------------------------------
Corpus Christi crude oil storage facility
Ringgold crude oil storage facility
Wichita Falls crude oil storage facility
Southlake refined product terminal
El Paso refined product terminal
Amarillo refined product terminal
Denver refined product terminal
Colorado Springs refined product terminal
San Antonio refined product terminal
Laredo refined product terminal
Various other crude oil storage facilities and refined product terminals
10
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Investment in Affiliate - Skelly-Belvieu Pipeline Company, LLC
--------------------------------------------------------------
Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu) owns a
natural gas liquids pipeline that begins in Skellytown, Texas and extends to
Mont Belvieu, Texas near Houston. Skelly-Belvieu is owned 50% by Valero
Logistics Operations and 50% by Phillips Pipeline Company.
Assets Retained by Valero Energy (formerly UDS)
-----------------------------------------------
UDS and its affiliates had retained certain pipeline, terminalling and storage
assets as of July 1, 2000 because they were either (a) undergoing construction
activities, (b) being evaluated for other developmental opportunities, or (c)
inactive. The Partnership had the option to purchase the assets that were
undergoing construction activities, which consisted of the Wichita Falls crude
oil pipeline and crude oil storage facility, the Southlake refined product
terminal and the Ringgold crude oil storage facility. The Southlake refined
product terminal and the Ringgold crude oil storage facility were purchased by
the Partnership in 2001, and the Wichita Falls crude oil pipeline and crude oil
storage facility was purchased by the Partnership on February 1, 2002 (see Note
4: Acquisitions).
NOTE 2: Summary of Significant Accounting Policies
Basis of Presentation: The consolidated and combined balance sheet includes the
accounts of Riverwalk Logistics, Valero L.P., Valero Logistics Operations and
the Wichita Falls Business. All intercompany balances have been eliminated. The
investment in affiliate is accounted for under the equity method. Certain of the
crude oil and refined product pipelines and terminals that are jointly owned
with other companies are proportionately consolidated in the accompanying
balance sheet.
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
statement and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates, including
those related to commitments, contingencies and environmental liabilities, based
on currently available information. Changes in facts and circumstances may
result in revised estimates.
Cash and Cash Equivalents: All highly liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents.
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 is provided principally using the straight-line method over the
estimated useful lives of the related assets. For certain interstate pipelines,
the depreciation rate used is based on FERC requirements and ranges from 1% to
17% of the net asset value. When property, plant and equipment is retired or
otherwise disposed of, the difference between the carrying value and the net
proceeds is recognized as gain or loss in the statement of income in the year
retired.
Goodwill: The excess of cost over the fair value of net assets acquired
(goodwill) is being amortized using the straight-line method over 20 years.
Effective January 1, 2002, amortization of goodwill ceased and the unamortized
balance will be tested annually for impairment. See the discussion of FASB
Statement No. 142 below regarding these required accounting changes.
11
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Impairment: Long-lived assets, including goodwill, 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. Effective January 1, 2002, impairment accounting requirements will
change. See the discussion of FASB Statement No. 144 below regarding the
required accounting change.
Environmental Remediation Costs: Environmental remediation costs are expensed
and the 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, including direct internal costs, 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.
Federal and State Income Taxes: Riverwalk Logistics, Valero L.P. and Valero
Logistics Operations are limited partnerships and are not subject to federal or
state income taxes. Accordingly, the taxable income or loss of Riverwalk
Logistics, Valero L.P. and Valero Logistics Operations, which may vary
substantially from income or loss reported for financial reporting purposes, is
generally includable in the federal and state income tax returns of the
individual partners. For transfers of publicly held units of Valero L.P.
subsequent to its initial public offering, Valero L.P. has made an election
permitted by section 754 of the Internal Revenue Code to adjust the common unit
purchaser's tax basis in the Partnership's underlying assets to reflect the
purchase price of the units. This results in an allocation of taxable income and
expense to the purchaser of the common units, including depreciation deductions
and gains and losses on sales of assets, based upon the new unitholder's
purchase price for the common units.
The Wichita Falls Business was included in UDS' (now Valero Energy's)
consolidated federal and state income tax returns. Deferred income taxes were
computed based on recognition of future tax expense or benefits, measured by
enacted tax rates that were attributable to taxable or deductible temporary
differences between financial statement and income tax reporting bases of assets
and liabilities. No recognition will be given to federal or state income taxes
associated with the Wichita Falls Business for financial statement purposes for
periods subsequent to its acquisition by Valero L.P. The deferred income tax
liabilities related to the Wichita Falls Business as of February 1, 2002 were
retained by Valero Energy and were credited to net parent investment upon the
transfer of the Wichita Falls Business to Valero L.P.
Net Parent Investment: The net parent investment as of December 31, 2001
represents the historical cost to Valero Energy, net of deferred income tax
liabilities and certain other accrued liabilities, related to the Wichita Falls
Business. The Wichita Falls Business is included in Valero L.P. as of December
31, 2001 due to a reorganization of entities under common control resulting from
the acquisition of the Wichita Falls Business by Valero L.P. on February 1,
2002. On the February 1 acquisition date, the Partnership paid $64,000,000 to
Valero Energy and Valero Energy retained the existing accrued liabilities and
deferred income tax liabilities. There are no terms of settlement or interest
charges associated with this balance.
The balance was the result of the Wichita Falls Business' participation in UDS'
central cash management program, wherein all of the Wichita Falls Business' cash
receipts were remitted to UDS and all cash disbursements were funded by UDS.
Other transactions included intercompany transportation and storage revenues and
related expenses, administrative and support expenses incurred by UDS and
allocated to the Wichita Falls Business, and income taxes.
Partners' Equity: Riverwalk Logistics' partnership equity consists of a 0.1%
general partner interest and a 99.9% limited partner interest. In accordance
with the partnership agreement of Riverwalk Logistics, net income is allocated
in proportion to ownership interest. Distributions of available cash are also
determined in accordance with the partnership agreement.
Segment Disclosures: The Partnership operates in only one segment, the petroleum
pipeline segment of the oil and gas industry.
12
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Derivative Instruments: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In June 1999, the FASB issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." In June 2000, the FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends Statement No. 133. Statement No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Partnership adopted Statement No. 133, as
amended, effective January 1, 2001 and there was no impact as the Partnership
does not hold or trade derivative instruments.
Accounting Pronouncements
FASB Statement No. 141
In June 2001, the FASB issued Statement No. 141, " Business Combinations."
Statement No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations within the scope of Statement No. 141
are to be accounted for using the purchase method. The provisions of Statement
No. 141 apply to all business combinations initiated after June 30, 2001 and to
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later. The Partnership implemented
Statement No. 141 on July 1, 2001; however, the acquisition of the Southlake
refined product terminal, the Ringgold crude oil storage facility and the
Wichita Falls Business have been accounted for at historical cost because they
were acquired from Valero Energy.
FASB Statement No. 142
Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, "Intangible Assets." Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of Statement
No. 142 are required to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be applied at the beginning of
an entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. The statement
provides that goodwill and other intangible assets that have indefinite useful
lives will not be amortized but instead will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives, but such lives will not be limited to 40
years. Impairment losses for goodwill and indefinite-lived intangible assets
that arise due to the initial application of Statement No. 142 are to be
reported as resulting from a change in accounting principle. The Partnership has
reviewed the requirements of Statement No. 142 and the impact of adoption
effective January 1, 2002 resulted in the cessation of goodwill amortization
beginning January 1, 2002, which amortization approximates $300,000 annually. In
addition, the Partnership believes that future reported net income may be more
volatile because impairment losses related to goodwill are likely to occur
irregularly and in varying amounts.
13
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
FASB Statement No. 143
Also in June 2001, the FASB 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 Partnership does not expect that the adoption of this statement
will have a material impact on its financial position or results of operations.
FASB Statement No. 144
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," but retains Statement No. 121's
fundamental provisions for recognition and measurement of impairment of
long-lived assets to be held and used and measurement of long-lived assets to be
disposed of by sale. This statement also supersedes APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. Statement
No. 144 does not apply to goodwill or other intangible assets, the accounting
and reporting of which is addressed in newly issued Statement No. 142, "Goodwill
and Other Intangible Assets." The provisions of Statement No. 144 are effective
for financial statements for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
There was no impact to the Partnership's financial position or results of
operations as a result of adopting this statement effective January 1, 2002.
FASB Statement No. 145
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement:
o rescinds Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt,"
o rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"
o rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and
o amends Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of Statement No. 145 related to the
rescission of Statement No. 4 shall be applied in fiscal years beginning after
May 15, 2002 and the provisions of this statement related to the Statement No.
13 sale-leaseback inconsistency shall be effective for transactions occurring
after May 15, 2002, with early application encouraged. All other provisions of
this statement shall be effective for financial statements issued on or after
May 15, 2002, with earlier application encouraged. The Partnership does not
expect that the adoption of this statement will have a material impact on its
financial position or results of operations.
14
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
NOTE 3: Valero L.P.'s Initial Public Offering
On April 16, 2001, Valero L.P. completed its initial public offering of common
units, by selling 5,175,000 common units to the public at $24.50 per unit. Total
proceeds before offering costs and underwriters' commissions were $126,787,000.
After the offering, outstanding equity included 9,599,322 common units,
including 4,424,322 held by UDS Logistics, LLC, 9,599,322 subordinated units
held by UDS Logistics, LLC and a 2% general partner interest held by Riverwalk
Logistics.
Concurrent with the closing of the initial public offering, Valero Logistics
Operations borrowed $20,506,000 under its existing revolving credit facility.
The net proceeds from the initial public offering and the borrowings under the
revolving credit facility were used to repay the debt due to parent, make a
distribution to affiliates of Valero Energy for reimbursement of previous
capital expenditures incurred with respect to the assets transferred to the
Partnership, and for working capital purposes.
A summary of the proceeds received and use of proceeds is as follows (in
thousands):
Proceeds received:
Sale of common units to the public.............. $ 126,787
Borrowings under the revolving credit facility.. 20,506
-------
Total proceeds............................... 147,293
-------
Use of proceeds:
Underwriters' commissions....................... 8,875
Professional fees and other costs............... 6,000
Debt issuance costs............................. 436
Repayment of debt due to parent................. 107,676
Reimbursement of capital expenditures........... 20,517
-------
Total use of proceeds........................ 143,504
-------
Net proceeds remaining....................... $ 3,789
=======
NOTE 4: Acquisitions
On July 2, 2001, the Partnership acquired the Southlake refined product terminal
located in Dallas, Texas from UDS for $5,600,000, the option purchase price per
the Omnibus Agreement. The Partnership paid for the terminal with available cash
on hand, a portion of which was borrowed at the time of Valero L.P.'s initial
public offering.
On December 1, 2001, the Partnership acquired the crude oil storage facility at
Ringgold, Texas from UDS for $5,200,000, the amended option purchase price per
the Omnibus Agreement. The Partnership borrowed $5,000,000 under the revolving
credit facility to acquire the facility. This crude oil storage facility, which
has a capacity of 600,000 barrels, will improve crude oil scheduling and enhance
the crude oil supply system for Valero Energy's Ardmore and McKee refineries.
On February 1, 2002, the Partnership acquired the Wichita Falls Business, which
includes the Wichita Falls to McKee crude oil pipeline and the Wichita Falls
crude oil storage facility, from Valero Energy for $64,000,000. The acquisition
was funded with $64,000,000 of borrowings under the revolving credit facility.
The pipeline, which runs from Wichita Falls, Texas to Valero Energy's McKee
refinery, has a capacity of 110,000 barrels per day and the storage facility has
a capacity of 660,000 barrels. The balance sheet of the Wichita Falls Business
as of December 31, 2001, which is included in the consolidated and combined
balance sheet as of December 31, 2001, includes the following amounts in the
respective captions.
Wichita Falls
Business
December 31, 2001
-----------------
Balance Sheet Caption: (in thousands)
Property, plant and equipment..................... $ 64,160
Accounts payable and accrued liabilities.......... 131
Taxes other than income taxes..................... 251
Deferred income tax liabilities................... 13,147
Net parent investment............................. 50,631
15
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
NOTE 5: Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following:
Estimated
Useful December 31,
Lives 2001
----- ----
(years) (in thousands)
Land and land improvements.................... 0 - 20 $ 888
Buildings..................................... 35 5,392
Pipeline and equipment........................ 3 - 40 427,227
Rights of way................................. 20 - 35 29,857
Construction in progress...................... - 7,037
-------
Total 470,401
Accumulated depreciation and amortization..... (121,389)
-------
Property, plant and equipment, net.......... $ 349,012
=======
NOTE 6: Investment in Affiliate
The Partnership owns a 50% interest in Skelly-Belvieu, which is accounted for
under the equity method. The following presents summarized unaudited balance
sheet information related to Skelly-Belvieu as of December 31, 2001:
December 31,
2001
----
(in thousands)
Balance Sheet Information:
Current assets............................................... $ 1,653
Property, plant and equipment, net........................... 50,195
------
Total assets............................................... $ 51,848
======
Current liabilities.......................................... $ 111
Members' equity.............................................. 51,737
------
Total liabilities and members' equity...................... $ 51,848
======
NOTE 7: Long-term Debt
On December 15, 2000, Valero Logistics Operations entered into a five-year
$120,000,000 revolving credit facility. Borrowings under the revolving credit
facility bear interest at either an alternative base rate or the LIBOR rate at
Valero Logistics Operations' option. The revolving credit facility requires that
Valero Logistics Operations maintain certain financial ratios and includes other
restrictive covenants, including a prohibition on distributions if any default,
as defined in the revolving credit facility, exists or would result from the
distribution. Management believes that Valero Logistics Operations is in
compliance with all of these ratios and covenants.
In conjunction with the initial public offering of Valero L.P. common units on
April 16, 2001, Valero Logistics Operations borrowed $20,506,000 under the
revolving credit facility. The net proceeds from the initial public offering and
the borrowings under the revolving credit facility were used to repay the debt
due to parent, make a distribution to affiliates of UDS for reimbursement of
previous capital expenditures incurred with respect to the assets transferred to
the Partnership, and for working capital purposes.
16
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Valero Logistics Operations made repayments under the revolving credit facility
in August 2001 of $5,506,000 and in October 2001 of $4,000,000. In November
2001, it borrowed $5,000,000 under the revolving credit facility to fund the
purchase of the Ringgold crude oil storage facility on December 1, 2001. The
outstanding balance as of December 31, 2001 was $16,000,000. On February 1,
2002, Valero Logistics Opeations borrowed $64,000,000 under the revolving credit
facility to fund the acquisition of the Wichita Falls Business (except certain
retained liabilities) from Valero Energy.
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into a
financing agreement with the Port of Corpus Christi Authority of Nueces County,
Texas (Port Authority of Corpus Christi) for the construction of a crude oil
storage facility. The original note totaled $12,000,000 and is due in annual
installments of $1,222,000 through December 31, 2015. Interest on the unpaid
principal balance accrues at a rate of 8% per annum. In conjunction with the
July 1, 2000 transfer of assets and liabilities to Valero Logistics Operations,
the $10,818,000 outstanding indebtedness owed to the Port of Corpus Christi
Authority was assumed by Valero Logistics Operations. The land on which the
crude oil storage facility was constructed is leased from the Port Authority of
Corpus Christi (see Note 10: Commitments and Contingencies).
The aggregate long-term debt repayments are due as follows (in thousands):
2002.................................. $ 462
2003.................................. 449
2004.................................. 485
2005.................................. 524
2006.................................. 16,566
Thereafter............................ 7,636
------
Total repayments.................. $ 26,122
======
NOTE 8: Debt due to Parent
UDS, through various subsidiaries, constructed or acquired the various crude oil
and refined product pipeline, terminalling and storage assets of the Ultramar
Diamond Shamrock Logistics Business. Effective June 30, 2000, in conjunction
with the initial public offering of common units of Valero L.P., the
subsidiaries of UDS which owned the various assets of the Ultramar Diamond
Shamrock Logistics Business formalized the terms under which certain
intercompany accounts and working capital loans would be settled by executing
promissory notes with an aggregate principal balance of $107,676,000. The
promissory notes required that the principal be repaid no later than June 30,
2005 and bear interest at a rate of 8% per annum on the unpaid balance.
Effective July 1, 2000, the $107,676,000 of debt due to parent was assumed by
Valero Logistics Operations.
Concurrent with the closing of Valero L.P.'s initial public offering on April
16, 2001, the Partnership repaid these promissory notes using a portion of the
net proceeds from the initial public offering and borrowings under the
$120,000,000 revolving credit facility (see Note 3: Valero L.P.'s Initial Public
Offering).
NOTE 9: Environmental Matters
The Partnership's operations are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although the Partnership believes its
operations are in general compliance with applicable environmental regulations,
risks of additional costs and liabilities are inherent in pipeline, terminalling
and storage operations, 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, 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 Partnership 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 such events. However, some risk of
environmental or other damage is inherent in pipeline, terminalling and storage
operations, as it is with other entities engaged in similar businesses.
17
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, UDS agreed to indemnify Shamrock Logistics Operations for environmental
liabilities that arose prior to July 1, 2000. In connection with the initial
public offering of Valero L.P., UDS agreed to indemnify Valero L.P. for
environmental liabilities that arose prior to April 16, 2001 and are discovered
within 10 years after April 16, 2001. Excluded from this indemnification are
liabilities that result from a change in environmental law after April 16, 2001.
Effective with the acquisition of UDS, Valero Energy has assumed this
environmental indemnification. In addition, as an operator or owner of the
assets, the Partnership could be held liable for pre-April 16, 2001
environmental damage should Valero Energy be unable to fulfill its obligation.
However, the Partnership believes that such a situation is remote given Valero
Energy's financial condition.
Environmental exposures are difficult to assess and estimate due to unknown
factors such as the magnitude of possible contamination, the timing and extent
of remediation, the determination of the Partnership's liability in proportion
to other parties, improvements in cleanup technologies and the extent to which
environmental laws and regulations may change in the future. Although
environmental costs may have a significant impact on results of operations for
any single period, the Partnership believes that such costs will not have a
material adverse effect on its financial position. As of December 31, 2001, the
Partnership has not incurred any environmental liabilities which were not
covered by the environmental indemnification.
In conjunction with the sale of the Wichita Falls Business to Valero L.P.,
Valero Energy has agreed to indemnify Valero L.P. for any environmental
liabilities that arose prior to February 1, 2002 and are discovered by April 15,
2011. As of December 31, 2001, the Wichita Falls Business had not incurred any
environmental liability, thus there is no accrual as of December 31, 2001.
NOTE 10: Commitments and Contingencies
In May 1994, the Ultramar Diamond Shamrock Logistics Business entered into
several agreements with the Port Authority of Corpus Christi including a crude
oil dock user agreement, a land lease agreement and a note agreement. The crude
oil dock user agreement allows the Partnership to operate and manage a crude oil
dock in Corpus Christi for a five-year period beginning August 1, 1994 and the
agreement has automatically been renewed annually since August, 1999. The
Partnership shares use of the crude oil dock with two other users and operating
costs are split evenly among the three users. The crude oil dock user agreement
requires that the Partnership collect wharfage fees, based on the quantity of
barrels off loaded from each vessel, and dockage fees, based on vessels berthing
at the dock. These fees are remitted to the Port Authority of Corpus Christi
monthly. The wharfage and one-half of the dockage fees that the Partnership pays
for its use of the crude oil dock reduces the annual amount it owes to the Port
Authority of Corpus Christi under the note agreement discussed in Note 7:
Long-term Debt.
Effective April 1988, the Ultramar Diamond Shamrock Logistics Business, along
with five other users, entered into a refined product dock user agreement with
the Port Authority of Corpus Christi to use a refined product dock for a
two-year period, and the agreement has automatically been renewed annually since
April, 1990. The Partnership also operates the refined product dock and
operating costs are split between the Partnership and one other user. The
Partnership is responsible for collecting and remitting the refined product
wharfage and dockage fees to the Port Authority of Corpus Christi.
The crude oil and the refined product docks provide Valero Energy's Three Rivers
refinery access to marine facilities to receive crude oil and deliver refined
products. For the year ended December 31, 2001, the Three Rivers refinery
received 92% of its crude oil requirements from crude oil received at the crude
oil dock. Also, for the year ended December 31, 2001, 6% of the refined products
produced at the Three Rivers refinery were transported via pipeline to the
Corpus Christi refined product dock.
18
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
The Partnership has the following land leases related to refined product
terminals and crude oil storage facilities:
o Corpus Christi crude oil storage facility: a 20-year noncancellable
operating lease on 31.35 acres of land through 2014, at which time the
lease is renewable every five years, for a total of 20 renewable years.
o Corpus Christi refined product terminal: a 5-year noncancellable operating
lease on 5.21 acres of land through 2006, and a 5-year noncancellable
operating lease on 8.42 acres of land through 2002, at which time the
agreements are renewable for at least three five-year periods.
o Harlingen refined product terminal: a 13-year noncancellable operating
lease on 5.88 acres of land through 2008, and a 30-year noncancellable
operating lease on 9.04 acres of land through 2008.
o Colorado Springs airport terminal: a 50-year noncancellable operating lease
on 46.26 acres of land through 2043, at which time the lease is renewable
for another 50-year period.
The above land leases require monthly payments totaling $18,000 and are
adjustable every five years based on changes in the Consumer Price Index. In
addition, the Partnership leases certain equipment and vehicles under operating
lease agreements expiring through 2002.
Future minimum rental payments applicable to noncancellable operating leases as
of December 31, 2001, are as follows (in thousands):
2002.......................................... $ 205
2003.......................................... 188
2004.......................................... 188
2005.......................................... 188
2006.......................................... 174
Thereafter.................................... 1,586
-----
Future minimum lease payments............. $ 2,529
=====
The Partnership is involved in various lawsuits, claims and regulatory
proceedings incidental to its business. In the opinion of management, the
outcome of such matters will not have a material adverse effect on the
Partnership's financial position or results of operations.
NOTE 11: Income Taxes
As discussed in "Note 2: Summary of Significant Accounting Policies," Riverwalk
Logistics, Valero L.P. and Valero Logistics Operations are limited partnerships
and are not subject to federal or state income taxes. However, the Wichita Falls
Business was subject to federal and state income taxes prior to its acquisition
on February 1, 2002. The deferred income tax liabilities included in the
consolidated and combined balance sheet relate only to the Wichita Falls
Business and were calculated as if the Wichita Falls Business filed separate
federal and state income tax returns.
Deferred income taxes arise from temporary differences between the income tax
bases of assets and liabilities and their reported amounts in the financial
statements. The net deferred income tax liabilities of $13,147,000 as of
December 31, 2001 consisted of the excess of book basis over tax basis of the
property, plant and equipment related to the Wichita Falls to McKee crude oil
pipeline and Wichita Falls crude oil storage facility.
NOTE 12: Financial Instruments and Concentration of Credit Risk
The estimated fair value of the Partnership's fixed rate debt as of December 31,
2001 was $11,240,000 as compared to the carrying value of $10,122,000. The fair
value was estimated using discounted cash flow analysis, based on the
Partnership's current incremental borrowing rates for similar types of borrowing
arrangements. Valero Logistics Operations has not utilized derivative financial
instruments related to these borrowings. Interest rates on borrowings under the
revolving credit facility float with market rates and thus the carrying amount
approximates fair value.
19
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Substantially all of the Partnership's revenues are derived from Valero Energy
and its various subsidiaries. Valero Energy transports crude oil to three of its
refineries using the Partnership's various crude oil pipelines and storage
facilities and transports refined products to its company-owned retail
operations or wholesale customers using the Partnership's various refined
product pipelines and terminals. Valero Energy and its subsidiaries are
investment grade customers; therefore, the Partnership does not believe that the
trade receivables from Valero Energy represent a significant credit risk.
However, the concentration of business with Valero Energy, which is a large
refining and retail marketing company, has the potential to impact the
Partnership's overall exposure, both positively and negatively, to changes in
the refining and marketing industry.
NOTE 13: Related Party Transactions
The Partnership has related party transactions with Valero Energy for pipeline
tariff and terminalling fee revenues, certain employee costs, insurance costs,
administrative costs and interest expense on debt due to parent for the period
from July 1, 2000 to April 15, 2001. The receivable from parent as of December
31, 2001 represents the net amount due from Valero Energy for these related
party transactions and the net cash collected under Valero Energy's centralized
cash management program on the Partnership's behalf.
Services Agreement
Effective July 1, 2000, UDS entered into a Services Agreement with the
Partnership, whereby UDS agreed to provide the corporate functions of legal,
accounting, treasury, information technology and other services for an annual
fee of $5,200,000 for a period of eight years. The $5,200,000 is adjustable
annually based on the Consumer Price Index published by the U.S. Department of
Labor, and may also be adjusted to take into account additional service levels
necessitated by the acquisition or construction of additional assets. Management
believes that the $5,200,000 is a reasonable approximation of the general and
administrative costs related to the pipeline, terminalling and storage
operations. This annual fee is in addition to the incremental general and
administrative costs to be incurred from third parties as a result of Valero
L.P. being a publicly held entity.
The Services Agreement also requires that the Partnership reimburse UDS for
various recurring costs of employees who work exclusively within the pipeline,
terminalling and storage operations and for certain other costs incurred by UDS
relating solely to the Partnership. These employee costs include salary, wages
and benefit costs. Concurrent with the acquisition of UDS by Valero Energy,
Valero Energy became the obligor under the Services Agreement.
Prior to July 1, 2000, UDS allocated approximately 5% of its general and
administrative expenses incurred in the United States to its pipeline,
terminalling and storage operations to cover costs of centralized corporate
functions and other corporate services. A portion of the allocated general and
administrative costs is passed on to partners, which jointly own certain
pipelines and terminals with the Partnership.
Pipelines and Terminals Usage Agreement
On April 16, 2001, UDS entered into a Pipelines and Terminals Usage Agreement
with the Partnership, whereby UDS agreed to use the Partnership's pipelines to
transport at least 75% of the crude oil shipped to and at least 75% of the
refined products shipped from the McKee, Three Rivers and Ardmore refineries and
to use the Partnership's refined product terminals for terminalling services for
at least 50% of all refined products shipped from these refineries until at
least April, 2008. For the year ended December 31, 2001, UDS used the
Partnership's pipelines to transport 78% of its crude oil shipped to and 80% of
the refined products shipped from the McKee, Three Rivers and Ardmore refineries
and UDS used the Partnership's terminalling services for 60% of all refined
products shipped from these refineries. Valero Energy also assumed the
obligation under the Pipelines and Terminals Usage Agreement in conjunction with
the acquisition of UDS by Valero Energy.
If market conditions change with respect to the transportation of crude oil or
refined products or to the end markets in which Valero Energy sells refined
products, in a material manner such that Valero Energy would suffer a material
adverse effect if it were to continue to use the Partnership's pipelines and
terminals at the required levels, Valero Energy's obligation to the Partnership
will be suspended during the period of the change in market conditions to the
extent required to avoid the material adverse effect.
20
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
NOTE 14: Employee Benefit Plans
The employees who work in Valero Logistics Operations 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.
NOTE 15: Restricted Units
Valero GP, LLC, the general partner of Riverwalk Logistics, adopted a long-term
incentive plan under which restricted units of Valero L.P. and distribution
equivalent rights (DERs) may be awarded to certain key employees and
non-employees. In July 2001, Valero GP, LLC granted 205 restricted units of
Valero L.P. and DERs to each of its two outside directors. The restricted units
of Valero L.P. were to vest at the end of a three-year period and be paid in
cash. The DERs were to accumulate equivalent distributions that other common
unitholders receive over the vesting period.
NOTE 16: Allocations of Net Income and Cash Distributions
Valero L.P.'s partnership agreement, as amended, sets forth the calculation to
be used to determine the amount and priority of cash distributions that the
common unitholders, subordinated unitholders and general partner will receive.
The partnership agreement also contains provisions for the allocation of net
income and loss to the unitholders and the general partner. For purposes of
maintaining partner capital accounts, the partnership agreement specifies that
items of income and loss shall be allocated among the partners in accordance
with their respective percentage interests. Normal allocations according to
percentage interests are done after giving effect, if any, to priority income
allocations in an amount equal to incentive cash distributions allocated 100% to
the general partner.
The outstanding subordinated units of Valero L.P. are held by UDS Logistics,
LLC, the limited partner of Riverwalk Logistics, and there is no established
public market for their trading. During the subordination period, the holders of
Valero L.P.'s common units are entitled to receive each quarter a minimum
quarterly distribution of $0.60 per unit ($2.40 annualized) prior to any
distribution of available cash to holders of the subordinated units. The
subordination period is defined generally as the period that will end on the
first day of any quarter beginning after December 31, 2005 if (1) Valero L.P.
has distributed at least the minimum quarterly distribution on all outstanding
units with respect to each of the immediately preceding three consecutive,
non-overlapping four-quarter periods and (2) the adjusted operating surplus, as
defined in Valero L.P.'s partnership agreement, during such periods equals or
exceeds the amount that would have been sufficient to enable Valero L.P. to
distribute the minimum quarterly distribution on all outstanding units on a
fully diluted basis and the related distribution on the 2% general partner
interest during those periods.
In addition, all of the subordinated units of Valero L.P. may convert to common
units of Valero L.P. on a one-for-one basis on the first day following the
record date for distributions for the quarter ending December 31, 2005, if
Valero L.P. meets the tests set forth in its partnership agreement. If the
subordination period ends, the rights of the holders of subordinated units will
no longer be subordinated to the rights of the holders of common units and the
subordinated units may be converted into common units of Valero L.P.
During the subordination period, Valero L.P.'s cash is distributed first 98% to
the holders of common units and 2% to the general partner until there has been
distributed to the holders of common units an amount equal to the minimum
quarterly distribution and arrearages in the payment of the minimum quarterly
distribution on the common units for any prior quarter. Any additional cash is
distributed 98% to the holders of subordinated units and 2% to the general
partner until there has been distributed to the holders of subordinated units an
amount equal to the minimum quarterly distribution.
21
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
Riverwalk Logistics, as general partner of Valero L.P., is entitled to incentive
distributions if the amount distributed with respect to any quarter exceeds
specified target levels shown below:
Percentage of Distribution
--------------------------
Valero L.P. Riverwalk
Quarterly Distribution Amount per Unit Unitholders Logistics
-------------------------------------- ----------- ---------
Up to $0.60 98% 2%
Above $0.60 up to $0.66 90% 10%
Above $0.66 up to $0.90 75% 25%
Above $0.90 50% 50%
The quarterly cash distributions of Valero L.P. applicable to 2001 were as
follows:
Amount
Year 2001 Record Date Payment Date Per Unit
--------- ----------- ------------ --------
4th Quarter February 1, 2002 February 14, 2002 $ 0.60
3rd Quarter November 1, 2001 November 14, 2001 0.60
2nd Quarter August 1, 2001 August 14, 2001 0.50
NOTE 17: Subsequent Events
Issuance of Restricted Units
As a part of Valero L.P.'s initial public offering, unitholders approved the
issuance of 250,000 common units under a long-term incentive plan. On January
21, 2002, Valero GP, LLC granted 55,250 restricted units of Valero L.P. to key
employees and three outside directors. At the end of each year of the three-year
vesting period, the grantees are entitled to receive for one third of the
restricted units issued, a common unit of Valero L.P. or its fair market value
in cash. The grantees of these restricted units will also receive distributions
over the vesting period.
Quarterly Distribution
On April 19, 2002, Valero L.P. declared a quarterly distribution of $0.65 per
unit payable on May 15, 2002 to unitholders of record on May 1, 2002. This
distribution, related to the first quarter of 2002, totaled $12,858,000, of
which $1,070,000 was an incentive distribution. Riverwalk Logistics' share of
the total distribution was $343,000, of which $107,000 was an incentive
distribution.
Restructuring of Valero Logistics Operations Ownership Interests
On May 30, 2002, Valero L.P. formed a wholly owned Delaware corporation, Valero
GP, Inc. (GP, Inc.). Valero L.P. contributed a 0.01% limited partner interest in
Valero Logistics Operations to GP, Inc. as a capital contribution. Valero
Logistics Operations' partnership agreement was then amended to convert GP,
Inc.'s limited partner interest in Valero Logistics Operations into a general
partner interest and to convert the existing 1.0101% general partner interest in
Valero Logistics Operations (held by Riverwalk Logistics) into a limited partner
interest. Riverwalk Logistics then contributed its 1.0101% limited partner
interest in Valero Logistics Operations to Valero L.P. in exchange for an
additional 1.0% general partner interest in Valero L.P.
22
RIVERWALK LOGISTICS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED BALANCE SHEET - (Continued)
The resulting structure is as follows. Riverwalk Logistics serves as the general
partner of Valero L.P. with a 2% general partner interest. GP, Inc. serves as
the general partner of Valero Logistics Operations with a 0.01% general partner
interest and Valero L.P. is the limited partner of Valero Logistics Operations
with a 99.99% limited partner interest. There was no financial statement impact
related to this restructuring as all amounts were recorded at historical cost.
23
EXHIBIT 99.2
REQUIRED LETTER TO SECURITIES AND EXCHANGE COMMISSION
UNDER TEMPORARY NOTE 3T
June 12, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20001
Ladies and Gentlemen:
This letter is furnished pursuant to your March 18, 2002 release and procedures
relating to companies using Arthur Andersen LLP as their independent auditors.
Arthur Andersen LLP audited the consolidated and combined financial statement of
Riverwalk Logistics, L.P. and subsidiaries included in this Form 8-K filed
substantially contemporaneously with this letter. In connection therewith,
Arthur Andersen LLP represented to us that its audit was subject to its quality
control system for its U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards, and that there was appropriate continuity of Arthur
Andersen LLP personnel working on the audit and availability of national office
consultation. Availability of personnel at foreign affiliates of Arthur Andersen
LLP was not relevant to the audit.
Sincerely,
Valero L.P.
By: Riverwalk Logistics, L.P., its General Partner
By: Valero GP, LLC, its General Partner
/s/ John H. Krueger, Jr.
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John H. Krueger, Jr.
Senior Vice President and Controller