SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: February 1, 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
This Form 8-K/A amends the previously filed Form 8-K dated February 1, 2002 and
filed with the Securities and Exchange Commission on February 15, 2002, to
provide the financial statements and the pro forma financial information
required under Item 7 of Form 8-K. That Form 8-K reported under Item 2 the
February 1, 2002 closing of the acquisition of the Wichita Falls crude oil
pipeline and storage facility assets by Valero Logistics Operations, L.P.
(Valero Logistics Operations), a subsidiary partnership of Valero L.P., from
Valero Energy Corporation (Valero Energy).
ITEM 2. Acquisition or Disposition of Assets
On February 1, 2002, Valero Logistics Operations reported that it had exercised
its option to purchase the Wichita Falls crude oil pipeline and storage facility
from Valero Energy for $64,000,000. The purchase price was funded with
borrowings under Valero Logistics Operations' existing revolving credit
facility.
Valero Energy indirectly owns 73.6% of Valero L.P. and Valero L.P. owns 98.9899%
of Valero Logistics Operations. The option to purchase was granted under the
Omnibus Agreement between Ultramar Diamond Shamrock Corporation (UDS, which was
acquired by Valero Energy on December 31, 2001) and Valero L.P. and Valero
Logistics Operations. The Omnibus Agreement was executed in connection with
Valero L.P.'s initial public offering on April 16, 2001.
The acquisition by Valero Logistics Operations was recorded at Valero Energy's
historical cost due to Valero Energy's common control of both the Wichita Falls
assets and Valero Logistics Operations. Valero Energy's net book value
approximated fair value as a result of Valero Energy's acquisition of UDS on
December 31, 2001.
ITEM 7. Financial Statements, Pro Forma Financial Information, and Exhibits
(a) Financial statements of business acquired.
Audited financial statements for the Wichita Falls Crude Oil Pipeline and
Storage Business as of December 31, 2001 and 2000 and for the years ended
December 31, 2001, 2000 and 1999, are filed herewith as Exhibit 99.1 and
incorporated herein by reference.
(b) Pro forma financial information.
Pro forma financial information for Valero L.P. as of and for the year ended
December 31, 2001 is filed herewith as Exhibit 99.2 and incorporated herein by
reference.
(c) Exhibits.
Exhibit No. and Description of Exhibit
23.1 Consent of Independent Public Accountants, dated April 15, 2002.
99.1 Financial statements of business acquired.
99.2 Pro forma financial information.
99.3 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: April 15, 2002
3
EXHIBIT INDEX
23.1 Consent of Independent Public Accountants, dated April 15, 2002.
99.1 Financial statements of business acquired.
The following financial statements of Wichita Falls Crude Oil
Pipeline and Storage Business are included in Exhibit 99.1 of
this Form 8-K/A:
o Report of Independent Public Accountants
o Balance Sheets as of December 31, 2001 and 2000
o Statements of Income for the Years Ended December 31, 2001, 2000 and
1999
o Statements of Cash Flows for the Years Ended December 31, 2001, 2000
and 1999
o Statements of Changes in Net Parent Investment for the Years Ended
December 31, 2001, 2000 and 1999
o Notes to Financial Statements
99.2 Pro forma financial information.
The following pro forma financial information is included in
Exhibit 99.2 of this Form 8-K/A:
o Pro Forma Combined Balance Sheet as of December 31, 2001
o Pro Forma Combined Statement of Income for the Year Ended
December 31, 2001
o Notes to Pro Forma Financial Information
99.3 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 inclusion in and
incorporation by reference in this current report on Form 8-K/A of our report
dated April 12, 2002 on the Wichita Falls Crude Oil Pipeline and Storage
Business.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 15, 2002
5
EXHIBIT 99.1
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Valero Energy Corporation:
We have audited the accompanying balance sheets of the Wichita Falls Crude Oil
Pipeline and Storage Business as of December 31, 2001 and 2000, and the related
statements of income, cash flows and changes in net parent investment for each
of the three years in the period ended December 31, 2001 included herein on
pages 7 through 20. These financial statements are the responsibility of Valero
Energy Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Wichita Falls Crude Oil
Pipeline and Storage Business as of December 31, 2001 and 2000, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 12, 2002
6
WICHITA FALLS CRUDE OIL PIPELINE AND STORAGE BUSINESS
BALANCE SHEETS
(in thousands)
December 31,
------------
2001 2000
---- ----
Assets
Property, plant and equipment................... $ 64,160 $ 59,118
Less accumulated depreciation and amortization.. - (13,059)
------- -------
Property, plant and equipment, net........... 64,160 46,059
------- -------
Total assets................................ $ 64,160 $ 46,059
======= =======
Liabilities and Net Parent Investment
Current liabilities:
Accrued liabilities.......................... $ 131 $ 33
Taxes other than income taxes................ 251 407
------- -------
Total current liabilities................. 382 440
Deferred income tax liabilities................. 13,147 6,926
------- -------
Total liabilities.......................... 13,529 7,366
Net parent investment........................... 50,631 38,693
------- -------
Total liabilities and net parent investment $ 64,160 $ 46,059
======= =======
See accompanying notes to the financial statements.
7
WICHITA FALLS CRUDE OIL PIPELINE AND STORAGE BUSINESS
STATEMENTS OF INCOME
(in thousands)
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Revenues................................. $18,485 $14,543 $17,923
------ ------ ------
Costs and expenses:
Operating expenses.................... 4,839 3,547 3,044
General and administrative expenses... 482 523 416
Taxes other than income taxes......... 533 631 601
Depreciation and amortization......... 1,966 1,647 1,642
------ ------ ------
Total costs and expenses........... 7,820 6,348 5,703
------ ------ ------
Income before income tax expense......... 10,665 8,195 12,220
Income tax expense..................... 4,031 3,098 4,619
------ ------ ------
Net income............................... $ 6,634 $ 5,097 $ 7,601
====== ====== ======
See accompanying notes to the financial statements.
8
WICHITA FALLS CRUDE OIL PIPELINE AND STORAGE BUSINESS
STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Cash Flows from Operating Activities:
Net income ...................................................... $ 6,634 $ 5,097 $ 7,601
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................. 1,966 1,647 1,642
Provision for deferred income taxes........................... 633 591 589
Changes in operating assets and liabilities:
Increase (decrease) in accrued liabilities................. 98 33 (3)
(Decrease) increase in taxes other than income taxes........ (156) 243 27
------ ------ ------
Net cash provided by operating activities............... 9,175 7,611 9,856
------ ------ ------
Cash Flows from Investing Activities:
Maintenance capital expenditures................................. (65) (163) (92)
Expansion capital expenditures................................... (5,228) (3,257) (3)
------ ------ ------
Net cash used in investing activities................... (5,293) (3,420) (95)
------ ------ ------
Cash Flows from Financing Activities:
Net cash repayments to UDS....................................... (3,882) (4,191) (9,761)
------ ------ ------
Net cash used in financing activities................... (3,882) (4,191) (9,761)
------ ------ ------
Net Increase in Cash............................................. - - -
Cash at Beginning of Year........................................ - - -
------- ------ ------
Cash at End of Year.............................................. $ - $ - $ -
======= ====== ======
Non-cash transaction
Effect of Valero Energy's acquisition of the Business on December 31, 2001:
Increase in property, plant and equipment, net................. $(14,774) $ - $ -
======= ====== ======
Increase in deferred income tax liabilities.................... $ 5,588 $ - $ -
======= ====== ======
Increase in net parent investment.............................. $ 9,186 $ - $ -
======= ====== ======
See accompanying notes to the financial statements.
9
WICHITA FALLS CRUDE OIL PIPELINE AND STORAGE BUSINESS
STATEMENTS OF CHANGES IN NET PARENT INVESTMENT
Years Ended December 31, 2001, 2000 and 1999
(in thousands)
Balance as of January 1, 1999 (unaudited)........................... $39,947
Net income....................................................... 7,601
Net cash repayments to UDS....................................... (9,761)
------
Balance as of December 31, 1999..................................... 37,787
Net income....................................................... 5,097
Net cash repayments to UDS....................................... (4,191)
------
Balance as of December 31, 2000..................................... 38,693
Net income....................................................... 6,634
Net cash repayments to UDS....................................... (3,882)
Push down accounting adjustment due to Valero Energy's
acquisition of the Business on December 31, 2001 .............. 9,186
------
Balance as of December 31, 2001..................................... $50,631
======
See accompanying notes to the financial statements.
10
WICHITA FALLS CRUDE OIL PIPELINE AND STORAGE BUSINESS
NOTES TO FINANCIAL STATEMENTS
NOTE 1: Business Description
During the periods covered by these financial statements, Ultramar Diamond
Shamrock Corporation (UDS), an independent refining and marketing company, owned
and operated 7 refineries and marketed its products through approximately 4,500
company-operated and dealer-operated convenience stores. Diamond Shamrock
Refining and Marketing Company (DSRMC), a wholly owned subsidiary of UDS, owned
and operated various UDS refining and marketing assets, including the Wichita
Falls crude oil pipeline and storage facility described below.
The Wichita Falls Crude Oil Pipeline and Storage Business (the Business)
consists of the following assets:
o A 271.7 mile pipeline originating in Wichita Falls, Texas and ending at
UDS' McKee refinery in Dumas, Texas. The pipeline has the capacity to
transport 110,000 barrels per day of crude oil gathered or acquired by UDS
at Wichita Falls. The Wichita Falls crude oil pipeline connects to third
party pipelines that originate along the Texas Gulf Coast.
o Four storage tanks located in Wichita Falls, Texas with a total capacity of
660,000 barrels.
In the fourth quarter of 2001, the Business completed an expansion project to
increase the capacity of the crude oil pipeline from 85,000 barrels per day to
110,000 barrels per day and increase the capacity of the storage facility from
360,000 barrels to 660,000 barrels.
Acquisition of UDS by Valero Energy
On May 7, 2001, UDS announced that it had entered into an Agreement and Plan of
Merger with Valero Energy Corporation (Valero Energy) whereby UDS agreed to be
acquired by Valero Energy for total consideration of approximately $4.3 billion.
In September 2001, the boards 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.
Prior to the acquisition, Valero Energy owned and operated six refineries in
Texas (3), Louisiana, New Jersey and California with a combined throughput
capacity of more than 1,100,000 barrels per day. Valero Energy marketed its
gasoline, diesel fuel and other refined products in 34 states through a bulk and
rack marketing network and, in California, through approximately 350 retail
locations.
Valero L.P. and Valero Logistics Operations, L.P.
Valero L.P. (formerly Shamrock Logistics, L.P.) was formed to ultimately acquire
Valero Logistics Operations, L.P. (Valero Logistics Operations, formerly
Shamrock Logistics Operations, L.P.). Valero Logistics Operations was formed to
operate the crude oil and refined product pipeline, terminalling and storage
assets of the Ultramar Diamond Shamrock Logistics Business.
Prior to July 1, 2000, UDS' pipeline, terminalling and storage assets located in
Texas, Oklahoma, New Mexico and Colorado that support the McKee, Three Rivers
and Ardmore refineries located in Texas and Oklahoma were referred to as the
Ultramar Diamond Shamrock Logistics Business. Effective July 1, 2000, UDS
transferred the assets and certain liabilities of the Ultramar Diamond Shamrock
Logistics Business to Valero Logistics Operations. The above transfer
represented a reorganization of entities under common control and was recorded
at historical cost.
11
On April 16, 2001, Valero L.P. completed its initial public offering by selling
limited partner interests to the public. After the offering, outstanding equity
included 5,175,000 common units (26.4%) held by the public, 4,424,322 common
units and 9,599,322 subordinated units (combined 71.6%) held by UDS Logistics,
LLC and a 2% general partner interest held by Riverwalk Logistics, L.P. Both UDS
Logistics, LLC and Riverwalk Logistics, L.P. are wholly owned subsidiaries of
Valero Energy.
Effective with the closing of Valero L.P.'s initial public offering, the
ownership of Valero Logistics Operations held by various subsidiaries of UDS was
transferred to Valero L.P. in exchange for the 71.6% limited partner interest in
Valero L.P. This transfer represented a reorganization of entities under common
control and was recorded at historical cost.
Omnibus Agreement
On April 16, 2001, Valero L.P. and Valero Logistics Operations entered into an
agreement (the Omnibus Agreement) with UDS and Riverwalk Logistics, L.P., which
governs potential competition among Valero L.P. and Valero Logistics Operations
and the other parties to the agreement. Concurrent with the acquisition of UDS
by Valero Energy, Valero Energy became the obligor under the Omnibus Agreement.
Valero Energy has agreed and will cause its controlled affiliates to agree, for
so long as Valero Energy and its affiliates control Riverwalk Logistics, L.P.,
not to engage in, whether by acquisition or otherwise, the business of
transporting crude oil or refined products, including petrochemicals, or
operating crude oil storage or refined product terminalling assets in the United
States.
This restriction will not apply to:
o any business retained by UDS at the closing of Valero L.P.'s initial public
offering;
o any business owned or leased by Valero Energy on December 31, 2001;
o any further development of the Diamond-Koch Joint Venture petrochemicals
business;
o any business with a fair market value of less than $10 million;
o any business acquired by Valero Energy that constitutes less than 50% of
the fair market value of a larger acquisition provided Valero L.P. has been
offered and declined the opportunity to purchase this business;
o any newly constructed logistics assets that Valero L.P. has not offered to
purchase within one year of construction at fair market value; and
o each of the Southlake refined product terminal, the Ringgold crude oil
storage facility and the Wichita Falls crude oil pipeline and storage
facility should Valero L.P. decline to exercise its option to purchase them
pursuant to the purchase option discussed below.
In accordance with the Omnibus Agreement, Valero L.P. had an option to purchase
the Southlake refined product terminal for $5,600,000, the Ringgold crude oil
storage facility for $5,200,000 and the Wichita Falls crude oil pipeline and
storage facility for $64,000,000. Effective July 1, 2001 and December 1, 2001,
Valero L.P. exercised its options to purchase the Southlake refined product
terminal and the Ringgold crude oil storage facility, respectively. Effective
February 1, 2002, Valero L.P. exercised its option to purchase the Wichita Falls
crude oil pipeline and storage facility.
12
NOTE 2: Summary of Significant Accounting Policies
Basis of Presentation: These audited financial statements have been prepared in
accordance with United States generally accepted accounting principles and
include all adjustments considered necessary for a fair presentation. The
financial statements represent a carve-out financial statement presentation of
the operations of the Business and reflect UDS' historical cost basis as of
December 31, 2000 and for the years ended December 31, 2001, 2000 and 1999. The
balance sheet as of December 31, 2001 reflects fair value as a result of
applying push down accounting to the Business' financial statements. Under push
down accounting, the assets and liabilities have been restated to their fair
values on December 31, 2001, the date the Business was acquired by Valero
Energy.
The financial statements include allocations and estimates of direct and
indirect UDS general and administrative costs attributable to the operations of
the Business. In addition, all of the Business' revenues were derived from
transportation services provided to UDS, the Business' sole customer. Management
believes that the assumptions, estimates and allocations used to prepare these
financial statements are reasonable. However, the allocations may not
necessarily be indicative of the costs and expenses that would have resulted if
the Business had been operated as a separate entity.
The Business' results of operations may be affected by seasonal factors, such as
the demand for petroleum products, which vary during the year, or industry
factors that may be specific to a particular period, such as industry supply
capacity and refinery turnarounds.
Use of Estimates: The preparation of financial statements in accordance with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
Property, Plant and Equipment: Property, plant and equipment is stated at cost.
Additions to property, plant and equipment, including maintenance and expansion
capital expenditures and capitalized interest, are recorded at cost. Maintenance
capital expenditures represent capital expenditures to replace partially or
fully depreciated assets to maintain the existing operating capacity of existing
assets and extend their useful lives. Expansion capital expenditures represent
capital expenditures to expand the operating capacity of existing assets,
whether through construction or acquisition. Repair and maintenance expenses
associated with existing assets that are minor in nature and do not extend the
useful life of existing assets are charged to operating expenses as incurred.
Depreciation is provided principally using the straight-line method over the
estimated useful lives of the related assets. 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.
Impairment: Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The evaluation of recoverability is performed using undiscounted
estimated net cash flows generated by the related assets. 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.
13
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.
Net Parent Investment: The net parent investment represents a net balance as the
result of various transactions between the Business and UDS. The balance is the
result of the Business' participation in UDS' centralized cash management
program under which all of the Business' cash receipts were remitted to and all
cash disbursements were funded by UDS. Other transactions affecting the net
parent investment include intercompany transportation revenues and related
expenses, administrative and support expenses incurred by UDS and allocated to
the Business, and income taxes. There are no terms of settlement or interest
charges associated with the net parent investment balance.
Revenue Recognition: Revenues are derived from pipeline transportation and
storage of crude oil and other feedstocks. Transportation revenues (based on
pipeline tariff rates) are recognized as crude oil and other feedstocks are
transported through the pipeline. The cost of the crude oil storage operations
is included in the crude oil pipeline tariff rate. The Wichita Falls crude oil
pipeline is an intrastate pipeline subject to the regulation of the Texas
Railroad Commission (the Commission). Regulations include rate regulations,
which govern the tariff rates charged to pipeline customers, which tariff rates
are required to be filed with the Commission upon completion of a pipeline and
when the rate is being revised. In addition, the regulations include annual
reporting requirements.
Operating Expenses: Operating expenses consist primarily of fuel and power
costs, telecommunication costs, labor costs of pipeline field and support
personnel, maintenance, utilities and insurance. Such expenses are recognized as
incurred.
Federal and State Income Taxes: Income taxes are accounted for under the asset
and liability method. Under this method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred amounts are measured
using enacted tax rates expected to apply to taxable income in the year those
temporary differences are expected to be recovered or settled.
Historically, the Business' results have been included in the consolidated
federal and state income tax returns filed by UDS. The income tax provisions in
the statements of income represent the current and deferred income taxes that
would have resulted if the Business were a stand-alone taxable entity filing its
own income tax returns. Accordingly, the calculations of income tax provisions
and deferred income taxes necessarily require certain assumptions, allocations
and estimates which management believes are reasonable to reflect the tax
reporting for the Business as a stand-alone taxpayer.
Comprehensive Income: The Business has reported no comprehensive income due to
the absence of items of other comprehensive income in all periods presented.
14
Derivative Instruments and Hedging Activities: 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 Business adopted Statement No. 133, as
amended, effective January 1, 2001 and there was no impact as the Business does
not hold or trade derivative instruments.
New 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 Business has not entered into
a business combination subsequent to July 1, 2001.
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 that arise due to the initial application of Statement
No. 142 are to be reported as resulting from a change in accounting principle.
Statement No. 142 should not impact the Business' financial statements upon
adoption, as the Business has no goodwill or other intangible assets.
15
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 retirement cost
would then be allocated to expense using a systematic and rational method.
Statement No. 143 will be effective for financial statements issued for fiscal
years beginning after June 15, 2002, with earlier application encouraged. The
Business is currently evaluating the impact of adopting this new statement.
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.
The Business does not expect the adoption of this statement will have an impact
on its financial statements.
NOTE 3: Acquisition of UDS (and the Business) by Valero Energy
On December 31, 2001, Valero Energy acquired UDS for $4.3 billion in a purchase
business combination. UDS' operations consisted of 7 refineries, a network of
approximately 4,500 company-operated and dealer-operated convenience stores,
certain pipeline and terminal assets (including the Business) and a 73.6%
ownership interest in Valero L.P. and Valero Logistics Operations. The total
purchase price was allocated based on the fair values of the individual assets
acquired and the liabilities assumed. The Wichita Falls crude oil pipeline and
the Wichita Falls crude oil storage facility were included in the assets
acquired by Valero Energy and were allocated $64,160,000 of the purchase price.
16
NOTE 4: Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Estimated December 31,
Useful Lives 2001 2000
------------ ---- ----
(years) (in thousands)
Land improvements........................ 20 $ 56 $ -
Buildings................................ 35 1,203 1,203
Pipeline and equipment................... 3-38 58,537 50,159
Rights of way............................ 35 4,364 4,364
Construction in progress................. - - 3,392
------ ------ -------
Total................................ 64,160 59,118
Accumulated depreciation and
amortization......................... - (13,059)
------ -------
Property, plant and equipment, net... $ 64,160 $ 46,059
====== =======
NOTE 5: Income Taxes
The amounts presented below relate only to the Business and were calculated as
if the Business filed separate federal and state income tax returns.
The provision for income taxes consisted of the following:
Years Ended December 31,
2001 2000 1999
---- ---- ----
(in thousands)
Current:
Federal.......................... $3,011 $2,221 $3,571
State............................ 387 286 459
----- ----- -----
Total current.................. 3,398 2,507 4,030
----- ----- -----
Deferred:
Federal.......................... 586 547 545
State............................ 47 44 44
----- ----- -----
Total deferred................. 633 591 589
----- ----- -----
Provision for income taxes......... $4,031 $3,098 $4,619
===== ===== =====
17
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the Business' financial
statements. The components of the Business' net deferred income tax liabilities
consisted of the following:
December 31,
2001 2000
---- ----
(in thousands)
Deferred income tax liabilities -
Excess of book basis over tax basis of
property, plant and equipment............... $13,147 $6,926
====== =====
The differences between the Business' effective income tax rate and the U.S.
federal statutory rate is reconciled as follows:
Years Ended December 31,
2001 2000 1999
---- ---- ----
U. S. federal statutory rate............ 35.0% 35.0% 35.0%
State income taxes (net of federal tax
benefit).............................. 2.8 2.8 2.8
---- ---- ----
Effective income tax rate.......... 37.8% 37.8% 37.8%
==== ==== ====
NOTE 6: Related-Party Transactions
Transactions between the Business and UDS included pipeline tariff revenues
received by the Business from UDS and the allocation of salary and employee
benefit costs, insurance costs, and administrative fees from UDS to the
Business.
The Business participated in UDS' centralized cash management program under
which cash receipts and cash disbursements were processed through UDS' cash
accounts with a corresponding credit or charge to an intercompany account. This
intercompany account is included in the net parent investment balance.
During the years ended December 31, 2001, 2000 and 1999, UDS allocated
approximately 0.4% of its general and administrative expenses incurred in the
United States to the Business to cover centralized function costs including
legal, accounting, treasury, engineering, information technology, human
resources and other corporate services. Management believes that the amount of
general and administrative expenses allocated to the Business is a reasonable
approximation of the costs related to the Business. For purposes of these
financial statements, payables and receivables related to transactions between
the Business and UDS are included as a component of the net parent investment.
18
NOTE 7: Employee Benefit Plans
Employees who work in the Business are included in the various employee benefit
plans of UDS. These plans include qualified, non-contributory defined benefit
retirement plans, defined contribution 401(k) plans, employee and retiree
medical, dental and life insurance plans, long-term incentive plans (i.e., stock
options and bonuses) and other such benefits. For the purposes of these
carve-out financial statements, the Business is considered to be participating
in multi-employer benefit plans of UDS.
The Business' allocated share of UDS employee benefit plan expenses were
$74,000, $67,000 and $56,000 for the years ended December 31, 2001, 2000 and
1999, respectively. These employee benefit plan expenses are included in
operating expenses with the related payroll costs.
NOTE 8: Contingencies and Commitments
There are various legal proceedings and claims pending against the Business
which arise in the ordinary course of business. It is management's opinion,
based upon advice of counsel, that these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
or financial position of the Business.
NOTE 9: Environmental Matters
The operations of the Business are subject to environmental laws and regulations
adopted by various federal, state and local governmental authorities in the
jurisdictions in which it operates. Although management believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in the petroleum pipeline
industry, and there can be no assurance that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
increasingly stringent environmental laws and regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from the operations, could result in substantial costs and liabilities.
Accordingly, the Business has adopted policies, practices and procedures in the
areas of pollution control, product safety, occupational health and the
production, handling, storage, use and disposal of hazardous materials to
prevent material environmental or other damage, and to limit the financial
liability which could result from those events. However, some risk of
environmental or other damage is inherent in the Business, as it is with other
companies engaged in similar businesses.
During the years ended December 31, 2001, 2000 and 1999, the Business did not
incur any environmental liability.
Note 10: Sale and Purchase Agreement with Valero Energy
On February 1, 2002, Valero Logistics Operations exercised its option under the
Omnibus Agreement to acquire the Wichita Falls crude oil pipeline and storage
facility for a purchase price of $64,000,000. The total purchase price includes
all property, plant and equipment and rights related to the pipeline and storage
facility, but excludes liabilities of the Business, including accounts payable,
accrued liabilities, and income tax obligations. In addition, Valero Energy has
agreed to indemnify Valero Logistics Operations for environmental liabilities
related to the Business that arose prior to February 1, 2002 and are discovered
by April 16, 2011. Excluded from this indemnification are liabilities that
result from a change in environmental law after February 1, 2002.
19
EXHIBIT 99.2
VALERO L.P.
PRO FORMA FINANCIAL INFORMATION
On February 1, 2002, Valero Logistics Operations, a subsidiary of Valero L.P.,
completed its acquisition of the Wichita Falls crude oil pipeline and storage
facility assets.
The following unaudited pro forma financial information combines the historical
consolidated financial information of Valero L.P. and Valero Logistics
Operations with the historical financial information of the Wichita Falls Crude
Oil Pipeline and Storage Business, giving effect to the acquisition using
historical cost due to Valero Energy's common control of both the Wichita Falls
assets and Valero Logistics Operations.
The pro forma combined balance sheet as of December 31, 2001 assumes that the
acquisition occurred on December 31, 2001 and the pro forma combined statement
of income for the year ended December 31, 2001 assumes that the acquisition
occurred on January 1, 2001.
The pro forma combined statement of income does not reflect anticipated
synergies or costs and charges that may result from the acquisition. For
purposes of this pro forma financial information, the purchase price was
allocated to the individual assets acquired based on Valero Energy's historical
cost. Valero Energy's historical cost was based on Valero Energy's December 31,
2001 purchase price allocation, less depreciation and amortization for the month
of January 2002. The accounting policies of Valero Logistics Operations and the
Wichita Falls Crude Oil Pipeline and Storage Business are substantially
comparable.
This pro forma financial information should be read in conjunction with the
historical consolidated financial statements included in Valero L.P.'s Annual
Report on Form 10-K for the year ended December 31, 2001, and the historical
financial statements of the Wichita Falls Crude Oil Pipeline and Storage
Business included in this Form 8-K/A as Exhibit 99.1. The pro forma adjustments
use estimates and assumptions based on currently available information.
Management believes that the estimates and assumptions are reasonable, and that
the significant effects of the acquisition are properly reflected. However, this
pro forma information is not intended to be indicative of the historical results
that would have been achieved had the operations always been combined or the
results of operations which may be achieved in the future.
20
VALERO L.P.
PRO FORMA COMBINED BALANCE SHEET
December 31, 2001
(unaudited, in thousands)
Wichita Falls
Crude Oil
Pipeline and
Storage
Valero L.P. Business Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents...................... $ 7,796 $ - $ - $ 7,796
Receivable from parent......................... 6,292 - - 6,292
Accounts receivable............................ 2,855 - - 2,855
------- -------- -------- --------
Total current assets........................ 16,943 - - 16,943
------- -------- -------- --------
Property, plant and equipment.................... 406,241 64,160 (160) (a) 470,241
Less accumulated depreciation and
amortization................................... (121,389) - - (121,389)
------- -------- -------- --------
Property, plant and equipment, net........... 284,852 64,160 (160) 348,852
Goodwill, net.................................... 4,715 - - 4,715
Investment in affiliate.......................... 16,492 - - 16,492
Other noncurrent assets, net..................... 384 - - 384
------- -------- -------- --------
Total assets................................ $ 323,386 $ 64,160 $ (160) $ 387,386
======= ======== ======== ========
Liabilities and Partners' Equity
/ Net Parent Investment
Current liabilities:
Current portion of long-term debt.............. $ 462 $ - $ - $ 462
Accounts payable and accrued liabilities....... 4,084 131 (131) (b) 4,084
Taxes other than income taxes.................. 1,643 251 (251) (b) 1,643
------- -------- -------- --------
Total current liabilities................... 6,189 382 (382) 6,189
------- -------- -------- --------
Long-term debt, less current portion............. 25,660 - 64,000 (c) 89,660
------- -------- -------- --------
Other long-term liabilities...................... 2 - - 2
------- -------- -------- --------
Deferred income tax liabilities.................. - 13,147 (13,147) (b) -
------- -------- -------- --------
Partners' equity / net parent investment:
Common units................................... 169,305 - - 169,305
Subordinated units............................. 116,399 - - 116,399
General partner equity......................... 5,831 - - 5,831
Net parent investment.......................... - 50,631 (50,631) (d) -
------- -------- ------- -------
Total partners' equity / net parent
investment................................. 291,535 50,631 (50,631) 291,535
------- -------- ------- -------
Total liabilities and partners' equity /
net parent investment...................... $ 323,386 $ 64,160 $ (160) $ 387,386
======= ======== ======= =======
See accompanying notes to pro forma financial information.
21
VALERO L.P.
PRO FORMA COMBINED STATEMENT OF INCOME
For The Year Ended December 31, 2001
(unaudited, in thousands, except unit and per unit amounts)
Wichita Falls
Crude Oil
Pipeline and
Storage
Valero L.P. Business Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
(unaudited) (unaudited)
Revenues......................................... $98,827 $18,485 $ - $ 117,312
------ ------ ------ -------
Costs and expenses:
Operating expenses............................ 29,997 4,839 - 34,836
General and administrative expenses........... 5,349 482 - 5,831
Depreciation and amortization expense......... 13,390 1,966 (149) (e) 15,207
Taxes other than income taxes................. 3,586 533 - 4,119
------ ------ ------ -------
Total costs and expenses.................... 52,322 7,820 (149) 59,993
------ ------ ------ ------
Operating income................................. 46,505 10,665 149 57,319
Interest expense, net......................... (3,811) - (3,001) (f) (6,812)
Equity income from affiliate.................. 3,179 - - 3,179
------ ------ ------ -------
Income before income tax expense................. 45,873 10,665 (2,852) 53,686
Income tax expense............................ - 4,031 (4,031) (g) -
------ ------ ------ -------
Net income....................................... $45,873 $ 6,634 $ 1,179 $ 53,686
====== ===== ====== =======
Allocation of 2001 Net Income
-----------------------------
Net income applicable to the period
January 1, 2001 to April 15, 2001.............. $10,126 (h) $ 11,842
Net income applicable to the period
April 16, 2001 to December 31, 2001............ 35,747 41,844
------ ------
Net income.................................. $45,873 $ 53,686
====== ======
General partner interest in net income
applicable to the period after April 15, 2001.. $ 715 (i) $ 837
Limited partners' interest in net income
applicable to the period after April 15, 2001.. 35,032 41,007
------ ------
Net income applicable to the period after
April 15, 2001............................. $35,747 $ 41,844
====== ======
Basic and diluted net income per unit
applicable to the period after April 15, 2001.. $ 1.82 (i) $ 2.14
==== ====
Weighted average number of units outstanding
for the period after April 15, 19,198,644 (i) 19,198,644
========== ==========
See accompanying notes to pro forma financial information.
22
NOTES TO PRO FORMA FINANCIAL INFORMATION
(unaudited)
The following adjustments were made to the pro forma combined balance sheet:
(a) To record the purchase of the Wichita Falls crude oil pipeline and storage
facility assets from Valero Energy. The acquisition will be accounted for
at historical cost because Valero Energy is the majority owner of Valero
L.P. and controls the general partner, Riverwalk Logistics, L.P. Valero
Energy acquired the Wichita Falls Crude Oil Pipeline and Storage Business
(the Business) on December 31, 2001 in conjunction with its acquisition of
Ultramar Diamond Shamrock Corporation (UDS). Valero Energy allocated
$64,160,000 of its $4.3 billion purchase price related to the acquisition
of UDS to the Wichita Falls crude oil pipeline and storage facility assets.
After considering depreciation and amortization expense for the month ended
January 31, 2002, the historical cost of the property, plant and equipment
is $64,000,000 as follows (in thousands):
Valero Energy's historical cost on December 31, 2001........... $64,160
Depreciation and amortization expense for the month ended
January 31, 2002 recognized by Valero Energy............... (160)
------
Valero Energy's historical cost as of January 31, 2002......... $64,000
======
(b) To eliminate the historical liabilities of the Business, including deferred
income tax liabilities, because Valero L.P. is not assuming these
liabilities.
(c) To record the borrowing of $64,000,000 under Valero Logistics Operations'
revolving credit facility to pay Valero Energy the purchase price.
(d) To eliminate the historical net parent investment of the Business.
The following adjustments were made to the pro forma statement of income:
(e) To record an adjustment to depreciation and amortization expense based on
Valero Energy's historical basis assuming a useful life of approximately 35
years.
(f) To record additional interest expense resulting from the borrowings under
Valero Logistics Operations' revolving credit facility assuming an interest
rate of 4.7%. Assuming market interest rates change by 1/8%, the potential
annual change in interest expense is approximately $80,000.
(g) To eliminate the historical income tax expense of the Business because
Valero L.P. is not a taxable entity.
23
(h) The initial public offering of Valero L.P. did not occur until April 16,
2001. As a result, a portion of the pro forma adjustments on the pro forma
combined statement of income are allocated to Valero L.P.'s predecessor
prior to April 16, 2001, as follows (in thousands):
The Business' income before income tax expense applicable to
the period January 1, 2001 to April 15, 2001.............. $ 2,548
Pro forma adjustment to depreciation and amortization
expense applicable to the period January 1, 2001
to April 15, 2001.................................... 43
Pro forma adjustment to interest expense applicable
to the period January 1, 2001 to April 15, 2001...... (875)
------
The Business' pro forma net income applicable to the period
January 1, 2001 to April 15, 2001........................ 1,716
Valero L.P.'s net income applicable to the period
January 1, 2001 to April 15, 2001................... 10,126
------
Pro forma combined net income applicable to the period
January 1, 2001 to April 15, 2001........................ $11,842
======
Net income per unit for the year ended December 31, 2001 was $2.34 per unit
assuming net income of $45,873,000, less $917,000 allocated to the 2%
general partner interest. Pro forma net income per unit for the year ended
December 31, 2001 would have been $2.74 per unit (net income of
$53,686,000, less $1,074,000 allocated to the 2% general partner interest,
divided by 19,198,644 units), assuming 100% of the Business' net income for
the year ended December 31, 2001 was allocated to Valero L.P.
(i) The general partner's allocation of net income is based on its combined 2%
interest in Valero L.P. The general partner's 2% allocation of net income
has been deducted before calculating the net income per unit. The
computation of net income per unit assumes that 9,599,322 common units and
9,599,322 subordinated units were outstanding at all times during the
periods presented.
24
EXHIBIT 99.3
REQUIRED LETTER TO SECURITIES AND EXCHANGE COMMISSION
UNDER TEMPORARY NOTE 3T
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 financial statements of the Wichita Falls Crude
Oil Pipeline and Storage Business included in this Form 8-K/A 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.
-------------------------
John H. Krueger, Jr.
Senior Vice President and
Controller
25