Underwriting Agreement (2006)Full Document 

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Execution Version

17,869,565 Units

VALERO GP HOLDINGS, LLC

Representing Limited Liability Company Interests

UNDERWRITING AGREEMENT

December 18, 2006

LEHMAN BROTHERS INC.

UBS SECURITIES LLC

CITIGROUP GLOBAL MARKETS INC.

MORGAN STANLEY & CO. INCORPORATED

As Representatives of the several

Underwriters named in Schedule II attached hereto,

c/o Lehman Brothers Inc.

745 Seventh Avenue

New York, New York 10019

Ladies and Gentlemen:

Certain unitholders of Valero GP Holdings, LLC, a Delaware limited liability company (the “Company”), named in Schedule I hereto (the “Selling Unitholders”) propose to sell an aggregate of 17,869,565 units (the “Firm Units”), representing limited liability company interests in the Company (the “Units”).  In addition, Diamond Shamrock Refining and Marketing Company, a Delaware corporation and one of the Selling Unitholders (“DSRMC”), proposes to grant to the underwriters (the “Underwriters”) named in Schedule II attached to this agreement (this “Agreement”) an option to purchase up to an aggregate of 2,680,435 additional Units on the terms and for the purposes set forth in Section 3 (the “Option Units”).  The Firm Units and the Option Units, if purchased, are hereinafter collectively called the “Offered Units.”

This is to confirm the agreement among the Company, the Selling Unitholders, Valero Energy Corporation, a Delaware corporation (“Valero Energy” and, together with the Selling Unitholders, the “Selling Unitholder Parties”), and the Underwriters concerning the purchase of the Offered Units from the Selling Unitholders by the Underwriters.

A.                                   It is understood and agreed to by all parties hereto that the Company owns, as of each Delivery Date (as defined in Section 4 hereof):

(i)                                     a 2% general partner interest in Valero L.P., a publicly traded Delaware limited partnership (the “Partnership”), held indirectly through a 100% indirect ownership interest in Riverwalk Logistics, L.P., a Delaware limited partnership and the general partner of the Partnership (the “General Partner”);

(ii)                                  10,213,894 common units representing a 21.38% interest in the Partnership, held indirectly through a 100% ownership interest in Riverwalk Holdings, LLC, a Delaware limited liability company (“Riverwalk Holdings”);

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(iii)                               6,976 common units representing a 0.02% interest in the Partnership held indirectly through a 100% ownership interest in Valero GP, LLC, a Delaware limited liability company and the general partner of the General Partner (“Valero GP”); and

(iv)                              all of the incentive distribution rights in the Partnership (the “Incentive Distribution Rights”), held indirectly through a 100% ownership interest in the General Partner;

each as more particularly described in the Preliminary Prospectus and the Prospectus (as such terms are hereinafter defined).

B.                                     It is further understood and agreed to by all parties hereto that as of the date hereof:

(i)                                     Valero Energy owns 59.4% of the Units in the Company, indirectly held through its 100% ownership interest in the subsidiaries named in Schedule III hereto (each such entity listed on Schedule III a “Valero Energy Subsidiary,” and collectively the “Valero Energy Subsidiaries”) and shall ultimately receive the proceeds from the sale of the Offered Units as contemplated by this Agreement;

(ii)                                  The Partnership owns:

(a)                                  a 99.99% limited partner interest in Valero Logistics Operations, L.P., a Delaware limited partnership (“Valero OLP”);

(b)                                 a 0.01% general partner interest in Valero OLP, indirectly held through its 100% ownership interest in Valero GP, Inc., a Delaware corporation and general partner of Valero OLP (“Valero OLP GP” and, together with Valero OLP, the “Valero OLP Entities”);

(c)                                  a 99% limited partner interest in Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (“KPP”);

(d)                                 a 1% general partner interest in KPP, indirectly held through a 100% indirect ownership interest in Kaneb GP, as hereinafter defined;

(e)                                  a 100% membership interest in Kaneb Pipe Line Company, LLC, a Delaware limited liability company (“Kaneb GP”) and the general partner of KPP and KPOP, as hereinafter defined, held indirectly through a 100% membership interest in Kaneb Services, LLC, a Delaware limited liability company and sole member of Kaneb GP (“Kaneb Services”);

(f)                                    a 100% ownership interest in Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership (“KPOP” and, together

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with KPP, Kaneb GP and Kaneb Services, the “Kaneb OLP Entities”), held indirectly through KPP and Kaneb GP; and

(g)                                 a 100% ownership interest in each of the subsidiaries listed on Schedule IV hereto, except as otherwise indicated on Schedule IV (collectively, the “Operating Subsidiaries” and each individually an “Operating Subsidiary”), held, directly or indirectly, through either of Valero OLP or KPOP.

Valero GP, Riverwalk Holdings, the Partnership, the General Partner, the Valero OLP Entities and the Kaneb OLP Entities are collectively referred to herein as the “Valero MLP Parties.”

C.                                     Prior to the execution hereof:

(i)                                     Valero OLP and the Partnership entered into the Fourth Amendment to the 5-Year Revolving Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and the Lenders party thereto, dated as of November 30, 2006 (the “Amended Credit Facility”).

D.                                    It is further understood and agreed to by the parties hereto that the following additional transactions will occur substantially contemporaneously with the Initial Delivery Date (as defined in Section 4 hereof):

(i)                                     DSRMC, Valero Corporate Services Company, the Partnership, Valero OLP, the General Partner and Valero GP shall have entered into a Fourth Amended and Restated Services Agreement (the “Amended Services Agreement”) to conform to the description thereof set forth in the Prospectus under the caption “Certain Relationships and Related Transactions—Valero L.P.’s Relationship with Valero Energy.”

The “Transaction Documents” shall mean the Amended Credit Facility and the Amended Services Agreement.  The “MLP Organizational Documents” shall mean the Valero GP LLC Agreement, the Riverwalk Holdings LLC Agreement, the GP Partnership Agreement, the Partnership Agreement, the Valero OLP Partnership Agreement, the Kaneb Services LLC Agreement, the Kaneb GP LLC Agreement, the KPP Partnership Agreement and the KPOP Partnership Agreement (as such terms are defined in Section 1 hereof).  The “Organizational Documents” shall mean the LLC Agreement (as defined in Section 1 hereof) and the MLP Organizational Documents collectively.  The “Operative Agreements” shall mean the Transaction Documents and the Organizational Documents collectively.

The Company and the Selling Unitholders wish to confirm as follows their agreement with you in connection with the purchase of the Offered Units from the Selling Unitholders by the Underwriters.

1.                                       Representations, Warranties and Agreements of the Company.  The Company represents, warrants and agrees that:

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(a)                                  Registration; Definitions; No Stop Order.  A registration statement (Registration No. 333-138810) on Form S-1 relating to the Offered Units has (i) been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations (the ”Rules and Regulations”) of the Securities and Exchange Commission (the ”Commission”) thereunder; (ii) been filed with the Commission under the Securities Act; and (iii) become effective under the Securities Act.  Copies of such registration statement and any amendment thereto have been delivered by the Company to you as the representatives of the Underwriters (the “Representatives”).  As used in this Agreement:

(i)                                     Applicable Time” means 8:00 a.m. (New York City time) on December 19, 2006;

(ii)                                  Effective Date” means each date and time as of which such registration statement, any post-effective amendment or amendments thereto and any registration statement or amendments thereto filed pursuant to Rule 462(b) relating to the offering of the Offered Units was or is declared effective by the Commission;

(iii)                               Issuer Free Writing Prospectus” means each “free writing prospectus” (as defined in Rule 405 of the Rules and Regulations) prepared by or on behalf of the Company or used or referred to by the Company in connection with the offering of the Offered Units;

(iv)                              Preliminary Prospectus” means any preliminary prospectus relating to the Offered Units included in such registration statement or filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations;

(v)                                 Pricing Disclosure Package” means, as of the Applicable Time, the most recent Preliminary Prospectus, together with each Issuer Free Writing Prospectus set forth on Schedule VI hereto and the information set forth on Schedule VII hereto;

(vi)                              Prospectus” means the final prospectus relating to the Offered Units, as filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations; and

(vii)                           Registration Statement” means such registration statement, as amended as of the Effective Date, including any Preliminary Prospectus or the Prospectus and all exhibits to such registration statement.

Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement or filed pursuant to Rule 424(b) on or prior to the date hereof.  The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending the effectiveness of the Registration Statement, and no proceeding or examination for such purpose has been instituted or threatened by the Commission.

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(b)                                 Company Not an “Ineligible Issuer.”  The Company was not at the time of initial filing of the Registration Statement and at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Rules and Regulations) of the Offered Units, is not on the date hereof and will not be on the applicable Delivery Date an “ineligible issuer” (as defined in Rule 405).

(c)                                  Registration Statement and Prospectus Conform to the Requirements of the Securities Act.  The Registration Statement conformed when filed and will conform in all material respects on the Effective Date and on the applicable Delivery Date, and any amendment to the Registration Statement filed after the date hereof will conform in all material respects when filed, to the requirements of the Securities Act and the Rules and Regulations.  The Preliminary Prospectus conformed when filed, and the Prospectus will conform, in all material respects when filed with the Commission pursuant to Rule 424(b) and on the applicable Delivery Date, to the requirements of the Securities Act and the Rules and Regulations.

(d)                                 No Material Misstatements or Omissions in Registration Statement.  The Registration Statement did not, as of the Effective Date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 9(f).

(e)                                  No Material Misstatements or Omissions in Prospectus.  The Prospectus will not, as of its date and on the applicable Delivery Date, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 9(f).

(f)                                    No Material Misstatements or Omissions in Pricing Disclosure Package.  The Pricing Disclosure Package did not, as of the Applicable Time, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Pricing Disclosure Package in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein, which information is specified in Section 9(f).

(g)                                 No Material Misstatements or Omissions in Issuer Free Writing Prospectuses.  Each Issuer Free Writing Prospectus (including, without limitation, any

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road show that is a free writing prospectus under Rule 433), when considered together with the Pricing Disclosure Package as of the Applicable Time, (i) did not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (ii) did not conflict with the information then contained in the Registration Statement.

(h)                                 Issuer Free Writing Prospectuses Conform to the Requirements of the Securities Act.  Each Issuer Free Writing Prospectus conformed or will conform in all material respects to the requirements of the Securities Act and the Rules and Regulations on the date of first use, and the Company has complied with all prospectus delivery requirements and any filing and record keeping requirements applicable to such Issuer Free Writing Prospectus pursuant to the Rules and Regulations.  The Company has not made any offer relating to the Offered Units that would constitute an Issuer Free Writing Prospectus without the prior written consent of the Representatives.  The Company has retained in accordance with the Rules and Regulations all Issuer Free Writing Prospectuses that were not required to be filed pursuant to the Rules and Regulations.  The Company has taken all actions necessary so that any “road show” (as defined in Rule 433 of the Rules and Regulations) in connection with the offering of the Offered Units will not be required to be filed pursuant to the Rules and Regulations.

(i)                                     Formation and Qualification.  The Company and each of the Valero MLP Parties has been duly organized and is validly existing and in good standing as a limited partnership, limited liability company or corporation, as applicable, under the laws of its jurisdiction of organization and is duly qualified to do business and in good standing as a foreign limited partnership, foreign limited liability company or foreign corporation, as applicable, in each jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing would not, and except where the failure of the Kaneb OLP Entities to be so duly organized would not, (i) in the aggregate, reasonably be expected to have a material adverse effect on the condition (financial or otherwise), results of operations, unitholders’ or stockholders’ equity, properties, business or prospects of the Company and its subsidiaries (as defined in Rule 405) taken as a whole (a “Material Adverse Effect”); or (ii) subject the members of the Company to any material liability or disability; and the Company and each of the Valero MLP Parties has all power and authority necessary to own or hold its properties and to conduct the businesses in which it is engaged in all material respects as described in the Pricing Disclosure Package.

(j)                                     Ownership of the Company.  The Valero Energy Subsidiaries own 59.4% of the issued and outstanding Units in and are members of the Company, as shown on Schedule III; such Units have been duly authorized and validly issued in accordance with the limited liability company agreement of the Company (the “LLC Agreement”), and are fully paid (to the extent required by the LLC Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 18-607 of the Delaware Limited Liability Company Act (the “Delaware LLC Act”)); and the Valero Energy Subsidiaries own such Units free and clear of all liens, encumbrances, security interests, charges or claims.

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(k)                                  Ownership of Valero GP by the Company.  At each Delivery Date, the Company will be the sole member of Valero GP and will own 100% of the issued and outstanding membership interests in Valero GP; such membership interests have been duly authorized and validly issued in accordance with the limited liability company agreement of Valero GP (the “Valero GP LLC Agreement”), and are fully paid (to the extent required under the Valero GP LLC Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 18-607 of the Delaware LLC Act); and the Company owns such membership interests free and clear of all liens, encumbrances, security interests, charges or claims.

(l)                                     Ownership of Riverwalk Holdings by the Company.  At each Delivery Date, the Company will be the sole member of Riverwalk Holdings and will own 100% of the issued and outstanding membership interests in Riverwalk Holdings; such membership interests have been duly authorized and validly issued in accordance with the limited liability company agreement of Riverwalk Holdings (the “Riverwalk Holdings LLC Agreement”), and are fully paid (to the extent required under the Riverwalk Holdings LLC Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 18-607 of the Delaware LLC Act); and the Company owns such membership interests free and clear of all liens, encumbrances, security interests, charges or claims.

(m)                               Ownership of the General Partner Interest in the General Partner.  At each Delivery Date, Valero GP will be the sole general partner of the General Partner with a 0.1% general partner interest in the General Partner; such general partner interest has been duly authorized and validly issued in accordance with the limited partnership agreement of the General Partner (the “GP Partnership Agreement”); and Valero GP owns such general partner interest free and clear of all liens, encumbrances, security interests, charges or claims.

(n)                                 Ownership of the Limited Partner Interests in the General Partner.  At each Delivery Date, Riverwalk Holdings will be the sole limited partner of the General Partner with a 99.9% limited partner interest in the General Partner; such limited partner interest has been duly authorized and validly issued in accordance with the GP Partnership Agreement and is fully paid (to the extent required under the GP Partnership Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 17-607 of the Delaware LP Revised Uniform Limited Partnership Act (the “Delaware LP Act”)); and Riverwalk Holdings owns such limited partner interest free and clear of all liens, encumbrances, security interests, charges or claims.

(o)                                 Ownership of the General Partner Interest and Incentive Distribution Rights in the Partnership.  At each Delivery Date, the General Partner will be the sole general partner of the Partnership with a 2% general partner interest and 100% of the Incentive Distribution Rights in the Partnership; such general partner interest and Incentive Distribution Rights have been duly authorized and validly issued in accordance with the limited partnership agreement of the Partnership (the “Partnership Agreement”) and, in the case of the Incentive Distribution Rights, are fully paid (to the

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extent required under the Partnership Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 17-607 of the Delaware LP Act); and the General Partner owns such general partner interest and Incentive Distribution Rights, in each case, free and clear of all liens, encumbrances, security interests, charges or claims.

(p)                                 Ownership of the Partnership’s Common Units by the Company.  At each Delivery Date, Riverwalk Holdings and, at the Initial Delivery Date, Valero GP, direct wholly owned subsidiaries of the Company, will own 10,213,894 and 6,976 of the Partnership’s common units, respectively, representing a 21.38% and 0.02% limited partner interest, respectively, in the Partnership; such limited partner interests have been duly authorized and validly issued in accordance with the Partnership Agreement and are fully paid (to the extent required under the Partnership Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 17-607 of the Delaware LP Act); and Riverwalk Holdings and Valero GP own such limited partner interests free and clear of all liens, encumbrances, security interests, charges or claims.

(q)                                 Ownership of Valero OLP GP by the Partnership.  At each Delivery Date, the Partnership will own 100% of the issued and outstanding capital stock of Valero OLP GP; such shares of capital stock have been duly authorized and validly issued in accordance with the certificate of incorporation and bylaws of Valero OLP GP, as amended to date, and are fully paid and nonassessable; and the Partnership owns such shares of capital stock free and clear of all liens, encumbrances, security interests, charges or claims.

(r)                                    Ownership of the General Partner Interest in Valero OLP.  At each Delivery Date, Valero OLP GP will be the sole general partner of Valero OLP with a 0.01% general partner interest in Valero OLP; such general partner interest has been duly authorized and validly issued in accordance with the limited partnership agreement of Valero OLP (the “Valero OLP Partnership Agreement”); and Valero OLP GP owns such general partner interest free and clear of all liens, encumbrances, security interests, charges or claims.

(s)                                  Ownership of the Limited Partner Interest in Valero OLP.  At each Delivery Date, the Partnership will be the sole limited partner of Valero OLP with a 99.99% limited partner interest in Valero OLP; such limited partner interest has been duly authorized and validly issued in accordance with the Valero OLP Partnership Agreement and is fully paid (to the extent required under the Valero OLP Partnership Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 17-607 of the Delaware LP Act); and the Partnership owns such limited partner interest free and clear of all liens, encumbrances, security interests, charges or claims.

(t)                                    Ownership of Kaneb Services by the Partnership.  At each Delivery Date, the Partnership will be the sole member of Kaneb Services and will own 100% of the issued and outstanding membership interests in Kaneb Services; such membership

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interests have been duly authorized and validly issued in accordance with the limited liability company agreement of Kaneb Services (the “Kaneb Services LLC Agreement”), and are fully paid (to the extent required under the Kaneb Services LLC Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 18-607 of the Delaware LLC Act); and the Partnership owns such membership interests free and clear of all liens, encumbrances, security interests, charges or claims.

(u)                                 Ownership of Kaneb GP.  At each Delivery Date, Kaneb Services, a wholly owned subsidiary of the Partnership, will be the sole member of Kaneb GP and will own 100% of the issued and outstanding membership interests in Kaneb GP; such membership interests have been duly authorized and validly issued in accordance with the limited liability company agreement of Kaneb GP (the “Kaneb GP LLC Agreement”), and are fully paid (to the extent required under the Kaneb GP LLC Agreement) and nonassessable (except as such nonassessability may be affected by matters described in Section 18-607 of the Delaware LLC Act); and Kaneb Services owns such membership interests free and clear of all liens, encumbrances, security interests, charges or claims.

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