Edgar Filing: VALERO L P

Filed Pursuant to Rule 424(b)(5)
Registration No. 333-89978
333-89978-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 17, 2002)

[VALERO L.P. LOGO]

VALERO LOGISTICS OPERATIONS, L.P.
$100,000,000
6 7/8% SENIOR NOTES DUE 2012
FULLY AND UNCONDITIONALLY GUARANTEED BY

VALERO L.P.
Issue price: 99.686%

The notes will bear interest at the rate of 6 7/8% per year. Interest on the
notes will accrue from July 15, 2002. Interest on the notes is payable on
January 15 and July 15 of each year, beginning January 15, 2003. The notes will
mature on July 15, 2012.

We may redeem some or all of the notes at any time at a redemption price that
includes a make-whole premium, as described under the caption "Description of
notes--Optional redemption."

The notes are irrevocably and unconditionally guaranteed on a senior unsecured
basis by our parent, Valero L.P. The guarantee by Valero L.P. will rank equal in
right of payment to all of Valero L.P.'s existing and future unsecured and
unsubordinated indebtedness.

We will not make application to list the notes on any securities exchange or to
include them in any automated quotation system.

INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-14
AND ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.

--------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO COMPANY
PUBLIC (1) DISCOUNTS BEFORE EXPENSES
--------------------------------------------------------------------------------------------------------------

Per Note 99.686% 0.650% 99.036%
--------------------------------------------------------------------------------------------------------------
Total $99,686,000 $650,000 $99,036,000
--------------------------------------------------------------------------------------------------------------

(1) Plus accrued interest from July 15, 2002.

We expect to deliver the notes to investors in registered book-entry form only
through the facilities of The Depository Trust Company, on or about July 15,
2002.

JPMORGAN LEHMAN BROTHERS
Lead Manager and Bookrunner Joint Lead Manager

MIZUHO INTERNATIONAL PLC
RBC CAPITAL MARKETS
SUNTRUST ROBINSON HUMPHREY
TOKYO-MITSUBISHI INTERNATIONAL PLC

July 10, 2002

[Map showing Valero Logistics' current asset portfolio including its refined
product pipelines, crude oil pipelines, natural gas liquid pipelines, hydrogen
pipeline, refined product terminals and crude oil storage facilities in
Colorado, Kansas, New Mexico, Oklahoma and Texas as well as the Valero Energy
refineries interconnected with the Valero Logistics pipelines.]

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT
About this prospectus supplement....... i
Prospectus summary..................... S-1
Risk factors........................... S-14
Ratio of earnings to fixed charges..... S-15
Use of proceeds........................ S-15
Capitalization......................... S-16
Description of revolving credit
facility............................. S-17
Management's discussion and analysis of
financial condition and results of
operations........................... S-20
Description of notes................... S-46
Tax considerations..................... S-53
Underwriting........................... S-57
Validity of the notes.................. S-58
Index to financial statements.......... F-1
PROSPECTUS
About Valero L. P. and Valero Logistics
Operations........................... 1
About this prospectus.................. 1
Where you can find more information.... 1
Forward-looking statements............. 3
Risk factors........................... 4
Use of proceeds........................ 16
Ratio of earnings to fixed charges..... 16
Description of common units............ 17
Cash distributions..................... 18
Description of debt securities......... 25
Book entry, delivery and form.......... 35
Tax considerations..................... 37
Investment in us by employee benefit
plans................................ 51
Plan of distribution................... 52
Validity of the securities............. 53
Experts................................ 53
Change in independent public
accountants.......................... 53

ABOUT THIS PROSPECTUS SUPPLEMENT

This document is in two parts. The first part is this prospectus supplement,
which describes the terms of this offering of notes and includes information
about us and our financial condition. The second part is the accompanying
prospectus, which gives more general information about the debt securities we
may offer from time to time and the related guarantees by Valero L.P. or the
common units Valero L.P. may offer from time to time. Generally, when we refer
to the prospectus, we are referring to both parts of this document combined,
some of which may not apply to the notes.

You should rely on the information contained or incorporated by reference in
this prospectus supplement or the accompanying prospectus. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted. You
should not assume that the information contained in this prospectus supplement
or the accompanying prospectus is accurate as of any date other than the date on
the front of those documents or that any information we have incorporated by
reference is accurate as of any date other than the date of the document
incorporated by reference.

PROSPECTUS SUMMARY

The summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectus. It does not contain all of the
information that you should consider before investing in the notes. You should
read the entire prospectus supplement and the accompanying prospectus carefully,
including the historical financial statements and notes to those financial
statements included in this prospectus supplement. Please read "Risk factors" on
page S-14 of this prospectus supplement and on page 4 of the accompanying
prospectus for more information about important factors that you should consider
before buying the notes. In this prospectus supplement, the terms "Valero
Logistics" and "we," "us," "our" and similar terms mean Valero Logistics
Operations, L.P.

VALERO LOGISTICS OPERATIONS, L.P.

We are a Delaware limited partnership formed in 1999 and a 100%-owned direct and
indirect subsidiary of Valero L.P., a publicly traded Delaware limited
partnership. Our operations are controlled and managed by our general partner, a
wholly owned subsidiary of Valero L.P. Valero L.P. is controlled and managed by
its general partner, an indirect wholly owned subsidiary of Valero Energy
Corporation, a publicly traded Delaware corporation. We own and operate 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. We transport crude oil to these
refineries and transport refined products from these refineries to our terminals
for further distribution to Valero Energy's company-operated convenience stores
or wholesale customers located in Texas, Oklahoma, Colorado, New Mexico and
Arizona. Our pipeline, terminalling and storage assets consist of:

- approximately 782 miles of crude oil pipelines, including approximately
31 miles jointly owned with third parties, and five major crude oil
storage facilities with a total storage capacity of approximately 3.3
million barrels; and

- approximately 2,870 miles of refined product pipelines, including
approximately 1,996 miles jointly owned with third parties, and eleven
refined product terminals, one of which is jointly owned, with a total
storage capacity of approximately 2.8 million barrels.

We generate revenues by charging tariffs for transporting crude oil and refined
products through our pipelines and by charging a fee for use of our terminals.
We do not own any of the crude oil or refined products transported through our
pipelines, and we do not engage in the trading of crude oil or refined products.
As a result, we are not directly exposed to any risks associated with
fluctuating commodities prices, although these risks indirectly influence our
activities and results of operations.

In the year ended December 31, 2001, we transported an average of 303,811
barrels per day through our crude oil pipelines, an average of 308,047 barrels
per day through our refined product pipelines and handled an average of 189,172
barrels per day in our refined product terminals. Our revenues for the year
ended December 31, 2001 were approximately $98.8 million, a 7.4% increase from
our revenues for the year ended December 31, 2000 of approximately $92.1
million. Operating income for the year ended December 31, 2001 was approximately
$46.5 million, a 13.0% increase from our operating income for the year ended
December 31, 2000 of approximately $41.1 million.
S-1

During the first quarter of 2002, we transported an average of 312,387 barrels
per day through our crude oil pipelines, an average of 262,872 barrels per day
through our refined product pipelines and handled an average of 175,816 barrels
per day in our refined product terminals. Our revenues for the quarter ended
March 31, 2002 were approximately $26.0 million, an 11.1% increase from our
first quarter 2001 revenues of $23.4 million.

BUSINESS STRATEGIES

The primary objective of our business strategies is to increase our
distributions to Valero L.P. to enable Valero L.P. to increase its distributable
cash flow per unit. We intend to achieve this primary objective by:

- Sustaining high levels of volumes in our pipelines and cash flow;

- Increasing volumes in our existing pipelines and shifting volumes to
higher tariff pipelines;

- Increasing our pipeline and terminal capacity through expansions and new
construction;

- Pursuing selective strategic and accretive acquisitions that complement
our existing asset base; and

- Continuing to improve our operating efficiency.

COMPETITIVE STRENGTHS

We believe we are well positioned to successfully execute our business
strategies due to the following competitive strengths:

- Our pipelines provide the principal access to and from Valero Energy's
McKee, Three Rivers and Ardmore refineries located near Amarillo, Texas,
Corpus Christi, Texas and Ardmore, Oklahoma, respectively. As a result, in
2001, we transported 78% of the crude oil and other feedstocks supplied
to, and 80% of the refined products produced by, these refineries.

- Our refined product pipelines serve Valero Energy's marketing operations
in the southwestern and Rocky Mountain regions of the United States. These
operations are concentrated in metropolitan areas in the states of Texas,
Colorado, New Mexico and Arizona that are expected to exceed the national
average of projected cumulative population growth through 2010.

- We believe our pipeline, terminalling and storage assets are modern,
efficient and well maintained, with 50% of our ownership mileage having
been built since 1990.

- Our pipelines have available capacity that provides us the opportunity
to increase volumes and distributable cash flow from existing assets.

- Our revolving credit facility, coupled with Valero L.P.'s ability to
issue new partnership units, provides us with financial flexibility to
pursue expansion and acquisition opportunities.
S-2

OUR RELATIONSHIP WITH VALERO ENERGY

Description of Valero Energy's Business. Valero Energy is one of the top three
U.S. refining companies in terms of refining capacity. It acquired Ultramar
Diamond Shamrock Corporation on December 31, 2001, and now owns and operates 12
refineries, three of which are served by our pipelines and terminals:

- the McKee refinery, which has a current total capacity to process
170,000 barrels per day, or bpd, of crude oil and other feedstocks, making
it the largest refinery located between the Texas Gulf Coast and the West
Coast;

- the Three Rivers refinery, which has a current total capacity to process
98,000 bpd of crude oil and other feedstocks; and

- the Ardmore refinery, which has a current total capacity to process
85,000 bpd of crude oil and other feedstocks.

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.

Our operations are strategically located within Valero Energy's refining and
marketing supply chain in the southwestern and Rocky Mountain regions of the
United States, but we do not own or operate any refining or marketing
operations. Valero Energy is dependent upon us to provide transportation
services that support its refining and marketing operations in these markets.
Valero Energy and its affiliates accounted for 99% of our 2000 and 2001
revenues. Although we intend to pursue strategic acquisitions as opportunities
may arise, we expect to continue to derive most of our revenues from Valero
Energy and its affiliates for the foreseeable future.

Our Pipelines and Terminals Usage Agreement with Valero Energy. In connection
with the initial public offering of Valero L.P. and as a result of its
acquisition of Ultramar Diamond Shamrock, Valero Energy has generally agreed to
transport at least 75% of the aggregate volumes of crude oil shipped to and at
least 75% of the aggregate volumes of refined products shipped from the McKee,
Three Rivers and Ardmore refineries in our crude oil pipelines and refined
product pipelines, respectively, and to use our refined product terminals for
terminalling services for at least 50% of the refined products shipped from
these refineries. These percentages reflect the recent historical volumes
shipped to and from these refineries using our pipelines and terminalled at our
terminals. For the year ended December 31, 2001, Valero Energy used our
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 used
our terminalling services for 60% of all refined products shipped from these
refineries.

Valero Energy's obligation to use our pipelines and terminals will be suspended
if Valero Energy ceases to own the refineries, if material changes in market
conditions occur that have a material adverse effect on Valero Energy or if we
are unable to handle the volumes due to operational difficulties with our
pipelines or terminals.

In addition, Valero Energy has agreed, until April of 2008, to remain the
shipper for its crude oil and refined products transported in our pipelines, and
not to challenge our tariff rates for the transportation of crude oil, refined
products or petrochemical products.
S-3

Valero Energy owns Valero L.P.'s general partner. We are a 100%-owned direct and
indirect subsidiary of Valero L.P. Valero Energy owns and controls Riverwalk
Logistics, L.P., which serves as the general partner of Valero L.P. Valero
Energy also indirectly owns an aggregate 71.4% limited partner interest in
Valero L.P.

Risks associated with our relationship with Valero Energy. We are dependent on
the continued use of our pipelines, terminals and storage facilities by Valero
Energy and the ability of Valero Energy's refineries to maintain their
production of refined products. Conflicts of interest are inherent in our
relationship with Valero Energy. Please read "Risk Factors -- Risks Inherent in
Our Business -- Valero Energy and its affiliates have conflicts of interest and
limited fiduciary responsibilities, which may permit them to favor their own
interests to the detriment of our security holders" on page 10 of the
accompanying prospectus.

Omnibus Agreement. We have entered into an omnibus agreement with Valero Energy
which governs potential competition between us and Valero Energy. Valero Energy
has agreed, and will cause its controlled affiliates to agree, for so long as
Valero Energy or its affiliates control Valero L.P.'s general partner, 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 products terminalling assets in the United States. This
restriction does not apply to:

- any business retained by Ultramar Diamond Shamrock (and now part of
Valero Energy) at the closing of the initial public offering of Valero
L.P.;

- any business with a fair market value of less than $10 million;

- any business acquired by Valero Energy in the future that constitutes
less than 50% of the fair market value of a larger acquisition, provided
that Valero L.P. has been offered and declined the opportunity to purchase
this business; or

- any newly constructed logistics assets that Valero L.P. has not offered
to purchase within one year of construction at fair market value.

RECENT DEVELOPMENTS

Acquisition of Wichita Falls Business. In February 2002, we exercised our option
under the omnibus agreement to purchase a 272-mile crude oil pipeline and
related storage facility from a wholly owned subsidiary of Valero Energy for $64
million in cash, which we borrowed under our revolving credit facility. The
pipeline runs from Wichita Falls, Texas to Valero Energy's McKee refinery in the
Texas panhandle.

Acquisition of crude hydrogen pipeline. On May 29, 2002, we completed the
acquisition of a 25-mile crude hydrogen pipeline from Praxair, Inc. for $11
million in cash borrowed under our revolving credit facility. The pipeline
supplies approximately 45 million standard cubic feet per day of crude hydrogen
from Celanese Chemicals' Clear Lake, Texas, facility to Valero Energy's Texas
City refinery under a long-term supply arrangement.

Reorganization of general partner ownership. On May 30, 2002, Valero L.P. and
Valero GP, LLC, the general partner of Riverwalk Logistics (at such date the
general partner of each of Valero L.P. and us), reorganized the general partner
ownership interest in us.
S-4

As a result of the reorganization, Riverwalk Logistics is the 2% general partner
of Valero L.P. and Valero L.P. now holds a 99.99% limited partner interest in
us. Valero L.P. formed Valero GP, Inc., a Delaware corporation wholly owned by
Valero L.P., which is our new general partner with a 0.01% general partner
interest. As a result of the reorganization, we are a 100%-owned direct and
indirect subsidiary of Valero L.P.

OUR STRUCTURE AND MANAGEMENT

We are a 100%-owned direct and indirect subsidiary of Valero L.P. Valero Energy
owns and controls Riverwalk Logistics, which serves as the general partner of
Valero L.P. Valero Energy also indirectly owns an aggregate 71.4% limited
partner interest in Valero L.P.

- Valero L.P. owns a 99.99% limited partner interest in us and 100% of
Valero GP, Inc., which is our sole general partner with a 0.01% general
partner interest and performs all management and operating functions for
us;

- Riverwalk Logistics, the general partner of Valero L.P. and an indirect
wholly owned subsidiary of Valero Energy, owns a 2% general partner
interest in Valero L.P. and the incentive distribution rights pursuant to
the Valero L.P. partnership agreement;

- UDS Logistics, LLC, the sole limited partner of Riverwalk Logistics, and
an indirect wholly owned subsidiary of Valero Energy, owns a 71.4% limited
partner interest in Valero L.P.; and

- Valero GP, LLC, an indirect wholly owned subsidiary of Valero Energy, is
the general partner of Riverwalk Logistics and performs all management and
operating functions of Valero L.P.

The chart on the following page depicts our organization and ownership structure
as of the date of this prospectus supplement.
S-5

------------------------------------------------------------
PERCENTAGE
OWNERSHIP OF VALERO L.P. INTEREST
----------
Public Common Units......................... 26.62%
Valero Energy's Common Units................ 22.52%
Valero Energy's Subordinated Units.......... 48.86%
Valero Energy's General Partner Interest ... 2.00%
----------
Total 100.00%
------------------------------------------------------------

--------------------------------------
| VALERO ENERGY CORPORATION |
| and its |
| wholly owned subsidiaries |
|-------------------------------------
| |
| |
100% 100%
| |
| |
------------------------- --------------------------------
| | | UDS LOGISTICS, LLC |
| VALERO GP, LLC | | 9,599,322 Subordinated Units |
| | | 4,424,322 Common Units |
------------------------- --------------------------------
0.1% General | |
Partner Interest | |
| | |
| | 99.9% Limited | 71.38% Limited
--------------------------------------- Partner Interest | Partner Interest
| RIVERWALK LOGISTICS, L.P. | |
|(the General Partner of Valero L.P.) | |
| Incentive Distribution Rights | |
--------------------------------------- |
| |
| 2.0% General Partner Interest |
| | ----------------
------------------------------------------------- | Public |
| VALERO L.P. |-----------------------------------| Unitholders |
| (the Partnership) | 26.62% Limited Partner Interest | 5,230,250 |
------------------------------------ | Common Units |
| | ----------------
100% |
| |
------------------------- |
| | |
| VALERO GP, INC. | | 99.99% Limited Partner Interest
| | |
------------------------- |
0.01% General |
Partner Interest |
| |
| |
----------------------------------- ---------------
| VALERO LOGISTICS | | Phillips |
| OPERATIONS, L.P. | | Petroleum |
| (the Operating Partnership) | | Company |
----------------------------------- ---------------
| |
| |
50% 50%
| |
| |
-------------------------------------------------------------------
|
|
|
---------------------
| Skelly-Belvieu |
| Pipeline |
| Company, L.L.C. |
---------------------

S-6

THE OFFERING

THE ISSUER..............Valero Logistics Operations, L.P.

SECURITIES OFFERED......$100 million principal amount of 6 7/8% Senior Notes due
2012.

GUARANTEE...............Valero L.P. will fully and unconditionally guarantee the
notes.

INTEREST RATE...........6 7/8% per year, commencing July 15, 2002.

INTEREST PAYMENT DATES..January 15 and July 15 of each year, beginning January
15, 2003.

MATURITY DATE...........July 15, 2012.

USE OF PROCEEDS.........We will use the net proceeds from this offering (after
the payments of offering expenses) of approximately
$98.5 million to:

- repay the $91 million of the outstanding principal
balance under our revolving credit facility; and

- provide cash for general operating purposes.

RATINGS.................We have obtained the following ratings on the notes:
Baa2 by Moody's Investors Service, Inc., and BBB by
Standard & Poor's Ratings Services.

A rating reflects only the view of a rating agency and
is not a recommendation to buy, sell or hold the notes.
Any rating can be revised upward or downward or
withdrawn at any time by a rating agency if the rating
agency decides that the circumstances warrant a
revision.

RANKING.................The notes will be our senior unsecured obligations and
will rank equally with all our other existing and future
unsecured senior indebtedness, including indebtedness
under our revolving credit facility. The guarantee by
Valero L.P. will rank equally with all of Valero L.P.'s
unsecured senior obligations. Valero L.P. currently has
no outstanding indebtedness for borrowed money.

The indenture does not limit the amount of unsecured
debt we may incur. The indenture contains restrictions
on our ability to incur secured indebtedness unless the
same security is also provided for the benefit of
holders of the notes.

SUBSIDIARY GUARANTEES...We will cause any of our future subsidiaries that
guarantees or becomes a co-obligor in respect of any of
our funded debt to equally and ratably guarantee the
notes.

CHANGE OF CONTROL.......Upon the occurrence of a change of control to a
non-investment grade entity, we must offer to purchase
the notes at a price equal to 100% of their principal
amount plus accrued and unpaid interest, if any, to the
date of purchase.
S-7

CERTAIN COVENANTS AND
EVENTS OF DEFAULT.......We will issue the notes under an indenture with The Bank
of New York, as trustee. The indenture will contain
limitations on, among other things, our ability to:

- incur indebtedness secured by certain liens; and

- engage in certain sale-leaseback transactions.

The indenture will provide for certain events of
default, including default on certain other
indebtedness.

OPTIONAL REDEMPTION.....We may redeem some or all of the notes at any time at a
redemption price, which includes a make-whole premium,
plus accrued and unpaid interest, if any, to the
redemption date, as described in "Description of notes"
beginning on page S-46 of this prospectus supplement.

RISK FACTORS............See "Risk factors" beginning on page S-14 and on page 4
of the accompanying prospectus and "Management's
discussion and analysis of financial condition and
results of operations" beginning on page S-20 of this
prospectus supplement for a discussion of factors you
should carefully consider before investing in the notes.
S-8

SUMMARY FINANCIAL AND OPERATING DATA

Organization. The following tables set forth selected financial data and
operating data of Valero L.P. (formerly Shamrock Logistics, L.P.), Valero
Logistics (formerly Shamrock Logistics Operations, L.P.), a subsidiary of Valero
L.P., and the Wichita Falls Crude Oil Pipeline and Storage Business (the Wichita
Falls Business) as of December 31, 2001 and selected financial data and
operating data of Valero L.P. and Valero Logistics as of December 31, 2000 and
for the year ended December 31, 2001 and the six months ended December 31, 2000
(collectively referred to as the successor to the Ultramar Diamond Shamrock
Logistics Business).

The selected financial data and operating data as of and for the years ended
December 31, 1997, 1998 and 1999 and for the six months ended June 30, 2000 was
derived from the audited financial statements of the Ultramar Diamond Shamrock
Logistics Business (predecessor).

The selected financial data and operating data as of March 31, 2002 and for the
three months ended March 31, 2001 and 2002 was derived from the unaudited
consolidated and combined financial statements of Valero L.P. and Valero
Logistics as of March 31, 2002 and for the two months ended March 31, 2002,
combined with the Wichita Falls Business for the one month ended January 31,
2002, and the combined financial statements of Valero L.P. and Valero Logistics
as of and for the three months ended March 31, 2001.

On February 1, 2002, Valero L.P. acquired 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
Ultramar Diamond Shamrock Corporation.

On December 31, 2001, Valero Energy acquired Ultramar Diamond Shamrock,
including the Wichita Falls Business and the 73.6% ownership interest in Valero
L.P. held by subsidiaries of Ultramar Diamond Shamrock, in a purchase business
combination. As a result of Valero Energy's acquisition of Ultramar Diamond
Shamrock, Valero Energy became the controlling owner of both the Wichita Falls
Business and Valero L.P. 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 Ultramar Diamond Shamrock on December
31, 2001. In addition, the consolidated financial statements and notes thereto
of Valero L.P. as of December 31, 2001 have been restated to include the Wichita
Falls Business as if it had been combined with Valero L.P. effective December
31, 2001.

Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations transferred to Valero Logistics were referred to as the Ultramar
Diamond Shamrock Logistics Business as if it had existed as a single separate
entity from Ultramar Diamond Shamrock. Ultramar Diamond Shamrock formed Valero
Logistics to assume ownership of and to operate the assets of the Ultramar
Diamond Shamrock Logistics Business. Effective July 1, 2000, Ultramar Diamond
Shamrock transferred the pipelines, terminalling and storage assets and certain
liabilities of the Ultramar Diamond Shamrock Logistics Business to Valero
Logistics. This transfer represented a reorganization of entities under common
control and was recorded at historical cost.
S-9

Effective April 16, 2001, the closing date of Valero L.P.'s initial public
offering, the ownership interests of Valero Logistics held by various
subsidiaries of Ultramar Diamond Shamrock were 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.

Tariff rate and terminalling revenue changes. The financial data included in the
tables below have been prepared utilizing the actual pipeline tariff rates and
terminalling fees in effect during the periods presented. Effective January 1,
2000, the Ultramar Diamond Shamrock Logistics Business filed revised tariff
rates on many of its crude oil and refined product pipelines to reflect the
total cost of the pipeline, the current throughput capacity, the current
throughput utilization and other market conditions. The tariff rates in effect
before January 1, 2000 were based on initial pipeline cost and were not revised
upon subsequent expansions or increases or decreases in throughput levels. The
revised tariff rates resulted in lower tariff revenues. Prior to 1999, the
Ultramar Diamond Shamrock Logistics Business did not charge a separate
terminalling fee for terminalling services at its refined product terminals.
These costs were charged back to the related refinery. Beginning January 1,
1999, the Ultramar Diamond Shamrock Logistics Business began charging a separate
terminalling fee at its refined product terminals.

The selected financial data in the tables below do not reflect the revised
tariff rates prior to January 1, 2000 and do not reflect the establishment of
terminalling fees prior to January 1, 1999.

Adjusted EBITDA. Adjusted EBITDA is defined as operating income, plus
depreciation and amortization, less gain on sale of property, plant and
equipment, plus distributions from Skelly-Belvieu Pipeline Company, of which
Valero Logistics owns 50%, and excluding the impact of volumetric expansions,
contractions and measurement discrepancies in the pipelines. Beginning July 1,
2000, the impact of volumetric expansions, contractions and measurement
discrepancies in the pipelines has been borne by the shippers in our pipelines
and is therefore not reflected in operating income subsequent to July 1, 2000.
The effect of volumetric expansions, contractions and measurement discrepancies
in the pipelines was a net reduction to income before income taxes of
$1,647,000, $555,000, $378,000 and $916,000 for the years ended December 31,
1997, 1998 and 1999 and for the six months ended June 30, 2000, respectively.
S-10

--------------------------------------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
------------------------------------------- ---------------------------
SIX MONTHS SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT PER UNIT DATA AND ------------------------------ JUNE 30, DECEMBER 31, DECEMBER 31,
BARREL/DAY INFORMATION) 1997 1998 1999 2000 2000 2001
--------------------------------------------------------------------------------------------------------------------

STATEMENT OF INCOME DATA:
Revenues(1).............................. $ 84,881 $ 97,883 $109,773 $ 44,503 $ 47,550 $ 98,827
-------------------------------------------------------------------------
Costs and expenses:
Operating expenses.................... 28,277 32,179 29,013 17,912 15,593 33,583
General and administrative expenses... 4,761 4,552 4,698 2,590 2,549 5,349
Depreciation and amortization......... 11,328 12,451 12,318 6,336 5,924 13,390
-------------------------------------------------------------------------
Total costs and expenses................. 44,366 49,182 46,029 26,838 24,066 52,322
Gain on sale of property, plant and
equipment(2).......................... - 7,005 2,478 - - -
-------------------------------------------------------------------------
Operating income......................... 40,515 55,706 66,222 17,665 23,484 46,505
Interest expense, net.................... (158) (796) (777) (433) (4,748) (3,811)
Equity income from Skelly-Belvieu
Pipeline Company...................... 3,025 3,896 3,874 1,926 1,951 3,179
-------------------------------------------------------------------------
Income before income taxes............... 43,382 58,806 69,319 19,158 20,687 45,873
Benefit (provision) for income
taxes(3)........................... (16,559) (22,517) (26,521) 30,812 - -
-------------------------------------------------------------------------
Net income............................... $ 26,823 $ 36,289 $ 42,798 $ 49,970 $ 20,687 $ 45,873
-------------------------------------------------------------------------
Basic and diluted net income per
unit(4)............................... $ 1.82
-------------------------------------------------------------------------
Cash distributions per unit.............. $ 1.70
-------------------------------------------------------------------------
OTHER FINANCIAL DATA:
Adjusted EBITDA.......................... $ 57,499 $ 65,399 $ 80,678 $ 27,223 $ 31,760 $ 62,769
Distributions from Skelly-Belvieu
Pipeline Company...................... 4,009 3,692 4,238 2,306 2,352 2,874
Net cash provided by operating
activities(5)......................... 47,756 48,642 54,054 20,247 1,870 77,132
Net cash provided by (used in) investing
activities(5)......................... (55,166) 14,703 2,787 (4,505) (1,736) (17,926)
Net cash provided by (used in) financing
activities............................ 7,410 (63,345) (56,841) (15,742) (133) (51,414)
Maintenance capital expenditures......... 633 2,345 2,060 1,699 619 2,786
Expansion capital expenditures........... 12,359 9,952 7,313 3,186 1,518 15,140
Total capital expenditures...... 12,992 12,297 9,373 4,885 2,137 17,926
OPERATING DATA (barrels/day):
Crude oil pipeline throughput............ 282,736 265,243 280,041 294,037 295,524 303,811
Refined product pipeline throughput...... 257,183 268,064 297,397 312,759 306,877 308,047
Refined product terminal throughput...... 136,454 144,093 161,340 168,433 162,904 189,172
--------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
------------------------------ -------------------
DECEMBER 31, DECEMBER 31,
------------------------------ -------------------
(IN THOUSANDS) 1997 1998 1999 2000 2001
-----------------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA:
Property, plant and equipment, net......................... $319,169 $297,121 $284,954 $280,017 $349,012
Total assets............................................... 346,082 321,002 308,214 329,484 387,546
Long-term debt, including current portion and debt due to
parent.................................................. 11,738 11,455 11,102 118,360 26,122
Partners' equity/net parent investment..................... 295,403 268,497 254,807 204,838 342,166
-----------------------------------------------------------------------------------------------------------------

S-11

-----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER UNIT DATA AND BARREL/DAY INFORMATION) 2001 2002
-----------------------------------------------------------------------------------------------

STATEMENT OF INCOME DATA:
Revenues........................................................... $23,422 $26,024
-------------------
Costs and expenses:
Operating expenses.............................................. 8,651 9,184
General and administrative expenses............................. 1,172 1,789
Depreciation and amortization................................... 3,238 4,355
-------------------
Total costs and expenses........................................... 13,061 15,328
-------------------
Operating income................................................... 10,361 10,696
Interest expense, net.............................................. (2,244) (556)
Equity income from Skelly-Belvieu Pipeline Company................. 669 678
-------------------
Income before income taxes......................................... 8,786 10,818
Benefit (provision) for income taxes(6)......................... - (395)
-------------------
Net income......................................................... $ 8,786 $10,423
-------------------
Basic and diluted net income per unit(4)........................... $ 0.50
-------------------
Cash distributions per unit........................................ $ 0.65
-------------------
OTHER FINANCIAL DATA:
Adjusted EBITDA.................................................... $14,238 $15,822
Distributions from Skelly-Belvieu Pipeline Company................. 639 771
Net cash provided by operating activities.......................... 907 14,037
Net cash used in investing activities.............................. (907) (65,798)
Net cash provided by financing activities.......................... - 51,654
Maintenance capital expenditures................................... 745 789
Expansion capital expenditures..................................... 162 1,009
Total capital expenditures................................... 907 1,798
OPERATING DATA (barrels/day):
Crude oil pipeline throughput...................................... 308,311 312,387
Refined product pipeline throughput................................ 317,464 262,872
Refined product terminal throughput................................ 167,814 175,816
-----------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------
MARCH 31,
-------------------
(IN THOUSANDS) 2001 2002
---------------------------------------------------------------------------------

BALANCE SHEET DATA:
Property, plant and equipment, net.......................... $277,761 $346,455
Total assets................................................ 336,192 385,025
Long-term debt, including current portion and debt due to
parent................................................... 118,360 90,076
Partners' equity............................................ 213,624 289,652
---------------------------------------------------------------------------------

S-12

(1) If the revised tariff rates and the terminalling fee had been implemented
effective January 1, 1997, revenues would have been as follows for the years
presented. The revised tariff rates and terminalling fee were in effect
throughout the years ended December 31, 2000 and 2001. The amounts in the table
below are unaudited.

--------------------------------------------------------------------------------------------
PREDECESSOR
------------------------------
YEARS ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS) 1997 1998 1999
--------------------------------------------------------------------------------------------

Revenues--historical........................................ $ 84,881 $ 97,883 $109,773
------------------------------
Decrease in tariff revenues.............................. (16,197) (17,067) (21,892)
Increase in terminalling revenues........................ 1,778 1,649 -
------------------------------
Net decrease.......................................... (14,419) (15,418) (21,892)
------------------------------
Revenues--as adjusted....................................... $ 70,462 $ 82,465 $ 87,881
--------------------------------------------------------------------------------------------

(2) In March 1998, the Ultramar Diamond Shamrock Logistics Business
(predecessor) recognized a gain on the sale of a 25% interest in the McKee to El
Paso refined product pipeline and the El Paso refined product terminal to
Phillips Petroleum Company. In August 1999, the Ultramar Diamond Shamrock
Logistics Business (predecessor) recognized a gain on the sale of an additional
8.33% interest in the McKee to El Paso refined product pipeline and terminal to
Phillips Petroleum Company.

(3) Effective July 1, 2000, Ultramar Diamond Shamrock transferred most of its
Mid-Continent pipeline, terminalling and storage assets and certain related
liabilities of the Ultramar Diamond Shamrock Logistics Business (predecessor) to
Valero Logistics (successor). As a limited partnership, Valero Logistics is not
subject to federal or state income taxes. Due to this change in tax status, the
deferred income tax liability of $38,217,000 as of June 30, 2000 was written off
in the statement of income of the Ultramar Diamond Shamrock Logistics Business
(predecessor) for the six months ended June 30, 2000. The resulting net benefit
for income taxes of $30,812,000 for the six months ended June 30, 2000, includes
the write-off of the deferred income tax liability less the provision for income
taxes of $7,405,000 for the six months ended June 30, 2000. The income tax
provisions for periods prior to July 1, 2000 were based upon the effective
income tax rate for the Ultramar Diamond Shamrock Logistics Business of 38%. The
effective income tax rate exceeds the U.S. federal statutory income tax rate due
to state income taxes.

(4) Net income applicable to the limited partners, after deduction of the
general partner's 2% allocation, for the period from April 16, 2001 to December
31, 2001, was $35,032,000 and net income applicable to the general partner was
$715,000. Net income per unit is computed by first allocating net income to each
class of unitholder, after deduction of the general partner's 2% interest. Basic
and diluted net income per unit is the same. Net income per unit for the periods
prior to April 16, 2001 is not shown as units had not been issued.

(5) The consolidated and combined statements of cash flows have been restated to
reclassify distributions received from Skelly-Belvieu Pipeline Company to
conform to the 2002 presentation. Distributions that relate to equity income
generated by the joint venture are reflected as cash flows from operating
activities while distributions in excess of equity income generated by the joint
venture are reflected as cash flows from investing activities.

(6) The Wichita Falls Business was included in Ultramar Diamond Shamrock's (now
Valero Energy's) consolidated federal and state income tax returns prior to its
acquisition by Valero L.P. on February 1, 2002. The income tax provision for the
three months ended March 31, 2002 represents income taxes incurred by the
Wichita Falls Business during the month ended January 31, 2002. The deferred
income tax liabilities of $13,147,000 as of December 31, 2001 related to the
Wichita Falls Business were credited to net parent investment upon the transfer
of the Wichita Falls Business to Valero L.P.
S-13

RISK FACTORS

You should read carefully the discussion of the material risks relating to our
business under the caption "Risk Factors" beginning on page 4 of the
accompanying prospectus and "Management's discussion and analysis of financial
condition and results of operations" beginning on page S-20 of this prospectus
supplement. In addition, please read carefully the following risks relating to
the notes:

WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.

If Valero Energy or an investment grade entity owns less than 51% of the general
partner of Valero L.P. or if Valero L.P. or an investment grade entity owns less
than all of our general partner or less than all of the limited partner interest
in us, a change of control will occur under the indenture and we must offer to
repurchase the notes. We may not have sufficient funds at the time of the change
of control to make the required repurchases of the notes. Additionally, it is a
change of control under our credit facility if Valero Energy ceases to own 100%
of Valero L.P.'s general partner or at least 20% of the outstanding limited
partner interests of Valero L.P. or a third party owns a greater aggregate
limited partner interest in Valero L.P. than Valero Energy and its affiliates.
Any of these change of control events would cause an event of default under our
revolving credit facility that would, should it occur, permit the lenders to
accelerate the debt outstanding under our revolving credit facility, which in
turn would cause an event of default under the indenture.

YOUR ABILITY TO TRANSFER THE NOTES AT A TIME OR PRICE YOU DESIRE MAY BE LIMITED
BY THE ABSENCE OF AN ACTIVE TRADING MARKET, WHICH MAY NOT DEVELOP.

The notes are a new issue of securities for which there is no established public
market. Although we have registered the notes under the Securities Act of 1933,
we do not intend to apply for listing of the notes on any securities exchange or
for quotation of the notes in any automated dealer quotation system. In
addition, although the underwriters have informed us that they intend to make a
market in the notes, as permitted by applicable laws and regulations, they are
not obliged to make a market in the notes, and they may discontinue their
market-making activities at any time without notice. An active market for the
notes may not develop or, if developed, may not continue. In the absence of an
active trading market, you may not be able to transfer the notes within the time
or at the price you desire.

S-14

RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for each of the periods indicated is as
follows:

--------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------- THREE MONTHS ENDED
1997 1998 1999 2000 2001 MARCH 31, 2002
--------------------------------------------------------------------------------------------

Ratio of earnings to fixed charges... 44.1x 59.5x 70.8x 8.7x 11.8x 17.6x
--------------------------------------------------------------------------------------------

For purposes of calculating the ratio of earnings to fixed charges:

- "fixed charges" represent interest expense (including amounts
capitalized and amortization of debt costs) and the portion of rental
expense representing the interest factor; and

- "earnings" represent the aggregate of pre-tax income from continuing
operations (before adjustment from equity investees), fixed charges,
amortization of capitalized interest and distributions from equity
investees, less capitalized interest.

USE OF PROCEEDS

We intend to use the approximately $98.5 million of net proceeds from this
offering (after the payment of offering expenses) to:

- repay the $91 million outstanding principal balance under our revolving
credit facility; and

- provide cash for general operating purposes.

The indebtedness under our revolving credit facility was incurred as follows:

- On April 16, 2001, we borrowed $20.5 million in connection with Valero
L.P.'s initial public offering. As of December 31, 2001, we reduced the
outstanding balance of borrowings under our revolving credit facility to
$16 million;

- On February 1, 2002, we borrowed $64 million to fund the acquisition of
the Wichita Falls Business; and

- On May 29, 2002, we borrowed $11 million to fund the acquisition of a
25-mile crude hydrogen pipeline.

As of March 31, 2002, the outstanding balance of borrowings under the revolving
credit facility was $80 million. Currently, the outstanding balance of
borrowings under the revolving credit facility is $91 million and the weighted
interest rate under the credit facility is 2.54%. The revolving credit facility
is currently scheduled to mature on January 15, 2006. Some of the underwriters
in this offering are affiliates of the lenders under the credit facility. A
portion of the proceeds of the offering will be used to repay these affiliates.

S-15

CAPITALIZATION

The following table shows:

- Valero L.P.'s historical capitalization as of March 31, 2002; and

- Valero L.P.'s pro forma capitalization as of March 31, 2002, adjusted to
reflect our offering of the notes and the application of the net proceeds
we receive in the offering in the manner described under "Use of
proceeds."

This table should be read together with the consolidated and combined financial
statements and the accompanying notes included elsewhere in this prospectus
supplement.

------------------------------------------------------------------------------------
AS OF MARCH 31, 2002
----------------------
AS
(IN THOUSANDS) ACTUAL ADJUSTED
------------------------------------------------------------------------------------

Bank revolving credit facility.............................. $ 80,000 $ -
Long-term debt, including current portion................... 10,076 10,076
6 7/8% Senior Notes due 2012................................ - 100,000
----------------------
Total debt.................................................. 90,076 110,076
----------------------
Equity:
Common units.......................................... 168,433 168,433
Subordinated units.................................... 115,429 115,429
General partner's equity.............................. 5,790 5,790
----------------------
Total equity.......................................... 289,652 289,652
----------------------
Total capitalization.................................. $379,728 $ 399,728
------------------------------------------------------------------------------------

S-16

DESCRIPTION OF REVOLVING CREDIT FACILITY

On December 15, 2000, we entered into a $120 million revolving credit facility
with JPMorgan Chase and other lenders. The term of the credit facility is
currently scheduled to expire on January 15, 2006.

In connection with the initial public offering of Valero L.P. on April 16, 2001,
we borrowed $20.5 million under the revolving credit facility. Currently, the
outstanding principal balance of borrowings under the revolving credit facility
is $91 million. Borrowings under the revolving credit facility may be used for
working capital and general partnership purposes, but borrowings in excess of
the $25 million sublimit may not be used to fund distributions to unitholders.
The obligations under the revolving credit facility are unsecured. The
indebtedness under the revolving credit facility ranks equally with all of our
outstanding unsecured and unsubordinated debt.

All loans under the revolving credit facility may be prepaid at any time without
penalty. All borrowings designated as borrowings subject to the $25 million
sublimit must be reduced to zero for a period of at least 15 consecutive days
during each fiscal year.

The revolving credit facility also allows us to issue letters of credit for an
aggregate amount of $25 million which may be used for general business purposes
in the ordinary course of business or any other purpose approved by JPMorgan
Chase.

Indebtedness under the revolving credit facility bears interest at our option of
either the alternative base rate or LIBOR (preadjusted for reserves), as those
terms are defined in the revolving credit facility, plus, in the case of loans
bearing interest at LIBOR, an applicable margin. We incur a facility fee on the
aggregate commitments of the lenders under the revolving credit facility,
whether used or unused.

The revolving credit facility contains a prohibition on distributions by us to
Valero L.P. if any default, as described below, is continuing or would result
from the distribution.

In addition, the revolving credit facility contains various covenants limiting
our ability to:

- incur indebtedness;

- grant liens;

- engage in transactions with affiliates;

- make investments, loans and acquisitions;

- enter into a merger, consolidation or sale of assets or liquidate;

- engage to a material extent in another type of business;

- enter into interest or currency exchange rate or commodity price hedging
agreements, except in the ordinary course of business;

- incur restrictions affecting the ability to grant liens;

- create or acquire any subsidiary that does not guarantee the obligations
under the revolving credit facility; or

S-17

- incur restrictions affecting our subsidiaries' ability to make dividends
or distributions or to make or repay loans or advances to, or guarantee
indebtedness of, us or any other subsidiary.

In addition, the revolving credit facility contains the following financial
covenants:

- the ratio of Consolidated EBITDA (as defined in the revolving credit
facility), pro forma for any dispositions or acquisitions of assets, to
Consolidated Interest Expense (as defined in the revolving credit
facility) must be at least 3.5 to 1.0 for any period of four consecutive
fiscal quarters; and

- the ratio of consolidated indebtedness to Consolidated EBITDA, pro forma
for any dispositions or acquisitions of assets, may not exceed 3.0 to 1.0
for any period of four consecutive fiscal quarters.

If an event of default exists under the revolving credit facility, the lenders
may accelerate the maturity of the revolving credit facility and exercise other
rights and remedies.

EVENTS OF DEFAULT

Each of the following is an event of default:

- failure to pay any principal when due, or any interest or other amount
within five business days of the date when due;

- failure of any representation or warranty to be true and correct;

- failure to perform or otherwise comply with the covenants in the
revolving credit facility;

- default by us or any of our subsidiaries on the payment of any
indebtedness in excess of $10 million, or any default in the performance
of any obligation or condition with respect to indebtedness in excess of
$10 million if the effect of the default is to accelerate the indebtedness
or to permit the holder of the indebtedness to accelerate its maturity;

- bankruptcy or insolvency events involving us or our subsidiaries;

- one or more satisfied judgments in excess of $10 million in the
aggregate that is not covered by insurance is rendered against us and/or
our subsidiaries;

- various events occur in connection with employee benefit plans involving
expected liability in excess of $10 million;

- our incurrence or any of our subsidiaries' incurrence of environmental
liabilities requiring payment in excess of $5 million in any four
consecutive fiscal quarters;

- the incurrence of indebtedness by Valero L.P.;

- if Valero L.P.

- engages in any business or operation other than those incidental to
its ownership of the limited partner interests in us;

S-18

- incurs or permits to exist any liabilities or other obligations
other than nonconsensual obligations imposed by law, obligations with
respect to the units of Valero L.P. and guarantees with respect to
indebtedness permitted by law or under the credit agreement; and

- owns, leases or operates any assets (including cash or cash
equivalents) other than the limited partner interest in us, ownership
interests (not to exceed 1%) in our subsidiaries and cash received as
distributions from us in accordance with the revolving credit
facility;

- the occurrence of a change of control, which is defined to include any
of the following events:

- Valero Energy ceases to own, directly or indirectly, 100% of the
general partner of Valero L.P. or at least 20% of the outstanding
units of Valero L.P.;

- our general partner ceases to be 100%-owned, directly or
indirectly, by either Valero L.P. or Valero Energy;

- any person or group of persons other than Valero Energy and its
wholly owned subsidiaries becomes the owner, directly or indirectly,
of a greater percentage of the units than those owned, directly or
indirectly, by Valero Energy; or

- 100% of the limited partnership interests in us cease to be owned,
directly or indirectly, by Valero L.P. or Valero Energy; and

- the sale by Valero Energy of a material portion of the McKee, Three
Rivers and Ardmore refineries, on an aggregate basis unless the long-term
indebtedness of the purchaser has an investment grade rating and the
purchaser assumes the rights and obligations of Valero Energy and its
affiliates under the pipelines and terminals usage agreement with respect
to the purchased refineries.

S-19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

CURRENT ORGANIZATION

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 and Three Rivers refineries
located in Texas and its Ardmore refinery located in Oklahoma.

Valero Energy is one of the largest independent refining and marketing companies
in the United States. Subsequent to the acquisition of Ultramar Diamond Shamrock
by Valero Energy, Valero Energy owns and operates a total of 12 refineries in
Texas (5), California (2), Louisiana, Oklahoma, Colorado, New Jersey and Quebec,
Canada, with a combined throughput capacity of approximately 1,900,000 barrels
per day. Valero Energy produces premium, environmentally clean products such as
reformulated gasoline, low-sulfur diesel 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. Valero Energy markets its refined products through a network of
approximately 4,600 retail outlets, as well as through other wholesale and spot
market sales and exchange agreements. In the northeast United States and in
eastern Canada, Valero Energy sells, 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. 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.

RESTRUCTURING OF VALERO LOGISTICS OWNERSHIP INTERESTS

On May 30, 2002, Valero L.P. formed a wholly owned Delaware corporation, Valero
GP, Inc. Valero L.P. contributed a 0.01% limited partner interest in Valero
Logistics to Valero GP, Inc. as a capital contribution. Valero Logistics'
partnership agreement was then amended to convert Valero GP, Inc.'s limited
partner interest in Valero Logistics into a general partner interest and to
convert the existing 1.0101% general partner interest in Valero Logistics (held
by Riverwalk Logistics) into a limited partner interest. Riverwalk Logistics
then contributed its 1.0101% limited partner interest in Valero Logistics to
Valero L.P. in exchange for an additional 1.0% general partner interest in
Valero L.P.

S-20

The resulting structure is as follows:

- Riverwalk Logistics serves as the general partner of Valero L.P. with a
2% general partner interest.

- Valero GP, Inc. serves as the general partner of Valero Logistics with a
0.01% general partner interest.

- Valero L.P. is the limited partner of Valero Logistics 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.

REORGANIZATION RELATED TO THE WICHITA FALLS BUSINESS

Because the Wichita Falls Business was an affiliate of ours at the time of its
acquisition, the acquisition was 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 Ultramar Diamond Shamrock on December
31, 2001. In addition, the consolidated financial information as of December 31,
2001 and for the one month ended January 31, 2002 has been restated to include
the Wichita Falls Business as if it had been combined with us effective December
31, 2001.

ACQUISITION OF ULTRAMAR DIAMOND SHAMROCK BY VALERO ENERGY

On May 7, 2001, Ultramar Diamond Shamrock announced that it had entered into an
Agreement and Plan of Merger (the acquisition agreement) with Valero Energy
whereby Ultramar Diamond Shamrock 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 Ultramar Diamond Shamrock and Valero
Energy approved the acquisition and, on December 31, 2001, Valero Energy
completed its purchase acquisition of Ultramar Diamond Shamrock. Under the
acquisition agreement, Ultramar Diamond Shamrock shareholders received, for each
share of Ultramar Diamond Shamrock 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

S-21

common stock valued at $35.78 per share (based on the average closing price of
Valero Energy common stock over a ten trading-day period ending three days prior
to December 31, 2001).

Ultramar Diamond Shamrock 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. Ultramar Diamond
Shamrock 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, Ultramar Diamond Shamrock
sold, on a retail basis, home heating oil to approximately 250,000 households.

Shamrock Logistics, L.P. (Shamrock Logistics) and Shamrock Logistics Operations,
L.P. (Shamrock Logistics Operations) were both subsidiaries of Ultramar Diamond
Shamrock. On December 31, 2001, upon Valero Energy's acquisition of Ultramar
Diamond Shamrock, Valero Energy assumed ownership of 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, L.P.

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. Upon completion of the acquisition, Valero Energy became the ultimate
parent of Riverwalk Logistics, Valero L.P.'s general partner. In addition,
Valero Energy became the obligor under the various agreements Ultramar Diamond
Shamrock had with us, 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 and
operations discussed in this section were referred to as the Ultramar Diamond
Shamrock Logistics Business as if it had existed as a single separate entity
from Ultramar Diamond Shamrock. Ultramar Diamond Shamrock formed Valero
Logistics to assume ownership of and to operate the assets of the Ultramar
Diamond Shamrock Logistics Business. Effective July 1, 2000, Ultramar Diamond
Shamrock transferred the crude oil and refined product pipelines, terminalling
and storage assets and certain liabilities of the Ultramar Diamond Shamrock
Logistics Business (predecessor) to Valero Logistics (successor). The transfer
of assets and certain liabilities to Valero Logistics represented a
reorganization of entities under common control and was recorded at historical
cost.

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 held by various
subsidiaries of Valero Energy 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.

S-22

The following discussion is based on the operating results of the consolidated
and combined financial statements of Valero L.P., Valero Logistics, the Wichita
Falls Business and the Ultramar Diamond Shamrock Logistics Business as follows:

- consolidated financial statements of Valero L.P. and Valero Logistics as
of March 31, 2002 and for the two months ended March 31, 2002;

- consolidated and combined financial statements of Valero L.P., Valero
Logistics (successor) and the Wichita Falls Business as of December 31,
2001 and for the one month ended January 31, 2002;

- consolidated financial statements of Valero L.P. and Valero Logistics
(successor) for the period from April 16, 2001 to December 31, 2001;

- combined financial statements of Valero L.P. and Valero Logistics
(successor) as of December 31, 2000 and for the period from July 1, 2000
to December 31, 2000 and the period from January 1, 2001 to April 15,
2001; and

- combined financial statements of Valero L.P., Valero Logistics and the
Ultramar Diamond Shamrock Logistics Business (predecessor) for the year
ended December 31, 1999 and for the six months ended June 30, 2000.

This consolidated and combined financial statement presentation more clearly
reflects our financial position and results of operations as a result of the
recent reorganizations of entities under common control.

SEASONALITY

The operating results of Valero L.P. are affected by factors affecting the
business of Valero Energy, including refinery utilization rates, crude oil
prices, the demand for and prices of refined products and industry refining
capacity.

The throughput of crude oil we transport is directly affected by the level of,
and refiner demand for, crude oil in markets served directly by our crude oil
pipelines. Crude oil inventories tend to increase due to overproduction of crude
oil by producing companies and countries and planned maintenance turnaround
activity by refiners. As crude oil inventories increase, the market price for
crude oil declines, along with the market prices for refined products. To bring
crude oil inventories back in line with demand, refiners reduce production
levels.

The throughput of the refined products we transport is directly affected by the
level of, and user demand for, refined products in the markets served directly
or indirectly by our refined product pipelines. Demand for gasoline in most
markets peaks during the summer driving season, which extends from May to
September, and declines during the fall and winter months. Demand for gasoline
in the Arizona market, however, generally is higher in the winter months than
summer months due to greater tourist activity and second home usage in the
winter months. Historically, we have not experienced significant fluctuations in
throughput due to the stable demand for refined products and the growing
population base in the southwestern and Rocky Mountain regions of the United
States.

S-23

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

FINANCIAL DATA

---------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------
(IN THOUSANDS) 2001 2002
---------------------------------------------------------------------------------

STATEMENT OF INCOME DATA:
Revenues.................................................... $23,422 $26,024
------------------
Costs and expenses:
Operating expenses....................................... 8,651 9,184
General and administrative expenses...................... 1,172 1,789
Depreciation and amortization............................ 3,238 4,355
------------------
Total costs and expenses.............................. 13,061 15,328
------------------
Operating income............................................ 10,361 10,696
Interest expense, net.................................... (2,244) (556)
Equity income from Skelly-Belvieu Pipeline Company....... 669 678
------------------
Income before income taxes.................................. 8,786 10,818
Provision for income taxes............................... - (395)
------------------
Net income.................................................. $ 8,786 $10,423
---------------------------------------------------------------------------------

-----------------------------------------------------------------------------------
MARCH 31,
--------------------
(IN THOUSANDS) 2001 2002
-----------------------------------------------------------------------------------

S-24

OPERATING DATA

The following table reflects throughput barrels for our crude oil and refined
product pipelines and the total throughput for all of the refined product
terminals for the three months ended March 31, 2001 and 2002.

-------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------
(IN THOUSANDS OF BARRELS) 2001 2002 % CHANGE
-------------------------------------------------------------------------------------------

Crude oil pipeline throughput:
Dixon to McKee.......................................... 5,459 4,179 (23)%
Wichita Falls to McKee.................................. - 5,441 -
Wasson to Ardmore....................................... 7,393 5,699 (23)%
Ringgold to Wasson...................................... 2,911 1,949 (33)%
Corpus Christi to Three Rivers.......................... 7,973 5,558 (30)%
Other crude oil pipelines............................... 4,012 5,289 32%
-------------------
Total crude oil pipelines............................ 27,748 28,115 1%
-------------------
Refined product pipeline throughput:
McKee to Colorado Springs to Denver..................... 2,261 1,630 (28)%
McKee to El Paso........................................ 5,758 5,616 (2)%
McKee to Amarillo to Abernathy.......................... 3,846 3,172 (18)%
Amarillo to Albuquerque................................. 1,176 965 (18)%
McKee to Denver......................................... 1,081 1,025 (5)%
Ardmore to Wynnewood.................................... 5,487 3,813 (31)%
Three Rivers to Laredo.................................. 1,085 1,098 1%
Three Rivers to San Antonio............................. 2,455 2,258 (8)%
Other refined product pipelines......................... 5,423 4,081 (25)%
-------------------
Total refined product pipelines...................... 28,572 23,658 (17)%
-------------------
Refined product terminal throughput........................ 15,103 15,823 5%
--------------------------------------------------------------------------------

Net income for the quarter ended March 31, 2002 was $10,423,000 as compared to
$8,786,000 for the quarter ended March 31, 2001. The increase of $1,637,000 is
primarily attributable to the additional net income generated from the three
acquisitions completed since July of 2001 (the Southlake refined product
terminal, the Ringgold crude oil storage facility and the Wichita Falls
Business) and lower interest expense in the first quarter of 2002 as a result of
repaying the $107,676,000 of debt due to parent in April of 2001. The increase
was partially offset by the impact of lower throughput barrels resulting from
economic-based refinery production cuts at the three Valero Energy refineries
served by our pipelines and terminals. Net income in the first quarter of 2002
includes $650,000 of net income related to the Wichita Falls Business for the
month ended January 31, 2002, which was allocated entirely to Valero Energy, the
Business' parent.

Revenues for the quarter ended March 31, 2002 were $26,024,000 as compared to
$23,422,000 for the quarter ended March 31, 2001, an increase of 11%, or
$2,602,000. This increase is due primarily to the addition of the Wichita Falls
crude oil pipeline revenues in the first quarter of

S-25

2002, partially offset by decreases in revenues on most of our other pipelines
during the quarter. The following discusses significant revenue increases and
decreases by pipeline:

- revenues in the first quarter of 2002 include $4,733,000 of revenues
related to the Wichita Falls Business, including $1,740,000 of revenues
(2,000,000 barrels of throughput) related to the month ended January 31,
2002 as a result of the common control transfer between Valero Energy and
Valero L.P.;

- revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil
pipelines and the Ardmore to Wynnewood refined product pipeline decreased
$559,000 due to a combined 27% decrease in throughput barrels, resulting
from reduced production at the Ardmore refinery. During January and
February of 2002, Valero Energy initiated economic-based refinery
production cuts as a result of significantly lower refining margins
industry-wide;

- revenues for the Corpus Christi to Three Rivers crude oil pipeline
decreased $696,000 due to a 30% decrease in throughput barrels, as a
result of reduced production at the Three Rivers refinery. During January
and February of 2002, Valero Energy also initiated economic-based refinery
production cuts at the Three Rivers refinery. In addition, during the
first quarter of 2002, Valero Energy accelerated certain refinery
maintenance turnaround work scheduled for later in 2002 resulting in the
partial shutdown of the refinery and reduced throughput barrels in our
pipelines;

- revenues for the McKee to Colorado Springs to Denver and the McKee to
Amarillo to Abernathy refined product pipelines decreased $1,051,000 due
to a combined 21% decrease in throughput barrels, resulting from reduced
production at the McKee refinery. During the first quarter of 2002, Valero
Energy began several planned refinery maintenance turnaround projects at
the McKee refinery which significantly reduced production and thus reduced
throughput barrels in our pipelines;

- revenues for the Three Rivers to Corpus Christi and the Three Rivers to
Pettus refined product pipelines decreased $354,000 due to a combined 67%
decrease in throughput barrels, as a result of reduced production at the
Three Rivers refinery. During the refinery turnaround and economic-induced
production cutbacks, the Three Rivers refinery curtailed production of
benzene, toluene and xylene, the primary refined products transported in
the refined product pipelines going to Corpus Christi from Three Rivers;
and

- revenues for the refined product terminals for the first quarter of
2002, excluding the impact of the Southlake terminal, remained flat with
the revenues recognized in the first quarter of 2001 since the additional
fee charged at the terminal for blending additives into certain refined
products offset the impact of the lower throughput barrels. Revenues for
the Southlake refined product terminal, which was acquired on July 1,
2001, were $613,000 and the throughput was 2,107,000 barrels for the
quarter ended March 31, 2002.

Operating expenses increased $533,000, or 6%, for the quarter ended March 31,
2002 as compared to the quarter ended March 31, 2001 due to $1,283,000 of
operating expenses related to the Southlake refined product terminal, the
Ringgold crude oil storage facility and the Wichita Falls Business, partially
offset by lower utility expenses of $645,000, or 22%, due to lower natural gas
costs and lower electricity rates negotiated with power suppliers.

S-26

General and administrative expenses increased 53% for the first quarter of 2002
as compared to the first quarter of 2001 due to general and administrative costs
related to Valero L.P. being a publicly held entity. In addition to the
$5,200,000 annual fee charged by Valero Energy for general and administrative
services, Valero L.P. incurs costs from third parties (e.g., unitholder annual
reports and K-1s and director fees) as a result of being a publicly held entity.
For the three months ended March 31, 2001, general and administrative expenses
of $1,172,000 reflect $1,300,000 of the annual service fee, less $128,000
reimbursed by partners on jointly owned pipelines. For the three months ended
March 31, 2002, general and administrative expenses of $1,789,000 reflect
$1,300,000 of the annual service fee, $40,000 of general and administrative
expenses related to the Wichita Falls Business for January 2002, $605,000 of
public entity expenses, less $156,000 reimbursed by partners on jointly owned
pipelines.

Depreciation and amortization expense increased $1,117,000 for the quarter ended
March 31, 2002 as compared to the quarter ended March 31, 2001 due to the
additional depreciation related to the acquisition of the Southlake refined
product terminal, the Ringgold crude oil storage facility and the Wichita Falls
Business, all subsequent to the first quarter of 2001. Included in the first
quarter of 2002 is $160,000 of depreciation expense related to the Wichita Falls
Business for the month ended January 31, 2002.

Equity income from Skelly-Belvieu Pipeline Company represents our 50% interest
in the net income of Skelly-Belvieu Pipeline Company, which operates the
Skellytown to Mont Belvieu refined product pipeline. Equity income from
Skelly-Belvieu Pipeline Company for the quarter ended March 31, 2002
approximated the amount of equity income recognized in the first quarter of 2001
as throughput volumes did not change significantly. Distributions from the
Skelly-Belvieu Pipeline Company totaled $639,000 for the first quarter of 2001
as compared to $771,000 in the first quarter of 2002.

Interest expense for the quarter ended March 31, 2002 was $556,000, net of
interest income of $19,000, as compared to $2,244,000 of interest expense for
the same period in 2001. Interest expense decreased due to the payoff of the
debt due to parent in April 2001 with proceeds from Valero L.P.'s initial public
offering. During the first quarter of 2002, we incurred $447,000 of interest
expense related to borrowings under the revolving credit facility and $128,000
of interest expense related to the Port of Corpus Christi note payable. The
acquisition of the Wichita Falls Business from Valero Energy on February 1, 2002
was funded with $64,000,000 of borrowings under the revolving credit facility.

Income tax expense for the first quarter of 2002 represents income taxes
incurred by the Wichita Falls Business for the month ended January 31, 2002,
prior to the transfer of the Business to us.

S-27

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 2001

The results of operations for the year ended December 31, 2000 presented in the
following table are derived from the statement of income of the Ultramar Diamond
Shamrock Logistics Business for the six months ended June 30, 2000 and the
combined statement of income of Valero L.P. and Valero Logistics for the six
months ended December 31, 2000, which in this discussion are combined and
referred to as the year ended December 31, 2000. The results of operations for
the year ended December 31, 2001 presented in the following table are derived
from the consolidated statement of income for Valero L.P. and Valero Logistics
for the period from April 16, 2001 to December 31, 2001 and the combined
statement of income for Valero L.P. and Valero Logistics for the period from
January 1, 2001 to April 15, 2001, which in this discussion are combined and
referred to as the year ended December 31, 2001.

FINANCIAL DATA

-------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
-----------------
(IN THOUSANDS) 2000 2001
-------------------------------------------------------------------------------

STATEMENT OF INCOME DATA:
Revenues.................................................... $92,053 $98,827
-----------------
Costs and expenses:
Operating expenses....................................... 33,505 33,583
General and administrative expenses...................... 5,139 5,349
Depreciation and amortization............................ 12,260 13,390
-----------------
Total costs and expenses.............................. 50,904 52,322
-----------------
Operating income............................................ 41,149 46,505
Interest expense, net.................................... (5,181) (3,811)
Equity income from Skelly-Belvieu Pipeline Company....... 3,877 3,179
-----------------
Income before income taxes.................................. $39,845 $45,873
-------------------------------------------------------------------------------

S-28

OPERATING DATA

The following table reflects throughput barrels for our crude oil and refined
product pipelines and the total throughput for all of our refined product
terminals for the years ended December 31, 2000 and 2001. The throughput barrels
for the year ended December 31, 2000 combine the barrels transported by the
Ultramar Diamond Shamrock Logistics Business for the six months ended June 30,
2000 with the barrels transported by Valero Logistics for the six months ended
December 31, 2000.

------------------------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
-----------------
(IN THOUSANDS) 2000 2001 % CHANGE
------------------------------------------------------------------------------------------

Crude oil pipeline throughput:
Dixon to McKee........................................... 22,736 20,403 (10)%
Wasson to Ardmore........................................ 28,003 29,612 6%
Ringgold to Wasson....................................... 10,724 13,788 29%
Corpus Christi to Three Rivers........................... 31,271 28,689 (8)%
Other crude oil pipelines................................ 15,157 18,399 21%
-----------------
Total crude oil pipelines............................. 107,891 110,891 3%
-----------------
Refined product pipeline throughput:
McKee to Colorado Springs to Denver...................... 8,982 8,838 (2)%
McKee to El Paso......................................... 22,277 24,285 9%
McKee to Amarillo to Abernathy........................... 13,219 13,747 4%
Amarillo to Albuquerque.................................. 4,714 4,613 (2)%
McKee to Denver.......................................... 4,307 4,370 1%
Ardmore to Wynnewood..................................... 20,705 20,835 1%
Three Rivers to Laredo................................... 5,886 4,479 (24)%
Three Rivers to San Antonio.............................. 9,761 10,175 4%
Other refined product pipelines.......................... 23,537 21,095 (10)%
-----------------
Total refined product pipelines....................... 113,388 112,437 (1)%
-----------------
Refined product terminal throughput......................... 60,629 64,522 6%
------------------------------------------------------------------------------------------

Revenues for the year ended December 31, 2001 were $98,827,000 as compared to
$92,053,000 for the year ended December 31, 2000, an increase of 7% or
$6,774,000. This increase in revenues is due primarily to the following items:

- revenues for the Ringgold to Wasson and the Wasson to Ardmore crude oil
pipelines increased $1,400,000 due to a combined 12% increase in
throughput barrels, resulting from Ultramar Diamond Shamrock purchasing
greater quantities of crude oil from third parties near Ringgold instead
of gathering crude oil barrels near Wasson. In March 2001, Ultramar
Diamond Shamrock sold its Oklahoma crude oil gathering operation which was
located near Wasson;

- revenues for the Corpus Christi to Three Rivers crude oil pipeline
increased $1,390,000 despite the 8% decrease in throughput barrels for the
year ended December 31, 2001 as compared to 2000. The Corpus Christi to
Three Rivers crude oil pipeline was temporarily converted into a refined
product pipeline during the third quarter of 2001 due to the alkylation
unit shutdown at Ultramar Diamond Shamrock's Three Rivers refinery. The
increase in revenues is primarily due to the increased tariff rate charged
to transport

S-29

refined products during the third quarter of 2001. In addition, effective
May 2001, the crude oil tariff rate was increased to cover the additional
costs (dockage and wharfage fees) associated with operating a marine crude
oil storage facility in Corpus Christi;

- revenues for the McKee to El Paso refined product pipeline increased
$1,187,000 primarily due to a 9% increase in throughput barrels resulting
from an increase in Ultramar Diamond Shamrock's sales into the Arizona
market. The McKee to El Paso refined product pipeline connects with a
third party pipeline which runs to Arizona;

- revenues for the Three Rivers to Laredo refined product pipeline
decreased by $464,000 due to a 24% decrease in throughput barrels
partially offset by an increase in the tariff rate effective July 1, 2001.
The Laredo refined product terminal revenues also decreased by $290,000
due to the 24% decrease in throughput barrels. The lower throughput
barrels are a result of Pemex's expansion of its Monterrey, Mexico
refinery that increased the supply of refined products to Nuevo Laredo,
Mexico, which is across the border from Laredo, Texas;

- revenues for the Southlake refined product terminal, acquired on July 1,
2001, increased by $1,341,000 and throughput barrels increased by
4,601,000 for the year ended December 31, 2001; and

- revenues for all refined product terminals, excluding the Southlake and
Laredo refined product terminals, increased $1,343,000 primarily due to an
increase in the terminalling fee charged at our marine-based refined
product terminals to cover the additional costs (dockage and wharfage
fees) associated with operating a marine refined product terminal and the
additional fee of $0.042 per barrel charged for blending additives into
certain refined products.

Operating expenses increased $78,000 for the year ended December 31, 2001 as
compared to the year ended December 31, 2000 primarily due to the following
items:

- during the year ended December 31, 2000, we recognized a loss of
$916,000 due to the impact of volumetric expansions, contractions and
measurement discrepancies in our pipelines related to the first six months
of 2000. Beginning July 1, 2000, the impact of volumetric expansions,
contractions and measurement discrepancies in the pipelines is borne by
the shippers and is therefore no longer reflected in operating expenses;

- utility expenses increased by $1,538,000, or 17%, due to higher
electricity rates during the year ended December 31, 2001 as compared to
the year ended December 31, 2000 resulting from higher natural gas costs;

- the acquisition of the Southlake refined product terminal increased
operating expenses by $308,000;

- employee related expenses increased due to higher accruals for incentive
compensation; and

- other operating expenses decreased due to lower rental expenses for
fleet vehicles, satellite communications and safety equipment as a result
of more favorable leasing arrangements.

General and administrative expenses increased 4% for the year ended December 31,
2001 as compared to 2000 due to increased general and administrative costs
related to being a publicly held entity. Prior to July 1, 2000, Ultramar Diamond
Shamrock allocated approximately 5% of its general and administrative expenses
incurred in the United States to its pipeline,

S-30

terminalling and storage operations to cover costs of centralized corporate
functions such as legal, accounting, treasury, engineering, information
technology and other corporate services. Effective July 1, 2000, Ultramar
Diamond Shamrock entered into a Services Agreement with us to provide the
general and administrative services noted above for an annual fee of $5,200,000,
payable monthly. This annual fee is in addition to the incremental general and
administrative costs incurred from third parties as a result of Valero L.P.
being a publicly held entity. General and administrative expenses were as
follows:

-----------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
---------------
(IN THOUSANDS) 2000 2001
-----------------------------------------------------------------------------

Services Agreement.......................................... $2,600 $5,200
Allocation of Ultramar Diamond Shamrock general and
administrative expenses for first six months of 2000..... 2,839 -
Third party expenses........................................ 200 730
Reimbursement from partners on jointly owned pipelines...... (500) (581)
---------------
$5,139 $5,349
-----------------------------------------------------------------------------

Depreciation and amortization expense increased $1,130,000 for the year ended
December 31, 2001 as compared to the year ended December 31, 2000 due to the
additional depreciation related to the Southlake refined product terminal and
the Ringgold crude oil storage facility acquired during 2001 and additional
depreciation related to the recently completed capital projects.

Interest expense for the year ended December 31, 2001 was $3,811,000 as compared
to $5,181,000 for 2000. During the period from January 1, 2001 to April 15,
2001, we incurred $2,513,000 of interest expense related to the $107,676,000 of
debt due to parent that we assumed on July 1, 2000 and paid off on April 16,
2001. In addition, beginning April 16, 2001, Valero Logistics borrowed
$20,506,000 under the revolving credit facility resulting in $738,000 of
interest expense for the eight and a half months ended December 31, 2001.
Interest expense prior to July 1, 2000 relates only to the debt due to the Port
of Corpus Christi Authority of Nueces County, Texas. Interest expense from July
1, 2000 through April 15, 2001 relates to the debt due to parent and the debt
due to the Port of Corpus Christi Authority. Interest expense subsequent to
April 16, 2001 relates to the borrowings under the revolving credit facility and
the debt due to the Port of Corpus Christi Authority.

Equity income from Skelly-Belvieu Pipeline Company for the year ended December
31, 2001 decreased $698,000, or 18%, as compared to 2000 due primarily to a 13%
decrease in throughput barrels in the Skellytown to Mont Belvieu refined product
pipeline. The decreased throughput in 2001 is due to both Ultramar Diamond
Shamrock and Phillips Petroleum Company utilizing greater quantities of natural
gas to run their refining operations instead of selling the natural gas to third
parties in Mont Belvieu.

S-31

The resulting net benefit for income taxes of $30,812,000 for the six months
ended June 30, 2000, includes the write-off of the deferred income tax liability
less the provision for income taxes of $7,405,000 for the six months ended June
30, 2000. The income tax provision for the six months ended June 30, 2000 was
based upon the effective income tax rate for the Ultramar Diamond Shamrock
Logistics Business of 38%. The effective income tax rate exceeds the U.S.
federal statutory income tax rate due to state income taxes.

Income before income taxes for the year ended December 31, 2001 was $45,873,000
as compared to $39,845,000 for the year ended December 31, 2000. The increase of
$6,028,000 is primarily due to the increase in revenues resulting from higher
tariff rates and higher throughput barrels in our pipelines and terminals for
2001 as compared to 2000.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000

The results of operations for the year ended December 31, 1999 presented in the
following table are derived from the statement of income for the Ultramar
Diamond Shamrock Logistics Business for the year ended December 31, 1999. The
results of operations for the year ended December 31, 2000 presented in the
following table are derived from the statement of income of the Ultramar Diamond
Shamrock Logistics Business (predecessor) for the six months ended June 30, 2000
and the combined statement of income of Valero L.P. and Valero Logistics
(successor) for the six months ended December 31, 2000, which in this discussion
are combined and referred to as the year ended December 31, 2000.

FINANCIAL DATA

-----------------------------------------------------------------------------------------
PREDECESSOR
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1999 2000
-----------------------------------------------------------------------------------------

STATEMENT OF INCOME DATA:
Revenues.................................................... $109,773 $92,053
---------------------------
Costs and expenses:
Operating expenses....................................... 29,013 33,505
General and administrative expenses...................... 4,698 5,139
Depreciation and amortization............................ 12,318 12,260
---------------------------
Total costs and expenses.............................. 46,029 50,904
Gain on sale of property, plant and equipment............... 2,478 --
---------------------------
Operating income............................................ 66,222 41,149
Interest expense, net.................................... (777) (5,181)
Equity income from Skelly-Belvieu Pipeline Company....... 3,874 3,877
---------------------------
Income before income taxes.................................. $69,319 $39,845
-----------------------------------------------------------------------------------------

S-32

OPERATING DATA

The following table reflects throughput barrels for our crude oil and refined
product pipelines and the total throughput for all of our refined product
terminals for the years ended December 31, 1999 and 2000. The throughput barrels
for the year ended December 31, 2000 combine the barrels transported by the
Ultramar Diamond Shamrock Logistics Business (predecessor) for the six months
ended June 30, 2000 with the barrels transported by Valero Logistics for the six
months ended December 31, 2000.

--------------------------------------------------------------------------------------------
PREDECESSOR
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
(IN THOUSANDS OF BARRELS) 1999 2000 % CHANGE
--------------------------------------------------------------------------------------------

Crude oil pipeline throughput:
Dixon to McKee................................... 22,305 22,736 2%
Wasson to Ardmore (both pipelines)............... 26,339 28,003 6%
Ringgold to Wasson............................... 10,982 10,724 (2)%
Corpus Christi to Three Rivers................... 29,417 31,271 6%
Other crude oil pipelines........................ 13,172 15,157 15%
---------------------------
Total crude oil pipelines..................... 102,215 107,891 6%
---------------------------
Refined product pipeline throughput:
McKee to Colorado Springs to Denver.............. 9,064 8,982 (1)%
McKee to El Paso................................. 19,767 22,277 13%
McKee to Amarillo (both pipelines) to
Abernathy..................................... 14,995 13,219 (12)%
Amarillo to Albuquerque.......................... 4,584 4,714 3%
McKee to Denver.................................. 3,924 4,307 10%
Ardmore to Wynnewood............................. 20,014 20,705 3%
Three Rivers to Laredo........................... 5,381 5,886 9%
Three Rivers to San Antonio...................... 10,154 9,761 (4)%
Other refined product pipelines.................. 20,667 23,537 14%
---------------------------
Total refined product pipelines............... 108,550 113,388 4%
---------------------------
Refined product terminal throughput.............. 58,889 60,629 3%
--------------------------------------------------------------------------------------------

Revenues for the year ended December 31, 2000 were $92,053,000 as compared to
$109,773,000 for the year ended December 31, 1999, a decrease of 16% or
$17,720,000. Effective January 1, 2000, we implemented revised tariff rates on
many of our pipelines, which resulted in lower revenues being recognized in 2000
as compared to 1999. Adjusting the revenues for the year ended December 31, 1999
using the newly established tariff rates and the throughput barrels resulted in
as adjusted revenues of $87,881,000. On a comparative basis, revenues increased
$4,172,000 or 5%. The following discussion is based on a comparison of the as
adjusted revenues for the year ended December 31, 1999 and the actual revenues
for the year ended December 31, 2000:

- revenues for the McKee to El Paso refined product pipeline increased
$1,618,000 due to a 13% increase in throughput barrels, resulting from
higher refined product demand in El Paso and the Arizona market and
temporary refinery disruptions on the West Coast;

S-33

- revenues increased $990,000 for the Corpus Christi to Three Rivers crude
oil pipeline due to a 6% increase in throughput barrels. In 2000, Ultramar
Diamond Shamrock increased production at the Three Rivers refinery to meet
the growing demand in south Texas;

- revenues generated from the refined product terminals were $15,516,000
for the year ended December 31, 2000 as compared to $15,238,000 for the
year ended December 31, 1999 due to a combined 3% increase in throughput
at the various terminals;

- revenues from the McKee to Denver refined product pipeline increased
$266,000 in 2000 as compared to 1999 as throughput increased 10% due to
increasing demand in Denver, Colorado;

- revenues from the Three Rivers to Pettus (Corpus Christi segment)
refined product pipeline increased $433,000 in 2000 as compared to 1999 as
throughput increased 112% due to rising refined product demand in south
Texas; and

- revenues for the Three Rivers to Laredo refined product pipeline
increased $260,000 for 2000 as compared to 1999 due to a 9% increase in
throughput barrels, resulting from increased refined product demand in
Laredo, Texas and its sister city of Nuevo Laredo, Mexico. Laredo, Texas
is one of the fastest growing cities in the United States and Valero
Energy is the major supplier of refined products to this area of Texas.

Operating expenses increased $4,492,000, or 15%, in 2000 from 1999 primarily due
to the following items:

- higher operating expenses of $538,000 resulting from a loss of $916,000
in 2000 as compared to a loss of $378,000 in 1999 due to the impact of
volumetric expansions and contractions and discrepancies in the
measurement of throughput. Effective July 1, 2000, the impact of these
items is borne by the shippers in our pipelines and is therefore not
reflected in operating expenses;

- higher maintenance expenses of $1,747,000 primarily related to
discretionary environmental expenditures on terminal operations;

- utility expenses increasing $1,801,000 in 2000 as compared to 1999 as a
result of higher throughput barrels in most pipelines and terminals and
higher electricity rates in the fourth quarter of 2000 as a result of
higher natural gas costs; and

- higher salary and employee benefit expenses of $853,000 in 2000 as
compared to 1999 due to increased benefit accruals and rising salary
costs.

Depreciation and amortization expense decreased $58,000 for the year ended
December 31, 2000 as compared to the year ended December 31, 1999 due to the
sale of an additional 8.33% interest in the McKee to El Paso refined product
pipeline and terminal in August 1999. Partially offsetting the decrease was
additional depreciation related to the recently completed capital projects,
including the expansion of the McKee to Colorado Springs and the Amarillo to
Albuquerque refined product pipelines.

S-34

General and administrative expenses increased 9% in 2000 as compared to 1999 due
to increased general and administrative costs at Ultramar Diamond Shamrock while
the net amount reimbursed by partners on jointly owned pipelines in 2000
remained comparable to 1999. General and administrative expenses were as
follows:

-----------------------------------------------------------------------------
YEARS ENDED
DECEMBER 31,
---------------
(IN THOUSANDS) 1999 2000
-----------------------------------------------------------------------------

Services Agreement.......................................... $ - $2,600
Allocation of Ultramar Diamond Shamrock general and
administrative expenses.................................. 5,201 2,839
Third party expenses........................................ - 200
Reimbursements from partners on jointly owned pipelines..... (503) (500)
---------------
$4,698 $5,139
-----------------------------------------------------------------------------

Interest expense of $5,181,000 for the year ended December 31, 2000 was higher
than the $777,000 recognized during the year ended December 31, 1999 due to the
additional interest expense recognized in the third and fourth quarters of 2000
related to the $107,676,000 of debt due to parent.

Equity income from Skelly-Belvieu Pipeline Company for the year ended December
31, 2000 was $3,877,000 as compared to $3,874,000 for the year ended December
31, 1999.

Effective July 1, 2000, Ultramar Diamond Shamrock transferred the assets and
certain liabilities of the Ultramar Diamond Shamrock Logistics Business
(predecessor) to Valero Logistics (successor). As limited partnerships, Valero
L.P. and Valero Logistics are not subject to federal or state income taxes. Due
to this change in tax status, the deferred income tax liability of $38,217,00 as
of June 30, 2000 was written off in the statement of income of the Ultramar
Diamond Shamrock Logistics Business for the six months ended June 30, 2000. The
resulting net benefit for income taxes of $30,812,000 for the six months ended
June 30, 2000, includes the write-off of the deferred income tax liability less
the provision for income taxes of $7,405,000 for the first six months of 2000.
The income tax provision for 1999 was based upon the effective income tax rate
for the Ultramar Diamond Shamrock Logistics Business of 38.3%. The effective
income tax rate exceeds the U.S. federal statutory income tax rate due to state
income taxes.

Income before income taxes for the year ended December 31, 2000 was $39,845,000
as compared to $69,319,000 for the year ended December 31, 1999. The decrease of
$29,474,000, or 43%, is primarily due to the decreased tariff revenues as a
result of the revised tariff rates that went into effect January 1, 2000, the
impact of which was $21,892,000.

OUTLOOK FOR THE REMAINDER OF 2002

During the second quarter of 2002, throughput levels in our pipelines and
terminals returned to more normal levels since Valero Energy increased
production at the McKee, Three Rivers and Ardmore refineries. With supply and
demand fundamentals in the refining and marketing industry becoming more
balanced, we anticipate that throughput levels will continue at normal levels
for the balance of 2002; however, there can be no assurance that throughput will
stay at these levels.

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Based on the throughput improvements, the additional cash flow generated from
the Wichita Falls Business acquired on February 1, 2002 and the additional cash
flow anticipated from the crude hydrogen pipeline acquired on May 29, 2002, we
expect to generate higher levels of distributable cash flow for the balance of
2002.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash requirements, in addition to normal operating expenses, are for
capital expenditures (both maintenance and expansion), business and asset
acquisitions, distributions to partners and debt service. We expect to fund our
short-term needs for such items as maintenance capital expenditures and
quarterly distributions to the partners from operating cash flows. Capital
expenditures for long-term needs resulting from future expansion projects and
acquisitions are expected to be funded by a variety of sources including cash
flows from operating activities, borrowings under the revolving credit facility
and the issuance of additional common units of Valero L.P., notes of Valero
Logistics and other capital market transactions.

FINANCING

As of March 31, 2002, we had $80,000,000 outstanding under our $120,000,000
revolving credit facility. During the first quarter of 2002, we borrowed
$64,000,000 under the revolving credit facility to purchase the Wichita Falls
Business from Valero Energy. In May 2002, we borrowed $11,000,000 under the
revolving credit facility to purchase a crude hydrogen pipeline from Praxair,
Inc.

The revolving credit facility expires on January 15, 2006 and borrowings under
the revolving credit facility bear interest at either an alternative base rate
or LIBOR at Valero Logistics' option.

The revolving credit facility requires that Valero Logistics 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 is in compliance with all of these ratios and covenants.

Our ability to complete future debt offerings and Valero L.P.'s ability to
complete future equity offerings and the timing of any such offerings will
depend upon various factors including prevailing market conditions, interest
rates and our financial condition.

INITIAL PUBLIC OFFERING

On April 16, 2001, Valero L.P. completed its initial public offering of
5,175,000 common units at a price of $24.50 per unit. Total proceeds were
$126,787,000 before offering costs and

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underwriters' commissions. In addition, we borrowed $20,506,000 under our
revolving credit facility. A summary of the use of proceeds is as follows (in
thousands):

----------------------------------------------------------------------
Use of proceeds:
Underwriters' commissions................................... $ 8,875
Professional fees and other offering 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
----------------------------------------------------------------------

The net proceeds of $3,789,000 were available for working capital and general
corporate purposes.

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.
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 Valero L.P.'s 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) Valero L.P.'s adjusted operating surplus, as defined in its 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 may convert to common units 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.

For the period from April 16, 2001 to December 31, 2001, Valero L.P. paid cash
distributions to unitholders totaling $21,571,000, which represents the required
minimum quarterly distribution for that period. In addition, in February 2002,
Valero L.P. paid a distribution of $0.60 per unit or $11,552,000 to unitholders
representing the distribution of available cash generated in the fourth quarter
of 2001. General partner cash distributions applicable to the period from April
16, 2001 to December 31, 2001, totaled $667,000, of which $236,000 related to
cash generated in the fourth quarter of 2001.

On April 19, 2002, Valero L.P. declared a distribution of $0.65 per unit or
$12,515,000, paid on May 15, 2002, to unitholders representing the distribution
of available cash generated in the first quarter of 2002. The general partner's
cash distribution applicable to the first quarter of 2002 was $343,000, of which
$107,000 represented an incentive distribution.

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CAPITAL REQUIREMENTS

The petroleum pipeline, storage and terminalling industry is capital-intensive,
requiring significant investments to upgrade or enhance existing operations and
to meet environmental regulations. Our capital expenditures consist primarily
of:

- maintenance capital expenditures, such as those required to maintain
equipment reliability and safety and to address environmental regulations;
and

- expansion capital expenditures, such as those to expand and upgrade
pipeline capacity and to construct new pipelines, terminals and storage
facilities to meet Valero Energy's needs. In addition, expansion capital
expenditures will include acquisitions of pipelines, terminals or storage
assets owned by Valero Energy or other parties.

We expect to fund our capital expenditures from cash provided by operations and
to the extent necessary, from proceeds of borrowings under the revolving credit
facility, debt offerings and equity offerings by Valero L.P.

THREE MONTHS ENDED MARCH 31, 2002

During the three months ended March 31, 2002, we incurred maintenance capital
expenditures of $789,000 primarily related to tank and automation upgrades at
the refined product terminals and cathodic (corrosion) protection and automation
upgrades for both refined product and crude oil pipelines. For the remainder of
2002, we anticipate incurring approximately $3 million of additional maintenance
capital expenditures for various automation upgrades and cathodic protection.

During the three months ended March 31, 2002, we incurred $1,009,000 of
expansion capital expenditures, which related primarily to the Amarillo to
Albuquerque refined product pipeline expansion project. The capital expenditures
for the Amarillo to Albuquerque refined product pipeline expansion project are
net of Phillips Petroleum Company's 50% share of costs. Upon completion in
January 2002, our capacity in the Amarillo to Albuquerque pipeline increased
from 16,083 barrels per day to 20,750 barrels per day.

Effective February 1, 2002, we exercised our option to purchase the Wichita
Falls Business (except certain retained liabilities) from Valero Energy at a
cost of $64,000,000.

On May 29, 2002, we completed the acquisition of a 25-mile crude hydrogen
pipeline from Praxair, Inc. The pipeline originates at the Celanese Chemical
facility in Clear Lake, Texas and runs to Valero Energy's Texas City refinery in
Texas City, Texas. The pipeline supplies crude hydrogen to the refinery under a
long-term supply arrangement between Valero Energy and Praxair, Inc. The total
cost of the pipeline was $11,000,000 and is expected to generate annual adjusted
EBITDA of $1,300,000.

We anticipate that we will continue to have adequate liquidity to fund future
recurring operating, investing and financing activities. Our ability to complete
future debt offerings and Valero L.P.'s ability to complete future equity
offerings, and the timing of any such offerings will depend upon various factors
including prevailing market conditions, interest rates and our financial
condition.

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YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

During the year ended December 31, 1999, we incurred $9,373,000 of capital
expenditures, including $5,392,000 relating to the expansion of the capacity of
the McKee to Colorado Springs refined product pipeline from 32,000 barrels per
day to 52,000 barrels per day, and $1,565,000 relating to the expansion of the
total capacity of the McKee to El Paso refined product pipeline from 40,000
barrels per day to 60,000 barrels per day.

During the year ended December 31, 2000, we incurred $7,022,000 of capital
expenditures, including $4,704,000 relating to expansion capital projects and
$2,318,000 related to maintenance projects. Expansion capital projects included
the project to expand the capacity of the McKee to Colorado Springs refined
product pipeline from 32,000 barrels per day to 52,000 barrels per day, which
was completed in the fourth quarter of 2000.

During the year ended December 31, 2001, we incurred maintenance capital
expenditures of $2,786,000 primarily related to tank and automation upgrades at
the refined product terminals and cathodic (corrosion) protection and automation
upgrades for both refined product and crude oil pipelines. Also during the year
ended December 31, 2001, we incurred expansion capital expenditures of
$15,140,000 for various acquisitions and capital projects. Acquisitions included
the July 2001 acquisition of the Southlake refined product terminal from Valero
Energy for $5,600,000 and the December 2001 acquisition of the Ringgold crude
oil storage facility from Valero Energy for $5,200,000. Capital projects
included $1,813,000 for rights-of-way related to the expansion of the Amarillo
to Albuquerque refined product pipeline, which is net of Phillips Petroleum
Company's 50% share of such cost.

RELATED PARTY TRANSACTIONS

SERVICES AGREEMENT

Effective July 1, 2000, Ultramar Diamond Shamrock entered into the Services
Agreement with us, whereby Ultramar Diamond Shamrock 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. As a
result of the merger, Valero Energy assumed Ultramar Diamond Shamrock's
obligation under the Services Agreement. 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 our current pipeline, terminalling and storage
operations. This annual fee is in addition to the incremental general and
administrative costs incurred from third parties as a result of Valero L.P.
being a publicly held entity.

The Services Agreement also requires that we reimburse Valero Energy for various
recurring costs of employees who work exclusively within the pipeline,
terminalling and storage operations and for certain other costs incurred by
Valero Energy relating solely to us. These employee costs include salary, wages
and benefit costs.

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which jointly own certain pipelines and terminals with us. Also, prior to July
1, 2000, the Ultramar Diamond Shamrock Logistics Business participated in
Ultramar Diamond Shamrock's centralized cash management program, wherein all
cash receipts were remitted to Ultramar Diamond Shamrock and all cash
disbursements were funded by Ultramar Diamond Shamrock. Other transactions
include intercompany transportation, storage and terminalling revenues and
related expenses, administrative and support expenses incurred by Ultramar
Diamond Shamrock and allocated to the Ultramar Diamond Shamrock Logistics
Business and income taxes.

PIPELINES AND TERMINALS USAGE AGREEMENT

On April 16, 2001, Ultramar Diamond Shamrock entered into the Pipelines and
Terminals Usage Agreement with us, whereby Ultramar Diamond Shamrock agreed to
use our 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 our 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, Ultramar
Diamond Shamrock used our 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 used our 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 connection with the acquisition
of Ultramar Diamond Shamrock by Valero Energy.

EQUITY OWNERSHIP

As of March 31, 2002, UDS Logistics, LLC, an indirect wholly owned subsidiary of
Valero Energy, owns 4,424,322 of Valero L.P.'s outstanding common units and all
9,599,322 of Valero L.P.'s outstanding subordinated units. As a result, UDS
Logistics, LLC owns 71.4% of Valero L.P.'s outstanding equity and Riverwalk
Logistics owns the 2% general partner interest in Valero L.P. We are a direct
and indirect 100%-owned subsidiary of Valero L.P.

In addition, prior to its acquisition by Valero L.P. on February 1, 2002, the
Wichita Falls Business was wholly owned by Valero Energy and such ownership
interest is reflected as net parent investment as of December 31, 2001 in the
combined balance sheet as of December 31, 2001.

ENVIRONMENTAL

Our operations are subject to environmental laws and regulations adopted by
various federal, state and local governmental authorities in the jurisdictions
in which we operate. Although we believe our 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, we have 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.

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In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, Ultramar Diamond Shamrock 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. on April 16, 2001,
Ultramar Diamond Shamrock 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. In
addition, as an operator or owner of the assets, we could be held liable for
pre-April 16, 2001 environmental damage should Valero Energy be unable to
fulfill its obligation. However, we believe 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 our 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, we believe that such costs will not have a material adverse
effect on our financial position. As of December 31, 2001, we have 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 and for the years ended December 31, 1999, 2000 and 2001, the
Wichita Falls Business did not incur any environmental liability; thus there is
no accrual as of December 31, 2001.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to select
appropriate accounting policies and to make estimates and assumptions that
affect the amounts reported in the consolidated and combined financial
statements and accompanying notes. Actual results could differ from those
estimates. See "Note 2: Summary of significant accounting policies" beginning on
page F-23 for our significant accounting policies.

On an ongoing basis, management reviews its estimates based on currently
available information. Changes in facts and circumstances may result in revised
estimates. Any effects on our financial position or results of operations
resulting from revisions to estimates are recorded in the period in which the
facts and circumstances that give rise to the revision become known. We deem the
following estimates and accounting policies to be critical:

TARIFF RATES

Tariff rates which we charge for the transportation of crude oil and refined
products in our pipelines are subject to extensive federal and/or state
regulation. Reductions to the current tariff rates we charge could have a
material adverse effect on our results of operations. Valero Energy has agreed
not to challenge our tariff rates until at least April, 2008.

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DEPRECIATION

Depreciation expense is calculated using the straight-line method over the
estimated useful lives of our property, plant and equipment. Because of the
expected long useful lives of our property, plant and equipment, we depreciate
them over a 3-year to 40-year period. Changes in the estimated useful lives of
our property, plant and equipment could have a material adverse effect on our
results of operations.

GOODWILL

Goodwill is the excess of cost over the fair value of net assets acquired.
Effective January 1, 2002, with the adoption of FASB Statement No. 142,
"Goodwill and Other Intangible Assets," amortization of goodwill ceased and the
unamortized balance will be tested annually for impairment. Management's
estimates will be crucial to determining whether an impairment exists and, if
so, the effect of such impairment. We believe that future reported net income
may be more volatile because impairment losses related to goodwill are likely to
occur irregularly and in varying amounts.

ENVIRONMENTAL LIABILITIES

Environmental laws and regulations adopted by various federal, state and local
governmental authorities in the jurisdictions in which we operate impact our
business. Although we believe our 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.
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. Adjustments to initial estimates are recorded, from time to time, to
reflect changing circumstances and estimates based upon additional information
developed in subsequent periods. In connection with the initial public offering
of Valero L.P., Valero Energy agreed to indemnify us 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 costs that
arise from changes in environmental law after April 16, 2001. In addition, as an
operator or owner of the assets, we could be held liable for pre-April 16, 2001
environmental damage should Valero Energy be unable to fulfill its obligation.
However, we believe that such a situation is remote given Valero Energy's
financial condition. As of March 31, 2002, we have not incurred any
environmental liabilities which were not covered by the environmental
indemnification.

INCOME TAXES

Although Valero L.P. is a limited partnership and not subject to federal or
state income taxes, the IRS could challenge positions it has taken for tax
purposes and could treat Valero L.P. as a corporation. While Valero L.P.
believes challenges to its positions should be rare, any changes to its tax
structure could have a material adverse effect on Valero L.P.'s results of
operations.

RELATIONSHIP WITH VALERO ENERGY

Under the Services Agreement, we pay Valero Energy $5,200,000 per year for
performing general and administrative services and reimburse it for other costs,
including employee and third party costs as well as costs incurred by reason of
Valero L.P. being a public entity. From time to time, we need to make judgments
as to whether or not particular services are covered

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by the $5,200,000 annual fee. These service judgments are reviewed by our
internal and independent auditors and reported to our audit committee at least
quarterly.

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. We 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 our
parent.

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. We have 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,
we believe that future reported net income may be more volatile because
impairment losses related to goodwill are likely to occur irregularly and in
varying amounts.

FASB STATEMENT NO. 143

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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. We do not expect that the adoption of this statement will have a
material impact on our 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 our 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:

- rescinds Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt,"

- rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"

- rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and

- 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.

S-44

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. We do not expect that the adoption of this statement will have a
material impact on our financial position or results of operations.

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DESCRIPTION OF NOTES

The following description of the particular terms of the notes (which represent
a new series of, and are referred to in the accompanying prospectus as, the
"senior debt securities") supplements and, to the extent inconsistent, replaces
the description of the general terms and provisions of the senior debt
securities set forth in the accompanying prospectus.

We will issue the notes under the senior indenture among us, Valero L.P., as
guarantor, and The Bank of New York, as trustee, to be dated as of July 15,
2002, which is described in the accompanying prospectus. The terms of the notes
include those set forth in the senior indenture and those made a part of the
senior indenture by reference to the Trust Indenture Act of 1939. The senior
indenture will be amended and supplemented pursuant to a supplemental indenture
setting forth the specific terms applicable to the notes. When we use the term
"indenture" in this prospectus supplement, we refer to the senior indenture, as
modified and supplemented by the supplemental indenture applicable to the notes,
unless the context requires otherwise.

The following description and the description in the accompanying prospectus are
a summary of the material provisions of the notes and the indenture. It does not
restate the indenture in its entirety. We urge you to read the indenture because
it, and not this description, defines your rights as a holder of notes. Copies
of the indenture are available upon request from us or the trustee.

BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES

THE NOTES

The notes:

- are our general unsecured obligations;

- are unconditionally guaranteed on a senior secured basis by Valero L.P.;

- rank equally in right of payment with all our other existing and future
senior debt;

- effectively rank junior to any of our secured debt, to the extent of the
security for that debt;

- rank senior in right of payment to all of our future subordinated debt;
and

- are non-recourse to our general partner.

Subject to the exceptions, and subject to compliance with the applicable
requirements, set forth in the indenture, we may discharge our obligations under
the indenture with respect to the notes as described under "Description of Debt
Securities--Discharging Valero Logistics' Obligations" in the accompanying
prospectus.

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THE VALERO L.P. GUARANTEE

The notes are guaranteed by Valero L.P.

The guarantee by Valero L.P.:

- is a general unsecured obligation of Valero L.P.;

- ranks equally in right of payment with all other existing and future
senior unsecured debt of Valero L.P.;

- effectively ranks junior to any secured debt of Valero L.P., to the
extent of the security for that debt;

- ranks senior in right of payment to any future subordinated indebtedness
of Valero L.P. in its capacity as guarantor; and

- is non-recourse to the general partner of Valero L.P.

PRINCIPAL, MATURITY AND INTEREST

We will issue notes initially in an aggregate principal amount of $100 million.
The notes will be in denominations of $1,000 and integral multiples of $1,000.
The notes will mature on July 15, 2012. We may issue additional notes of this
series from time to time, without the consent of the holders of the notes, in
compliance with the terms of the indenture.

Interest on the notes will:

- accrue at the rate of 6 7/8% per annum;

- accrue from the date of issuance or the most recent interest payment
date;

- be payable in cash semi-annually in arrears on each January 15 and July
15, commencing on January 15, 2003;

- be payable to the holders of record on January 1 and July 1 immediately
preceding the related interest payment date;

- be computed on the basis of a 360-day year comprised of twelve 30-day
months; and

- be payable, to the extent lawful, on overdue interest to the extent
permitted by law at the same rate as interest is payable on principal.

If any interest payment date, maturity date or redemption date falls on a day
that is not a business day, the payment will be made on the next business day
with the same force and effect as if made on the relevant interest payment date,
maturity date or redemption date. Unless we default on a payment, no interest
will accrue for the period from and after the maturity date or redemption date.

PAYMENT AND TRANSFER

Initially, the notes will be issued only in global form. Beneficial interests in
notes in global form will be shown on, and transfers of interests in notes in
global form will be made only through, records maintained by the depositary and
its participants. Notes in definitive form, if any, may

S-47

be registered, exchanged or transferred at the office or agency maintained by us
for such purpose (which initially will be the corporate trust office of the
trustee located at 101 Barclay Street, New York, New York 10286). Payment of
principal, or premium, if any, and interest on notes in global form registered
in the name of or held by the depositary or its nominee will be made in
immediately available funds to the depositary or its nominee, as the case may
be, as the registered holder of such global note. If any of the notes are no
longer represented by global notes, all payments on such notes will be made at
the corporate trust office of the trustee in New York City, located initially at
101 Barclay Street, New York, New York 10286; however, any payment of interest
on such notes may be made, at our option, by check mailed directly to registered
holders at their registered addresses or, at the option of a registered holder,
by wire transfer to an account designated in writing by the holder.

No service charge will be made for any registration of transfer or exchange of
notes, but we may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith. We are not
required to transfer or exchange any note selected for redemption or any other
note for a period of 15 days before any mailing of notice of notes to be
redeemed.

The registered holder of a note will be treated as the owner of it for all
purposes.

OPTIONAL REDEMPTION

The notes will be redeemable by us, in whole or in part, at any time at a
redemption price equal to the greater of:

- 100% of the principal amount of the notes then outstanding to be
redeemed; or

- the sum of the present values of the remaining scheduled payments of
principal and interest thereon (exclusive of interest accrued to the date
of redemption) from the redemption date to the maturity date computed by
discounting such payments to the redemption date on a semiannual basis,
assuming a 360-day year consisting of twelve 30-day months, at a rate
equal to the sum of 30 basis points plus the Adjusted Treasury Rate on the
third business day prior to the redemption date;

plus, in each case, unpaid interest accrued to the date of redemption.

"Adjusted Treasury Rate" means:

- the yield, under the heading which represents the average for the week
immediately preceding the week of publication, appearing in the then most
recently published statistical release designated "H.15(519)" or any
successor publication which is published weekly by the Board of Governors
of the Federal Reserve System and which contains yields on actively traded
U.S. Treasury securities adjusted to constant maturity under the caption
"Treasury Constant Maturities," for the maturity corresponding to the
Comparable Treasury Issue (if no maturity is within three months before or
after the remaining term of the notes, yields for the two published
maturities most closely corresponding to the Comparable Treasury Issue
will be determined and the Adjusted Treasury Rate will be interpolated or
extrapolated from such yields on a straight line basis, rounding to the
nearest month); or

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- if such release (or any successor release) is not published during the
week including or immediately preceding the calculation date or does not
contain such yields, the rate per annum equal to the semiannual equivalent
yield to maturity of the Comparable Treasury Issue, calculated using a
price for the Comparable Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury Price for such
redemption date.

"Comparable Treasury Issue" means the U.S. Treasury security selected by an
Independent Investment Banker as having a maturity comparable to the remaining
term of the notes that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the remaining term of the notes or,
if, in the reasonable judgment of the Independent Investment Banker, there is no
such security, then the Comparable Treasury Issue will mean the U.S. Treasury
security or securities selected by an Independent Investment Banker as having an
actual or interpolated maturity or maturities comparable to the remaining term
of the notes.

"Comparable Treasury Price" means (1) the average of five Reference Treasury
Dealer Quotations for the third business day prior to the applicable redemption
date, after excluding the highest and lowest Reference Treasury Dealer
Quotations, or (2) if the Independent Investment Banker obtains fewer than five
such Reference Treasury Dealer Quotations, the average of all such quotations.

"Independent Investment Banker" means J.P. Morgan Securities Inc. and any
successor firm selected by us, or if any such firm is unwilling or unable to
serve as such, an independent investment and banking institution of national
standing appointed by us.

"Reference Treasury Dealer Quotations" means the average, as determined by the
Independent Investment Banker, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Independent Investment Banker and the trustee at 5:00
p.m., New York City time, on the third business day preceding such redemption
date.

The redemption price will be calculated by J.P. Morgan Securities Inc. If J.P.
Morgan Securities Inc. is unwilling or unable to make the calculation, we will
appoint an independent investment banking institution of national standing to
make the calculation.

We will mail notice of redemption at least 30 days but not more than 60 days
before the applicable redemption date to each holder of the notes to be
redeemed. Any notice to holders of notes of such redemption will include the
appropriate calculation of the redemption price, but need not include the
redemption price itself. The actual redemption price, calculated as provided
above, will be set forth in an officer's certificate delivered to the trustee no
later than two business days prior to the redemption date.

Upon the payment of the redemption price, plus accrued and unpaid interest, if
any, to the date of redemption, interest will cease to accrue on and after the
applicable redemption date on the notes or portions thereof called for
redemption.

In the case of any partial redemption, selection of the notes for redemption
will be made by the trustee on a pro rata basis, by lot or by such other method
as the trustee in its sole discretion shall deem to be fair and appropriate.
Notes will only be redeemed in multiples of $1,000 in principal amount. If any
note is to be redeemed in part only, the notice of

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redemption will state the portion of the principal amount to be redeemed. A new
note in principal amount equal to the unredeemed portion of the original note
will be issued upon the cancellation of the original note.

NO SINKING FUND

We are not required to make mandatory redemption or sinking fund payments with
respect to the notes.

COVENANTS

Except to the extent described below, the indenture does not limit the amount of
indebtedness or other obligations that we may incur. The indenture contains two
principal material financial covenants:

- Limitation on Liens. This covenant limits our ability, and that of our
subsidiaries, to permit liens to exist on our principal assets; and

- Limitations of Sale-Leaseback Transactions. This covenant limits our
ability to sell or transfer our principal assets and then lease back those
assets.

Please read "Description of Debt Securities--Provisions Only in the Senior
Indenture" in the accompanying base prospectus.

FUTURE SUBSIDIARY GUARANTORS

We will cause any of our future subsidiaries that become guarantors or
co-obligors of our Funded Debt, as defined below, to fully and unconditionally
guarantee, as "guarantors," our payment obligations on the notes. In particular,
the supplemental indenture will require those subsidiaries who become guarantors
or borrowers under our revolving credit facility to equally guarantee the notes.

The term "subsidiary" means, with respect to any person:

- any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled, without
regard to the occurrence of any contingency, to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that person or one or more of the
other subsidiaries of that person or a combination thereof; or

- any partnership of which more than 50% of the partner's equity
interests, considering all partners' equity interests as a single class,
is at the time owned or controlled, directly or indirectly, by that person
or one or more of the other subsidiaries of that person or a combination
thereof.

"Funded Debt" means all debt:

- maturing one year or more from the date of its creation;

- directly or indirectly renewable or extendable, at the option of the
debtor, by its terms or by the terms of any instrument or agreement
relating to the debt, to a date one year or more from the date of its
creation; or

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- under a revolving credit or similar agreement obligating the lender or
lenders to extend credit over a period of one year or more.

ADDITION AND RELEASE OF GUARANTORS

The supplemental indenture will provide that if any of our subsidiaries is a
guarantor or obligor of any of our Funded Debt at any time on or subsequent to
the date on which the notes are originally issued, then we will cause the notes
to be equally and ratably guaranteed by that subsidiary. We also will do so if
the subsidiary becomes a guarantor or obligor of any of our Funded Debt
following any release of the subsidiary from its guarantee as described below.
Under the terms of the supplemental indenture, a guarantor may be released from
its guarantee if the guarantor is not a guarantor or obligor of any of our
Funded Debt, provided that no default or event of default with respect to the
notes has occurred or is continuing.

Each future guarantor would be obligated under its guarantee only up to an
amount that would not constitute a fraudulent conveyance or fraudulent transfer
under federal, state or foreign law.

REPURCHASE UPON A CHANGE OF CONTROL

If a Change of Control, as defined below, occurs, we will make an offer to
purchase all or any part, in multiples of $1,000, of the notes pursuant to the
offer described below at a price in cash equal to 100% of the aggregate
principal amount of those notes plus accrued and unpaid interest, if any, to the
date of purchase. Within 30 days following any Change of Control, we will mail a
notice to each holder of notes, with a copy to the trustee, offering to purchase
notes on the change of control payment date specified in the notice, pursuant to
the procedure required by the indenture and described in the notice.

On the change of control payment date, we will, to the extent permitted by law,

- accept for payment all notes or portions of notes properly tendered
pursuant to the change of control offer,

- deposit with the paying agent an amount equal to the aggregate change of
control payment in respect of all notes or portions of notes so tendered,
and

- deliver, or cause to be delivered, to the trustee for cancellation the
notes so accepted together with an officers' certificate stating that
those notes or portions of notes have been tendered to and purchased by
us.

The paying agent will promptly mail to each holder of notes the change of
control payment for such notes, and the trustee will promptly authenticate and
mail to each holder a new note equal in principal amount to any unpurchased
portion of the notes surrendered, if any, provided, that each such new note will
be in a principal amount of $1,000 or an integral multiple thereof. We will
publicly announce the results of the change of control offer on or as soon as
practicable after the change of control payment date.

We will comply with the requirements of Rule 14e-1 and Rule 13e-4 under the
Securities Exchange Act of 1934 and any other securities laws and regulations
thereunder to the extent such laws or regulations are applicable in connection
with the repurchase of the notes pursuant to a change of control offer. To the
extent that the provisions of any securities laws

S-51

or regulations conflict with the provisions of the indenture, we will comply
with the applicable securities laws and regulations and will not be deemed to
have breached our obligations described in the indenture by virtue thereof.

"Change of Control" means the occurrence of any transaction that results in:

- the failure of Valero Energy or an Investment Grade Person (as defined
below), to own, directly or indirectly, 51% of the general partner
interests in Valero L.P.;

- the failure of Valero L.P. or an Investment Grade Person to own,
directly or indirectly, all of the general partner interests in us; or

- the failure of Valero L.P. or an Investment Grade Person to own,
directly or indirectly, all of the limited partner interests in us.

"Investment Grade Person" means an entity that has issued unsecured senior debt
that has at least two of the following ratings on the date the transaction
constituting a Change of Control is consummated:

- BBB- or above, in the case of Standard & Poor's Ratings Services, a
Division of The McGraw-Hill Companies, Inc. (or its equivalent under any
successor rating categories of S&P);

- Baa3 or above, in the case of Moody's Investors Service, Inc. (or its
equivalent under any successor rating categories of Moody's); or

- the equivalent in respect of the rating categories of any rating
agencies substituted for S&P or Moody's.

EVENTS OF DEFAULT

In addition to the "Events of Default" described in the accompanying base
prospectus under the caption "Description of Debt Securities--Events of Default
and Remedies," "Events of Default" with respect to the notes will include:

- failure to pay any indebtedness of Valero Logistics for borrowed money
in excess of $10 million, whether at final maturity (after the expiration
of any applicable grace periods) or upon acceleration of the maturity
thereof, if such indebtedness is not discharged, or such acceleration is
not annulled, within 10 days after written notice is given to Valero
Logistics by the trustee or to Valero Logistics and the trustee by the
holders of at least 25% in principal amount of the outstanding notes,
specifying such default and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the applicable indenture.

CONCERNING THE TRUSTEE

The Bank of New York is the trustee under the indenture and has been appointed
by us as registrar and paying agent with regard to the notes.

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TAX CONSIDERATIONS

The following is a discussion of the material U.S. federal income and estate tax
consequences of the ownership and disposition of the notes. Unless otherwise
stated, this discussion is limited to the tax consequences to those persons who
purchase the notes in this offering and who hold these notes as capital assets
under Section 1221 of the Internal Revenue Code of 1986, as amended. The
discussion does not address specific tax consequences that may be relevant to
particular persons including, for example, financial institutions,
broker-dealers, insurance companies, tax-exempt organizations, and persons in
special situations, such as those who hold notes as part of a straddle, hedge,
conversion transaction, or other integrated investment. In addition, this
discussion does not address U.S. federal alternative minimum tax consequences or
any aspect of state, local or foreign taxation. This discussion is based upon
the Internal Revenue Code, the Treasury Department regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change, possibly with retroactive effect. We will treat the
notes as indebtedness for federal income tax purposes, and the following
discussion assumes that this treatment is correct.

PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE SPECIFIC U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM
OF OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.

TAX CONSEQUENCES TO U.S. HOLDERS

For purposes of this discussion, you are a "U.S. holder" if you are a beneficial
owner of a note and are a U.S. citizen or resident, a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, an estate or certain electing trusts in
existence as of August 28, 1996, the income of which is subject to U.S. federal
income taxation regardless of its source, or a trust if a U.S. court is able to
exercise primary supervision over its administration and one or more U.S.
persons have the authority to control all of its substantial decisions. If a
partnership holds notes, the tax treatment of a partner will generally depend on
the status of the partner and on the activities of the partnership. Partners of
partnerships holding notes should consult their tax advisors.

Taxation of interest. If you are a U.S. holder, interest on your notes generally
will be taxable as ordinary interest income at the time payments are accrued or
are received in accordance with your regular method of accounting for federal
income tax purposes. The notes are not expected to be issued with "original
issue discount" for U.S. federal income tax purposes. Special rules governing
the treatment of market discount and amortizable premium are described below.

Market discount. A U.S. holder who purchases a note at a discount may be subject
to the "market discount" rules of the Internal Revenue Code. These rules
provide, in part, that gain on the sale or other disposition of a note and
partial principal payments on a note are treated as ordinary income to the
extent of accrued market discount. The market discount rules also provide for
deferral of interest deductions with respect to debt incurred to purchase or
carry a note that has market discount.

Amortizable premium. A U.S. holder, who purchases a note at a premium over the
sum of all amounts payable thereafter on the note that are treated as stated
redemption price at maturity, may elect to offset the premium against interest
income over the remaining term of

S-53

the note in accordance with the "premium amortization" provisions of the
Internal Revenue Code.

Sale, exchange or retirement of the notes. Upon the sale, exchange or retirement
of the notes, you generally will recognize gain or loss equal to the difference
between the amount realized upon the sale, exchange or retirement (less any
portion allocable to accrued and unpaid interest) and your adjusted tax basis in
the notes. Your adjusted tax basis in the notes generally will be your cost for
the notes, increased by the amount of any market discount previously included in
your gross income with respect to the note, decreased by any amortized premium
and any principal payments you receive.

The gain or loss you recognize on the sale, exchange or retirement of the notes
generally will be capital gain or loss, except to the extent of any accrued
market discount. The gain or loss will be long-term capital gain or loss if you
hold the notes for more than one year. Long-term capital gains of individuals,
estates and trusts currently are subject to a maximum federal tax rate of 20%,
or 18% if you hold the notes for more than five years. The deductibility of
capital losses by U.S. holders is subject to limitation.

To the extent that the amount realized on the sale, exchange or retirement of
the notes represents accrued but unpaid interest, that amount must be taken into
account as interest income, if it was not previously included in your income.
Please read "--Taxation of interest" above.

TAX CONSEQUENCES TO NON-U.S. HOLDERS

For purposes of this discussion, you are a "non-U.S. holder" if you are a
beneficial owner of a note that is not a U.S. holder.

Taxation of interest. If you are a non-U.S. holder, you generally will not be
subject to U.S. federal income or withholding tax on interest paid on the notes
so long as that interest is not effectively connected with your conduct of a
trade or business within the United States, and you:

- do not actually or constructively own 10% or more of our capital or
profits interests;

- are not a "controlled foreign corporation" with respect to which we are
a "related person" within the meaning of the Internal Revenue Code;

- are not a bank within the meaning of Section 881(c)(3)(A) of the
Internal Revenue Code; and

- satisfy the requirements of Sections 871(h) or 881(c) of the Internal
Revenue Code, as described below under "--Owner statement requirement."

If these conditions are not satisfied, then interest paid on the notes will be
subject to U.S. withholding tax at a rate of 30% unless that rate is reduced or
eliminated pursuant to an applicable tax treaty and you provide us with a
properly completed and executed IRS Form W-8 BEN, as provided for in the
Treasury Regulations.

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Sale, exchange or retirement of the notes. Any capital gain you recognize on the
sale, exchange, retirement or other taxable disposition of a note generally will
be exempt from U.S. federal income and withholding tax, provided that:

- the gain is not effectively connected with your conduct of a trade or
business within the United States; and

- if you are an individual, you are not present in the United States for
183 days or more during the taxable year of the disposition.

Effectively connected income. If the interest, gain or other income you
recognize on a note is effectively connected with your conduct of a trade or
business within the United States, you will be exempt from the withholding tax
previously discussed if an appropriate statement is furnished, but generally
will be subject to U.S. federal income tax on the interest, gain or other income
at regular federal income tax rates. In addition to regular U.S. federal income
tax, if you are a corporation, you may be subject to a branch profits tax equal
to 30% of your effectively connected earnings and profits, as adjusted for
certain items, unless you qualify for a lower rate under an applicable tax
treaty.

Federal estate taxes. A note held by an individual who at the time of death is
not a citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of the individual's death, provided that the
individual does not actually or constructively own 10% or more of our capital or
profits interests and that the interest accrued on the notes was not effectively
connected with that holder's conduct of a trade or business within the United
States.

Owner statement requirement. Sections 871(h) and 881(c) of the Internal Revenue
Code require that either the beneficial owner of a note or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and that holds a note on behalf of a non-U.S. holder files a
statement with us or our agent to the effect that the non-U.S. holder is not a
U.S. person in order to avoid withholding of the U.S. federal income tax. Under
current regulations, this requirement will be satisfied if we or our agent
receives:

- a statement (an "owner statement") from the beneficial owner of a note
in which that owner certifies, under penalties of perjury, that the owner
is not a U.S. person and provides such owner's name and address; or

- a statement from the financial institution holding the note on behalf of
the beneficial owner in which the financial institution certifies, under
penalties of perjury, that it has received the owner statement, together
with a copy of it.

Generally, this statement is made on IRS Form W-8 BEN. The beneficial owner must
inform us or our agent (or, in the case of a statement described in the second
bullet point of the immediately preceding sentence, the financial institution)
within 30 days of any change in information on the owner statement. A non-U.S.
holder who is not an individual or corporation (or an entity treated as a
corporation for federal income tax purposes) holding the notes on its own behalf
may have additional reporting requirements. In particular, in the case of notes
held by a foreign partnership (or foreign trust), the partnership (or trust)
will be required to provide the statement from each of its partners (or
beneficiaries), and the partnership (or trust) will be required to provide
certain additional information.

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INFORMATION REPORTING AND BACKUP WITHHOLDING

We will, where required, report to you and the Internal Revenue Service the
amount of any interest paid on the notes in each calendar year and the amounts
of tax withheld, if any, with respect to those payments. A noncorporate U.S.
holder may be subject to information reporting and to backup withholding with
respect to payments of interest made on a note, or proceeds of the disposition
of a note before maturity, unless the U.S. holder provides a correct taxpayer
identification number or proof of an applicable exemption and otherwise complies
with applicable requirements of the information reporting and backup withholding
rules. The backup withholding rate is currently 30% and will gradually be
reduced periodically until 2006, when the backup withholding rate will be 28%.
After December 31, 2010, the backup withholding rate will be increased to 31%.

In the case of payments of interest to non-U.S. holders, current Treasury
Regulations provide that the backup withholding tax and certain information
reporting requirements will not apply to payments with respect to which either
the requisite certification, as described above, has been received or an
exemption has otherwise been established, provided that neither we nor our
payment agent has actual knowledge or reason to know that the holder is a U.S.
person or that the conditions of any other exemption are not in fact satisfied.

Under current Treasury Regulations, information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a non-U.S.
holder on the disposition of the notes by or through a U.S. office of a U.S. or
foreign broker, unless the non-U.S. holder otherwise establishes an exemption.
Information reporting requirements, but not backup withholding, will also apply
to payment of the proceeds of a disposition of the notes by or through a foreign
office of a U.S. broker or foreign brokers with certain types of relationships
to the U.S. unless the broker has documentary evidence in its file that the
holder of the notes is not a U.S. person and the broker has no actual knowledge
or reason to know to the contrary, or the holder establishes an exemption.
Neither information reporting nor backup withholding generally will apply to
payment of the proceeds of a disposition of the notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the holder's U.S.
federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.

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UNDERWRITING

J.P. Morgan Securities Inc. is acting as lead manager and bookrunner and Lehman
Brothers Inc. is acting as joint lead manager of the offering and as
representatives of the underwriters named below.

Subject to the terms and conditions stated in the underwriting agreement dated
the date of this prospectus supplement, each underwriter named below has agreed
to purchase, and we have agreed to sell to that underwriter, the principal
amount of notes set forth opposite the underwriter's name.

--------------------------------------------------------------------------
PRINCIPAL
AMOUNT OF
NAME NOTES
--------------------------------------------------------------------------

J.P. Morgan Securities Inc. ................................ $ 58,511,000
Lehman Brothers Inc. ....................................... 15,957,000
Mizuho International plc.................................... 6,383,000
RBC Dominion Securities Corporation......................... 6,383,000
SunTrust Capital Markets, Inc. ............................. 6,383,000
Tokyo-Mitsubishi International plc.......................... 6,383,000
------------
Total....................................................... $100,000,000
--------------------------------------------------------------------------

The underwriting agreement provides that the obligations of the underwriters to
purchase the notes included in this offering are subject to the approval of
legal matters by counsel and to other conditions. The underwriters are obligated
to purchase all the notes if they purchase any of the notes.

The underwriters propose to offer some of the notes directly to the public at
the public offering price set forth on the cover page of this prospectus
supplement and some of the notes to dealers at the public offering price less a
concession not to exceed 0.400% of the principal amount. The underwriters may
allow and dealers may reallow a concession to certain other dealers not to
exceed 0.250% of the principal amount. After the initial offering of the notes
to the public, the representatives may change the public offering price and
concessions.

In connection with the offering, J.P. Morgan Securities Inc., on behalf of the
underwriters, may purchase and sell notes in the open market. These transactions
may include over-allotment, syndicate covering transactions and stabilizing
transactions. Over-allotment involves syndicate sales of notes in excess of the
principal amount of notes to be purchased by the underwriters in the offering,
which creates a syndicate short position. Syndicate covering transactions
involve purchases of the notes in the open market after the distribution has
been completed in order to cover syndicate short positions. Stabilizing
transactions consist of certain bids or purchases of notes made for the purpose
of preventing or retarding a decline in the market price of the notes while the
offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when J.P.
Morgan Securities Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases notes originally sold by that syndicate
member.

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Any of these activities may have the effect of preventing or retarding a decline
in the market price of the notes. They may also cause the price of the notes to
be higher than the price that otherwise would exist in the open market in the
absence of these transactions. The underwriters may conduct these transactions
in the over-the-counter market or otherwise. If the underwriters commence any of
these transactions, they may discontinue them at any time.

To the extent any underwriter that is not a U.S.-registered broker-dealer
intends to effect sales of notes in the United States, it will do so through one
or more U.S.-registered broker-dealers in accordance with the applicable U.S.
securities laws and regulations.

We estimate that our total expenses for this offering will be approximately
$500,000, of which $39,000 will be reimbursed by the underwriters.

J.P. Morgan Securities Inc. and Lehman Brothers Inc. will make the notes
available for distribution on the Internet through a proprietary Web site and/or
a third-party system operated by Market Axess Inc., an Internet-based
communications technology provider. Market Axess Inc. is providing the system as
a conduit for communications between J.P. Morgan Securities Inc. and Lehman
Brothers Inc. and their customers and is not a party to any transactions. Market
Axess Inc., a registered broker-dealer, will receive compensation from J.P.
Morgan Securities Inc. and Lehman Brothers Inc. based on transactions J.P.
Morgan Securities Inc. and Lehman Brothers Inc. conduct through the system. J.P.
Morgan Securities Inc. and Lehman Brothers Inc. will make notes available to
their customers through the Internet distributions, whether made through a
proprietary or third-party system, on the same terms as distributions made
through other channels.

Certain of the underwriters and their respective affiliates have performed and
may continue to perform investment banking, financial advisory, trustee and
lending services for us for which they receive customary fees and compensation.
Some of the underwriters participating in this offering or their commercial
banking affiliates are participants in our revolving credit facility and, in the
aggregate, will receive a significant portion of the net proceeds of this
offering of notes in accordance with their relative participation in our
revolving credit facility. Such amount is subject to reborrowing by us until
January 15, 2006. Because more than 10% of the net proceeds of the offering will
be paid to the underwriters or their affiliates, this offering is being
conducted in compliance with Rule 2710 of the National Association of Securities
Dealers, Inc.'s Conduct Rules.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.

VALIDITY OF THE NOTES

The validity of the notes and certain federal income tax matters related to the
notes will be passed upon for Valero Logistics by Andrews & Kurth Mayor, Day &
Caldwell L.L.P., Houston, Texas. Certain legal matters in connection with the
notes offered by this prospectus supplement will be passed upon for the
underwriters by Baker Botts L.L.P., Houston, Texas. Baker Botts L.L.P. has, from
time to time, performed legal services for Valero Energy Corporation.

S-58

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

INDEX TO FINANCIAL STATEMENTS

Unaudited financial statements
Consolidated and combined balance sheets as of December 31,
2001 and March 31, 2002.................................. F-2
Consolidated and combined statements of income for the three
months ended March 31, 2001 and 2002..................... F-3
Consolidated and combined statements of cash flows for the
three months ended March 31, 2001 and 2002............... F-4
Notes to consolidated and combined financial statements..... F-5
Audited financial statements
Report of independent public accountants.................... F-13
Consolidated and combined balance sheets as of December 31,
2000 and December 31, 2001............................... F-14
Consolidated and combined statements of income for the year
ended December 31, 1999 and the six months ended June 30,
2000 (predecessor) and for the six months ended December
31, 2000 and the year ended December 31, 2001
(successor).............................................. F-15
Consolidated and combined statements of cash flows for the
year ended December 31, 1999 and the six months ended
June 30, 2000 (predecessor) and for the six months ended
December 31, 2000 and the year ended December 31, 2001
(successor).............................................. F-16
Combined statements of partners' equity/net parent
investment for the year ended December 31, 1999 and the
six months ended June 30, 2000 and December 31, 2000 and
consolidated and combined statement of partners' equity
for the year ended December 31, 2001..................... F-17
Notes to consolidated and combined financial statements..... F-19
-------------------------------------------------------------------

F-1

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED BALANCE SHEETS

--------------------------------------------------------------------------------------
RESTATED
DECEMBER 31,
2001 MARCH 31,
(UNAUDITED, IN THOUSANDS, EXCEPT UNIT DATA) (NOTE 2) 2002
--------------------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents................................ $ 7,796 $ 7,689
Receivable from parent................................... 6,292 6,327
Accounts receivable...................................... 2,855 2,596
Other current assets..................................... -- 460
------------------------
Total current assets............................... 16,943 17,072
------------------------
Property, plant and equipment............................... 470,401 472,039
Less accumulated depreciation and amortization.............. (121,389) (125,584)
------------------------
Property, plant and equipment, net....................... 349,012 346,455
Goodwill, net............................................... 4,715 4,715
Investment in Skelly-Belvieu Pipeline Company............... 16,492 16,399
Other noncurrent assets, net................................ 384 384
------------------------
Total assets....................................... $ 387,546 $ 385,025
------------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 462 $ 416
Accounts payable and accrued liabilities................. 4,215 4,107
Taxes other than income taxes............................ 1,894 1,190
------------------------
Total current liabilities.......................... 6,571 5,713
Long-term debt, less current portion........................ 25,660 89,660
Other long-term liabilities................................. 2 --
Deferred income tax liabilities............................. 13,147 --
Commitments and contingencies
Partners' equity:
Common units (9,599,322 and 9,654,572 outstanding as of
2001 and 2002, respectively)........................... 169,305 168,433
Subordinated units (9,599,322 outstanding as of 2001 and
2002).................................................. 116,399 115,429
General partner's equity................................. 5,831 5,790
Net parent investment in the Wichita Falls Business...... 50,631 --
------------------------
Total partners' equity.......................... 342,166 289,652
------------------------
Total liabilities and partners' equity.......... $ 387,546 $ 385,025
--------------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-2

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

-----------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------------------
(UNAUDITED, IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA) 2001 2002
-----------------------------------------------------------------------------------

Revenues.................................................... $23,422 $ 26,024
---------------------
Costs and expenses:
Operating expenses........................................ 8,651 9,184
General and administrative expenses....................... 1,172 1,789
Depreciation and amortization............................. 3,238 4,355
---------------------
Total costs and expenses............................... 13,061 15,328
---------------------
Operating income............................................ 10,361 10,696
Interest expense, net..................................... (2,244) (556)
Equity income from Skelly-Belvieu Pipeline Company........ 669 678
---------------------
Income before income taxes.................................. 8,786 10,818
Provision for Income taxes................................ -- (395)
---------------------
Net income.................................................. $ 8,786 $ 10,423
---------------------
Allocation of net income:
General partner's interest in net income.................... $ 195
Limited partners' interest in net income.................... 9,578
Net income applicable to the Wichita Falls Business for the
month ended January 31, 2002.............................. 650
---------------------
Net income.................................................. $ 10,423
---------------------
Basic and diluted net income per limited partnership unit... $ 0.50
---------------------
Weighted average number of limited partnership units
outstanding............................................... 19,241,617
-----------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-3

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------
(UNAUDITED, IN THOUSANDS) 2001 2002
--------------------------------------------------------------------------------

Cash Flows from Operating Activities:
Net income.................................................. $8,786 $ 10,423
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 3,238 4,355
Equity income from Skelly-Belvieu Pipeline Company..... (669) (678)
Deferred income taxes.................................. -- 54
Compensation recognized under the restricted unit
plan.................................................. -- 132
Changes in operating assets and liabilities:
Increase in receivable from parent................... (7,780) (35)
Decrease (increase) in accounts receivable........... (674) 259
Increase in other current assets..................... (555) (460)
Decrease in accounts payable, accrued liabilities and
taxes other than income taxes....................... (2,078) (782)
Distributions of equity income from Skelly-Belvieu
Pipeline Company...................................... 639 771
Decrease in other long-term liabilities................ -- (2)
------------------
Net cash provided by operating activities......... 907 14,037
------------------
Cash Flows from Investing Activities:
Maintenance capital expenditures............................ (745) (789)
Expansion capital expenditures.............................. (162) (1,009)
Acquisition of the Wichita Falls Business................... -- (64,000)
------------------
Net cash used in investing activities............. (907) (65,798)
------------------
Cash flows from financing activities:
Proceeds from long-term debt borrowings..................... -- 64,000
Repayment of long-term debt................................. -- (46)
Distribution to Valero Energy in January 2002 related to the
Wichita Falls Business.................................... -- (512)
Payment of distributions to unitholders..................... -- (11,788)
------------------
Net cash provided by financing activities......... -- 51,654
------------------
Net decrease in cash and cash equivalents................... -- (107)
Cash and cash equivalents as of the beginning of the
period.................................................... 4 7,796
------------------
Cash and cash equivalents as of the end of the period....... $ 4 $ 7,689
--------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-4

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

Valero L.P. is a Delaware limited partnership owned approximately 73% by Valero
Energy Corporation (Valero Energy) and approximately 27% by public unitholders.
Valero Logistics Operations, L.P. (Valero Logistics) is also a Delaware limited
partnership and is a subsidiary of Valero L.P. As used in these interim
financial statements, the term "we," "our," "us" or similar words or phrases may
refer, depending on the context, to Valero L.P., Valero Logistics or both of
them taken as a whole.

We own and operate 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 and Three Rivers refineries located
in Texas and its Ardmore refinery located in Oklahoma.

Valero Energy is a refining and marketing company with 12 refineries and
approximately 4,600 company-operated and dealer-operated convenience stores.
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. 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 other wholesale and spot
market sales and exchange agreements.

On December 31, 2001, Valero Energy completed its acquisition of Ultramar
Diamond Shamrock Corporation in a purchase business combination. The assets
acquired included Ultramar Diamond Shamrock's ownership in Valero L.P. and
Valero Logistics as well as ownership of Riverwalk Logistics, L.P. (Riverwalk
Logistics), the general partner of both Valero L.P. and Valero Logistics at such
time.

NOTE 2: BASIS OF PRESENTATION

These unaudited consolidated and combined financial statements have been
prepared in accordance with United States' generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and notes required by
United States generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain previously reported amounts have been reclassified to conform
to the 2002 presentation.

F-5

Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The balance sheet as of December 31, 2001 has been derived from the
audited consolidated financial statements as of that date and restated to
include the balances of the Wichita Falls Business as discussed below, but does
not include all of the information and notes required by United States generally
accepted accounting principles for complete financial statements.

In addition, substantially all of our revenues are derived from Valero Energy
and its various subsidiaries, based on the operations of Valero Energy's McKee,
Three Rivers and Ardmore refineries. Accordingly, our results are directly
impacted by the operations of these three Valero Energy refineries.

These consolidated and combined financial statements should be read along with
the audited consolidated and combined financial statements and notes thereto
included in Valero L.P.'s Form 10-K/A filed on April 3, 2002 and Valero L.P.'s
Form 8-K/A dated February 1, 2002 and filed on April 16, 2002.

Reclassifications: Certain previously reported amounts have been reclassified
for comparative purposes.

ACQUISITION OF THE WICHITA FALLS BUSINESS

On February 1, 2002, we acquired the Wichita Falls Crude Oil Pipeline and
Storage Business (the Wichita Falls Business) from Valero Energy for a total
cost of $64,000,000. The purchase price was funded with borrowings under Valero
Logistics' revolving credit facility.

The Wichita Falls Business consists of the following assets:

- A 271.7 mile pipeline originating in Wichita Falls, Texas and ending
at Valero Energy's McKee refinery in Dumas, Texas. The pipeline has the
capacity to transport 110,000 barrels per day of crude oil gathered or
acquired by Valero Energy at Wichita Falls. The Wichita Falls crude oil
pipeline connects to third party pipelines that originate along the
Texas Gulf Coast.

- Four storage tanks located in Wichita Falls, Texas with a total
capacity of 660,000 barrels.

In the fourth quarter of 2001, Ultramar Diamond Shamrock 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 to increase the capacity of the storage
facility from 360,000 barrels to 660,000 barrels.

Since the acquisition of the Wichita Falls Business represents the transfer of a
business under the common control of Valero Energy, the balance sheet as of
December 31, 2001 and the statements of income and cash flows for the month
ended January 31, 2002 (preceding the acquisition date) have been restated to
include the Wichita Falls Business. The assumed transfer to us as of December
31, 2001 (the earliest date on which common control existed) and the restatement
of the January 2002 statements of income and cash flows have been recorded based
on Valero Energy's historical cost, which was based on Valero Energy's
allocation of the purchase price paid for Ultramar Diamond Shamrock. The balance
sheet of the Wichita Falls

F-6

Business as of December 31, 2001, which is included in the combined balance
sheet as of December 31, 2001, includes the following amounts in the respective
captions.

-------------------------------------------------------------------------------
WICHITA FALLS
BUSINESS
(IN THOUSANDS) DECEMBER 31, 2001
-------------------------------------------------------------------------------

BALANCE SHEET CAPTION:
Property, plant and equipment............................ $64,160
Accrued liabilities...................................... 131
Taxes other than income taxes............................ 251
Deferred income tax liabilities.......................... 13,147
Net parent investment.................................... 50,631
-------------------------------------------------------------------------------

The following unaudited pro forma financial information for the three months
ended March 31, 2001 assumes that the Wichita Falls Business was acquired on
January 1, 2001 with borrowings under the revolving credit facility.

--------------------------------------------------------------------------------
THREE MONTHS ENDED
(IN THOUSANDS) MARCH 31, 2001
--------------------------------------------------------------------------------

PRO FORMA INCOME STATEMENT INFORMATION:
Revenues................................................. $27,298
Costs and expenses....................................... 14,642
Operating income......................................... 12,656
Net income............................................... 10,331
--------------------------------------------------------------------------------

Since Valero L.P. had not completed its IPO by March 31, 2001, all the net
income for the three months ended March 31, 2001 would have been allocated to
Valero Energy (the Business's parent), and thus there was no net income per
limited partnership unit for that period.

These interim financial statements represent the consolidated and combined
financial statements of Valero L.P., Valero Logistics and the Wichita Falls
Business as follows:

- consolidated financial statements of Valero L.P. and Valero Logistics,
including the Wichita Falls Business, as of March 31, 2002 and for the
two months ended March 31, 2002;

- consolidated and combined financial statements of Valero L.P., Valero
Logistics and the Wichita Falls Business as of December 31, 2001 and for
the one month ended January 31, 2002; and

- combined financial statements of Valero L.P. and Valero Logistics for
the three months ended March 31, 2001.

F-7

NOTE 3: ACCOUNTING PRONOUNCEMENTS

FASB STATEMENT NO. 144

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard 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 our financial
position or results of operations as a result of adopting this statement
effective January 1, 2002.

FASB STATEMENT NO. 145

- rescinds Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt,"

- rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"

- rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and

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. We do not expect that the
adoption of this statement will have a material impact on our financial position
or results of operations.

F-8

NOTE 4: COMMITMENTS AND CONTINGENCIES

In connection with the initial public offering of Valero L.P., Ultramar Diamond
Shamrock 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 Ultramar Diamond Shamrock by Valero Energy, Valero Energy has assumed this
environmental indemnification. In addition, as an operator or owner of the
assets, we could be held liable for pre-April 16, 2001 environmental damage
should Valero Energy be unable to fulfill its obligation. However, we believe
that such a situation is remote given Valero Energy's financial condition.

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 and for the years ended December 31, 1999, 2000 and 2001, and as of
and for the one month ended January 31, 2002, the Wichita Falls Business did not
incur any environmental liability; thus there was no accrual on January 31,
2002.

We are involved in various lawsuits, claims and regulatory proceedings
incidental to our business. In the opinion of management, the outcome of such
matters will not have a material adverse effect on our financial position or
results of operations.

NOTE 5: RELATED PARTY TRANSACTIONS

We have related party transactions with Valero Energy for pipeline tariff and
terminalling fee revenues, certain employee costs, insurance costs,
administrative costs and interest expense on the debt due to parent (for the
period January 1, 2001 to April 15, 2001). The receivable from parent 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 our behalf.

F-9

The following table summarizes transactions with Valero Energy:

--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------
(IN THOUSANDS) 2001 2002
--------------------------------------------------------------------------------

Revenues.................................................... $23,272 $25,910
Operating expenses.......................................... 2,683 3,407
General and administrative expenses......................... 1,300 1,300
Interest expense on debt due to parent...................... 2,154 --
--------------------------------------------------------------------------------

Under the Services Agreement with us, Valero Energy has agreed to provide the
corporate functions of legal, accounting, treasury, information technology and
other services for an annual fee of $5,200,000 until July 2008. 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. 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.

Under the Pipelines and Terminals Usage Agreement with us, Valero Energy has
agreed to use our 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 our 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 three months ended March 31, 2002, Valero
Energy used our pipelines to transport 91% of its crude oil shipped to and 79%
of the refined products shipped from the McKee, Three Rivers and Ardmore
refineries and Valero Energy used our terminalling services for 63% of all
refined products shipped from these refineries.

If market conditions change, either 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 our pipelines and
terminals at the required levels, Valero Energy's obligation to us will be
suspended during the period of the change in market conditions to the extent
required to avoid the material adverse effect. The economic-based production
cutbacks at the McKee, Three Rivers and Ardmore refineries during the first
quarter of 2002 were not considered a triggering event under the Pipelines and
Terminals Usage Agreement.

NOTE 6: LONG-TERM DEBT

As of March 31, 2002, Valero Logistics had $80,000,000 outstanding under its
$120,000,000 revolving credit facility. During the first quarter of 2002, Valero
Logistics borrowed $64,000,000 under its revolving credit facility to purchase
the Wichita Falls Business from Valero Energy.

F-10

The revolving credit facility expires on January 15, 2006 and borrowings under
the revolving credit facility bear interest at either an alternative base rate
or LIBOR at the option of Valero Logistics.

The revolving credit facility requires Valero Logistics to 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 is in compliance with all of these ratios and covenants.

NOTE 7: NET INCOME PER LIMITED PARTNERSHIP UNIT

The following table provides details of the basic and diluted net income per
limited partnership unit computations:

-------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------
NET INCOME UNITS PER UNIT
(IN THOUSANDS) (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------------------------------------------------

Limited partners' interest in net income........... $9,578
--------------------------------------
Basic net income per common and subordinated unit.. $9,578 19,242 $0.50
--------------------------------------
Dilutive net income per common and subordinated
unit............................................ $9,578 19,242 $0.50
-------------------------------------------------------------------------------------------

We generated sufficient net income such that the amount of net income allocated
to Valero L.P.'s common units was equal to the amount allocated to the
subordinated units, after consideration of the general partner interest.

Net income prior to Valero L.P.'s initial public offering on April 16, 2001 was
allocated entirely to Ultramar Diamond Shamrock and its affiliates and the net
income related to the Wichita Falls Business for the month ended January 31,
2002 of $650,000 was allocated entirely to Valero Energy, the Business's parent.

NOTE 8: RESTRICTED UNITS

Valero GP, LLC, the general partner of Riverwalk Logistics, adopted a long-term
incentive plan under which restricted units may be awarded to certain key
employees and non-employees. In January 2002, Valero GP, LLC granted a total of
55,250 restricted units to its officers and outside directors. One-third of the
restricted units will vest at the end of each year of the three-year vesting
period. For the three months ended March 31, 2002, we recognized $132,000 of
compensation expense associated with these restricted units, which were valued
at $40.95 per unit as of January 21, 2002, the date of grant.

NOTE 9: DISTRIBUTIONS

Valero L.P. makes quarterly distributions of 100% of its available cash,
generally defined as cash receipts less cash disbursements and cash reserves
established by the general partner in its sole discretion. Pursuant to the
partnership agreement, Riverwalk Logistics is entitled to

F-11

incentive distributions if the amount Valero L.P. distributes with respect to
any quarter exceeds specified target levels shown below:

-------------------------------------------------------------------------------------------
PERCENTAGE OF DISTRIBUTION
-----------------------------
QUARTERLY DISTRIBUTION AMOUNT PER UNIT UNITHOLDERS GENERAL PARTNER
-------------------------------------------------------------------------------------------

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%
-------------------------------------------------------------------------------------------

On February 14, 2002, Valero L.P. paid the fourth quarter cash distribution of
$0.60 per unit for a total distribution of $11,788,000, including $236,000 paid
to Riverwalk Logistics.

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.

NOTE 10: SUBSEQUENT EVENTS

REORGANIZATION OF GENERAL PARTNER OWNERSHIP OF VALERO LOGISTICS

As described in a Form 8-K filed by Valero L.P. with the Securities and Exchange
Commission on June 5, 2002, the general partner ownership of Valero Logistics
was reorganized on May 30, 2002, resulting in Valero Logistics being a
100%--owned subsidiary of Valero L.P.

GUARANTEE OF VALERO LOGISTICS DEBT SECURITIES BY VALERO L.P.

On June 6, Valero L.P. and Valero Logistics filed a Registration Statement on
Form S-3 (Registration Statement), and as a result, this information is being
provided to supplement information previously reported in Valero L.P.'s Form
10-Q for the first quarter of 2002. Under the Registration Statement, Valero
L.P. may issue common units and Valero Logistics may issue debt securities. All
operating assets of Valero L.P. are owned by, and all of the related operations
are accounted for within, Valero Logistics. Valero L.P. has no independent
assets or operations. Any debt securities issued by Valero Logistics pursuant to
the Registration Statement will be fully and unconditionally guaranteed by
Valero L.P.

The revolving credit facility of Valero Logistics contains certain provisions
that could restrict the ability of Valero L.P. to obtain funds from Valero
Logistics. The revolving credit facility requires that Valero Logistics 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.

F-12

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Unitholders of Valero L.P.:

We have audited the accompanying consolidated and combined balance sheets of
Valero L.P., formerly Shamrock Logistics, L.P. (a Delaware limited partnership)
and Valero Logistics Operations, L.P., formerly Shamrock Logistics Operations,
L.P. successor to the Ultramar Diamond Shamrock Logistics Business (a Delaware
limited partnership) (collectively, the Partnerships) as of December 31, 2001
and 2000 (successor), and the related consolidated and combined statements of
income, cash flows (as restated -- see Note 2), partners' equity/net parent
investment for the year ended December 31, 2001 and the six months ended
December 31, 2000 (successor) and the related combined statements of income,
cash flows (as restated -- see Note 2), partners' equity/net parent investment
for the six months ended June 30, 2000 and the year ended December 31, 1999
(predecessor). These financial statements are the responsibility of the
Partnership'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 consolidated and combined financial position of the
Partnerships as of December 31, 2001 and 2000, and the results of their
operations and their cash flows (as restated) 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
May 14, 2002

F-13

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

CONSOLIDATED AND COMBINED BALANCE SHEETS

------------------------------------------------------------------------------------
DECEMBER 31,
----------------------
(IN THOUSANDS) 2000 2001
------------------------------------------------------------------------------------
(RESTATED)

ASSETS
Current assets:
Cash and cash equivalents................................ $ 4 $ 7,796
Receivable from parent................................... 22,348 6,292
Accounts receivable...................................... 2,386 2,855
Other current assets..................................... 3,528 --
----------------------
Total current assets.................................. 28,266 16,943
----------------------
Property, plant and equipment............................... 388,537 470,401
Less accumulated depreciation and amortization.............. (108,520) (121,389)
----------------------
Property, plant and equipment, net....................... 280,017 349,012
Goodwill, net............................................... 5,014 4,715
Investment in Skelly-Belvieu Pipeline Company............... 16,187 16,492
Other noncurrent assets, net................................ -- 384
----------------------
Total assets.......................................... $ 329,484 $ 387,546
----------------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 608 $ 462
Accounts payable and accrued liabilities................. 2,685 4,215
Taxes other than income taxes............................ 3,601 1,894
----------------------
Total current liabilities............................. 6,894 6,571
Long-term debt, less current portion........................ 10,076 25,660
Debt due to parent.......................................... 107,676 --
Other long-term liabilities................................. -- 2
Deferred income tax liabilities............................. -- 13,147
Commitments and contingencies
Partners' equity:
Common Units (9,599,322 outstanding as of December 31,
2001).................................................. -- 169,305
Subordinated Units (9,599,322 outstanding as of December
31, 2001).............................................. -- 116,399
Limited partners' equity................................. 202,790 --
General partner equity................................... 2,048 5,831
Net parent investment.................................... -- 50,631
----------------------
Total partners' equity................................ 204,838 342,166
----------------------
Total liabilities and partners' equity................ $ 329,484 $ 387,546
------------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-14

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

-------------------------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
-------------------------- ---------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA) 1999 2000 2000 2001
-------------------------------------------------------------------------------------------------------

Revenues.................................... $109,773 $44,503 $47,550 $98,827
--------------------------------------------------------
Costs and expenses:
Operating expenses....................... 29,013 17,912 15,593 33,583
General and administrative expenses...... 4,698 2,590 2,549 5,349
Depreciation and amortization............ 12,318 6,336 5,924 13,390
--------------------------------------------------------
Total costs and expenses.............. 46,029 26,838 24,066 52,322
Gain on sale of property, plant and
equipment............................. 2,478 -- -- --
--------------------------------------------------------
Operating income............................ 66,222 17,665 23,484 46,505
Interest expense, net.................... (777) (433) (4,748) (3,811)
Equity income from Skelly-Belvieu Pipeline
Company............................... 3,874 1,926 1,951 3,179
--------------------------------------------------------
Income before income taxes.................. 69,319 19,158 20,687 45,873
Benefit (provision) for income taxes..... (26,521) 30,812 -- --
--------------------------------------------------------
Net income.................................. $42,798 $49,970 $20,687 $45,873
--------------------------------------------------------
Allocation of 2001 net income:
Net income applicable to the period
January 1 to April 15, 2001........... $10,126
Net income applicable to the period after
April 15, 2001........................ 35,747
--------------------------------------------------------
Net income............................ $45,873
--------------------------------------------------------
General partner interest in net income
applicable to the period after April 15,
2001..................................... $715
--------------------------------------------------------
Limited partners' interest in net income
applicable to the period after April 15,
2001..................................... $35,032
--------------------------------------------------------
Basic and diluted net income per unit
applicable to the period after April 15,
2001..................................... $1.82
--------------------------------------------------------
Weighted average number of units outstanding
for the period from April 16 to December
31, 2001................................. 19,198,644
-------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-15

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

------------------------------------------------------------------------------------------------------------------
PREDECESSOR
------------------------- SUCCESSOR
SIX ---------------------------
MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
(RESTATED, IN THOUSANDS) 1999 2000 2000 2001
------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net income............................................... $42,798 $49,970 $20,687 $45,873
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 12,318 6,336 5,924 13,390
Amortization of debt issuance costs................... -- -- -- 90
Equity income from Skelly-Belvieu Pipeline Company.... (3,874) (1,926) (1,951) (3,179)
Gain on sale of property, plant and equipment......... (2,478) -- -- --
(Benefit) provision for deferred income taxes......... 3,622 (36,677) -- --
Changes in operating assets and liabilities:
Decrease (increase) in receivable from parent...... (1) -- (22,347) 16,056
Decrease (increase) in accounts receivable......... (42) 263 (1,676) (469)
Decrease (increase) in other current assets........ -- -- (3,528) 3,528
Increase (decrease) in accounts payable, accrued
liabilities and taxes other than income taxes... (142) 492 2,810 (559)
Distributions of equity income from Skelly-Belvieu
Pipeline Company................................... 4,078 1,926 1,951 2,874
Increase in other noncurrent assets................... -- -- -- (474)
Increase (decrease) in other long-term liabilities.... (2,225) (137) -- 2
-------------------------------------------------------
Net cash provided by operating activities.......... 54,054 20,247 1,870 77,132
-------------------------------------------------------
Cash flows from investing activities:
Maintenance capital expenditures......................... (2,060) (1,699) (619) (2,786)
Expansion capital expenditures........................... (7,313) (3,186) (1,518) (15,140)
Distributions in excess of equity income from
Skelly-Belvieu Pipeline Company....................... 160 380 401 --
Proceeds from sale of property, plant and equipment...... 12,000 -- -- --
-------------------------------------------------------
Net cash (used in) provided by investing
activities...................................... 2,787 (4,505) (1,736) (17,926)
-------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt borrowings.................. -- -- -- 25,506
Repayment of long-term debt.............................. (353) (284) (134) (10,068)
Partners' contributions.................................. 1 -- 1 --
Distributions to parent and affiliates................... (56,489) (15,458) -- (29,000)
Net proceeds from sale of common units to the public..... -- -- -- 111,912
Distribution to affiliates of parent for reimbursement of
capital expenditures.................................. -- -- -- (20,517)
Repayment of debt due to parent.......................... -- -- -- (107,676)
Payment of distributions to unitholders.................. -- -- -- (21,571)
-------------------------------------------------------
Net cash used in financing activities.............. (56,841) (15,742) (133) (51,414)
-------------------------------------------------------
Net increase in cash and cash equivalents................ -- -- 1 7,792
Cash and cash equivalents as of the beginning of
period................................................ 3 3 3 4
-------------------------------------------------------
Cash and cash equivalents as of the end of period........ $3 $3 $4 $7,796
-------------------------------------------------------
Non-cash activities--Deemed contribution of the Wichita
Falls Business to Valero L.P. by Valero Energy:
Property, plant and equipment...................... $-- $-- $-- $(64,160)
Accrued liabilities and taxes other than income
taxes........................................... -- -- -- 382
Deferred income tax liabilities.................... -- -- -- 13,147
Net parent investment.............................. -- -- -- 50,631
------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-16

SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

COMBINED STATEMENTS OF PARTNERS' EQUITY/NET PARENT INVESTMENT
YEAR ENDED DECEMBER 31, 1999 AND THE
SIX MONTHS ENDED JUNE 30, 2000 AND DECEMBER 31, 2000

-----------------------------------------------------------------------
(IN THOUSANDS)
-----------------------------------------------------------------------

Balance as of January 1, 1999............................... $268,497
Net income................................................ 42,798
Net change in parent advances............................. (56,489)
Partners' contributions................................... 1
--------
Balance as of December 31, 1999............................. 254,807
Net income................................................ 49,970
Net change in parent advances............................. (15,458)
Formalization of the terms of debt due to parent.......... (107,676)
--------
Balance as of June 30, 2000................................. 181,643
Net income................................................ 20,687
Partners' contributions................................... 1
Environmental liabilities as of June 30, 2000 retained by
Ultramar Diamond Shamrock Corporation.................. 2,507
--------
Balance as of December 31, 2000............................. $204,838
-----------------------------------------------------------------------

F-17

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

CONSOLIDATED AND COMBINED STATEMENT OF PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 2001

-----------------------------------------------------------------------------------------------
LIMITED PARTNERS' TOTAL
----------------------- GENERAL NET PARENT PARTNERS'
(IN THOUSANDS) COMMON SUBORDINATED PARTNER INVESTMENT EQUITY
-----------------------------------------------------------------------------------------------

Combined balance as of
January 1, 2001.................. $202,790 $ -- $2,048 $ -- $204,838
Net income applicable to the period
January 1 to April 15, 2001...... 10,025 -- 101 -- 10,126
Distributions to affiliates of
Ultramar Diamond Shamrock
Corporation of net income
applicable to the period July 1,
2000 to April 15, 2001........... (28,710) -- (290) -- (29,000)
Distribution to affiliates of
Ultramar Diamond Shamrock
Corporation for reimbursement of
capital expenditures............. (20,517) -- -- -- (20,517)
Issuance of common and subordinated
units for the contribution of
Valero Logistics' limited partner
interest......................... (113,141) 109,453 3,688 -- --
Sale of common units to the
public........................... 111,912 -- -- -- 111,912
Net income applicable to the period
from April 16 to December 31,
2001............................. 17,516 17,516 715 -- 35,747
Cash distributions to
unitholders...................... (10,570) (10,570) (431) -- (21,571)
Adjustment for the Wichita Falls
Business transaction............. -- -- -- 50,631 50,631
----------------------------------------------------------
Consolidated balance as of December
31, 2001......................... $169,305 $116,399 $5,831 $50,631 $342,166
-----------------------------------------------------------------------------------------------

See accompanying notes to consolidated and combined financial statements.

F-18

VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
(FORMERLY SHAMROCK LOGISTICS, L.P. AND SHAMROCK LOGISTICS OPERATIONS, L.P.)
(SUCCESSOR TO THE ULTRAMAR DIAMOND SHAMROCK LOGISTICS BUSINESS)

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

Valero L.P. (formerly Shamrock Logistics, L.P.), a Delaware limited partnership
and majority-owned subsidiary of Valero Energy Corporation (Valero Energy) was
formed to ultimately acquire Valero Logistics Operations, L.P. (formerly
Shamrock Logistics Operations, L.P.)

Valero Logistics Operations, L.P. (Valero Logistics), 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 Logistics 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 and Three Rivers refineries
located in Texas and its Ardmore refinery located in Oklahoma.

Valero Energy is an independent refining and marketing company. Prior to the
acquisition of Ultramar Diamond Shamrock Corporation 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.
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.

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.
F-19

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 Ultramar Diamond Shamrock.

ACQUISITION OF ULTRAMAR DIAMOND SHAMROCK BY VALERO ENERGY

On May 7, 2001, Ultramar Diamond Shamrock announced that it had entered into an
Agreement and Plan of Merger (the acquisition agreement) with Valero Energy
whereby Ultramar Diamond Shamrock 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 Ultramar Diamond Shamrock and Valero
Energy approved the acquisition and, on December 31, 2001, Valero Energy
completed its acquisition of Ultramar Diamond Shamrock. Under the acquisition
agreement, Ultramar Diamond Shamrock shareholders received, for each share of
Ultramar Diamond Shamrock 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
price of Valero Energy common stock 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 Ultramar Diamond
Shamrock. On December 31, 2001, upon Valero Energy's acquisition of Ultramar
Diamond Shamrock, Valero Energy assumed Ultramar Diamond Shamrock's ownership of
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, L.P.

Valero Energy is the ultimate parent of Riverwalk Logistics, L.P. (Riverwalk
Logistics), the general partner of both Valero L.P. and Valero Logistics. In
addition, Valero Energy became the

F-20

obligor under the various agreements between Ultramar Diamond Shamrock and us,
including the Services Agreement, the Pipelines and Terminals Usage Agreement
and the environmental indemnification.

As used in these audited financial statements, the terms "we," "our," "us" or
similar words or phrases may refer, depending on the context, to Valero L.P. or
Valero Logistics or both of them taken as a whole.

REORGANIZATIONS AND INITIAL PUBLIC OFFERING

Prior to July 1, 2000, the pipeline, terminalling and storage assets and
operations included in these financial statements were referred to as the
Ultramar Diamond Shamrock Logistics Business as if it had existed as a single
separate entity from Ultramar Diamond Shamrock. Ultramar Diamond Shamrock formed
Valero Logistics to assume ownership of and to operate the assets of the
Ultramar Diamond Shamrock Logistics Business. Effective July 1, 2000, Ultramar
Diamond Shamrock transferred the crude oil and refined product pipelines,
terminalling and storage assets and certain liabilities of the Ultramar Diamond
Shamrock Logistics Business (predecessor) to Valero Logistics (successor). The
transfer of assets and certain liabilities to Valero Logistics represented a
reorganization of entities under common control and was recorded at historical
cost.

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 held by various
subsidiaries of Ultramar Diamond Shamrock 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.

These audited financial statements represent the consolidated and combined
financial statements of Valero L.P., Valero Logistics, the Wichita Falls
Business and the Ultramar Diamond Shamrock Logistics Business as follows:

- consolidated and combined financial statements of Valero L.P., Valero
Logistics (successor) and the Wichita Falls Business as of December 31,
2001;

- consolidated financial statements of Valero L.P. and Valero Logistics
(successor) for the period from April 16, 2001 to December 31, 2001;

F-21

OPERATIONS

Our 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 our principal assets and operations:

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

INVESTMENT IN SKELLY-BELVIEU PIPELINE COMPANY, LLC
Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu
Pipeline Company) owns a natural gas liquids pipeline that begins in Skellytown,
Texas and extends to Mont Belvieu, Texas near Houston. Skelly-Belvieu Pipeline
Company is owned 50% by Valero Logistics and 50% by Phillips Pipeline Company.

F-22

ASSETS RETAINED BY VALERO ENERGY (FORMERLY ULTRAMAR DIAMOND SHAMROCK)
Ultramar Diamond Shamrock 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. We 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
us in 2001, and the Wichita Falls crude oil pipeline and crude oil storage
facility was purchased by us on February 1, 2002 (see Note 4: Acquisitions).

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: These consolidated and combined financial statements
include the accounts and operations of Valero L.P., Valero Logistics and the
Wichita Falls Business (effective December 31, 2001). All intercompany
transactions have been eliminated. The investment in Skelly-Belvieu Pipeline
Company is accounted for under the equity method. The operations of certain of
the crude oil and refined product pipelines and terminals that are jointly owned
with other companies are proportionately consolidated in the accompanying
financial statements.

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, 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

F-23

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.

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.

Revenue Recognition: Revenues are derived from interstate and intrastate
pipeline transportation, storage and terminalling of refined products and crude
oil. Transportation revenues (based on pipeline tariff rates) are recognized as
refined product or crude oil is transported through the pipelines. In the case
of crude oil pipelines, the cost of the storage operations are included in the
crude oil pipeline tariff rates. Terminalling revenues (based on a terminalling
fee) are recognized as refined products are moved into the terminal and as
additives are blended with refined products.

Operating Expenses: Operating expenses consist primarily of fuel and power
costs, telecommunication costs, labor costs of pipeline field and support
personnel, maintenance, utilities, insurance and taxes other than income taxes.
Such expenses are recognized as incurred.

Federal and State Income Taxes: For the periods prior to July 1, 2000, the
Ultramar Diamond Shamrock Logistics Business was included in the consolidated
federal and state income tax returns of Ultramar Diamond Shamrock. 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. The current portion of income taxes
payable prior to July 1, 2000 was due to Ultramar Diamond Shamrock and has been
included in the net parent investment amount.

The Wichita Falls Business was included in Ultramar Diamond Shamrock's (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

F-24

Energy and were credited to net parent investment upon the transfer of the
Wichita Falls Business to Valero L.P.

Valero L.P. and Valero Logistics are limited partnerships and are not subject to
federal or state income taxes. Accordingly, the taxable income or loss of Valero
L.P. and Valero Logistics, 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 subsequent to the initial public offering, we have made
an election permitted by section 754 of the Internal Revenue Code to adjust the
common unit purchaser's tax basis in our 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.

Restatement of Consolidated and Combined Statements of Cash Flow: The
consolidated and combined statements of cash flows have been restated to
reclassify distributions received from Skelly-Belvieu Pipeline Company to
conform to the 2002 presentation. Distributions that relate to equity income
generated by the joint venture are reflected as cash flows from operating
activities while distributions in excess of equity income generated by the joint
venture are reflected as cash flows from investing activities.

Net Parent Investment: The net parent investment, prior to July 1, 2000,
represents a net balance as the result of various transactions between the
Ultramar Diamond Shamrock Logistics Business and Ultramar Diamond Shamrock.
There are no terms of settlement or interest charges associated with this
balance. The balance was the result of the Ultramar Diamond Shamrock Logistics
Business' participation in Ultramar Diamond Shamrock's central cash management
program, wherein all of the Ultramar Diamond Shamrock Logistics Business' cash
receipts were remitted to Ultramar Diamond Shamrock and all cash disbursements
were funded by Ultramar Diamond Shamrock. Other transactions included
intercompany transportation, storage and terminalling revenues and related
expenses, administrative and support expenses incurred by Ultramar Diamond
Shamrock and allocated to the Ultramar Diamond Shamrock Logistics Business, and
income taxes. In conjunction with the transfer of the assets and liabilities of
the Ultramar Diamond Shamrock Logistics Business to Valero Logistics on July 1,
2000, Valero L.P. and Valero Logistics issued limited and general partner
interests to various Ultramar Diamond Shamrock subsidiaries.

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, for which we
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.

Partners' Equity: Effective April 16, 2001, Valero L.P.'s consolidated partners'
equity consisted of 2% general partner interest and 98% limited partners'
interest (represented by common and subordinated units). From July 1, 2000
through April 15, 2001, both Valero L.P. and Valero Logistics partners' equity
consisted of a 1% general partner interest and a 99% limited partner interest.

F-25

Net Income per Unit: The computation of basic net income per unit is based on
the weighted-average number of common and subordinated units outstanding during
the year. Diluted net income per unit is based on the weighted average number of
common and subordinated units outstanding during the year and, to the extent
dilutive, unit equivalents consisting of unit options and restricted units.

Segment Disclosures: We operate in only one segment, the petroleum pipeline
segment of the oil and gas industry.

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. We adopted Statement No. 133, as amended,
effective January 1, 2001 and there was no impact as we do not hold or trade
derivative instruments.

Reclassifications: Certain previously reported amounts have been reclassified
for comparative purposes.

ACCOUNTING PRONOUNCEMENTS

FASB STATEMENT NO. 141

FASB STATEMENT NO. 142

F-26

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. We have 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, we believe that future reported net income may be more
volatile because impairment losses related to goodwill are likely to occur
irregularly and in varying amounts.

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. We are currently evaluating the impact of adopting this new
statement.

FASB STATEMENT NO. 144

F-27

years, with early application encouraged. There was no impact to our financial
position or results of operations as a result of adopting this statement
effective January 1, 2002.

FASB STATEMENT NO. 145

- rescinds Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt,"

- rescinds Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements,"

- rescinds Statement No. 44, "Accounting for Intangible Assets of Motor
Carriers," and

NOTE 3: 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, a subsidiary of Valero Energy,
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 Valero L.P.'s initial public offering, Valero
Logistics 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 us, and
for working capital purposes.

F-28

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, we acquired the Southlake refined product terminal located in
Dallas, Texas from Ultramar Diamond Shamrock for $5,600,000, the option purchase
price per the Omnibus Agreement. We paid for the terminal with available cash on
hand, a portion of which was borrowed at the time of the initial public
offering. During the six months ended December 31, 2001, the Southlake refined
product terminal averaged approximately 25,000 barrels per day of throughput and
increased our operating income by approximately $750,000.

On December 1, 2001, we acquired the crude oil storage facility at Ringgold,
Texas from Ultramar Diamond Shamrock for $5,200,000, the amended option purchase
price per the Omnibus Agreement. Valero Logistics borrowed $5,000,000 under its
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, we 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.

F-29

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.

BALANCE SHEET CAPTION:
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
-------------------------------------------------------------------------------

The following unaudited pro forma financial information for the year ended
December 31, 2001 assumes that the Wichita Falls Business was acquired on
January 1, 2001 with borrowings under the revolving credit facility.

-------------------------------------------------------------------------------
PRO FORMA
YEAR ENDED
(IN THOUSANDS) DECEMBER 31, 2001
-------------------------------------------------------------------------------

PRO FORMA INCOME STATEMENT INFORMATION:
Revenues................................................. $117,312
Total costs and expenses................................. (59,993)
Operating income......................................... 57,319
Net income............................................... 53,686
-------------------------------------------------------------------------------

Since Valero L.P. did not complete its IPO until April 16, 2001, pro forma net
income applicable to the period April 16, 2001 to December 31, 2001 would have
been $41,844,000, of which $41,007,000 would have related to the limited
partners. Pro forma net income per unit applicable to the period after April 15,
2001 would have been $2.14 per unit.

F-30

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, consisted of the following:

-------------------------------------------------------------------------------------------
ESTIMATED DECEMBER 31,
USEFUL ---------------------
(IN THOUSANDS) LIVES 2000 2001
-------------------------------------------------------------------------------------------
(YEARS)

Land and land improvements.............................. 0-20 $ 830 $ 888
Buildings............................................... 35 3,289 5,392
Pipeline and equipment.................................. 3-40 345,761 427,227
Rights of way........................................... 20-35 25,477 29,857
Construction in progress................................ - 13,180 7,037
---------------------------------
Total................................................ 388,537 470,401
Accumulated depreciation and amortization............... (108,520) (121,389)
---------------------------------
Property, plant and equipment, net................... $ 280,017 $ 349,012
-------------------------------------------------------------------------------------------

In August 1999, upon the completion of an expansion of the McKee to El Paso
refined product pipeline, we sold an 8.33% interest in the pipeline and the El
Paso refined product terminal to Phillips Petroleum Company for $12,000,000,
resulting in a pre-tax gain of $2,478,000. The ownership interest sold in the
McKee to El Paso refined product pipeline and terminal represented excess
throughput capacity that we had not utilized, thus revenues did not decline as a
result of the sale.

Capitalized interest costs included in property, plant and equipment were
$115,000 and $298,000 for the years ended December 31, 1999 and 2001,
respectively. No interest was capitalized in the six months ended June 30, 2000
or in the six months ended December 31, 2000.

F-31

NOTE 6: INVESTMENT IN SKELLY-BELVIEU PIPELINE COMPANY

We own a 50% interest in Skelly-Belvieu Pipeline Company, which is accounted for
under the equity method. The following presents summarized unaudited financial
information related to Skelly-Belvieu Pipeline Company as of December 31, 2000
and 2001, for the years ended December 31, 1999 and 2001 and for the six months
ended June 30, 2000 and December 31, 2000:

---------------------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1999 2000 2000 2001
---------------------------------------------------------------------------------------------

STATEMENT OF INCOME INFORMATION:
Revenues............................ $12,133 $6,902 $6,883 $12,287
Income before income taxes.......... 5,954 3,469 3,517 5,587
Valero Logistics' share of net
income........................... 3,874 1,926 1,951 3,179
Valero Logistics' share of
distributions.................... 4,238 2,306 2,352 2,874
---------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------
DECEMBER 31,
------------------
(IN THOUSANDS) 2000 2001
--------------------------------------------------------------------------------

BALANCE SHEET INFORMATION:
Current assets.............................................. $ 1,618 $ 1,653
Property, plant and equipment, net.......................... 50,649 50,195
------------------
Total assets............................................. $52,267 $51,848
------------------
Current liabilities......................................... $ 369 $ 111
Members' equity............................................. 51,898 51,737
------------------
Total liabilities and members' equity.................... $52,267 $51,848
--------------------------------------------------------------------------------

NOTE 7: LONG-TERM DEBT

On December 15, 2000, Valero Logistics 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 LIBOR at Valero Logistics'
option. The revolving credit facility requires that Valero Logistics 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 is in compliance with all of these ratios and covenants.

In conjunction with Valero L.P.'s initial public offering of common units on
April 16, 2001, Valero Logistics 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 Ultramar Diamond Shamrock for reimbursement
of previous capital expenditures incurred with respect to the assets transferred
to us, and for working capital purposes.

F-32

Valero Logistics 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, Valero
Logistics 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 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, the
$10,818,000 outstanding indebtedness owed to the Port of Corpus Christi
Authority was assumed by Valero Logistics. 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
----------------------------------------------------------------------

Interest payments totaled $948,000, $433,000, $441,000 and $1,559,000 for the
year ended December 31, 1999, the six months ended June 30, 2000 and December
31, 2000 and the year ended December 31, 2001, respectively.

NOTE 8: DEBT DUE TO PARENT

Ultramar Diamond Shamrock, 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 Ultramar Diamond Shamrock 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. Interest expense accrued and recorded as a
reduction of receivable from parent totaled $4,307,000 for the six months ended
December 31, 2000 and $2,513,000 for the period January 1, 2001 through April
15, 2001.

F-33

Concurrent with the closing of Valero L.P.'s initial public offering on April
16, 2001, we 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: Initial public offering).

NOTE 9: ENVIRONMENTAL MATTERS

The balances of and changes in accruals for environmental matters which were
included in accrued liabilities and other long-term liabilities, prior to July
1, 2000, consisted of the following:

---------------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
(IN THOUSANDS) 1999 2000
---------------------------------------------------------------------------------------

Balance as of beginning of period........................... $ 4,319 $ 2,757
Additions to (reductions from) accrual.................... (1,114) 100
Liabilities retained by Ultramar Diamond Shamrock......... -- (2,507)
Payments.................................................. (448) (350)
-------------------------
Balance as of end of period................................. $ 2,757 $ --
---------------------------------------------------------------------------------------

During 1999, based on the annual review of environmental liabilities, it was
determined that certain liabilities were overstated as the required cleanup
obligations were less than originally estimated. Accordingly, environmental
liabilities were reduced $1,114,000.

In connection with the transfer of assets and liabilities from the Ultramar
Diamond Shamrock Logistics Business to Shamrock Logistics Operations on July 1,
2000, Ultramar Diamond Shamrock 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., Ultramar Diamond
Shamrock 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 Ultramar Diamond Shamrock, Valero Energy has assumed this environmental
indemnification. In addition, as an operator or owner of the assets,

F-34

we could be held liable for pre-April 16, 2001 environmental damage should
Valero Energy be unable to fulfill its obligation. However, we believe that such
a situation is remote given Valero Energy's financial condition.

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 and for the years ended December 31, 1999, 2000 and 2001, the
Wichita Falls Business did not incur 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 us 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. We share 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 we 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 we pay for the use of the crude oil dock reduces the annual
amount we owe to the Port Authority of Corpus Christi under the note agreement
discussed in Note 7: Long-term debt. The wharfage and dockage fees for our use
of the crude oil dock totaled $1,302,000, $698,000, $692,000 and $1,449,000 for
the year ended December 31, 1999, the six months ended June 30, 2000 and
December 31, 2000 and the year ended December 31, 2001, respectively.

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. We also operate the refined product dock and operating costs are
split between us and one other user. We are responsible for collecting and
remitting the refined product wharfage and dockage fees to the Port Authority of
Corpus Christi. The wharfage and dockage fees for our use of the refined product
dock totaled $211,000, $114,000, $86,000 and $166,000 for the year ended
December 31, 1999, the six months ended June 30, 2000 and December 31, 2000 and
the year ended December 31, 2001, respectively.

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 years ended

F-35

December 31, 1999, 2000 and 2001, the Three Rivers refinery received 91%, 93%
and 92%, respectively, of its crude oil requirements from crude oil received at
the crude oil dock. Also, for the years ended December 31, 1999, 2000 and 2001,
7%, 6% and 6%, respectively, of the refined products produced at the Three
Rivers refinery were transported via pipeline to the Corpus Christi refined
product dock.

We have the following land leases related to refined product terminals and crude
oil storage facilities:

- 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.

- 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.

- 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.

- 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, we lease 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
---------------------------------------------------------------------

Rental expense for all operating leases totaled $315,000, $203,000, $53,000 and
$281,000 for the year ended December 31, 1999, the six months ended June 30,
2000 and December 31, 2000 and the year ended December 31, 2001, respectively.

F-36

NOTE 11: INCOME TAXES

As discussed in "Note 2: Summary of significant accounting policies," Valero
L.P. and Valero Logistics are limited partnerships and are not subject to
federal or state income taxes. However, the operations of the Ultramar Diamond
Shamrock Logistics Business were subject to federal and state income taxes and
the results of operations prior to July 1, 2000 were included in Ultramar
Diamond Shamrock's consolidated federal and state income tax returns. In
addition, the Wichita Falls Business is subject to federal and state income
taxes prior to its acquisition on February 1, 2002. The amounts presented below
relate only to the Ultramar Diamond Shamrock Logistics Business prior to July 1,
2000 and the Wichita Falls Business as of December 31, 2001 and were calculated
as if the Businesses filed separate federal and state income tax returns.

The transfer of assets and liabilities from the Ultramar Diamond Shamrock
Logistics Business to Valero Logistics was deemed a change in tax status.
Accordingly, the deferred income tax liability as of June 30, 2000 of
$38,217,000 was written off through the statement of income in the caption,
benefit (provision) for income taxes.

The benefit (provision) for income taxes consisted of the following:

---------------------------------------------------------------------------------------
PREDECESSOR
-------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
(IN THOUSANDS) 1999 2000
---------------------------------------------------------------------------------------

Current:
Federal.................................................. $(20,036) $(5,132)
State.................................................... (2,863) (733)
Deferred:
Federal.................................................. (3,327) (1,415)
State.................................................... (295) (125)
Write-off of the deferred income tax liability.............. - 38,217
-------------------------
Benefit (provision) for income taxes..................... $(26,521) $30,812
---------------------------------------------------------------------------------------

F-37

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 components of the net deferred income tax liabilities consisted
of the following:

-------------------------------------------------------------------------------------------
ULTRAMAR DIAMOND
SHAMROCK LOGISTICS
BUSINESS WICHITA FALLS
(PREDECESSOR) BUSINESS
(IN THOUSANDS) JUNE 30, 2000 DECEMBER 31, 2001
-------------------------------------------------------------------------------------------

Deferred income tax liabilities:
Excess of book basis over tax basis of:
Property, plant and equipment................... $36,212 $13,147
Investment in Skelly-Belvieu Pipeline Company... 2,960 -
--------------------------------------
Total deferred income tax liabilities........ 39,172 13,147
Deferred income tax assets --
Accrued liabilities and payables................ (955) -
--------------------------------------
Net deferred income tax liabilities.......... $38,217 $13,147
-------------------------------------------------------------------------------------------

The differences between the Ultramar Diamond Shamrock Logistics Business'
effective income tax rate and the U.S. federal statutory rate is reconciled as
follows:

------------------------------------------------------------------------------------------
PREDECESSOR
------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------------------------------------------------------------------------------

U.S. federal statutory rate......................... 35.0% 35.0%
State income taxes, net of federal taxes............ 3.1 3.1
Non-deductible goodwill............................. 0.2 0.3
------------------------------------
Effective income tax rate........................ 38.3% 38.4%
------------------------------------------------------------------------------------------

Income taxes paid to Ultramar Diamond Shamrock totaled $22,899,000 and
$5,865,000 for the year ended December 31, 1999 and for the six months ended
June 30, 2000, respectively. The differences between net income and taxable net
income are reconciled as follows:

------------------------------------------------------------------------------------------
PREDECESSOR
------------------------------------
YEAR ENDED SIX MONTHS ENDED
(IN THOUSANDS) DECEMBER 31, 1999 JUNE 30, 2000
------------------------------------------------------------------------------------------

Net income.......................................... $42,798 $49,970
(Benefit) provision for income taxes................ 26,521 (30,812)
Tax depreciation and amortization in excess of book
depreciation and amortization.................... (7,990) (3,076)
Book equity income in excess of taxable income of
Skelly-Belvieu Pipeline Company.................. (790) (567)
Other, net.......................................... (3,288) (983)
------------------------------------
Taxable net income............................ $57,251 $14,532
------------------------------------------------------------------------------------------

F-38

NOTE 12: FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The estimated fair value of our fixed rate debt as of December 31, 2000 and 2001
was $119,220,000 and $11,240,000, respectively, as compared to the carrying
value of $118,360,000 and $10,122,000, respectively. These fair values were
estimated using discounted cash flow analysis, based on our current incremental
borrowing rates for similar types of borrowing arrangements. Valero L.P. 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.

Substantially all of our revenues are derived from Valero Energy and its various
subsidiaries. Valero Energy transports crude oil to three of its refineries
using our various crude oil pipelines and storage facilities and transports
refined products to its company-owned retail operations or wholesale customers
using our various refined product pipelines and terminals. Valero Energy and its
subsidiaries are investment grade customers; therefore, we do 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 our overall
exposure, both positively and negatively, to changes in the refining and
marketing industry.

NOTE 13: RELATED PARTY TRANSACTIONS

We have related party transactions with Valero Energy for pipeline tariff and
terminalling fee revenues, certain employee costs, insurance costs,
administrative costs and interest expense on the debt due to parent (for the
period from July 1, 2000 to April 15, 2001). The receivable from parent as of
December 31, 2000 and 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 our behalf, respectively.

The following table summarizes transactions with Valero Energy (formerly
Ultramar Diamond Shamrock):

------------------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
------------------------- ---------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1999 2000 2000 2001
------------------------------------------------------------------------------------------------

Revenues................................ $108,467 $44,187 $47,210 $98,166
Operating expenses...................... 9,614 5,393 5,718 11,452
General and administrative expenses..... 5,201 2,839 2,600 5,200
Interest expense on debt due to parent.. - - 4,307 2,513
------------------------------------------------------------------------------------------------

SERVICES AGREEMENT

Effective July 1, 2000, Ultramar Diamond Shamrock entered into a Services
Agreement with us, whereby Ultramar Diamond Shamrock 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

F-39

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 we reimburse Ultramar Diamond Shamrock
for various recurring costs of employees who work exclusively within the
pipeline, terminalling and storage operations and for certain other costs
incurred by Ultramar Diamond Shamrock relating solely to us. These employee
costs include salary, wages and benefit costs. Concurrent with the acquisition
of Ultramar Diamond Shamrock by Valero Energy, Valero Energy became the obligor
under the Services Agreement.

Prior to July 1, 2000, Ultramar Diamond Shamrock 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 us. The net amount of general and
administrative costs allocated to partners of jointly owned pipelines totaled
$503,000, $249,000, $251,000 and $581,000 for the year ended December 31, 1999,
the six months ended June 30, 2000 and December 31, 2000 and the year ended
December 31, 2001, respectively.

PIPELINES AND TERMINALS USAGE AGREEMENT

On April 16, 2001, Ultramar Diamond Shamrock entered into a Pipelines and
Terminals Usage Agreement with us, whereby Ultramar Diamond Shamrock agreed to
use our 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 our 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, Ultramar
Diamond Shamrock used our 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 Ultramar Diamond Shamrock used our 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 Ultramar Diamond Shamrock 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 our pipelines and terminals at the
required levels, Valero Energy's obligation to us will be suspended during the
period of the change in market conditions to the extent required to avoid the
material adverse effect.

NOTE 14: EMPLOYEE BENEFIT PLANS

The employees who work in Valero L.P. 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

F-40

insurance plans, long-term incentive plans (i.e. stock options and bonuses) and
other such benefits.

Our share of allocated parent company employee benefit plan expenses was
$1,197,000, $702,000, $662,000 and $1,346,000 for the year ended December 31,
1999, the six months ended June 30, 2000 and December 31, 2000 and the year
ended December 31, 2001, respectively. These employee benefit plan expenses are
included in operating expenses with the related payroll costs.

NOTE 15: IMPACT OF TARIFF RATE AND TERMINALLING REVENUE CHANGES

Over the past several years, we have expanded the throughput capacity of several
of our crude oil and refined product pipelines. The historical tariff rates were
based on initial pipeline cost and were not revised upon subsequent expansions
or increases or decreases in throughput levels.

As a result, we filed revised tariff rates on many of our crude oil and refined
product pipelines to reflect the total cost of the pipeline, the current
throughput capacity, the current throughput utilization and other market
conditions. The revised tariff rates were implemented January 1, 2000 and the
overall impact of the tariff rate changes resulted in a decrease to revenues.

Prior to 1999, we did not charge a separate terminalling fee for terminalling
services at the refined product terminals. Terminalling revenues for 1998 and
prior years were recognized based on the total costs incurred at the terminals,
which costs were charged back to the related refinery. Effective January 1,
1999, we began charging a separate terminalling fee at the refined product
terminals. The terminalling fee was established at a rate that we believed to be
competitive with rates charged by other entities for terminalling similar
refined products. Since the terminalling fee now includes a margin of profit,
terminalling revenues increased.

If the revised tariff rates had been implemented effective January 1, 1999
revenues would have decreased approximately 20%.

NOTE 16: RESTRICTED UNITS

Valero GP, LLC (formerly Shamrock Logistics GP, LLC), the general partner of
Riverwalk Logistics, adopted a long-term incentive plan under which restricted
units 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 and DERs to each of its two outside directors. The restricted units 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 unitholders receive over the
vesting period. For the year ended December 31, 2001, we recognized $2,000 of
compensation expense associated with the restricted units and DERs that were
granted.

F-41

NOTE 17: NET INCOME PER UNIT

The following table provides details of the basic and diluted net income per
unit computations:

-------------------------------------------------------------------------------------------
PERIOD FROM APRIL 16, 2001
TO DECEMBER 31, 2001
--------------------------------------
NET INCOME UNITS PER UNIT
(IN THOUSANDS) (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------------------------------------------------

Limited partners' interest in net income applicable
to the period after April 15, 2001............... $35,032
--------------------------------------
Basic net income per common and subordinated unit.. $35,032 19,199 $1.82
--------------------------------------
Dilutive net income per common and subordinated
unit............................................. $35,032 19,199 $1.82
-------------------------------------------------------------------------------------------

We generated sufficient net income such that the amount of net income allocated
to common units was equal to the amount allocated to the subordinated units,
after consideration of the general partner interest.

NOTE 18: 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, Riverwalk Logistics.

The outstanding subordinated units 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.
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 Valero L.P. 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 it 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 may convert to common units 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 the partnership agreement. If the subordination period ends, the rights
of the holders of subordinated units will no longer be

F-42

subordinated to the rights of the holders of common units and the subordinated
units may be converted into common units.

During the subordination period, Valero L.P.'s cash is distributed first 98% to
the holders of common units and 2% to our 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 our general
partner until there has been distributed to the holders of subordinated units an
amount equal to the minimum quarterly distribution.

Riverwalk Logistics is entitled to incentive distributions if the amount Valero
L.P. distributes with respect to any quarter exceeds specified target levels
shown below:

-----------------------------------------------------------------------------------
PERCENTAGE OF
DISTRIBUTION
---------------------
GENERAL
QUARTERLY DISTRIBUTION AMOUNT PER UNIT UNITHOLDERS PARTNER
-----------------------------------------------------------------------------------

The quarterly cash distributions 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
------------------------------------------------------------------------------------------

F-43

NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)

-------------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
----------------- -----------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER UNIT DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
-------------------------------------------------------------------------------------------

2000:
Revenues.................................. $21,406 $23,097 $24,903 $22,647 $92,053
Operating income.......................... 8,604 9,061 12,298 11,186 41,149
Net income(1)............................. 5,695 44,275 11,041 9,646 70,657
Pro forma net income per unit(2).......... 0.29 2.26 0.56 0.49 3.60
-------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------
SUCCESSOR
-------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER UNIT DATA) QUARTER QUARTER QUARTER QUARTER TOTAL
-------------------------------------------------------------------------------------------

2001:
Revenues.................................. $23,422 $23,637 $26,857 $24,911 $98,827
Operating income.......................... 10,361 10,319 13,430 12,395 46,505
Net income................................ 8,786 10,356 13,771 12,960 45,873
Net income per unit(3).................... -- 0.46 0.70 0.66 1.82
Pro forma net income per unit(2).......... 0.45 0.53 0.70 0.66 2.34
Cash distributions per unit(4)............ -- 0.50 0.60 0.60 1.70
-------------------------------------------------------------------------------------------

(1) Due to a change in tax status, effective July 1, 2000, the deferred income
tax liability of $38,217,000 as of June 30, 2000 was written off in the
statement of income. Net income in the second quarter of 2000 includes this
$38,217,000 write-off of the deferred income tax liability less the provision
for income taxes of $3,843,000 for the second quarter of 2000. Net income in the
first quarter of 2000 includes a provision for income taxes of $3,562,000. Net
income before income taxes was $9,257,000 and $9,901,000 for the first and
second quarters of 2000, respectively.

(2) Pro forma net income per unit is determined by dividing net income that
would have been allocated to the common and subordinated unitholders, which is
98% of net income, by the weighted average number of common and subordinated
units outstanding for the period from April 16 to December 31, 2001. Pro forma
net income per unit adjusted to eliminate the impact of income taxes for the
first and second quarters of 2000 would have been $0.47 and $0.51, respectively.

(3) The net income per unit is based on 19,198,644 units, which was the number
of common and subordinated units issued and outstanding from April 16, 2001 (the
date of Valero L.P.'s initial public offering) to December 31, 2001. Net income
in the net income per unit computation excludes net income applicable to the 2%
general partner interest.

(4) Represents cash distributions per unit that were declared for each
applicable quarter since Valero L.P. became a publicly held entity.

NOTE 20: SUBSEQUENT EVENTS

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 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.

F-44

PROSPECTUS

$500,000,000

VALERO L.P.

COMMON UNITS

---------------------

VALERO LOGISTICS OPERATIONS, L.P.

DEBT SECURITIES

FULLY AND UNCONDITIONALLY GUARANTEED BY VALERO L.P.

---------------------

Valero L.P. may, in one or more offerings, offer and sell common units
representing limited partner interests in Valero L.P.

Valero Logistics Operations may, in one or more offerings, offer and sell
its debt securities, which will be fully and unconditionally guaranteed by
Valero L.P.

The aggregate initial offering price of the securities that we offer by
this prospectus will not exceed $500,000,000. We will offer the securities in
amounts, at prices and on terms to be determined by market conditions at the
time of our offerings. We will provide the specific terms of the securities in
supplements to this prospectus. The applicable prospectus supplement may also
add, update or change information contained in this prospectus.

You should read this prospectus and the prospectus supplement carefully
before you invest in any of our securities. This prospectus may not be used to
consummate sales of our securities unless it is accompanied by a prospectus
supplement.

Valero L.P. common units are listed for trading on The New York Stock
Exchange under the symbol "VLI."

SEE "RISK FACTORS" ON PAGE 4 TO READ ABOUT IMPORTANT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING OUR SECURITIES.

---------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is June 17, 2002.

TABLE OF CONTENTS

ABOUT VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P...... 1
ABOUT THIS PROSPECTUS....................................... 1
WHERE YOU CAN FIND MORE INFORMATION......................... 1
FORWARD-LOOKING STATEMENTS.................................. 3
RISK FACTORS................................................ 4
Risks Inherent In Our Business............................ 4
Risks Inherent In An Investment In Valero L.P............. 12
Tax Risks................................................. 14
USE OF PROCEEDS............................................. 16
RATIO OF EARNINGS TO FIXED CHARGES.......................... 16
DESCRIPTION OF COMMON UNITS................................. 17
Number of Units........................................... 17
Voting.................................................... 17
Listing................................................... 18
Transfer Agent and Registrar.............................. 18
CASH DISTRIBUTIONS.......................................... 18
Distributions Of Available Cash........................... 18
Operating Surplus, Capital Surplus And Adjusted Operating
Surplus................................................ 18
Subordination Period...................................... 19
Distributions of Available Cash from Operating Surplus
During the Subordination Period........................ 20
Distributions of Available Cash from Operating Surplus
After the Subordination Period......................... 20
Incentive Distribution Rights............................. 21
Percentage Allocations Of Available Cash From Operating
Surplus................................................ 21
Distributions From Capital Surplus........................ 22
Adjustment To The Minimum Quarterly Distribution And
Target Distribution Levels............................. 22
Distributions Of Cash Upon Liquidation.................... 23
DESCRIPTION OF DEBT SECURITIES.............................. 25
Parent Guarantee.......................................... 25
Specific Terms of Each Series of Debt Securities in the
Prospectus Supplement.................................. 25
Provisions Only in the Senior Indenture................... 26
Provisions Only in the Subordinated Indenture............. 30
Consolidation, Merger or Asset Sale....................... 30
Modification of Indentures................................ 31
Events of Default and Remedies............................ 32
Registration of Debt Securities........................... 33
Minimum Denominations..................................... 33
No Personal Liability of General Partner.................. 33
Payment and Transfer...................................... 33
Form, Exchange, Registration and Transfer................. 33
Discharging Valero Logistics' Obligations................. 34
The Trustee............................................... 34
Governing Law............................................. 35
BOOK ENTRY, DELIVERY AND FORM............................... 35

TAX CONSIDERATIONS.......................................... 37
Partnership Status........................................ 37
Tax Treatment Of Unitholders.............................. 39
Tax Treatment Of Operations............................... 42
Disposition Of Common Units............................... 44
Tax-Exempt Organizations And Other Investors.............. 46
Administrative Matters.................................... 47
State, Local, And Other Tax Considerations................ 49
Tax Consequences of Ownership of Debt Securities.......... 50
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS.................. 51
PLAN OF DISTRIBUTION........................................ 52
VALIDITY OF THE SECURITIES.................................. 53
EXPERTS..................................................... 53
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS.................... 53

ABOUT VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.

Valero L.P. is a publicly traded Delaware limited partnership formed in
1999 that owns, through its 100%-owned operating subsidiary, Valero Logistics
Operations, L.P. (Valero Logistics), 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 Corporation's McKee, Three
Rivers, and Ardmore refineries located in Texas and Oklahoma. We transport crude
oil to these refineries and transport refined products from these refineries to
our terminals for further distribution to Valero Energy's company-operated
convenience stores or wholesale customers located in Texas, Oklahoma, Colorado,
New Mexico, and Arizona.

The general partner of Valero L.P., Riverwalk Logistics, L.P. (Riverwalk
Logistics), holds no assets other than its investment in Valero L.P. Riverwalk
Logistics is an indirect wholly owned subsidiary of Valero Energy, a publicly
held company whose annual and quarterly financial statements are filed with the
Securities and Exchange Commission. The financial information of Riverwalk
Logistics is included in the consolidated financial statements of Valero Energy.

Our principal executive offices are located at One Valero Place, San
Antonio, Texas 78212, and our phone number is (210) 370-2000.

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf registration process, we may sell up to $500,000,000 in total
offering amount of the common units of Valero L.P. or debt securities of Valero
Logistics described in this prospectus in one or more offerings. This prospectus
generally describes us and the common units of Valero L.P. and debt securities
of Valero Logistics. Each time we sell common units or debt securities with this
prospectus, we will provide a prospectus supplement that will contain specific
information about the terms of that offering and the securities offered by us in
that offering. The prospectus supplement may also add to, update or change
information in this prospectus. The information in this prospectus is accurate
as of its date. You should carefully read both this prospectus and any
prospectus supplement and the additional information described below under the
heading "Where You Can Find More Information."

As used in this prospectus, "we," "us," and "our" and similar terms mean
either or both of Valero L.P. and Valero Logistics, except that those terms,
when used in this prospectus in connection with

- the common units described herein mean Valero L.P. and

- the debt securities described herein mean Valero Logistics,

unless the context indicates otherwise.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement with the SEC under the Securities
Act of 1933 that registers the securities offered by this prospectus. The
registration statement, including the attached exhibits, contains additional
relevant information about us. The rules and regulations of the SEC allow us to
omit some information included in the registration statement from this
prospectus.

In addition, Valero L.P. files annual, quarterly and other reports and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference room. Our SEC filings are also available
at the SEC's web site at http://www.sec.gov.

The SEC allows us to "incorporate by reference" the information Valero L.P.
has filed with the SEC. This means that we can disclose important information to
you without actually including the specific information in this prospectus by
referring you to another document filed separately with the SEC. The information
incorporated by reference is an important part of this prospectus. Information
that Valero L.P. files later with the SEC will automatically update and may
replace information in this prospectus and information previously filed with the
SEC.

We incorporate by reference the documents listed below that Valero L.P. has
previously filed with the SEC. They contain important information about us, our
financial condition and results of operations. Some of these documents have been
amended by later filings, which are also listed.

- Valero L.P.'s Annual Report on Form 10-K for the year ended December 31,
2001 (as amended on April 4, 2002);

- Valero L.P.'s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2002;

- Valero L.P.'s Current Report on Form 8-K dated February 1, 2002 (as
amended on April 16, 2002);

- Valero L.P.'s Current Report on Form 8-K dated May 15, 2002;

- Valero L.P.'s Current Report on Form 8-K dated May 30, 2002;

- Valero L.P.'s Current Report on Form 8-K dated June 6, 2002;

- the description of our common units contained in our registration
statement on Form 8-A, filed on March 30, 2001; and

- any future filings made with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 subsequent to the date of
this prospectus and until all of the securities offered by this
prospectus have been sold.

We also incorporate by reference any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
the initial registration statement and prior to effectiveness of the
registration statement.

You may obtain any of the documents incorporated by reference in this
document through us or from the SEC through the SEC's website at the address
provided above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents, unless the exhibit is
specifically incorporated by reference in this document, by requesting them in
writing or by telephone from us at the following address:

Investor Relations
Valero L.P.
One Valero Place
San Antonio, Texas 78212
Telephone: (210) 370-2000

FORWARD-LOOKING STATEMENTS

Some of the information included in this prospectus, the accompanying
prospectus supplement and the documents we incorporate by reference contain
"forward-looking" statements as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and information relating to us that is based on the beliefs of our management as
well as assumptions made by and information currently available to management.
The words "anticipate," "believe," "estimate," "expect," and "intend" and words
or phrases or similar expressions, as they relate to us or our management,
identify forward-looking statements. These statements reflect the current views
of management with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations, including as a result of:

- competitive factors such as competing pipelines;

- pricing pressures and changes in market conditions;

- reductions in production at the refineries that we supply with crude oil
and whose refined products we transport;

- inability to acquire additional nonaffiliated pipeline entities;

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

- shifts in market demand;

- general economic conditions; and

- other factors.

Should one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.

Finally, our future results will depend upon various other risks and
uncertainties, including, but not limited to, those detailed in Valero L.P.'s
other filings with the SEC. For additional information regarding risks and
uncertainties, please read Valero L.P.'s other current filings with the SEC
under the Exchange Act and the Securities Act, particularly under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Valero L.P.'s Current Report on Form 8-K dated May 15, 2002.

RISK FACTORS

Limited partner interests are inherently different from the capital stock
of a corporation, although many of the business risks to which we are subject
are similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together with
all of the other information included in this prospectus in evaluating an
investment in our securities.

If any of the following risks were actually to occur, our business,
financial condition, or results of operations could be materially adversely
affected. In that case, the trading price of our securities could decline and
you could lose all or part of your investment.

RISKS INHERENT IN OUR BUSINESS

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO ENABLE US TO
PAY THE REQUIRED PAYMENTS TO OUR DEBT HOLDERS OR THE MINIMUM QUARTERLY
DISTRIBUTION ON THE COMMON UNITS EVERY QUARTER.

Because the amount of cash we are able to pay to our debt holders or
distribute on the common units is principally dependent on the amount of cash we
are able to generate from operations, which will fluctuate from quarter to
quarter based on our performance, we may not be able to pay all our debt or the
minimum quarterly distribution on the common units for each quarter. The amount
of cash flow we generate from operations is in turn principally dependent on the
average daily volumes of crude oil and refined products transported through our
pipelines, the tariff rates and terminalling fees we charge, and the level of
operating costs we incur.

Other factors affecting the actual amount of cash that we will have
available include the following:

- required principal and interest payments on our debt;

- the costs of acquisitions;

- restrictions contained in our debt instruments;

- issuances of debt and equity securities;

- fluctuations in working capital;

- capital expenditures; and

- adjustments in reserves made by the general partner in its discretion.

Cash distributions to debt and equity holders are dependent primarily on
cash flow, including cash flow from financial reserves and working capital
borrowings, and not solely on profitability, which is affected by non-cash
items. Therefore, we may make cash distributions during periods when we record
losses and may not make cash distributions during periods when we record net
income.

YOU MAY RECEIVE LESS THAN YOUR DEBT PAYMENTS OR THE MINIMUM QUARTERLY
DISTRIBUTION BECAUSE FEES AND COST REIMBURSEMENTS DUE TO VALERO ENERGY AND ITS
AFFILIATES MAY BE SUBSTANTIAL AND WILL REDUCE OUR CASH AVAILABLE FOR
DISTRIBUTION.

Prior to making any distribution on the common units, we have agreed to pay
Valero Energy and its affiliates an administrative fee that currently equals
$5.2 million on an annualized basis in exchange for providing corporate, general
and administrative services to us. Valero L.P.'s general partner, with approval
and consent of the conflicts committee of its general partner, will have the
right to increase the annual administrative fee by up to 1.5% each year, as
further adjusted for inflation, during the eight-year term of the services
agreement and may agree to further increases in connection with expansions of
our operations through the acquisition or construction of new logistics assets
that require additional administrative services. Additionally, we reimburse
Valero Energy and its affiliates for direct expenses it incurs to provide all
other services to us (for example, salaries for pipeline operations personnel).
The direct expenses we reimbursed to Valero Energy and its affiliates were
approximately $12 million in 2001. The payment of the

annual administrative fee and the reimbursement of direct expenses could
adversely affect our ability to make cash distributions to our unitholders.

WE DEPEND UPON VALERO ENERGY FOR THE CRUDE OIL AND REFINED PRODUCTS
TRANSPORTED IN OUR PIPELINES AND HANDLED AT OUR TERMINALS AND STORAGE
FACILITIES, AND ANY REDUCTION IN THOSE QUANTITIES COULD REDUCE OUR ABILITY TO
MAKE CASH DISTRIBUTIONS TO OUR UNITHOLDERS OR PAYMENTS TO OUR DEBT HOLDERS.

Because of the geographic location of our pipelines, terminals, and storage
facilities, we depend almost exclusively upon Valero Energy to provide
throughput for our pipelines and terminals. If Valero Energy were to decrease
the throughput of crude oil and/or refined products transported in our pipelines
for any reason, we would experience great difficulty in replacing those lost
barrels. For example, during January and February of 2002, Valero Energy
initiated economic-based refinery production cuts as a result of significantly
lower refining margins industry-wide, resulting in a decrease in throughput
barrels and revenues from some of our pipelines. Because our operating costs are
primarily fixed, a reduction in throughput would result in not only a reduction
of revenues but a decline in net income and cash flow of similar or greater
magnitude, which would reduce our ability to make cash distributions to our
unitholders or payments to our debt holders.

Valero Energy may reduce throughput in our pipelines either because of
market conditions that affect refineries generally or because of factors that
specifically affect Valero Energy. These conditions and factors include the
following:

- a decrease in demand for refined products in the markets served by our
pipelines;

- a temporary or permanent decline in the ability of the McKee, Three
Rivers, or Ardmore refineries to produce refined products;

- a decision by Valero Energy to redirect refined products transported in
our pipelines to markets not served by our pipelines or to transport
crude oil by means other than our pipelines;

- a decision by Valero Energy to sell one or more of the McKee, Three
Rivers, or Ardmore refineries to a purchaser that elects not to use our
pipelines to deliver crude oil to, or transport refined products from,
the refinery;

- a loss of customers by Valero Energy in the markets served by our
pipelines or a failure to gain additional customers in growing markets;
and

- the completion of competing refined product pipelines in the western,
southwestern, and Rocky Mountain market regions.

DISTRIBUTIONS TO UNITHOLDERS OR PAYMENTS TO OUR DEBT HOLDERS COULD BE
ADVERSELY AFFECTED BY A SIGNIFICANT DECREASE IN DEMAND FOR REFINED PRODUCTS IN
THE MARKETS SERVED BY OUR PIPELINES.

Any sustained decrease in demand for refined products in the markets served
by our pipelines could result in a significant reduction in throughput in our
crude oil and refined product pipelines and therefore in our cash flow, reducing
our ability to make distributions to our unitholders or payments to our debt
holders. Factors that could lead to a decrease in market demand include:

- a recession or other adverse economic condition that results in lower
spending by consumers on gasoline, diesel, and travel;

- higher fuel taxes or other governmental or regulatory actions that
increase, directly or indirectly, the cost of gasoline or diesel;

- an increase in fuel economy, whether as a result of a shift by consumers
to more fuel-efficient vehicles or technological advances by
manufacturers. Pending legislation in the U.S. Congress, such as the
National Fuel Savings and Security Act of 2002 and the Fuel Economy and
Security Act of 2002, may mandate such increases in fuel economy in the
future;

- an increase in the market price of crude oil that leads to higher refined
product prices, which may reduce demand for gasoline or diesel. Market
prices for crude oil and refined products are subject to wide fluctuation
in response to changes in global and regional supply over which neither
we nor Valero Energy have any control, and recent significant increases
in the price of crude oil may result in a lower demand for refined
products; and

- the increased use of alternative fuel sources, such as battery-powered
engines. Several state and federal initiatives mandate this increased
use. For example, the Energy Policy Act of 1992 requires 75% of all new
vehicles purchased by federal agencies since 1999, 75% of all new
vehicles purchased by state governments since 2000, and 70% of all new
vehicles purchased for private fleets in 2006 and thereafter to use
alternative fuels. Additionally, California has enacted a regulation
requiring that by the year 2003, 10% of all fleets delivered to
California for sale be zero-emissions vehicles.

OUR ABILITY TO MAKE PAYMENTS TO DEBT HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS
COULD BE REDUCED BY A MATERIAL DECLINE IN PRODUCTION BY ANY OF VALERO ENERGY'S
MCKEE, THREE RIVERS, OR ARDMORE REFINERIES.

Any significant curtailing of production at the McKee, Three Rivers, or
Ardmore refineries could, by reducing throughput in our pipelines, result in our
realizing materially lower levels of revenues and cash flow for the duration of
the shutdown. Operations at a refinery could be partially or completely shut
down, temporarily or permanently, as the result of a number of circumstances,
none of which are within our control, such as:

- scheduled turnarounds or unscheduled maintenance or catastrophic events
at a refinery;

- labor difficulties that result in a work stoppage or slowdown at a
refinery;

- environmental proceedings or other litigation that compel the cessation
of all or a portion of the operations at a refinery;

- increasingly stringent environmental regulations, such as the
Environmental Protection Agency's Gasoline Sulfur Control Requirements
and Diesel Fuel Sulfur Control Requirements which limit the concentration
of sulfur in gasoline and diesel fuel;

- a disruption in the supply of crude oil to a refinery; and

- a governmental ban or other limitation on the use of an important product
of a refinery.

The magnitude of the effect on us of any shutdown will depend on the length
of the shutdown and the extent of the refinery operations affected by the
shutdown. Furthermore, we have no control over the factors that may lead to a
shutdown or the measures Valero Energy may take in response to a shutdown.
Valero Energy will make all decisions at the refineries concerning levels of
production, regulatory compliance, refinery turnarounds, labor relations,
environmental remediation, and capital expenditures.

VALERO ENERGY'S SEVEN-YEAR AGREEMENT TO USE OUR PIPELINES AND TERMINALS WILL
BE SUSPENDED IF MATERIAL CHANGES IN MARKET CONDITIONS OCCUR THAT HAVE A
MATERIAL ADVERSE EFFECT ON VALERO ENERGY, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO MAKE PAYMENTS TO DEBT HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS.

If market conditions with respect to the transportation of crude oil or
refined products or with respect to the end markets in which Valero Energy sells
refined products change in a material manner such that Valero Energy would
suffer a material adverse effect if it were to continue to use our pipelines and
terminals at the required levels, Valero Energy's obligation to us will be
suspended during the period of the change in market conditions to the extent
required to avoid the material adverse effect. Any suspension of Valero Energy's
obligation could adversely affect throughput in our pipelines and terminals and
therefore our ability to make payments to debt holders or distributions to
unitholders.

The concepts of a material change in market conditions and material adverse
effect on Valero Energy are not defined in the agreement. However, situations
that might constitute a material change in market

conditions having a material adverse effect on Valero Energy include the cost of
transporting crude oil or refined products by our pipelines becoming materially
more expensive than transporting crude oil or refined products by other means or
a material change in refinery profit that makes it materially more advantageous
for Valero Energy to shift large volumes of refined products from markets served
by our pipelines to pipelines retained by Valero Energy or owned by third
parties. Valero Energy may suspend obligations by presenting a certificate from
its chief financial officer that there has been a material change in market
conditions having a material adverse effect on Valero Energy. If we disagree
with Valero Energy, we have the right to refer the matter to an independent
accounting firm for resolution.

ANY LOSS BY VALERO ENERGY OF CUSTOMERS IN THE MARKETS SERVED BY OUR REFINED
PRODUCT PIPELINES MAY ADVERSELY AFFECT OUR ABILITY TO MAKE PAYMENTS TO DEBT
HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS.

Should Valero Energy's retail marketing efforts become unsuccessful and
result in declining or stagnant sales of its refined products, Valero Energy
would have to find other end-users for its refined products. It may not choose
or be able to replace lost branded retail sales through wholesale, spot, and
exchange sales. Any failure by Valero Energy to replace lost branded retail
sales could adversely affect throughput in our pipelines and, therefore, our
cash flow and ability to make payments to debt holders or distributions to
unitholders.

IF OUR ASSUMPTIONS CONCERNING POPULATION GROWTH ARE INACCURATE OR VALERO
ENERGY'S GROWTH STRATEGY IS NOT SUCCESSFUL, OUR ABILITY TO MAKE PAYMENTS TO
DEBT HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS MAY BE ADVERSELY AFFECTED.

Our growth strategy is dependent upon:

- the accuracy of our assumption that many of the markets that we serve in
the southwestern and Rocky Mountain regions of the United States will
experience population growth that is higher than the national average;
and

- the willingness and ability of Valero Energy to capture a share of this
additional demand in its existing markets and to identify and penetrate
new markets in the southwestern and Rocky Mountain regions of the United
States.

If our assumption about growth in market demand proves incorrect, Valero
Energy may not have any incentive to increase refinery capacity and production,
shift additional throughput to our pipelines, or shift volumes from our lower
tariff pipelines to our higher tariff pipelines, which would adversely affect
our growth strategy. Furthermore, Valero Energy is under no obligation to pursue
a growth strategy with respect to its business that favors us. If Valero Energy
chooses not, or is unable, to gain additional customers in new or existing
markets in the southwestern and Rocky Mountain regions of the United States, our
growth strategy would be adversely affected.

NEW COMPETING REFINED PRODUCT PIPELINES COULD CAUSE DOWNWARD PRESSURE ON
MARKET PRICES, AND AS A RESULT, VALERO ENERGY MIGHT DECREASE THE VOLUMES
TRANSPORTED IN OUR PIPELINES.

We are aware of a number of proposals or industry discussions regarding
refined product pipeline projects that, if or when undertaken and completed,
could adversely impact some of the most significant markets we serve. One of
these projects, the Longhorn Pipeline, will transport refined products from the
Texas Gulf Coast to El Paso. Most of the pipeline has been constructed, and it
has obtained regulatory approval and is expected to begin operation by the end
of 2002. The completion of the Longhorn Pipeline will increase the amount of
refined products available in the El Paso, New Mexico, and Arizona markets,
which could put downward pressure on refined product prices in those markets. As
a result, Valero Energy might not find it economically attractive to maintain
its current market share in those markets and might decrease the throughput in
our pipelines to those markets. In addition, two other refined product pipeline
projects have been announced, the Williams Pipeline project from northwestern
New Mexico to Salt Lake City, Utah and the Equilon Pipeline project from Odessa,
Texas to Bloomfield, New Mexico. It is uncertain if and when these proposed
pipelines will commence operations. If completed, these proposed

pipeline projects could cause downward pressure on market prices in the New
Mexico and Arizona markets and could cause Valero Energy to decrease the volumes
transported in our pipelines.

IF ONE OR MORE OF OUR TARIFF RATES IS REDUCED, IF FUTURE INCREASES IN OUR
TARIFF RATES DO NOT ALLOW US TO RECOVER FUTURE INCREASES IN OUR COSTS, OR IF
RATEMAKING METHODOLOGIES ARE ALTERED, OUR ABILITY TO MAKE PAYMENTS TO DEBT
HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS MAY BE ADVERSELY AFFECTED.

Our interstate pipelines are subject to extensive regulation by the Federal
Energy Regulatory Commission under the Interstate Commerce Act. This Act allows
the FERC, shippers, and potential shippers to challenge our current rates that
are already effective and any proposed changes to those rates, as well as our
terms and conditions of service. The FERC may subject any proposed changes to
investigation and possible refund or reduce our current rates and order that we
pay reparations for overcharges caused by these rates during the two years prior
to the beginning of the FERC's investigation. In addition, a state commission
could also investigate our intrastate rates or our terms and conditions of
service on its own initiative or at the urging of a shipper or other interested
parties.

Valero Energy has agreed not to challenge, or cause others to challenge,
our tariff rates until 2008. This agreement does not prevent other shippers or
future shippers from challenging our tariff rates. At the end of this time,
Valero Energy will be free to challenge, or cause other parties to challenge,
our tariff rates. If Valero Energy or any third party is successful in
challenging our tariff rates, we may not be able to sustain our rates, which may
adversely affect our revenues. Cash available for payments to debt holders or
distribution to unitholders could be materially reduced by a successful
challenge to our rates.

Despite Valero Energy's agreement not to challenge rates, adverse market
conditions could nevertheless cause us to lower our tariff rates. Valero Energy
may find it economically advantageous to reduce the feedstock consumption or the
production of refined products at the McKee, Three Rivers, or Ardmore refineries
or to transport refined products to markets other than those we serve, any of
which would have the effect of reducing throughput in our pipelines. If a
material change in market conditions occurs, the pipelines and terminals usage
agreement allows Valero Energy to reduce throughput in our pipelines.
Accordingly, we could be forced to lower our tariff rates in an effort to make
transportation through our pipelines economically attractive to Valero Energy in
order to maintain throughput volumes. However, even a significant reduction of
our tariffs may not provide enough economic incentive to Valero Energy to
maintain historical throughput levels.

Under the FERC's current ratemaking methodology, the maximum rate we may
charge with respect to interstate pipelines is adjusted up or down each year by
the percentage change in the producer price index for finished goods minus 1%.
The FERC's current methodology also allows us, in some circumstances, to change
rates based either on our cost of service, or market-based rates, or on a
settlement or agreement with all of our shippers, instead of the index-based
rate change. Under any of these methodologies, our ability to set rates based on
our true costs may be limited or delayed. If for any reason future increases in
our tariff rates are not sufficient to allow us to recover increases in our
costs, our ability to make payments to debt holders or distributions to
unitholders may be adversely affected.

Potential changes to current ratemaking methods and procedures of the FERC
and state regulatory commissions may impact the federal and state regulations
under which we will operate in the future. In addition, if the FERC's petroleum
pipeline ratemaking methodology were reviewed by a federal appeals court and
changed, this change could reduce our revenues and reduce cash available for
payments to debt holders or distribution to our unitholders.

A MATERIAL DECREASE IN THE SUPPLY, OR A MATERIAL INCREASE IN THE PRICE, OF
CRUDE OIL AVAILABLE FOR TRANSPORT THROUGH OUR PIPELINES TO VALERO ENERGY'S
REFINERIES, COULD MATERIALLY REDUCE OUR ABILITY TO MAKE PAYMENTS TO DEBT
HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS.

The volume of crude oil we transport in our crude oil pipelines depends on
the availability of attractively priced crude oil produced in the areas
accessible to our crude oil pipelines, imported to our Corpus Christi storage
facilities, and received from common carrier pipelines outside of our areas of

operations. If Valero Energy does not replace volumes lost due to a material
temporary or permanent decrease in supply from any of these sources with volumes
transported in one of our other crude oil pipelines, we would experience an
overall decline in volumes of crude oil transported through our pipelines and
therefore a corresponding reduction in cash flow. Similarly, if there were a
material increase in the price of crude oil supplied from any of these sources,
either temporary or permanent, which caused Valero Energy to reduce its
shipments in the related crude oil pipelines, we could experience a decline in
volumes of crude oil transported in our pipelines and therefore a corresponding
reduction in cash flow. Furthermore, a reduction of supply from our pipelines,
either because of the unavailability or high price of crude oil, would likely
result in reduced production of refined products at the McKee, Three Rivers, and
Ardmore refineries, causing a reduction in the volumes of refined products we
transport and our cash flow. Some of the local gathering systems that supply
crude oil that we transport to the McKee and Ardmore refineries are experiencing
a decline in production. Furthermore, international political and economic
uncertainties over which neither we nor Valero Energy have any control may
affect imports of crude oil.

IF WE ARE NOT ABLE TO SUCCESSFULLY ACQUIRE, EXPAND, AND BUILD PIPELINES AND
OTHER LOGISTICS ASSETS OR ATTRACT SHIPPERS IN ADDITION TO VALERO ENERGY, THE
GROWTH OF OUR BUSINESS WILL BE LIMITED.

We intend to grow our business in part through selective acquisitions,
expansions of pipelines, and construction of new pipelines, as well as by
attracting shippers in addition to Valero Energy. Each of these components has
uncertainties and risks associated with it, and none of these approaches may be
successful.

We may be unable to consummate any acquisitions or identify attractive
acquisition candidates in the future, to acquire assets or businesses on
economically acceptable terms, or to obtain financing for any acquisition on
satisfactory terms or at all. Valero Energy may not make any acquisitions that
would provide acquisition opportunities to us or, if these opportunities arose,
they may not be on terms attractive to us. Moreover, Valero Energy is not
obligated in all instances to offer to us logistics assets acquired as part of
an acquisition by Valero Energy. Valero Energy is also under no obligation to
sell to us any pipeline assets it owns.

Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations, technologies, and services of the acquired
companies or business segments, the diversion of management's attention from
other business concerns, and the potential loss of key employees of the acquired
businesses. As a result, our business could be adversely affected by an
acquisition.

The construction of a new pipeline or the expansion of an existing
pipeline, by adding additional horsepower or pump stations or by adding a second
pipeline along an existing pipeline, involves numerous regulatory,
environmental, political, and legal uncertainties beyond our control. These
projects may not be completed on schedule or at all or at the budgeted cost.
Moreover, our revenues may not increase immediately upon the expenditure of
funds on a particular project. For instance, if we build a new pipeline, the
construction will occur over an extended period of time and we will not receive
any material increases in revenues until after completion of the project. This
could have an adverse effect on our ability to make payments to debt holders or
distributions to unitholders.

Once we increase our capacity through acquisitions, construction of new
pipelines, or expansion of existing pipelines, we may not be able to obtain or
sustain throughput to utilize the newly available capacity. The underutilization
of a recently acquired, constructed, or expanded pipeline could adversely affect
our ability to make payments to debt holders or distributions to unitholders.

We may not be able to obtain financing of any acquisitions, expansions, and
new construction on satisfactory terms or at all. Furthermore, any debt we incur
may adversely affect our ability to make payments to debt holders or
distributions to unitholders.

We also plan to seek volumes of crude oil or refined products to transport
on behalf of shippers other than Valero Energy. However, volumes transported by
us for third parties have been very limited historically and because of our lack
of geographic relationship or interconnections with other refineries, we may not
be able to obtain material third party volumes.

ANY REDUCTION IN THE CAPACITY OF, OR THE ALLOCATIONS TO, OUR SHIPPERS IN
INTERCONNECTING THIRD PARTY PIPELINES COULD CAUSE A REDUCTION OF VOLUMES
TRANSPORTED IN OUR PIPELINES AND COULD NEGATIVELY AFFECT OUR ABILITY TO MAKE
PAYMENTS TO DEBT HOLDERS OR DISTRIBUTIONS TO UNITHOLDERS.

Valero Energy and the other shippers in our pipelines are dependent upon
connections to third party pipelines both to receive crude oil from the Texas
Gulf Coast, the Permian Basin, and other areas and to deliver refined products
to outlying market areas in Arizona, the midwestern United States, and the Rocky
Mountain region of the United States. Any reduction of capacities in these
interconnecting pipelines due to testing, line repair, reduced operating
pressures, or other causes could result in reduced volumes transported in our
pipelines. Similarly, any reduction in the allocations to our shippers in these
interconnecting pipelines because additional shippers begin transporting volumes
over the pipelines could also result in reduced volumes transported in our
pipelines. Any reduction in volumes transported in our pipelines could adversely
affect our revenues and cash flows.

VALERO ENERGY AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST AND LIMITED
FIDUCIARY RESPONSIBILITIES, WHICH MAY PERMIT THEM TO FAVOR THEIR OWN INTERESTS
TO THE DETRIMENT OF OUR SECURITY HOLDERS.

Valero Energy and its affiliates currently have an aggregate 71.58% limited
partner interest in us and own and control both Valero L.P.'s general partner
and Valero Logistics Operations' general partner. Conflicts of interest may
arise between Valero Energy and its affiliates, including the general partners,
on the one hand, and us, on the other hand. As a result of these conflicts, the
general partners may favor their own interests and the interests of their
affiliates over the interests of the unitholders. These conflicts include, among
others, the following situations:

- Valero Energy, as the primary shipper in our pipelines, has an economic
incentive to seek lower tariff rates for our pipelines and lower
terminalling fees;

- Some officers of Valero Energy, who provide services to us, also devote
significant time to the businesses of Valero Energy and are compensated
by Valero Energy for the services rendered by them;

- Neither of the respective partnership agreements nor any other agreement
requires Valero Energy to pursue a business strategy that favors us or
utilizes our assets, including any increase in refinery production or
pursuing or growing markets linked to our assets. Valero Energy's
directors and officers have a fiduciary duty to make these decisions in
the best interests of the stockholders of Valero Energy;

- Valero Energy and its affiliates may engage in limited competition with
us;

- Valero Energy may use other transportation methods or providers for up to
25% of the crude oil processed and refined products produced in the
Ardmore, McKee, and Three Rivers refineries and is not required to use
our pipelines if there is a material change in the market conditions for
the transportation of crude oil and refined products, or in the markets
for refined products served by these refineries, that has a material
adverse effect on Valero Energy;

- Valero L.P.'s general partner is allowed to take into account the
interests of parties other than us, such as Valero Energy, in resolving
conflicts of interest, which has the effect of limiting its fiduciary
duty to the unitholders;

- Valero L.P.'s general partner may limit its liability and reduce its
fiduciary duties, while also restricting the remedies available to
unitholders for actions that might, without the limitations, constitute
breaches of fiduciary duty. As a result of purchasing common units,
holders consent to some actions and conflicts of interest that might
otherwise constitute a breach of fiduciary or other duties under
applicable state law;

- Valero L.P.'s general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuance of
additional limited partner interests and reserves, each of which can
affect the amount of cash that is paid to our holders of securities;

- Valero L.P.'s general partner determines which costs incurred by Valero
Energy and its affiliates are reimbursable by us;

- Neither partnership agreement restricts Valero L.P.'s general partner
from causing us to pay the general partner or its affiliates for any
services rendered on terms that are fair and reasonable to us or entering
into additional contractual arrangements with any of these entities on
our behalf;

- Valero L.P.'s general partner controls the enforcement of obligations
owed to us by Valero L.P.'s general partner and its affiliates, including
the pipelines and terminals usage agreement with Valero Energy;

- Valero L.P.'s general partner decides whether to retain separate counsel,
accountants, or others to perform services for us; and

- In some instances, Valero L.P.'s general partner may cause us to borrow
funds in order to permit the payment of distributions, even if the
purpose or effect of the borrowing is to make a distribution on the
subordinated units or to make incentive distributions or to hasten the
expiration of the subordination period.

Valero L.P.'s partnership agreement gives the general partner broad
discretion in establishing financial reserves for the proper conduct of our
business. These reserves also will affect the amount of cash available for
distribution. The general partner may establish reserves for distributions on
the subordinated units, but only if those reserves will not prevent us from
distributing the full minimum quarterly distribution, plus any arrearages, on
the common units for the following four quarters.

OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS, MAKE
DISTRIBUTIONS TO UNITHOLDERS, OR CAPITALIZE ON BUSINESS OPPORTUNITIES.

As of March 31, 2002, our total indebtedness was $90.1 million, consisting
of approximately $80 million outstanding under our revolving credit facility and
$10.1 million of other debt. On May 29, 2002, we borrowed an additional $11
million under our revolving credit facility to pay for the cash purchase price
of our acquisition of a 25-mile crude hydrogen pipeline. Our leverage may:

- adversely affect our ability to finance future operations and capital
needs;

- limit our ability to pursue acquisitions and other business
opportunities; and

- make our results of operations more susceptible to adverse economic or
operating conditions.

We currently make interest payments of approximately $3.4 million on an
annualized basis on the amount of debt outstanding, of which approximately $2.6
million are interest payments under our revolving credit facility and the
remainder are interest payments on the debt assumed July 1, 2000.

In addition, we currently have approximately $29.0 million of aggregate
unused borrowing capacity under our revolving credit facility. Future
borrowings, under our revolving credit facility or otherwise, could result in a
significant increase in our leverage.

The payment of principal and interest on our indebtedness will reduce the
cash available for payments to debt holders and distributions to the
unitholders. We will not be able to make any distributions to our unitholders if
there is or will be an event of default under our debt agreements. Our ability
to make principal and interest payments depends on our future performance, which
is subject to many factors, several of which are outside our control.

The revolving credit facility contains restrictive covenants that limit our
ability to incur additional debt and to engage in some types of transactions.
These limitations could reduce our ability to capitalize on business
opportunities that arise. Any subsequent refinancing of our current indebtedness
or any new indebtedness could have similar or greater restrictions.

The revolving credit facility contains provisions relating to changes in
ownership. If these provisions are triggered, the outstanding debt may become
due. If that happens, we may not be able to pay the debt.

Valero L.P.'s general partner and its direct and indirect owners are not
prohibited by the partnership agreement from entering into a transaction that
would trigger these change-in-ownership provisions.

THE TRANSPORTATION AND STORAGE OF CRUDE OIL AND REFINED PRODUCTS IS SUBJECT TO
FEDERAL AND STATE LAWS RELATING TO ENVIRONMENTAL PROTECTION AND OPERATIONAL
SAFETY AND RESULTS IN A RISK THAT CRUDE OIL AND OTHER HYDROCARBONS MAY BE
RELEASED INTO THE ENVIRONMENT, POTENTIALLY CAUSING SUBSTANTIAL EXPENDITURES
THAT COULD LIMIT OUR ABILITY TO MAKE PAYMENTS TO DEBT HOLDERS AND
DISTRIBUTIONS TO UNITHOLDERS.

Our operations are subject to federal and state laws and regulations
relating to environmental protection and operational safety. Risks of
substantial costs and liabilities are inherent in pipeline, gathering, storage,
and terminalling operations, and we may incur these costs and liabilities in the
future.

Moreover, it is possible that other developments, such as increasingly
strict environmental and safety laws, regulations and enforcement policies of
those laws, and claims for damages to property or persons resulting from our
operations, could result in substantial costs and liabilities to us. If we were
not able to recover these resulting costs through insurance or increased
revenues, cash distributions to unitholders or payments to debt holders could be
adversely affected. The transportation and storage of crude oil and refined
products results in a risk of a sudden or gradual release of crude oil or
refined products into the environment, potentially causing substantial
expenditures for a response action, significant government penalties, liability
for natural resources damages to government agencies, personal injury, or
property damages to private parties and significant business interruption.

RISKS INHERENT IN AN INVESTMENT IN VALERO L.P.

EVEN IF THE UNITHOLDERS ARE DISSATISFIED, THEY CANNOT REMOVE OUR GENERAL
PARTNER WITHOUT ITS CONSENT.

Valero L.P.'s general partner manages our operations. Unlike the holders of
common stock in a corporation, unitholders have only limited voting rights on
matters affecting our business. Unitholders have no right to elect the general
partner or the directors of its general partner on an annual or other continuing
basis. Furthermore, our general partner and its affiliates own sufficient units
to be able to prevent its removal as general partner.

In addition, the effect of the following provisions of the partnership
agreement may be to discourage a person or group from attempting to remove our
general partner or otherwise change our management:

- if the holders of at least 66 2/3% of the units remove Valero L.P.'s
general partner without cause and units held by Valero L.P.'s general
partner and its affiliates are not voted in favor of that removal, all
remaining subordinated units will automatically convert into common units
and will share distributions with the existing common units pro rata,
existing arrearages on the common units will be extinguished, and the
common units will no longer be entitled to arrearages if we fail to pay
the minimum quarterly distribution in any quarter. Cause is narrowly
defined to mean that a court of competent jurisdiction has entered a
final, non-appealable judgment finding the general partner liable for
actual fraud, gross negligence, or willful or wanton misconduct in its
capacity as general partner;

- any units held by a person that owns 20% or more of any class of units
then outstanding, other than Valero L.P.'s general partner and its
affiliates, cannot be voted on any matter; and

- Valero L.P.'s partnership agreement contains provisions limiting the
ability of unitholders to call meetings or to acquire information about
our operations, as well as other provisions limiting the unitholders'
ability to influence the manner or direction of management.

As a result of these provisions, the price at which the common units will
trade could be diminished because of the absence or reduction of a takeover
premium in the trading price.

WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT UNITHOLDER APPROVAL, WHICH MAY
DILUTE EXISTING UNITHOLDERS' INTERESTS.

During the subordination period, Valero L.P.'s general partner, without the
approval of the unitholders, may cause us to issue common units in a number of
circumstances such as the conversion of the general partner interest and the
incentive distribution rights as a result of the withdrawal of Valero L.P.'s
general partner.

The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:

- an existing unitholder's proportionate ownership interest in Valero L.P.
will decrease;

- the amount of cash available for distribution on each unit may decrease;

- since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;

- the relative voting strength of each previously outstanding unit may be
diminished; and

- the market price of the common units may decline.

After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Valero L.P.'s partnership agreement does not give the unitholders
the right to approve our issuance of equity securities ranking junior to the
common units at any time.

THE GENERAL PARTNER OF VALERO L.P. HAS A LIMITED CALL RIGHT THAT MAY REQUIRE A
UNITHOLDER TO SELL ITS COMMON UNITS AT AN UNDESIRABLE TIME OR PRICE.

If at any time the general partner and its affiliates own 80% or more of
the common units, the general partner will have the right, but not the
obligation, which it may assign to any of its affiliates or to us, to acquire
all, but not less than all, of the remaining common units held by unaffiliated
persons at a price not less than their then-current market price. As a result,
at such time, a unitholder may be required to sell its common units at an
undesirable time or price and may therefore not receive any return on the
unitholder's investment. A unitholder may also incur a tax liability upon a sale
of its units.

A UNITHOLDER MAY NOT HAVE LIMITED LIABILITY IF A STATE OR COURT FINDS THAT WE
ARE NOT IN COMPLIANCE WITH THE APPLICABLE STATUTES OR THAT UNITHOLDER ACTION
CONSTITUTES CONTROL OF OUR BUSINESS.

The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states. A unitholder could be held liable in some circumstances for
Valero L.P.'s obligations to the same extent as a general partner if a state or
a court determined that:

- Valero L.P. had been conducting business in any state without compliance
with the applicable limited partnership statute; or

- the right or the exercise of the right by the unitholders as a group to
remove or replace Valero L.P.'s general partner, to approve some
amendments to the partnership agreement, or to take other action under
the partnership agreement constituted participation in the "control" of
Valero L.P.'s business.

Valero L.P.'s general partner, under applicable state law, has unlimited
liability for the obligations of Valero L.P., for example its debts and
environmental liabilities, if any, except for those contractual obligations of
Valero L.P. that are expressly made without recourse to the general partner.

In addition, under some circumstances a unitholder may be liable to Valero
L.P. for the amount of a distribution for a period of three years from the date
of the distribution.

TAX RISKS

For a discussion of all of the expected material federal income tax
consequences of owning and disposing of common units, please read "Tax
Considerations."

THE IRS COULD TREAT US AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE THE
CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS.

The federal income tax benefit of an investment in us depends largely on
our classification as a partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on this or any
other matter affecting us. We have, however, received an opinion of counsel
that, based on current law, we have been and will be classified as a partnership
for federal income tax purposes. Opinions of counsel are based on specified
factual assumptions and are not binding on the IRS or any court.

If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, currently 35%, distributions
would generally be taxed again to you as corporate distributions, and no income,
gains, losses, or deductions would flow through to you. Because a tax would be
imposed upon us as an entity, the cash available for distribution to you would
be substantially reduced. Treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to you and
thus would likely result in a substantial reduction in the value of the common
units.

Current law may change so as to cause us to be taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level taxation.
Our partnership agreement provides that, if a law is enacted or existing law is
modified or interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation for federal, state
or local income tax purposes, then distributions will be decreased to reflect
the impact of that law on us.

A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR COMMON UNITS AND THE COSTS OF ANY CONTEST WILL
BE BORNE BY SOME OR ALL OF THE UNITHOLDERS.

We have not requested any ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes or any other
matter affecting us. The IRS may adopt positions that differ from counsel's
conclusions expressed in this prospectus. It may be necessary to resort to
administrative or court proceedings in an effort to sustain some or all of
counsel's conclusions or positions we take. A court may not concur with some or
all of our conclusions. Any contest with the IRS may materially and adversely
impact the market for the common units and the prices at which common units
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by some or all of the unitholders and the general partner.

YOU MAY BE REQUIRED TO PAY TAXES ON INCOME FROM US EVEN IF YOU DO NOT RECEIVE
ANY CASH DISTRIBUTIONS.

You will be required to pay federal income taxes and, in some cases, state
and local income taxes on your share of our taxable income, whether or not you
receive cash distributions from us. You may not receive cash distributions equal
to your allocable share of our taxable income or even the tax liability that
results from that income. Further, you may incur a tax liability, in excess of
the amount of cash you receive, upon the sale of your common units.

TAX GAIN OR LOSS ON THE DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.

Upon a sale of common units, you will recognize gain or loss equal to the
difference between the amount realized and your adjusted tax basis in those
common units. Prior distributions from us in excess of the total net taxable
income you were allocated for a common unit which decreased your tax basis in
the common unit will, in effect, become taxable income if the common unit is
sold at a price greater than your tax basis in the common unit, even if the
price is less than your original cost. A portion of the

amount realized, whether or not representing gain, will likely be ordinary
income. Furthermore, should the IRS successfully contest some conventions we
use, you could realize more gain on the sale of common units than would be the
case under those conventions without the benefit of decreased income in prior
years.

INVESTORS, OTHER THAN INDIVIDUALS WHO ARE U.S. RESIDENTS, MAY HAVE ADVERSE TAX
CONSEQUENCES FROM OWNING COMMON UNITS.

Investment in common units by some tax-exempt entities, regulated
investment companies, and foreign persons raises issues unique to these persons.
For example, virtually all of the taxable income derived by most organizations
exempt from federal income tax, including individual retirement accounts and
other retirement plans, from the ownership of a common unit will be unrelated
business income and thus will be taxable to the unitholder. Very little of our
income will be qualifying income to a regulated investment company.
Distributions to foreign persons will be reduced by withholding taxes. Foreign
persons will be required to file federal income tax returns and pay taxes on
their share of our taxable income.

WE HAVE REGISTERED AS A "TAX SHELTER" WITH THE SECRETARY OF THE TREASURY. THIS
MAY INCREASE THE RISK OF AN IRS AUDIT OF US OR A UNITHOLDER.

We have registered as a "tax shelter" with the Secretary of the Treasury.
As a result, we may be audited by the IRS and tax adjustments could be made. The
rights of a unitholder owning less than a 1% interest in us to participate in
the income tax audit process are very limited. Further, any adjustments in our
tax returns will lead to adjustments in your tax returns and may lead to audits
of your tax returns and adjustments of items unrelated to us. You would bear the
cost of any expenses incurred in connection with an examination of your personal
tax return.

WE TREAT A PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX BENEFITS AS THE
SELLER. A SUCCESSFUL IRS CHALLENGE COULD ADVERSELY AFFECT THE VALUE OF THE
COMMON UNITS.

Because we cannot match transferors and transferees of common units, we
have adopted certain depreciation conventions that do not conform with all
aspects of final Treasury Regulations. A successful IRS challenge to those
conventions could adversely affect the amount of tax benefits available to you
or could affect the timing of these tax benefits or the amount of gain from the
sale of common units and could have a negative impact on the value of the common
units or result in audit adjustments to your tax returns.

YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES AND RETURN FILING
REQUIREMENTS AS A RESULT OF AN INVESTMENT IN COMMON UNITS.

In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance, or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. You will likely be
required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which we do business
or own property and may be subject to penalties for failure to comply with those
requirements. We own property and conduct business in Texas, Colorado, New
Mexico, Kansas, and Oklahoma. Of these states, Colorado, New Mexico, Kansas, and
Oklahoma currently impose a personal income tax. It is the responsibility of
each unitholder to file all federal, state, and local tax returns that may be
required of the unitholder. Our counsel has not rendered an opinion on the state
or local tax consequences of an investment in us.

USE OF PROCEEDS

Except as otherwise provided in the applicable prospectus supplement, we
will use the net proceeds we receive from the sale of the securities offered by
this prospectus for general corporate purposes. These general corporate purposes
could include, among other things:

- repayment of debt;

- working capital;

- capital expenditures; and

- future acquisitions, which may consist of acquisitions of discrete assets
or businesses.

The actual application of proceeds from the sale of any particular tranche
of securities issued using this prospectus will be described in the applicable
prospectus supplement relating to such tranche of securities. The precise amount
and timing of the application of these proceeds will depend upon our funding
requirements and the availability and cost of other funds.

RATIO OF EARNINGS TO FIXED CHARGES

The ratio of earnings to fixed charges for each of the periods indicated is
as follows:

THREE MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED
------------------------------------ MARCH 31,
1997 1998 1999 2000 2001 2002
----- ----- ----- ---- ----- ------------

Ratio of Earnings to Fixed Charges....... 44.1x 59.5x 70.8x 8.7x 11.8x 17.6x

For purposes of calculating the ratio of earnings to fixed charges:

- "fixed charges" represent interest expense (including amounts capitalized
and amortization of debt costs) and the portion of rental expense
representing the interest factor; and

- "earnings" represent the aggregate of pre-tax income from continuing
operations (before adjustment for income from equity investees), fixed
charges, amortization of capitalized interest and distributions from
equity investees, less capitalized interest.

DESCRIPTION OF COMMON UNITS

References in this "Description of Common Units" to "we," "us" and "our"
mean Valero L.P.

NUMBER OF UNITS

We currently have 9,654,572 common units outstanding, of which 5,230,250
are held by the public and 4,424,322 are held by an affiliate of our general
partner. We also have 9,599,322 subordinated units outstanding, all of which are
held by an affiliate of our general partner, for which there is no established
public trading market. The common units and the subordinated units represent an
aggregate 98% limited partner interest and the general partner interests
represent an aggregate 2% general partner interest in Valero L.P.

Under our partnership agreement we may issue, without further unitholder
action, an unlimited number of additional limited partner interests and other
equity securities with such rights, preferences and privileges as may be
established by our general partner in its sole discretion. However, during the
subordination period, we may not issue equity securities senior to the common
units or an aggregate of more than 4,462,161 common units or other units having
rights to distributions or in liquidation ranking on a parity with the common
units without the prior approval of at least a majority of the outstanding
common units voting as a class and at least a majority of the outstanding
subordinated units voting as a class; provided that, we may issue an unlimited
number of additional common units or parity securities prior to the end of the
subordination period and without unitholder approval for acquisitions which
increase cash flow from operations per unit on a pro forma basis.

VOTING

Each holder of common units is entitled to one vote for each common unit on
all matters submitted to a vote of the unitholders; provided that, if at any
time any person or group, except our general partner, owns beneficially 20% or
more of all common units, the common units so owned may not be voted on any
matter and may not be considered to be outstanding when sending notices of a
meeting of unitholders (unless otherwise required by law), calculating required
votes, determining the presence of a quorum or for other similar purposes under
our partnership agreement.

Holders of subordinated units will sometimes vote as a single class
together with the common units and sometimes vote as a class separate from the
holders of common units and, as in the case of holders of common units, will
have very limited voting rights. During the subordination period, common units
and subordinated units each vote separately as a class on the following matters:

- a sale or exchange of all or substantially all of our assets;

- the election of a successor general partner in connection with the
removal of our general partner;

- dissolution or reconstitution of Valero L.P.;

- a merger of Valero L.P.;

- issuance of limited partner interests in some circumstances; and

- specified amendments to our partnership agreement, including any
amendment that would cause us to be treated as an association taxable as
a corporation.

The subordinated units are not entitled to vote on approval of the
withdrawal of our general partner or the transfer by our general partner of its
general partner interest or incentive distribution rights under some
circumstances. Removal of our general partner requires:

- a two-thirds vote of all outstanding units voting as a single class; and

- the election of a successor general partner by the holders of a majority
of the outstanding common units and subordinated units, voting as
separate classes.

LISTING

Our outstanding common units are listed on The New York Stock Exchange
under the symbol "VLI". Any additional common units we issue will also be listed
on the NYSE.

TRANSFER AGENT AND REGISTRAR

Our transfer agent and registrar for the common units is Mellon Investor
Services, LLC.

CASH DISTRIBUTIONS

References in this "Cash Distributions" section to "we," "us" and "our"
mean Valero L.P.

DISTRIBUTIONS OF AVAILABLE CASH

General. Within approximately 45 days after the end of each quarter, we
will distribute all of our available cash to unitholders of record on the
applicable record date and to our general partner.

Definition of Available Cash. Available cash generally means, for each
fiscal quarter, all cash on hand at the end of the quarter:

- less the amount of cash that our general partner determines in its
reasonable discretion is necessary or appropriate to:

- provide for the proper conduct of our business;

- comply with applicable law, any of our debt instruments, or other
agreements; or

- provide funds for distributions to our unitholders and to our general
partner for any one or more of the next four quarters;

- plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our credit facility and in all cases are used solely for
working capital purposes or to pay distributions to partners.

Intent to Distribute the Minimum Quarterly Distribution. We intend to
distribute to holders of common units and subordinated units on a quarterly
basis at least the minimum quarterly distribution of $0.60 per quarter or $2.40
per year to the extent we have sufficient cash from our operations after the
establishment of reserves and the payment of fees and expenses, including
payments to our general partner. However, there is no guarantee that we will pay
the minimum quarterly distribution on the common units in any quarter.

Event of Default under the Credit Facility. We will be prohibited from
making any distributions to unitholders if it would cause an event of default,
or if an event of default is existing, under Valero Logistics' revolving credit
facility.

Increase in Quarterly Distribution. On April 19, 2002, we announced an
increase in the quarterly distribution from $0.60 per unit to $0.65 per unit for
the 2002 first quarter cash distribution, which was paid on May 15, 2002.

OPERATING SURPLUS, CAPITAL SURPLUS AND ADJUSTED OPERATING SURPLUS

General. All cash distributed to unitholders will be characterized either
as operating surplus or capital surplus. We distribute available cash from
operating surplus differently than available cash from capital surplus.

Definition of Operating Surplus. For any period, operating surplus
generally means:

- our cash balance on the closing date of our initial public offering; plus

- $10 million; plus

- all of our cash receipts since the closing of our initial public
offering, excluding cash from borrowings that are not working capital
borrowings, sales of equity and debt securities and sales or other
dispositions of assets outside the ordinary course of business; plus

- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less

- all of our operating expenditures since the closing of our initial public
offering, including the repayment of working capital borrowings, but not
the repayment of other borrowings, and including maintenance capital
expenditures; less

- the amount of reserves that our general partner deems necessary or
advisable to provide funds for future operating expenditures.

Definition of Capital Surplus. Capital surplus will generally be generated
only by:

- borrowings other than working capital borrowings;

- sales of debt and equity securities; and

- sales or other dispositions of assets for cash, other than inventory,
accounts receivable and other current assets sold in the ordinary course
of business or as part of normal retirements or replacements of assets.

Characterization of Cash Distributions. We will treat all available cash
distributed as coming from operating surplus until the sum of all available cash
distributed since we began operations equals the operating surplus as of the
most recent date of determination of available cash. We will treat any amount
distributed in excess of operating surplus, regardless of its source, as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.

Definition of Adjusted Operating Surplus. Adjusted operating surplus is
intended to reflect the cash generated from operations during a particular
period and therefore excludes net increases in working capital borrowings and
net drawdowns of reserves of cash generated in prior periods.

Adjusted operating surplus for any period generally means:

- operating surplus generated with respect to that period; less

- any net increase in working capital borrowings with respect to that
period; less

- any net reduction in reserves for operating expenditures with respect to
that period not relating to an operating expenditure made with respect to
that period; plus

- any net decrease in working capital borrowings with respect to that
period; plus

- any net increase in reserves for operating expenditures with respect to
that period required by any debt instrument for the repayment of
principal, interest or premium.

SUBORDINATION PERIOD

General. During the subordination period, the common units have the right
to receive distributions of available cash from operating surplus in an amount
equal to the minimum quarterly distribution of $0.60 per unit, plus any
arrearages in the payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. The purpose of the
subordinated units is to increase the likelihood that during the subordination
period there will be available cash to be distributed on the common units.

Definition of Subordination Period. The subordination period will extend
until the first day of any quarter beginning after March 31, 2006 that each of
the following tests are met:

- distributions of available cash from operating surplus on each of the
outstanding common units and subordinated units equaled or exceeded the
minimum quarterly distribution for each of the three consecutive,
non-overlapping four-quarter periods immediately preceding that date;

- the adjusted operating surplus generated during each of the three
immediately preceding non-overlapping four-quarter periods equaled or
exceeded the sum of the minimum quarterly distributions on all of the
outstanding common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2% general
partner interest during those periods; and

- there are no arrearages in payment of the minimum quarterly distribution
on the common units.

Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders remove our
general partner other than for cause and units held by our general partner and
its affiliates are not voted in favor of this removal:

- the subordination period will end and each subordinated unit will
immediately convert into one common unit;

- any existing arrearages in payment of the minimum quarterly distribution
on the common units will be extinguished; and

- our general partner will have the right to convert its general partner
interest and its incentive distribution rights into common units or to
receive cash in exchange for those interests.

DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD

We will make distributions of available cash from operating surplus for any
quarter during the subordination period in the following manner:

- First, 98% to the common unitholders, pro rata, and 2% to our general
partner until we distribute for each outstanding common unit an amount
equal to the minimum quarterly distribution for that quarter;

- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner until we distribute for each outstanding common unit an amount
equal to any arrearages in payment of the minimum quarterly distribution
on the common units for any prior quarters during the subordination
period;

- Third, 98% to the subordinated unitholders, pro rata, and 2% to our
general partner until we distribute for each subordinated unit an amount
equal to the minimum quarterly distribution for that quarter; and

- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.

DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD

We will make distributions of available cash from operating surplus for any
quarter after the subordination period in the following manner:

- First, 98% to all unitholders, pro rata, and 2% to our general partner
until we distribute for each outstanding unit an amount equal to the
minimum quarterly distribution for that quarter; and

- Thereafter, in the manner described in "-- Incentive Distribution Rights"
below.

INCENTIVE DISTRIBUTION RIGHTS

Incentive distribution rights represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. Our general partner currently holds the incentive distribution
rights, but may transfer these rights separately from its general partner
interest, subject to restrictions in the partnership agreement.

If for any quarter:

- we have distributed available cash from operating surplus to the common
and subordinated unitholders in an amount equal to the minimum quarterly
distribution; and

- we have distributed available cash from operating surplus on outstanding
common units in an amount necessary to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus
for that quarter among the unitholders and our general partner in the following
manner:

- First, 90% to all unitholders, pro rata, 8% to the holders of the
incentive distribution rights, and 2% to our general partner, until each
unitholder receives a total of $0.66 per unit for that quarter (the
"first target distribution");

- Second, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, and 2% to our general partner, until each
unitholder receives a total of $0.90 per unit for that quarter (the
"second target distribution"); and

- Thereafter, 50% to all unitholders, pro rata, 48% to the holders of the
incentive distribution rights, and 2% to our general partner.

In each case, the amount of the target distribution set forth above is exclusive
of any distributions to common unitholders to eliminate any cumulative
arrearages in payment of the minimum quarterly distribution.

PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS

The following table illustrates the percentage allocations of the
additional available cash from operating surplus between the unitholders and our
general partner up to the various target distribution levels. The amounts set
forth under "Marginal Percentage Interest in Distributions" are the percentage
interests of our general partner and the unitholders in any available cash from
operating surplus we distribute up to and including the corresponding amount in
the column "Total Quarterly Distribution Target Amount," until available cash
from operating surplus we distribute reaches the next target distribution level,
if any. The percentage interests shown for the unitholders and our general
partner for the minimum quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly distribution.

MARGINAL PERCENTAGE INTEREST IN
TOTAL QUARTERLY DISTRIBUTIONS
DISTRIBUTION -------------------------------
TARGET DISTRIBUTION TARGET AMOUNT UNITHOLDERS GENERAL PARTNER
------------------- --------------- ------------ ----------------

Minimum Quarterly Distribution................ $0.60 98% 2%
First Target Distribution..................... 0.66 90% 10%
Second Target Distribution.................... 0.90 75% 25%
Thereafter.................................... above 0.90 50% 50%

DISTRIBUTIONS FROM CAPITAL SURPLUS

How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus in the following manner:

- First, 98% to all unitholders, pro rata, and 2% to our general partner,
until we distribute for each common unit, an amount of available cash
from capital surplus equal to the initial public offering price;

- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner, until we distribute for each common unit that was issued in the
offering, an amount of available cash from capital surplus equal to any
unpaid arrearages in payment of the minimum quarterly distribution on the
common units; and

- Thereafter, we will make all distributions of available cash from capital
surplus as if they were from operating surplus.

Effect of a Distribution from Capital Surplus. The partnership agreement
treats a distribution of capital surplus as the repayment of the unit price from
our initial public offering, which is a return of capital. The initial public
offering price less any distributions of capital surplus per unit is referred to
as the unrecovered initial unit price. Each time a distribution of capital
surplus is made, the minimum quarterly distribution and the target distribution
levels will be reduced in the same proportion as the corresponding reduction in
the unrecovered initial unit price. Because distributions of capital surplus
will reduce the minimum quarterly distribution, after any of these distributions
are made, it may be easier for our general partner to receive incentive
distributions and for the subordinated units to convert into common units.
However, any distribution of capital surplus before the unrecovered initial unit
price is reduced to zero cannot be applied to the payment of the minimum
quarterly distribution or any arrearages.

Once we distribute capital surplus on a unit issued in this offering in an
amount equal to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero and we will make all
future distributions from operating surplus, with 50% being paid to the holders
of units, 48% to the holders of the incentive distribution rights and 2% to our
general partner.

ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS

In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:

- the minimum quarterly distribution;

- target distribution levels;

- unrecovered initial unit price;

- the number of common units issuable during the subordination period
without a unitholder vote; and

- the number of common units into which a subordinated unit is convertible.

For example, if a two-for-one split of the common units should occur, the
minimum quarterly distribution, the target distribution levels and the
unrecovered initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance of additional
units for cash or property.

In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates. For

example, if we became subject to a maximum marginal federal and effective state
and local income tax rate of 38%, then the minimum quarterly distribution and
the target distribution levels would each be reduced to 62% of their previous
levels.

DISTRIBUTIONS OF CASH UPON LIQUIDATION

If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called a liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors. We will
distribute any remaining proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to reflect any gain
or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the
extent possible, to entitle the holders of outstanding common units to a
preference over the holders of outstanding subordinated units upon the
liquidation of Valero L.P., to the extent required to permit common unitholders
to receive their unrecovered initial unit price plus the minimum quarterly
distribution for the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on the common units.
However, there may not be sufficient gain upon liquidation of Valero L.P. to
enable the holder of common units to fully recover all of these amounts, even
though there may be cash available for distribution to the holders of
subordinated units. Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive distribution rights
of our general partner.

Manner of Adjustments for Gain. The manner of the adjustment is set forth
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners in the following
manner:

- First, to our general partner and the holders of units who have negative
balances in their capital accounts to the extent of and in proportion to
those negative balances;

- Second, 98% to the common unitholders, pro rata, and 2% to our general
partner, until the capital account for each common unit is equal to the
sum of:

(1) the unrecovered initial unit price for that common unit; plus

(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs; plus

(3) any unpaid arrearages in payment of the minimum quarterly
distribution on that common unit;

- Third, 98% to the subordinated unitholders, pro rata, and 2% to our
general partner, until the capital account for each subordinated unit is
equal to the sum of:

(1) the unrecovered initial unit price on that subordinated unit; and

(2) the amount of the minimum quarterly distribution for the quarter
during which our liquidation occurs;

- Fourth, 90% to all unitholders, pro rata, 8% to the holders of the
incentive distribution rights, and 2% to our general partner, pro rata,
until we allocate under this paragraph an amount per unit equal to:

(1) the sum of the excess of the first target distribution per unit
over the minimum quarterly distribution per unit for each quarter
of our existence; less

(2) the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the minimum quarterly
distribution per unit that we distributed 90% to the units, pro
rata, and 10% to our general partner, pro rata, for each quarter of
our existence;

- Fifth, 75% to all unitholders, pro rata, 23% to the holders of the
incentive distribution rights, and 2% to our general partner, until we
allocate under this paragraph an amount per unit equal to:

(1) the sum of the excess of the second target distribution per unit
over the first target distribution per unit for each quarter of our
existence; less

(2) the cumulative amount per unit of any distributions of available
cash from operating surplus in excess of the first target
distribution per unit that we distributed 75% to the unitholders,
pro rata, 23% to the holders of the incentive distribution rights,
and 2% to our general partner for each quarter of our existence;

- Thereafter, 50% to all unitholders, pro rata, 48% to the holders of
incentive distribution rights, and 2% to our general partner.

If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
clause (3) of the second bullet point above and all of the third bullet point
above will no longer be applicable.

Manner of Adjustments for Losses. Upon our liquidation, we will generally
allocate any loss to the general partner and the unitholders in the following
manner:

- First, 98% to holders of subordinated units in proportion to the positive
balances in their capital accounts and 2% to our general partner until
the capital accounts of the holders of the subordinated units have been
reduced to zero;

- Second, 98% to the holders of common units in proportion to the positive
balances in their capital accounts and 2% to our general partner until
the capital accounts of the common unitholders have been reduced to zero;
and

- Thereafter, 100% to our general partner.

If the liquidation occurs after the end of the subordination period, the
distinction between common units and subordinated units will disappear, so that
all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts. We will make adjustments to capital
accounts upon the issuance of additional units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss resulting from
the adjustments to the unitholders and our general partner in the same manner as
we allocate gain or loss upon liquidation. In the event that we make positive
adjustments to the capital accounts upon the issuance of additional units, we
will allocate any later negative adjustments to the capital accounts resulting
from the issuance of additional units or upon our liquidation in a manner which
results, to the extent possible, in our general partner's capital account
balances equaling the amount which they would have been if no earlier positive
adjustments to the capital accounts had been made.

DESCRIPTION OF DEBT SECURITIES

The following description sets forth the general terms and provisions that
apply to the debt securities. Each prospectus supplement will state the
particular terms that will apply to the debt securities included in the
supplement.

The debt securities will be either senior debt securities or subordinated
debt securities of Valero Logistics, which does not have any debt securities
outstanding at this time. All debt securities will be unsecured. The senior debt
securities will have the same rank as all of Valero Logistics' other unsecured
and unsubordinated debt. The subordinated debt securities will be subordinated
to senior indebtedness as described under "Provisions Only in the Subordinated
Indenture -- Subordinated Debt Securities Subordinated to Senior Debt" below.

If Valero Logistics offers senior debt securities, it will issue them under
a senior indenture. If Valero Logistics offers subordinated debt securities, it
will issue them under a subordinated indenture. In addition to the following
summary, you should refer to the applicable provisions in the senior indenture
and the subordinated indenture for more detailed information. Valero Logistics
has filed forms of each of the senior indenture and the subordinated indenture
as exhibits to the registration statement of which this prospectus is a part.

Neither indenture limits the aggregate principal amount of debt securities
that Valero Logistics may issue under that indenture. The debt securities may be
issued in one or more series as Valero Logistics may authorize from time to
time.

PARENT GUARANTEE

Valero Logistics' payment obligations under any series of debt securities
will be fully and unconditionally guaranteed by Valero L.P. Valero L.P. will
execute a notation of guarantee as further evidence of its guarantee. The
applicable prospectus supplement will describe the terms of any guarantee by
Valero L.P.

Pursuant to the parent guarantee, Valero L.P. will guarantee the due and
punctual payment of the principal of, and interest and premium, if any, on, the
debt securities of a particular series, when the same shall become due, whether
by acceleration or otherwise. The parent guarantee will be enforceable against
Valero L.P. without any need to first enforce any debt securities against Valero
Logistics.

Valero L.P.'s guarantee of the senior debt securities:

- will be Valero L.P.'s unsecured and unsubordinated general obligation;
and

- will rank on a parity with all of Valero L.P.'s other unsecured and
unsubordinated indebtedness.

If a series of subordinated debt securities is guaranteed by Valero L.P.,
then the guarantee will be subordinated to the senior debt of Valero L.P. to
substantially the same extent as the series of subordinated debt securities is
subordinated to the senior debt of Valero Logistics.

SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT

Valero Logistics will prepare a prospectus supplement and a supplemental
indenture or authorizing resolutions relating to any series of debt securities
being offered, which will include specific terms relating to such debt
securities. These terms will include some or all of the following:

- the form and title of the debt securities;

- the total principal amount of the debt securities;

- the date or dates on which the debt securities may be issued;

- whether the debt securities are senior or subordinated debt securities;

- the currency or currencies in which principal and interest will be paid,
if not U.S. dollars;

- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;

- any right Valero Logistics may have to defer payments of interest by
extending the dates payments are due and whether interest on those
deferred amounts will be payable as well;

- the dates on which the principal of the debt securities will be payable;

- the interest rate that the debt securities will bear and the interest
payment dates for the debt securities;

- any conversion or exchange provisions;

- any optional redemption provisions;

- any sinking fund or other provisions that would obligate Valero Logistics
to repurchase or otherwise redeem the debt securities;

- any changes to or additional events of default or covenants;

- the subordination, if any, of the debt securities and any changes to the
subordination provisions of the subordinated indenture; and

- any other terms of the debt securities.

PROVISIONS ONLY IN THE SENIOR INDENTURE

SUMMARY

The senior debt securities will rank equally in right of payment with all
other senior and unsubordinated debt of Valero Logistics and senior in right of
payment to any subordinated debt (including the subordinated debt securities) of
Valero Logistics. The senior indenture will contain restrictive covenants,
including provisions that:

- limit the ability of Valero Logistics to put liens on any of its property
or assets; and

- limit the ability of Valero Logistics to sell and lease back its
principal assets.

Subordinated debt securities issued under the subordinated indenture may or
may not be subject to similar provisions, as will be specified in the applicable
prospectus supplement. Valero Logistics has described below these provisions and
some of the defined terms used in them.

LIMITATION ON LIENS

The senior indenture will provide that Valero Logistics will not, nor will
it permit any subsidiary to, create, assume, incur or suffer to exist any lien
upon any property or assets, whether owned or leased on the date of the senior
indenture or thereafter acquired, to secure any of its debt or debt of any other
person (other than the senior debt securities issued thereunder), without in any
such case making effective provision whereby all of the senior debt securities
outstanding thereunder shall be secured equally and ratably with, or prior to,
such debt so long as such debt shall be so secured.

This restriction does not apply to:

1. Permitted Liens, as defined below;

2. any lien upon any property or assets of Valero Logistics or any
subsidiary in existence on the date the senior debt securities of
such series are first issued or created pursuant to an "after-
acquired property" clause or similar term or provided for pursuant
to agreements existing on such date;

3. any lien upon any property or assets created at the time of
acquisition of such property or assets by Valero Logistics or any
subsidiary or within one year after such time to secure all

or a portion of the purchase price for such property or assets or
debt incurred to finance such purchase price, whether such debt was
incurred prior to, at the time of or within one year after the date
of such acquisition;

4. any lien upon any property or assets existing thereon at the time of
the acquisition thereof by Valero Logistics or any subsidiary;
provided, however, that such lien only encumbers the property or
assets so acquired;

5. any lien upon any property or assets of a person existing thereon at
the time such person becomes a subsidiary by acquisition, merger or
otherwise; provided, however, that such lien only encumbers the
property or assets of such person at the time such person becomes a
subsidiary;

6. any lien upon any property or assets to secure all or part of the
cost of construction, development, repair or improvements thereon or
to secure debt incurred prior to, at the time of, or within one year
after completion of such construction, development, repair or
improvements or the commencement of full operations thereof,
whichever is later, to provide funds for any such purpose;

7. liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith,
and liens which secure a judgment or other court-ordered award or
settlement as to which Valero Logistics or the applicable subsidiary
has not exhausted its appellate rights;

8. any lien upon any additions, improvements, replacements, repairs,
fixtures, appurtenances or component parts thereof attaching to or
required to be attached to property or assets pursuant to the terms
of any mortgage, pledge agreement, security agreement or other
similar instrument creating a lien upon such property or assets
permitted by clauses (1) through (7) above;

9. any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancings, refundings or
replacements) of any lien, in whole or in part, referred to in
clauses (1) through (8), inclusive, above; provided, however, that
the principal amount of debt secured thereby shall not exceed the
principal amount of debt so secured at the time of such extension,
renewal, refinancing, refunding or replacement (plus in each case
the aggregate amount of premiums, other payments, costs and expenses
required to be paid or incurred in connection with such extension,
renewal, refinancing, refunding or replacement); provided, further,
however, that such extension, renewal, refinancing, refunding or
replacement lien shall be limited to all or a part of the property
(including improvements, alterations and repairs on such property)
subject to the encumbrance so extended, renewed, refinanced,
refunded or replaced (plus improvements, alterations and repairs on
such property); or

10. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of Valero
Logistics or any subsidiary.

Notwithstanding the foregoing, Valero Logistics may, and may permit any
subsidiary to, create, assume, incur, or suffer to exist any lien upon any
property or assets to secure its debt or debt of any person (other than the
senior debt securities) that is not excepted by clauses (1) through (10),
inclusive, above without securing the senior debt securities issued under the
senior indenture, provided that the aggregate principal amount of all debt then
outstanding secured by such lien and all similar liens, together with all
Attributable Indebtedness, as defined below, from Sale-Leaseback Transactions,
as defined below (excluding Sale-Leaseback Transactions permitted by clauses (1)
through (4), inclusive, of the first paragraph of the restriction on
sale-leasebacks covenant described below) does not exceed 10% of Consolidated
Net Tangible Assets (as defined below).

"Permitted Liens" means:

1. Liens upon rights-of-way for pipeline purposes created by a person
other than Valero Logistics;

2. any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers',
carriers', landlords', warehousemen's or similar lien incurred in
the ordinary course of business which is not yet due or which is
being contested in good faith by appropriate proceedings and any
undetermined lien which is incidental to construction, development,
improvement or repair;

3. the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant,
license, permit or by any provision of law, to purchase or recapture
or to designate a purchaser of, any property;

4. liens of taxes and assessments which are (A) for the then current
year, (B) not at the time delinquent, or (C) delinquent but the
validity of which is being contested in good faith at the time by
Valero Logistics or any subsidiary;

5. liens of, or to secure the performance of, leases, other than
capital leases;

6. any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity or
stay of judicial proceedings;

7. any lien upon property or assets acquired or sold by Valero
Logistics or any subsidiary resulting from the exercise of any
rights arising out of defaults on receivables;

8. any lien incurred in the ordinary course of business in connection
with worker's compensation, unemployment insurance, temporary
disability, social security, retiree health or similar laws or
regulations or to secure obligations imposed by statute or
governmental regulations;

9. any lien in favor of Valero Logistics or any subsidiary;

10. any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to
secure partial, progress, advance, or other payments pursuant to any
contract or statute, or any debt incurred by Valero Logistics or any
subsidiary for the purpose of financing all or any part of the
purchase price of, or the cost of constructing, developing,
repairing or improving, the property or assets subject to such lien;

11. any lien securing industrial development, pollution control or
similar revenue bonds;

12. any lien securing debt of Valero Logistics or any subsidiary, all or
a portion of the net proceeds of which are used, substantially
concurrent with the funding thereof (and for purposes of determining
such "substantial concurrence," taking into consideration, among
other things, required notices to be given to holders of outstanding
senior debt securities under the senior indenture in connection with
such refunding, refinancing or repurchase, and the required
corresponding durations thereof), to refinance, refund or repurchase
all outstanding senior debt securities under the senior indenture
including the amount of all accrued interest thereon and reasonable
fees and expenses and premium, if any, incurred by Valero Logistics
or any subsidiary in connection therewith;

13. liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or
surety obligations required or requested by any governmental
authority in connection with any contract or statute; or

14. any lien upon or deposits of any assets to secure performance of
bids, trade contracts, leases or statutory obligations.

"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:

- all current liabilities, excluding (A) any current liabilities that by
their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the
amount thereof is being computed, and (B) current maturities of long-term
debt, and

- the value, net of any applicable amortization, of all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and
other like intangible assets,

all as set forth on the consolidated balance sheet of Valero L.P. for its most
recently completed fiscal quarter, prepared in accordance with United States
generally accepted accounting principles.

RESTRICTIONS ON SALE-LEASEBACKS

The senior indenture will provide that Valero Logistics will not, and will
not permit any subsidiary to, engage in the sale or transfer by Valero Logistics
or any subsidiary of any property or assets to a person (other than Valero
Logistics or a subsidiary) and the taking back by Valero Logistics or any
subsidiary, as the case may be, of a lease of such property or assets (a
"Sale-Leaseback Transaction"), unless:

1. the Sale-Leaseback Transaction occurs within one year from the date
of completion of the acquisition of the property or assets subject
thereto or the date of the completion of construction, development
or substantial repair or improvement, or commencement of full
operations on such property or assets, whichever is later;

2. the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than three years;

3. Valero Logistics or such subsidiary would be entitled to incur debt
secured by a lien on the property or assets subject thereto in a
principal amount equal to or exceeding the Attributable Indebtedness
from such Sale-Leaseback Transaction without equally and ratably
securing the senior debt securities issued under the senior
indenture; or

4. Valero Logistics or such subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an
amount not less than the Attributable Indebtedness from such
Sale-Leaseback Transaction to (A) the prepayment, repayment,
redemption, reduction or retirement of Pari Passu Debt of Valero
Logistics, or (B) the expenditure or expenditures for property or
assets used or to be used in the ordinary course of business of
Valero Logistics or its subsidiaries.

Notwithstanding the foregoing, Valero Logistics may, and may permit any of
its subsidiaries to, effect any Sale-Leaseback Transaction that is not excepted
by clauses (1) through (4), inclusive, above; provided that the Attributable
Indebtedness from the Sale-Leaseback Transaction, together with the aggregate
principal amount of then outstanding debt other than the senior debt securities
secured by liens upon any property or assets of Valero Logistics or its
subsidiaries not excepted by clauses (1) through (10), inclusive, of the second
paragraph of the limitation on liens covenant described above, do not exceed 10%
of the Consolidated Net Tangible Assets.

"Attributable Indebtedness," when used with respect to any Sale-Leaseback
Transaction, means, as at the time of determination, the present value,
discounted at the rate set forth or implicit in the terms of the lease included
in the transaction, of the total obligations of the lessee for rental payments,
other than amounts required to be paid on account of property taxes,
maintenance, repairs, insurance, assessments, utilities, operating and labor
costs and other items that constitute payments for property rights, during the
remaining term of the lease included in the Sale-Leaseback Transaction,
including any period for which the lease has been extended. In the case of any
lease that is terminable by the lessee upon the payment of

a penalty or other termination payment, the amount shall be the lesser of the
amount determined assuming termination upon the first date the lease may be
terminated, in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under the lease subsequent to the first date upon which it may be so
terminated, or the amount determined assuming no termination.

"Pari Passu Debt" means any debt of Valero Logistics, whether outstanding
on the date any senior debt securities are issued under the senior indenture or
thereafter created, incurred or assumed, unless in the case of any particular
debt, the instrument creating or evidencing the same or pursuant to which the
same is outstanding expressly provides that such debt shall be subordinated in
right of payment to the senior debt securities.

PROVISIONS ONLY IN THE SUBORDINATED INDENTURE

SUBORDINATED DEBT SECURITIES SUBORDINATED TO SENIOR DEBT

The subordinated debt securities will rank junior in right of payment to
all of the Senior Debt of Valero Logistics. "Senior Debt" is generally defined
to include all notes or other evidences of indebtedness for money, including
guarantees, borrowed by Valero Logistics, that are not expressly subordinate or
junior in right of payment to any other indebtedness of Valero Logistics.

PAYMENT BLOCKAGES

The subordinated indenture will provide that no payment of principal,
interest and any premium on the subordinated debt securities may be made in the
event that Valero Logistics fails to pay when due any amounts on any Senior Debt
and in other instances specified in the subordinated indenture.

NO LIMITATION ON AMOUNT OF SENIOR DEBT

The subordinated indenture will not limit the amount of Senior Debt that
Valero Logistics may incur.

CONSOLIDATION, MERGER OR ASSET SALE

Pursuant to each of the indentures, Valero Logistics may not consolidate
with or merge into any other entity or sell, lease or transfer its properties
and assets as, or substantially as, an entirety to, any entity, unless:

- (a) in the case of a merger, Valero Logistics is the surviving entity, or
(b) the entity formed by such consolidation or into which Valero
Logistics is merged or the entity which acquires by sale or transfer, or
which leases, Valero Logistics' properties and assets as, or
substantially as, an entirety expressly assumes the due and punctual
payment of the principal of and any premium and interest on all the debt
securities under the applicable indenture and the performance or
observance of every covenant of the applicable indenture on the part of
Valero Logistics to be performed or observed and shall have expressly
provided for conversion rights in respect of any series of outstanding
securities with conversion rights;

- the surviving entity or successor entity is an entity organized and
existing under the laws of the United States of America, any state
thereof or the District of Columbia;

- immediately after giving effect to such transaction, no default or event
of default shall have occurred and be continuing under the applicable
indenture; and

- Valero Logistics has delivered to the trustee under the applicable
indenture an officers' certificate and an opinion of counsel regarding
compliance with the terms of the applicable indenture.

MODIFICATION OF INDENTURES

Valero Logistics may modify or amend each indenture if the holders of a
majority in principal amount of the outstanding debt securities of all series
issued under the indenture affected by the modification or amendment consent to
it. Without the consent of the holders of each outstanding debt security
affected, however, generally no modification may:

- change the stated maturity of the principal of or any installment of
principal of or interest on any debt security;

- reduce the principal amount of, the interest rate on or the premium
payable upon redemption of any debt security;

- change the redemption date for any debt security;

- reduce the principal amount of an original issue discount debt security
payable upon acceleration of maturity;

- change the place of payment where any debt security or any premium or
interest on any debt security is payable;

- change the coin or currency in which any debt security or any premium or
interest on any debt security is payable;

- impair the right to institute suit for the enforcement of any payment on
any debt security;

- modify the provisions of the applicable indenture in a manner adversely
affecting any right to convert or exchange any debt security into another
security;

- reduce the percentage in principal amount of outstanding debt securities
of any series necessary to modify the applicable indenture, to waive
compliance with certain provisions of the applicable indenture or to
waive certain defaults and their consequences; or

- modify any of the above provisions.

Valero Logistics may modify or amend each indenture without the consent of
any holders of the debt securities in certain circumstances, including:

- to provide for the assumption of obligations of Valero Logistics under
such indenture and the debt securities issued thereunder by a successor;

- to provide for the assumption of Valero L.P.'s guarantee under such
indenture by a successor;

- to add covenants and events of default or to surrender any rights Valero
Logistics has under such indenture;

- to secure the senior debt securities as described above under "Provisions
Only in the Senior Indenture -- Limitations on Liens;"

- to make any change that does not adversely affect any outstanding debt
securities of a series in any material respect;

- to supplement such indenture in order to establish a new series of debt
securities under such indenture;

- to provide for successor trustees;

- to cure any ambiguity, omission, defect or inconsistency;

- to provide for uncertificated securities in addition to certificated
securities;

- to supplement any provision of such indenture necessary to permit or
facilitate the defeasance and discharge of any series of debt securities
issued thereunder so long as that action does not adversely affect the
interests of the holders of any outstanding debt securities issued
thereunder;

- to comply with the rules or regulations of any securities exchange or
automated quotation system on which any of the debt securities issued
thereunder may be listed or traded; and

- to qualify such indenture under the Trust Indenture Act.

The holders of a majority in principal amount of the outstanding debt
securities of any series issued under either of the indentures may waive past
defaults, with respect to such series, under such indenture. The holders of a
majority in principal amount of the outstanding debt securities of all affected
series issued under either of the indentures (voting as one class) may waive
compliance by Valero Logistics with its covenants with respect to the debt
securities of those series. Those holders may not, however, waive any default in
any payment on any debt security of that series or compliance with a provision
that cannot be modified or amended without the consent of each holder affected.

EVENTS OF DEFAULT AND REMEDIES

"Event of Default" when used in each indenture, means any of the following
with respect to debt securities of any series:

- failure to pay interest on any debt security of that series for 30 days;

- failure to pay the principal of or any premium on any debt security of
that series when due;

- failure to perform any other covenant or warranty in such indenture
(other than a term, covenant or warranty a default in whose performance
or whose breach is elsewhere in this event of default section
specifically dealt with or which has expressly been included in the
applicable indenture solely for the benefit of a series of debt
securities other than that series) that continues for 60 days after
written notice is given to Valero Logistics by the trustee or to Valero
Logistics and the trustee by the holders of at least 25% in principal
amount of the outstanding debt securities of the series, specifying such
default and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the applicable indenture;

- failure to pay any indebtedness of Valero Logistics for borrowed money in
excess of $25 million, whether at final maturity (after the expiration of
any applicable grace periods) or upon acceleration of the maturity
thereof, if such indebtedness is not discharged, or such acceleration is
not annulled, within 10 days after written notice is given to Valero
Logistics by the trustee or to Valero Logistics and the trustee by the
holders of at least 25% in principal amount of the outstanding debt
securities of the series, specifying such default and requiring it to be
remedied and stating that such notice is a "Notice of Default" under the
applicable indenture;

- certain events of bankruptcy, insolvency or reorganization of Valero
Logistics; or

- any other Event of Default with respect to debt securities of that series
included in such indenture or supplemental indenture.

The subordination provisions of the subordinated indenture do not affect
the obligation of Valero Logistics, which is absolute and unconditional, to pay,
when due, the principal of and any premium and interest on the subordinated debt
securities. In addition, such subordination provisions do not prevent the
occurrence of any default under the subordinated indenture.

An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under either indenture. The trustee may withhold notice to the
holders of debt securities of any default, except in the payment of principal or
interest, if it considers such withholding of notice to be in the best interests
of the holders.

If an Event of Default for any series of debt securities occurs and
continues, the trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of the series may declare the entire principal of
(or, if any of the debt securities of that series are original issue discount
debt securities, the portion of the principal specified in the terms of those
securities), and accrued but unpaid interest, if any, on all the debt securities
of that series to be due and payable immediately. If this happens, subject to
32

certain conditions, the holders of a majority of the aggregate principal amount
of the debt securities of that series can rescind the declaration. If an event
of default relating to certain events of bankruptcy, insolvency or
reorganization occurs, the entire principal of all the outstanding notes shall
be due and payable immediately without further action or notice.

Other than its duties in case of a default, a trustee is not obligated to
exercise any of its rights or powers under either indenture at the request,
order or direction of any holders, unless the holders offer the trustee
reasonable indemnity. If they provide this reasonable indemnification, the
holders of a majority in principal amount of any series of debt securities may,
subject to certain limitations, direct the time, method and place of conducting
any proceeding or any remedy available to the trustee, or exercising any power
conferred upon the trustee, for any series of debt securities.

REGISTRATION OF DEBT SECURITIES

Valero Logistics may issue debt securities of a series in registered,
bearer, coupon or global form.

MINIMUM DENOMINATIONS

Unless the prospectus supplement for each issuance of debt securities
states otherwise, the debt securities will be issued in registered form in
amounts of $1,000 each or multiples of $1,000.

NO PERSONAL LIABILITY OF GENERAL PARTNER

Unless otherwise stated in a prospectus supplement and supplemental
indenture relating to a series of debt securities being offered, the general
partner of Valero Logistics and its directors, officers, employees and
stockholders (in their capacity as such) will not have any liability for its
obligations under the indentures or the debt securities. In addition, Valero GP,
LLC, the general partner of Valero L.P.'s general partner, and the directors,
officers, employees and members of Valero GP, LLC will not have any liability
for Valero L.P.'s obligations as a guarantor under the indentures or the debt
securities. Each holder of debt securities by accepting a debt security waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the debt securities. This waiver may not be
effective, however, to waive liabilities under the federal securities laws and
it is the view of the SEC that such a waiver is against public policy.

PAYMENT AND TRANSFER

Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the debt securities are registered on days specified in the
indentures or any prospectus supplement. Debt securities payments in other forms
will be paid at a place designated by Valero Logistics and specified in a
prospectus supplement.

Fully registered securities may be transferred or exchanged at the
corporate trust office of the trustee or at any other office or agency
maintained by Valero Logistics for such purposes, without the payment of any
service charge except for any tax or governmental charge.

FORM, EXCHANGE, REGISTRATION AND TRANSFER

Debt securities of any series will be exchangeable for other debt
securities of the same series, the same total principal amount and the same
terms but in different authorized denominations in accordance with the
applicable indenture. Holders may present debt securities for registration of
transfer at the office of the security registrar or any transfer agent Valero
Logistics designates. The security registrar or transfer agent will effect the
transfer or exchange when it is satisfied with the documents of title and
identity of the person making the request. Valero Logistics will not charge a
service charge for any registration of transfer or exchange of the debt
securities. Valero Logistics may, however, require the payment of any tax or
other governmental charge payable for that registration.

Valero Logistics will appoint the trustee under each indenture as security
registrar for the debt securities issued under that indenture. Valero Logistics
is required to maintain an office or agency for transfers and exchanges in each
place of payment. Valero Logistics may at any time designate additional transfer
agents for any series of debt securities. In the case of any redemption in part,
Valero Logistics will not be required

- to issue, register the transfer of or exchange debt securities of a
series either during a period beginning 15 business days prior to the
selection of debt securities of that series for redemption and ending on
the close of business on the day of mailing of the relevant notice of
redemption or

- to register the transfer of or exchange any debt security, or portion of
any debt security, called for redemption, except the unredeemed portion
of any debt security Valero Logistics is redeeming in part.

DISCHARGING VALERO LOGISTICS' OBLIGATIONS

Valero Logistics may choose to either discharge its obligations on the debt
securities of any series in a legal defeasance, or to release itself from its
covenant restrictions on the debt securities of any series in a covenant
defeasance. Valero Logistics may do so at any time on the 91st day after it
deposits with the applicable trustee sufficient cash or government securities to
pay the principal, interest, any premium and any other sums due on the stated
maturity date or a redemption date of the debt securities of the series. If
Valero Logistics chooses the legal defeasance option, the holders of the debt
securities of the series will not be entitled to the benefits of the applicable
indenture except for registration of transfer and exchange of debt securities,
replacement of lost, stolen or mutilated debt securities, conversion or exchange
of debt securities, sinking fund payments and receipt of principal and interest
on the original stated due dates or specified redemption dates.

Valero Logistics may discharge its obligations under the indentures or
release itself from covenant restrictions only if it meets certain requirements.
Among other things, Valero Logistics must deliver to the trustee an opinion of
its legal counsel to the effect that holders of the series of debt securities
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit and defeasance had not occurred. In the case of legal defeasance
only, this opinion must be based on either a ruling received from or published
by the IRS or change in federal income tax law. Valero Logistics may not have a
default on the debt securities discharged on the date of deposit. The discharge
may not violate any of its agreements. The discharge may not result in Valero
Logistics becoming an investment company in violation of the Investment Company
Act of 1940.

THE TRUSTEE

RESIGNATION OR REMOVAL OF TRUSTEE

Under provisions of the indentures and the Trust Indenture Act of 1939, as
amended, governing trustee conflicts of interest, any uncured Event of Default
with respect to any series of senior debt securities will force the trustee to
resign as trustee under either the subordinated indenture or the senior
indenture. Also, any uncured Event of Default with respect to any series of
subordinated debt securities will force the trustee to resign as trustee under
either the senior indenture or the subordinated indenture. Any resignation will
require the appointment of a successor trustee under the applicable indenture in
accordance with the terms and conditions of such indenture. Valero Logistics may
appoint a separate trustee for any series of debt securities. The term "trustee"
refers to the trustee appointed with respect to any such series of debt
securities. The holders of a majority in aggregate principal amount of the debt
securities of any series may remove the trustee with respect to the debt
securities of such series.

LIMITATIONS ON TRUSTEE IF IT IS A CREDITOR OF VALERO LOGISTICS

There are limitations on the right of the trustee, in the event that it
becomes a creditor of Valero Logistics, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise.

ANNUAL TRUSTEE REPORT TO HOLDERS OF DEBT SECURITIES

The trustee is required to submit an annual report to the holders of the
debt securities regarding, among other things, the trustee's eligibility to
serve as such, the priority of the trustee's claims regarding certain advances
made by it, and any action taken by the trustee materially affecting the debt
securities.

CERTIFICATES AND OPINIONS TO BE FURNISHED TO TRUSTEE

Every application by Valero Logistics for action by the trustee shall be
accompanied by a certificate of certain of Valero Logistics' officers and an
opinion of counsel (who may be Valero Logistics' counsel) stating that, in the
opinion of the signers, all conditions precedent to such action have been
complied with by Valero Logistics.

GOVERNING LAW

The indentures and the debt securities will be governed by the laws of the
State of New York.

BOOK ENTRY, DELIVERY AND FORM

The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a prospectus supplement.

Unless otherwise stated in any prospectus supplement, The Depository Trust
Company (DTC) will act as depositary. Book-entry notes of a series will be
issued in the form of a global note that will be deposited with or on behalf of
DTC. This means that Valero Logistics will not issue certificates to each
holder. One or more global notes will be issued to DTC who will keep a
computerized record of its participants (for example, a broker) whose clients
have purchased the notes. The participant will then keep a record of its clients
who purchased the notes. Unless it is exchanged in whole or in part for a
certificated note, a global note may not be transferred; except that DTC, its
nominees and their successors may transfer a global note as a whole to one
another.

Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.

DTC advises us that it is:

- a limited-purpose trust company organized under the New York Banking Law;

- a "banking organization" within the meaning of the New York Banking Law;

- a member of the United States Federal Reserve System;

- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and

- a "clearing agency" registered under the provisions of Section 17A of the
Exchange Act.

DTC holds securities that its participants ("Direct Participants") deposit
with DTC. DTC also records the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in deposited securities
through computerized records for Direct Participants' accounts. This eliminates
the need to exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations.

DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.

DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.

Valero Logistics will wire principal and interest payments on the global
notes to DTC's nominee. Valero Logistics and the trustee will treat DTC's
nominee as the owner of the global notes for all purposes. Accordingly, Valero
Logistics, the trustee and any paying agent will have no direct responsibility
or liability to pay amounts due on the global notes to owners of beneficial
interests in the global notes.

It is DTC's current practice, upon receipt of any payment of principal or
interest on the global notes, to credit Direct Participants' accounts on the
payment date according to their respective holdings of beneficial interests in
the global notes as shown on DTC's records. In addition, it is DTC's current
practice to assign any consenting or voting rights to Direct Participants whose
accounts are credited with notes on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global notes,
and voting by participants, will be governed by the customary practices between
the participants and owners of beneficial interests, as is the case with notes
held for the account of customers registered in "street name." However, payments
will be the responsibility of the participants and not of DTC, the trustee or
Valero Logistics.

Debt securities represented by a global note will be exchangeable for
certificated notes with the same terms in authorized denominations only if:

- DTC notifies Valero Logistics that it is unwilling or unable to continue
as depositary or if DTC ceases to be a clearing agency registered under
applicable law and a successor depositary is not appointed by Valero
Logistics within 90 days; or

- Valero Logistics determines not to require all of the debt securities of
a series to be represented by a global note and notifies the trustee of
the decision of Valero Logistics.

TAX CONSIDERATIONS

This section is a summary of the material tax considerations that may be
relevant to an investment in our securities and, unless otherwise noted in the
following discussion, expresses the opinion of Andrews & Kurth Mayor, Day,
Caldwell & Keeton L.L.P., our tax counsel, insofar as it relates to matters of
United States federal income tax law and legal conclusions with respect to those
matters. This section is based upon current provisions of the Internal Revenue
Code, existing and proposed regulations and current administrative rulings and
court decisions, all of which are subject to change. Later changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to us are references to both Valero L.P. and Valero Logistics.

No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, real estate investment trusts or mutual funds. Accordingly,
we recommend that you consult, and depend on your own tax advisor in analyzing
the federal, state, local and foreign tax consequences to you of an investment
in our securities.

All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations we make.

No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. An opinion of counsel represents only
that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which the common units trade. In addition, the costs of any contest with the
IRS will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the treatment of us, or an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.

For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:

1. the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "-- Tax
Treatment of Unitholders -- Treatment of Short Sales");

2. whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees"); and

3. whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Disposition of Common Units -- Section 754
Election").

PARTNERSHIP STATUS

A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss, and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions of cash by a partnership to a partner are
generally not taxable unless the amount of cash distributed to a partner is in
excess of the partner's adjusted basis in his partnership interest.

No ruling has been or will be sought from the IRS with respect to our, or
Valero Logistics', classification as a partnership for federal income tax
purposes or whether our operations generate "qualifying income" under Section
7704 of the Internal Revenue Code or any other matter affecting us or

prospective unitholders. Instead, we have relied on the opinion of counsel that,
based upon the Internal Revenue Code, Treasury Regulations, published revenue
rulings and court decisions and the representations described below, each of
Valero L.P. and Valero Logistics has been and will continue to be classified as
a partnership for federal income tax purposes.

In rendering its opinion that we have been and will continue to be treated
as partnerships for federal income tax purposes, Andrews & Kurth Mayor, Day,
Caldwell & Keeton L.L.P. has relied on the following factual representations and
covenants made by us and the general partner:

- Neither Valero L.P. nor Valero Logistics has elected or will elect to be
treated as an association or corporation;

- Valero L.P. and Valero Logistics have been and will be operated in
accordance with all applicable partnership statutes, the applicable
partnership agreement and in the manner described in this prospectus; and

- For each taxable year, more than 90% of our gross income has been and
will be derived from the exploration, development, production,
processing, refining, transportation, storage or marketing of any mineral
or natural resource, including oil, gas, or products thereof which come
from either a crude oil refinery or a natural gas processing facility, or
other items of income as to which counsel has opined or will opine are
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code.

Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "qualifying income exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the transportation and marketing of crude oil,
natural gas, and products thereof. Other types of qualifying income include
interest from other than a financial business, dividends, gains from the sale of
real property, and gains from the sale or other disposition of capital assets
held for the production of income that otherwise constitutes qualifying income.
We estimate that less than 4% of our current income is not qualifying income;
however, this estimate could change from time to time. Based upon and subject to
this estimate, the factual representations made by us and the general partner
and a review of the applicable legal authorities, counsel is of the opinion that
at least 90% of our gross income constitutes qualifying income.

If we fail to meet the qualifying income exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the qualifying income exception,
in return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to us and the unitholders so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.

If Valero L.P. or Valero Logistics were treated as an association taxable
as a corporation in any taxable year, either as a result of a failure to meet
the qualifying income exception or otherwise, its items of income, gain, loss
and deduction would be reflected only on its tax return rather than being passed
through to the unitholders, and its net income would be taxed at corporate
rates. In addition, any distributions we made to a unitholder would be treated
as either taxable dividend income, to the extent of Valero L.P.'s current or
accumulated earnings and profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the unitholder's tax basis in his
common units, or taxable capital gain, after the unitholder's tax basis in the
common units is reduced to zero. Accordingly, treatment of either Valero L.P. or
Valero Logistics as an association taxable as a corporation would result in a
material reduction in a unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the common units.

The discussion below is based on Andrews & Kurth Mayor, Day, Caldwell &
Keeton L.L.P.'s opinion that we will be classified as a partnership for federal
income tax purposes.

TAX TREATMENT OF UNITHOLDERS

Limited Partner Status. Unitholders who have become limited partners of
Valero L.P. will be treated as partners of Valero L.P. for federal income tax
purposes. Assignees who have executed and delivered transfer applications, and
are awaiting admission as limited partners, and unitholders whose common units
are held in street name or by a nominee and who have the right to direct the
nominee in the exercise of all substantive rights attendant to the ownership of
their common units will also be treated as partners of Valero L.P. for federal
income tax purposes. Because there is no direct authority addressing assignees
of common units who are entitled to execute and deliver transfer applications
and thereby become entitled to direct the exercise of attendant rights, but who
fail to execute and deliver transfer applications, counsel's opinion does not
extend to these persons. Furthermore, a purchaser or other transferee of common
units who does not execute and deliver a transfer application may not receive
some federal income tax information or reports furnished to record holders of
common units unless the common units are held in a nominee or street name
account and the nominee or broker has executed and delivered a transfer
application for those common units.

A beneficial owner of common units whose common units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner with respect to these common units for federal income tax purposes.
Please read "-- Treatment of Short Sales."

Income, gain, deductions, or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
of Valero L.P. for federal income tax purposes.

Flow-Through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
allocable share of our income, gains, losses, and deductions without regard to
whether corresponding cash distributions are received by that unitholder.
Consequently, a unitholder may be allocated a share of our income even if he has
not received a cash distribution. Each unitholder must include in income his
allocable share of our income, gain, loss, and deduction for our taxable year
ending with or within his taxable year.

Treatment of Distributions. Our distributions to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent that our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years that are equal to the amount of that
shortfall.

A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if that
distribution reduces the unitholder's share of our "unrealized receivables",
including depreciation recapture, and/or substantially appreciated "inventory
items", both as defined in Section 751 of the Internal Revenue Code, and
collectively, "Section 751 assets." To that extent, a unitholder will be treated
as having been distributed his proportionate share of the Section 751 assets and
having exchanged those assets with us in return for the non-pro rata portion of
the actual distribution made to him. This latter deemed exchange will generally
result in the unitholder's realization of ordinary income under Section 751(b)
of the Internal Revenue

Code. That income will equal the excess of the non-pro rata portion of that
distribution over the unitholder's tax basis for the share of the Section 751
assets deemed relinquished in the exchange.

Tax Rates. In general, the highest effective United States federal income
tax rate for individuals for 2002 is 38.6% and the maximum United States federal
income tax rate for net capital gains of an individual is generally 20% if the
asset was held for more than 12 months at the time of disposition.

Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, deduction or
loss for purposes of the alternative minimum tax. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders should consult with
their own tax advisors as to the impact of an investment in common units on
their liability for the alternative minimum tax.

Basis of Common Units. A unitholder will have an initial tax basis for his
common units equal to the amount he paid for the common units plus his share of
our nonrecourse liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse liabilities. That
basis will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decrease in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing our taxable income and are not required to be
capitalized. A limited partner will have no share of our debt which is recourse
to the general partner, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities.

Limitations on Deductibility of Our Losses. The deduction by a unitholder
of his share of our losses will be limited to the tax basis in his common units
and, in the case of an individual unitholder or a corporate unitholder that is
subject to the "at-risk" rules, to the amount for which the unitholder is
considered to be "at risk" with respect to our activities, if that is less than
his tax basis. A unitholder must recapture losses deducted in previous years to
the extent that distributions cause his at risk amount to be less than zero at
the end of any taxable year. Losses disallowed to a unitholder or recaptured as
a result of these limitations will carry forward and will be allowable to the
extent that his tax basis or at risk amount, whichever is the limiting factor,
subsequently increases. Upon the taxable disposition of a common unit, any gain
recognized by a unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended by
the basis limitation. Any excess loss above that gain previously suspended by
the at risk or basis limitations is no longer utilizable.

In general, a unitholder will be at risk to the extent of the tax basis of
his common units, excluding any portion of that basis attributable to his share
of our nonrecourse liabilities, reduced by any amount of money he borrows to
acquire or hold his common units, if the lender of those borrowed funds owns an
interest in us, is related to the unitholder, or can look only to the common
units for repayment. A unitholder's at risk amount will increase or decrease as
the tax basis of the unitholder's common units increases or decreases, other
than tax basis increases or decreases attributable to increases or decreases in
his share of our nonrecourse liabilities.

The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally activities in which
the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
our passive income generated in the future and will not be available to offset
income from other passive activities or investments, including other
publicly-traded partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a unitholder's share of our
income may be deducted in full when he disposes of his entire investment in us
in a fully taxable transaction to an unrelated party. The passive activity loss
rules are applied after other applicable limitations on deductions, including
the at risk rules and the basis limitation.

A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.

Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." The IRS has announced that Treasury
Regulations will be issued that characterize net passive income from a
publicly-traded partnership as investment income for this purpose. In addition,
the unitholder's share of our portfolio income will be treated as investment
income. Investment interest expense includes:

- interest on indebtedness properly allocable to property held for
investment;

- our interest expense attributed to portfolio income; and

- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.

The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a common unit. Net investment income includes gross income
from property held for investment and amounts treated as portfolio income under
the passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.

Allocation of Income, Gain, Loss, and Deduction. In general, if we have a
net profit, our items of income, gain, loss, and deduction are allocated among
the general partner and the unitholders in accordance with their particular
percentage interests in us. At any time that distributions are made to the
common units and not to the subordinated units, or that incentive distributions
are made to the general partner, gross income is allocated to the recipients to
the extent of these distributions. If we have a net loss, the amount of that
loss will be allocated first, to the general partner and the unitholders in
accordance with their particular percentage interests in us to the extent of
their positive capital accounts as maintained under the partnership agreement,
and, second, to the general partner.

Specified items of our income, deduction, gain, and loss are allocated to
account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and affiliates of the general
partner, and to account for the differences between the fair market value of our
assets and their carrying value on our books at the time of any offering made
pursuant to this prospectus, referred to in this discussion as "contributed
property." The effect of these allocations to a unitholder purchasing common
units pursuant to this prospectus will be essentially the same as if the tax
basis of our assets were equal to their fair market value at the time of
purchase. In addition, specified items of recapture income are allocated to the
extent possible to the partner who was allocated the deduction giving rise to
the treatment of that gain as recapture income in order to minimize the
recognition of ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.

An allocation of items of our income, gain, loss, or deduction, other than
an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of contributed property, and "tax" capital account, credited with the tax basis
of contributed property, will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in us, which will be determined by taking
into account all the facts and circumstances, including the partner's relative
contributions to us, the interests of the partners in economic profits and
losses, the interests of the partners in cash flow and other nonliquidating
distributions, and rights of the partners to distributions of capital upon
liquidation.

Counsel is of the opinion that, with the exception of the issues described
in "-- Disposition of Common Units -- Section 754 Election" and "-- Disposition
of Common Units -- Allocations Between Transferors and Transferees," allocations
under our partnership agreement will be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction.

Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or any
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend our partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of common units and to
adjust later distributions, so that after giving effect to these distributions,
the priority and characterization of distributions otherwise applicable under
our partnership agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax on behalf of an
individual partner, in which event the partner could file a claim for credit or
refund.

Treatment of Short Sales. A unitholder whose common units are loaned to a
"short seller" to cover a short sale of common units may be considered as having
disposed of ownership of those common units. If so, he would no longer be a
partner with respect to those common units during the period of the loan and may
recognize gain or loss from the disposition. As a result, during this period:

- any of our income, gain, deduction or loss with respect to those common
units would not be reportable by the unitholder;

- any cash distributions received by the unitholder with respect to those
common units would be fully taxable; and

- all of these distributions would appear to be treated as ordinary income.

Counsel has not rendered an opinion regarding the treatment of a unitholder
whose common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition should modify any applicable brokerage
account agreements to prohibit their brokers from borrowing their common units.
The IRS has announced that it is actively studying issues relating to the tax
treatment of short sales of partnership interests. Please also read
"-- Disposition of Common Units -- Recognition of Gain or Loss."

TAX TREATMENT OF OPERATIONS

Accounting Method and Taxable Year. We currently use the year ending
December 31 as our taxable year and we have adopted the accrual method of
accounting for federal income tax purposes. Each unitholder will be required to
include in income his allocable share of our income, gain, loss and deduction
for our taxable year ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than December 31 and
who disposes of all of his common units following the close of our taxable year
but before the close of his taxable year must include his allocable share of our
income, gain, loss and deduction in income for his taxable year, with the result
that he will be required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction. Please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees."

Tax Basis, Depreciation, and Amortization. The adjusted tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to an offering will be
borne by the contributing partners and other unitholders at that time. Please
read "-- Tax Treatment of Unitholders -- Allocation of Income, Gain, Loss and
Deduction."

To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We will not be entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.

If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own may be required to recapture those deductions as
ordinary income upon a sale of his interest in us. Please read "-- Tax Treatment
of Unitholders -- Allocation of Income, Gain, Loss and Deduction" and
"-- Disposition of Common Units -- Recognition of Gain or Loss."

Costs incurred in our organization are being amortized over a period of 60
months. The costs incurred in promoting the issuance of common units (i.e.
syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. Uncertainties exist regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses, which may not be amortized. The underwriting discounts and
commissions we incur are treated as syndication costs.

Uniformity of Units. Because we cannot match transferors and transferees
of common units, uniformity of the economic and tax characteristics of the
common units to a purchaser of these common units must be maintained. In the
absence of uniformity, compliance with a number of federal income tax
requirements, both statutory and regulatory, could be substantially diminished.
A lack of uniformity can result from a literal application of Treasury
Regulation Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative
impact on the value of the common units. Please read "-- Disposition of Common
Units -- Section 754 Election."

Consistent with the regulations under Section 743 of the Internal Revenue
Code, we intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property, to the extent of any unamortized Section 704(c) built-in
gain, using a rate of depreciation or amortization derived from the depreciation
or amortization method and useful life applied to the common basis of that
property, or treat that portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable, even though that position
may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6). To the
extent that the Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Section 704(c) built-in gain, we apply rules
described in the regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation and
amortization convention under which all purchasers acquiring common units in the
same month would receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in our property. If
this position is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to some unitholders
and risk the loss of depreciation and amortization deductions not taken in the
year that these deductions are otherwise allowable. This position will not be
adopted if we determine that the loss of depreciation and amortization
deductions will have a material adverse effect on the unitholders. If we choose
not to utilize this aggregate method, we may use any other reasonable
depreciation and amortization convention to preserve the uniformity of the
intrinsic tax characteristics of any common units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
type of challenge were sustained, the uniformity of common units might be
affected, and the gain from the sale of common units might be increased without
the benefit of additional deductions. Please read "-- Disposition of Common
Units -- Recognition of Gain or Loss."

Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of common units will depend in
part on our estimates of the relative fair market values,

and determinations of the initial tax bases, of our assets. Although we may from
time to time consult with professional appraisers regarding valuation matters,
we will make many of the relative fair market value estimates ourselves. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are later found to be incorrect, the character and
amount of items of income, gain, loss, or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years.

DISPOSITION OF COMMON UNITS

Recognition of Gain or Loss. A unitholder will recognize gain or loss on a
sale of common units equal to the difference between the amount realized and the
unitholder's tax basis for the common units sold. A unitholder's amount realized
will be measured by the sum of the cash or the fair market value of other
property received plus his share of our nonrecourse liabilities. Because the
amount realized includes a unitholder's share of our nonrecourse liabilities,
the gain recognized on the sale of common units could result in a tax liability
in excess of any cash received from the sale.

Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price is less
than his original cost.

Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in common units, on the sale or exchange of a common unit held for
more than one year will generally be taxable as capital gain or loss. Capital
gain recognized by an individual on the sale of common units held for more than
12 months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss, which will likely be substantial, however, will be separately
computed and taxed as ordinary income or loss under Section 751 of the Internal
Revenue Code to the extent attributable to assets giving rise to depreciation
recapture or other "unrealized receivables" or to "inventory items" we own. The
term "unrealized receivables" includes potential recapture items, including
depreciation recapture. Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of the common unit and may be recognized even if there is a net
taxable loss realized on the sale of the common unit. Thus, a unitholder may
recognize both ordinary income and a capital loss upon a disposition of common
units. Net capital loss may offset no more than $3,000 of ordinary income in the
case of individuals and may only be used to offset capital gain in the case of
corporations.

The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. On the other
hand, a selling unitholder who can identify common units transferred with an
ascertainable holding period may elect to use the actual holding period of the
common units transferred. A unitholder electing to use the actual holding period
of common units transferred must consistently use that identification method for
all subsequent sales or exchanges of common units.

Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or a related person enters into a short sale,
an offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest or substantially identical property.

Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership

interest or substantially similar property. The Secretary of the Treasury is
also authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.

Allocations Between Transferors and Transferees. In general, our taxable
income and losses are determined annually, are prorated on a monthly basis and
are subsequently apportioned among the unitholders in proportion to the number
of common units owned by each of them as of the opening of the NYSE on the first
business day of the month (the "allocation date"). However, gain or loss
realized on a sale or other disposition of our assets other than in the ordinary
course of business is allocated among the unitholders on the allocation date in
the month in which that gain or loss is recognized. As a result, a unitholder
transferring common units in the open market may be allocated income, gain, loss
and deduction accrued after the date of transfer.

The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of common units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests otherwise
vary during a taxable period, to conform to a method permitted under future
Treasury Regulations.

A unitholder who owns common units at any time during a quarter and who
disposes of these common units prior to the record date set for a cash
distribution with respect to that quarter will be allocated items of our income,
gain, loss and deductions attributable to that quarter but will not be entitled
to receive that cash distribution.

Section 754 Election. We have made the election permitted by Section 754
of the Internal Revenue Code. The election is irrevocable without the consent of
the IRS. The election generally permits us to adjust a common unit purchaser's
tax basis in our assets ("inside basis") under Section 743(b) of the Internal
Revenue Code to reflect his purchase price. This election does not apply to a
person who purchases common units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. For purposes of
this discussion, a partner's inside basis in our assets will be considered to
have two components, (1) his share of our tax basis in our assets ("common
basis") and (2) his Section 743(b) adjustment to that basis.

Treasury Regulations under Section 743 of the Internal Revenue Code require
a partnership that adopts the remedial allocation method (which we have done) to
depreciate a portion of the Section 743(b) adjustment attributable to recovery
property over the remaining cost recovery period for the Section 704(c) built-in
gain. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167 of
the Internal Revenue Code rather than cost recovery deductions under Section 168
is generally required to be depreciated using either the straight-line method or
the 150% declining balance method. Under our partnership agreement, we have
adopted a convention to preserve the uniformity of common units even if that
convention is not consistent with these Treasury Regulations. Please read
"-- Tax Treatment of Operations -- Uniformity of Units."

Although Andrews & Kurth, May, Day, Caldwell & Keeton L.L.P. is unable to
opine as to the validity of this method because there is no clear authority on
this issue, we intend to depreciate or amortize the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property, to the extent of any unamortized Section 704(c) built-in gain, using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of the property,
or treat that portion as non-amortizable to the extent attributable to property
the common basis of which is not amortizable. This method is consistent with the
regulations under Section 743 of the Internal Revenue Code but is arguably
inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6). To the extent
this Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Section 704(c) built-in gain, we will apply the rules

described in the Treasury Regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring common units in the
same month would receive depreciation or amortization, whether attributable to
common basis or Section 743(b) adjustment, based upon the same applicable rate
as if they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to specified unitholders. Please read "-- Tax
Treatment of Operations -- Uniformity of Units."

A Section 754 election is advantageous if the transferee's tax basis in his
common units is higher than the common units' share of the aggregate tax basis
of our assets immediately prior to the transfer. In that case, as a result of
the election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in his common units is lower than those common units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the common units may be affected either favorably or
adversely by the election.

The calculations involved in the Section 754 election are complex, and we
will make them on the basis of assumptions as to the value of our assets and
other matters. The determinations we make may be successfully challenged by the
IRS and the deductions resulting from them may be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in our opinion, the expense of compliance exceed the benefit of the
election, we may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of common units may
be allocated more income than he would have been allocated had the election not
been revoked.

Notification Requirements. A unitholder who sells or exchanges common
units is required to notify us in writing of that sale or exchange within 30
days after the sale or exchange. We are required to notify the IRS of that
transaction and to furnish specified information to the transferor and
transferee. However, these reporting requirements do not apply with respect to a
sale by an individual who is a citizen of the United States and who effects the
sale or exchange through a broker. Additionally, a transferee of a common unit
will be required to furnish a statement to the IRS, filed with its income tax
return for the taxable year in which the sale or exchange occurred, that
describes the amount of the consideration paid for the common unit. Failure to
satisfy these reporting obligations may lead to the imposition of substantial
penalties.

Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. Our termination
will cause a termination of Valero Logistics. Our termination would result in
the closing of our taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending December 31, the
closing of our taxable year may result in more than 12 months of our taxable
income or loss being includable in his taxable income for the year of
termination. We would be required to make new tax elections after a termination,
including a new election under Section 754 of the Internal Revenue Code, and a
termination could result in a deferral of our deductions for depreciation. A
termination could also result in penalties if we were unable to determine that
the termination had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation enacted before the
termination.

TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS

Ownership of common units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons,
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable

income. Virtually all of our taxable income allocated to a unitholder which is a
tax-exempt organization will be unrelated business taxable income and will be
taxable to that unitholder.

A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.

Non-resident aliens and foreign corporations, trusts, or estates that own
common units will be considered to be engaged in business in the United States
on account of ownership of common units. As a consequence they will be required
to file federal tax returns for their share of our income, gain, loss, or
deduction and pay federal income tax at regular rates on any net income or gain.

Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income that is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to these partners. However, under rules applicable to publicly-traded
partnerships, we will withhold taxes on actual cash distributions made quarterly
to foreign unitholders at the highest marginal rate applicable to individuals at
the time of the distribution. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our transfer agent
on a Form W-8 BEN or applicable substitute form in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures.

Because a foreign corporation that owns common units will be treated as
engaged in a United States trade or business, that corporation may be subject to
United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of our income and gain, as adjusted
for changes in the foreign corporation's "U.S. net equity," which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the United
States and the country in which the foreign corporate unitholder is a "qualified
resident." In addition, this type of unitholder is subject to special
information reporting requirements under Section 6038C of the Internal Revenue
Code.

Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a common unit will be subject to federal income tax on gain realized
on the disposition of that common unit to the extent that this gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed or
subject to withholding upon the disposition of a common unit if that foreign
unitholder has owned 5% or less in value of the common units during the five-
year period ending on the date of the disposition and if the common units are
regularly traded on an established securities market at the time of the
disposition.

ADMINISTRATIVE MATTERS

Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes each unitholder's share
of our income, gain, loss and deduction for our preceding taxable year. In
preparing this information, which will generally not be reviewed by counsel, we
will use various accounting and reporting conventions, some of which have been
mentioned in the previous discussion, to determine the unitholder's share of
income, gain, loss and deduction. Any of those conventions may not yield a
result that conforms to the requirements of the Internal Revenue Code,
regulations or administrative interpretations of the IRS. The IRS may
successfully contend in court that those accounting and reporting conventions
are impermissible. Any challenge by the IRS could negatively affect the value of
the common units.

The IRS may audit our federal income tax information returns. Adjustments
resulting from an audit of this kind may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an

audit of that unitholder's own return. Any audit of a unitholder's return could
result in adjustments not related to our returns as well as those related to our
returns.

Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "tax matters partner" for these
purposes. Our partnership agreement appoints the general partner as the tax
matters partner of Valero L.P.

The tax matters partner will make some elections on our behalf and on
behalf of unitholders. In addition, the tax matters partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The tax matters partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the tax matters partner. The tax matters partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the tax matters partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1%
interest in our profits and by the unitholders having in the aggregate at least
a 5% profits interest. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may participate.

A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.

Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:

(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;

(b) whether the beneficial owner is

(1) a person that is not a United States person,

(2) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the
foregoing, or

(3) a tax-exempt entity;

(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales.

Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on common units they acquire, hold or transfer for their own
account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar
year, is imposed by the Internal Revenue Code for failure to report that
information to us. The nominee is required to supply the beneficial owner of the
common units with the information furnished to us.

Registration as a Tax Shelter. The Internal Revenue Code requires that
"tax shelters" be registered with the Secretary of the Treasury. Although we may
not be subject to the registration requirement on the basis that we do not
constitute a tax shelter, we have registered as a tax shelter with the Secretary
of the Treasury in light of the substantial penalties which might be imposed if
registration is required and not undertaken.

OUR TAX SHELTER REGISTRATION NUMBER IS 00294000008. ISSUANCE OF THIS
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US OR THE CLAIMED
TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.

A unitholder who sells or otherwise transfers a common unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a common unit to furnish the registration
number to the transferee is $100 for each failure. The unitholders must disclose
our tax shelter registration number on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit we generate is claimed or
on which any of our income is included. A unitholder who fails to disclose the
tax shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.

Accuracy-related Penalties. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.

A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return:

(1) for which there is, or was, "substantial authority"; or

(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.

More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.

A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.

STATE, LOCAL, AND OTHER TAX CONSIDERATIONS

In addition to federal income taxes, a unitholder will be subject to other
taxes, including state and local income taxes, unincorporated business taxes,
and estate, inheritance, or intangible taxes that may be imposed by the various
jurisdictions in which he resides or in which we do business or own property.
Although an analysis of those various taxes is not presented here, each
prospective unitholder should consider their potential impact on his investment
in us. We own assets or do business in Texas, Colorado, New Mexico, Kansas, and
Oklahoma. Of these states, Colorado, New Mexico, Kansas, and Oklahoma currently
impose a personal income tax. A unitholder will be required to file state income
tax returns and to pay state income taxes in some or all of these states in
which we do business or own property and may be subject to penalties for failure
to comply with those requirements. In some states, tax losses may not produce a
tax benefit in the year incurred and also may not be available to offset income
in subsequent taxable years. Some of the states may require us, or we may elect,
to withhold a percentage of income from amounts to be distributed to a
unitholder who is not a resident of the state. Withholding, the amount of which
may be greater or less than a particular unitholder's income tax liability to
the state, generally

does not relieve a nonresident unitholder from the obligation to file an income
tax return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. Please read "-- Tax
Treatment of Unitholders -- Entity-Level Collections." Based on current law and
our estimate of our future operations, our general partner anticipates that any
amounts required to be withheld will not be material.

It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, each prospective unitholder should consult, and
must depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each unitholder to file all state
and local, as well as United States federal tax returns that may be required of
him. Counsel has not rendered an opinion on the state or local tax consequences
of an investment in us.

TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES

A description of the material federal income tax consequences of the
ownership and disposition of debt securities will be included in the prospectus
supplement relating to the offering of debt securities.

INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS

An investment in Valero L.P. by an employee benefit plan is subject to
additional considerations because the investments of these plans are subject to
the fiduciary responsibility and prohibited transaction provisions of ERISA, and
restrictions imposed by Section 4975 of the Internal Revenue Code. For these
purposes the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to:

(a) whether the investment is prudent under Section 404(a)(1)(B) of
ERISA;

(b) whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA; and

(c) whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return.

The person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine whether an
investment in Valero L.P. is authorized by the appropriate governing instrument
and is a proper investment for the plan.

Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibits employee benefit plans, and also IRAs that are not considered part of
an employee benefit plan, from engaging in specified transactions involving
"plan assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code with respect to the plan.

In addition to considering whether the purchase of common units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether the plan will, by investing in Valero L.P., be deemed to own an
undivided interest in the assets of Valero L.P., with the result that the
general partner would also be a fiduciary of the plan and the operations of
Valero L.P. would be subject to the regulatory restrictions of ERISA, including
its prohibited transaction rules, as well as the prohibited transaction rules of
the Internal Revenue Code.

The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under some circumstances. Under these
regulations, an entity's assets would not be considered to be "plan assets" if,
among other things,

(a) the equity interests acquired by employee benefit plans are
publicly offered securities -- i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and
each other, freely transferable and registered under some
provisions of the federal securities laws,

(b) the entity is an "operating company," -- i.e., it is primarily
engaged in the production or sale of a product or service other
than the investment of capital either directly or through a
majority-owned subsidiary or subsidiaries, or

(c) there is no significant investment by benefit plan investors,
which is defined to mean that less than 25% of the value of each
class of equity interest, disregarding some interests held by our
general partner, its affiliates, and some other persons, is held
by the employee benefit plans referred to above, IRAs and other
employee benefit plans not subject to ERISA, including
governmental plans.

Valero L.P.'s assets should not be considered "plan assets" under these
regulations because it is expected that the investment will satisfy the
requirements in (a) above.

Plan fiduciaries contemplating a purchase of common units should consult
with their own counsel regarding the consequences under ERISA and the Internal
Revenue Code in light of the serious penalties imposed on persons who engage in
prohibited transactions or other violations.

PLAN OF DISTRIBUTION

We may sell the securities being offered hereby:

- directly to purchasers,

- through agents,

- through underwriters or dealers, or

- pursuant to delayed delivery contracts or forward contracts.

We, or agents designated by us, may directly solicit, from time to time,
offers to purchase the securities. Any such agent may be deemed to be an
underwriter as that term is defined in the Securities Act of 1933, as amended.
We will name the agents involved in the offer or sale of the securities and
describe any commissions payable by us to these agents in the prospectus
supplement. Unless otherwise indicated in the prospectus supplement, these
agents will be acting on a best efforts basis for the period of their
appointment. The agents may be entitled under agreements which may be entered
into with us to indemnification by us against specific civil liabilities,
including liabilities under the Securities Act. The agents may also be our
customers or may engage in transactions with or perform services for us in the
ordinary course of business.

If any underwriters are utilized in the sale of the securities in respect
of which this prospectus is delivered, we will enter into an underwriting
agreement with those underwriters at the time of sale to them. The names of
these underwriters and the terms of the transaction will be set forth in the
prospectus supplement, which will be used by the underwriters to make resales of
the securities in respect of which this prospectus is delivered to the public.
The underwriters may be entitled, under the relevant underwriting agreement, to
indemnification by us against specific liabilities, including liabilities under
the Securities Act. The underwriters may also be our customers or may engage in
transactions with or perform services for us in the ordinary course of business.

If a dealer is utilized in the sale of the securities in respect of which
this prospectus is delivered, we will sell those securities to the dealer, as
principal. The dealer may then resell those securities to the public at varying
prices to be determined by the dealer at the time of resale. Dealers may be
entitled to indemnification by us against specific liabilities, including
liabilities under the Securities Act. The dealers may also be our customers or
may engage in transactions with, or perform services for, us in the ordinary
course of business.

Common units and debt securities may also be sold directly by us. In this
case, no underwriters or agents would be involved. We may use electronic media,
including the Internet, to sell offered securities directly.

To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution.

The place and time of delivery for the securities in respect of which this
prospectus is delivered will be set forth in the accompanying prospectus
supplement.

VALIDITY OF THE SECURITIES

The validity of the securities and certain federal income tax matters
related to the securities will be passed upon by Andrews & Kurth Mayor, Day,
Caldwell & Keeton L.L.P., Houston, Texas. Any underwriter will be advised about
other issues relating to any offering by its own legal counsel.

EXPERTS

The financial statements of:

- Valero L.P., formerly Shamrock Logistics, L.P. and Valero Logistics
Operations, L.P., formerly Shamrock Logistics Operations, L.P. (successor
to the Ultramar Diamond Shamrock Logistics Business), (collectively, the
Partnerships) as of December 31, 2001 and 2000 (successor), and for the
year ended December 31, 2001 and the six months ended December 31, 2000
(successor) and for the six months ended June 30, 2000 and the year ended
December 31, 1999 (predecessor) included in Valero L.P.'s Annual Report
on Form 10-K for the year ended December 31, 2001, and incorporated by
reference in this prospectus and elsewhere in the registration statement;

- Wichita Falls Crude Oil Pipeline and Storage Business as of December 31,
2001 and 2000, and for each of the three years in the period ended
December 31, 2001 included in Valero L.P.'s Current Report on Form 8-K/A
filed April 16, 2002, and incorporated by reference in this prospectus
and elsewhere in the registration statement; and

- Valero L.P., formerly Shamrock Logistics, L.P. and Valero Logistics
Operations, L.P., formerly Shamrock Logistics Operations, L.P. (successor
to the Ultramar Diamond Shamrock Logistics Business), (collectively, the
Partnerships) as of December 31, 2001 (restated) and 2000 (successor),
and for the year ended December 31, 2001 and the six months ended
December 31, 2000 (successor) and for the six months ended June 30, 2000
and the year ended December 31, 1999 (predecessor) included in Valero
L.P.'s Current Report on Form 8-K filed May 16, 2002, and incorporated by
reference in this prospectus and elsewhere in the registration statement;

have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS

On March 22, 2002, upon the recommendation of the audit committee, the
board of directors approved the dismissal of Arthur Andersen LLP (Arthur
Andersen) as Valero L.P.'s independent public accountants and the selection of
Ernst & Young LLP (Ernst & Young) as Valero L.P.'s new independent public
accountants to audit the consolidated financial statements of Valero L.P. for
the year ending December 31, 2002. This change became effective upon the
completion by Arthur Andersen of its audits of the financial statements of the
Wichita Falls Crude Oil Pipeline and Storage Business, which were filed on Form
8-K/A on April 16, 2002. It should be noted that Arthur Andersen has not
audited, or performed a review in accordance with standards established by the
American Institute of Certified Public Accountants of, any financial statements
of Valero L.P. as of any date or for any period subsequent to December 31, 2001.

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