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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes      X   No       

The number of common and subordinated units outstanding as of October 31, 2004 was 13,442,072 and 9,599,322, respectively.

VALERO L.P. AND SUBSIDIARIES
FORM 10-Q

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

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VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except unit and per unit data)

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VALERO L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

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VALERO L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 2004 and 2003
(unaudited)

NOTE 1: Organization, Basis of Presentation and Principles of Consolidation

As used in this report, the term Valero L.P. may refer, depending on the context, to Valero L.P., Valero Logistics Operations, L.P. (Valero Logistics), the wholly owned subsidiary of Valero L.P., or both of them taken as a whole. Riverwalk Logistics, L.P., a wholly owned subsidiary of Valero Energy Corporation (Valero Energy), is the 2% general partner of Valero L.P. Valero Energy, through various affiliates, is also a limited partner in Valero L.P., resulting in a combined limited partner ownership of 43.6% as of September 30, 2004. The remaining 54.4% limited partnership interest is held by public unitholders.

These unaudited consolidated financial statements include the accounts of Valero L.P. and subsidiaries in which it has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in 50% or less owned entities are accounted for using the equity method of accounting. In addition, the operations of certain crude oil and refined product pipelines and refined product terminals, in which Valero L.P. owns an undivided interest, are proportionately consolidated in the accompanying consolidated financial statements.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The consolidated balance sheet as of December 31, 2003 has been derived from the audited consolidated financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in Valero L.P.‘s Annual Report on Form 10-K for the year ended December 31, 2003.

NOTE 2: Acquisition

On February 20, 2004, Valero L.P. acquired two asphalt terminals, one in Catoosa, Oklahoma near Tulsa and one in Rosario, New Mexico near Santa Fe, from Royal Trading Company (Royal Trading) for $28.1 million. These terminals have an aggregate storage capacity of 500,000 barrels in 32 tanks and six loading stations. This acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations,” and the purchase price was preliminarily allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. The final allocation of the purchase price is pending an independent appraisal, which is currently expected to be completed by year-end.

In conjunction with the Royal Trading acquisition, Valero L.P. entered into a five-year terminal storage and throughput agreement with Valero Energy. The agreement provides a base throughput and blending fee schedule with volume incentive discounts once certain thresholds are met. In addition, Valero Energy has agreed to utilize the acquired terminals for a minimum of 18.5% of the McKee and Ardmore refineries’ asphalt production. The results of operations for these two terminals are included in the consolidated statements of income commencing on February 20, 2004.

The pro forma financial information for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003 that give effect to the acquisition of Royal Trading as of January 1, 2004 and 2003 has not been disclosed as the effect is not significant.

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VALERO L.P. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 3: Long-term Debt

         $175.0 Million Revolving Credit Facility
During the nine months ended September 30, 2004, Valero Logistics borrowed $28.0 million under its $175.0 million revolving credit facility to fund the Royal Trading acquisition and borrowed $15.0 million to partially fund construction of the Nuevo Laredo, Mexico propane terminal and related pipelines. Valero Logistics repaid $5.0 million of the borrowings under the revolving credit facility in the third quarter of 2004. Borrowings under Valero Logistics’ $175.0 million revolving credit facility bear interest based on either an alternative base rate or LIBOR. The effective interest rate related to outstanding borrowings under the revolving credit facility during the three months ended September 30, 2004 was 2.6%, and during the nine months ended September 30, 2004 and 2003 was 2.3% and 3.3%, respectively. There were no outstanding borrowings under the revolving credit facility during the three months ended September 30, 2003. As of September 30, 2004, Valero Logistics had $137.0 million available under its revolving credit facility.

         Interest Rate Swaps
During 2003, Valero Logistics entered into $167.5 million (notional amount) of interest rate swaps, which effectively convert $167.5 million of fixed-rate debt to variable-rate debt. As of September 30, 2004, the weighted-average effective interest rate for the interest rate swaps was 4.5% and the aggregate estimated fair value was a net payable of $0.8 million. Valero Logistics accounts for the interest rate swaps as fair value hedges, with changes in the fair value of each swap and the related debt instrument recorded as an adjustment to interest expense in the consolidated statements of income.

         Other Long-term Debt
During the nine months ended September 30, 2004, Valero Logistics repaid $0.5 million on the note payable to the Port of Corpus Christi Authority of Nueces County, Texas. The note payable is due in annual installments of $1.2 million through December 31, 2015 and is collateralized by the crude oil storage facility.

NOTE 4: Related Party Transactions

Valero L.P. has related party transactions with Valero Energy with regard to pipeline tariff, terminalling fee and crude oil storage tank rent and fee revenues, certain employee costs, insurance costs, operating expenses, administrative costs and rent expense. The receivable from Valero Energy represents amounts due for pipeline tariff, terminalling fee and tank rent and fee revenues, and the payable to Valero Energy represents amounts due for employee costs, insurance costs, operating expenses, administrative costs and rent expense.

The following table summarizes the results of transactions with Valero Energy:

         Services Agreement
Valero L.P. previously received certain corporate services such as legal, accounting, treasury, engineering, information technology and other corporate functions from Valero Energy under the provisions of a services agreement (Services Agreement) entered into in July of 2000 for an annual fee of $5.2 million. Due to the significant growth of Valero L.P. over the past three years and the increased levels of service provided by Valero Energy for Valero L.P., Valero L.P. and Valero Energy amended the terms of the Services Agreement, effective April 1, 2004, to change the annual services fee.

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Under the terms of the amended Services Agreement, Valero L.P. reimburses Valero Energy for the cost of corporate employees dedicated to Valero L.P. and pays an annual services fee of $1.2 million. Each year over the next four years, the annual services fee will be increased by $1.2 million and by Valero Energy’s average percentage increase in salaries. The annual services fee may also be adjusted to account for changed service levels due to Valero L.P.‘s acquisition, sale or construction of assets. The Services Agreement also requires Valero L.P. to reimburse Valero Energy for various recurring costs, including salary, wage and benefit costs of operational employees who work exclusively within the pipeline, terminalling and storage operations and for certain other costs incurred by Valero Energy relating solely to Valero L.P. The conflicts committee of the board of directors of Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., approved the amendment to the Services Agreement in March 2004.

         Crude Oil Storage Tanks Agreement
Effective January 1, 2004, Valero Energy and Valero L.P. entered into a one-year shell barrel capacity lease agreement whereby Valero Energy agreed to lease 1.6 million barrels of storage capacity at Valero L.P.‘s Corpus Christi North Beach storage facility for an annual fee of $5.8 million, payable monthly.

NOTE 5: Employee Benefit Expenses

Valero L.P.‘s share of allocated Valero Energy employee benefit plan expenses, excluding compensation expense related to restricted common units and unit options, was $3.2 million and $1.2 million for the three months ended September 30, 2004 and 2003, respectively, and was $8.4 million and $2.8 million for the nine months ended September 30, 2004 and 2003, respectively. These employee benefit plan expenses and the related payroll costs are included in operating expenses and general and administrative expenses.

NOTE 6: Partners’ Equity

         Outstanding Equity
As of September 30, 2004, Valero L.P.‘s outstanding partners’ equity consisted of 13,442,072 common units (of which 614,572 were held by UDS Logistics, LLC and 40,421 were held by Valero GP, LLC), 9,599,322 subordinated units held by UDS Logistics, LLC and a 2% general partner interest held by Riverwalk Logistics, L.P.

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

Effective March 11, 2004, Valero L.P.‘s partnership agreement was amended to reduce the percentage of the vote required to remove Valero L.P.‘s general partner from 58% to a simple majority of units entitled to vote, which excludes the units held by the general partner and its affiliates.

         Cash Distributions
Effective March 11, 2004, Valero L.P.‘s partnership agreement was amended to lower the general partner’s incentive distribution rights with respect to distributions of available cash from 48% to 23% of the amount of any quarterly distribution that exceeds $0.90 per unit. The general partner will continue to receive a 2% distribution with respect to its general partner interest. The general partner’s incentive distribution allocation for the three months ended September 30, 2004 and 2003 was $1.1 million and $0.8 million, respectively, and for the nine months ended September 30, 2004 and 2003 was $3.3 million and $1.9 million, respectively. Valero L.P. 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. On July 26, 2004, Valero L.P. declared a quarterly distribution of $0.80 per unit paid on August 13, 2004 to unitholders of record on August 6, 2004. On November 1, 2004, Valero L.P. declared a quarterly distribution of $0.80 per unit to be paid on November 12, 2004 to unitholders of record on November 8, 2004.

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The following table reflects the allocation of total cash distributions to the general and limited partners applicable to the period in which the distributions are earned:

NOTE 7: Segment Information

Segment information for Valero L.P.‘s four reportable segments was as follows:

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Total assets by reportable segment were as follows:

Effective January 1, 2004, Valero L.P.‘s Corpus Christi North Beach storage facility was transferred from the crude oil pipelines segment to the crude oil storage tanks segment. Valero L.P. and Valero Energy entered into a one-year shell barrel capacity lease agreement for the 1.6 million barrels of capacity at the facility. The use of this storage facility was previously included as part of the crude oil pipeline tariff for the Corpus Christi to Three Rivers crude oil pipeline. As of December 31, 2003, the assets related to the Corpus Christi North Beach storage facility totaled $18.0 million. Goodwill is allocated to two of Valero L.P.‘s segments, crude oil pipelines and refined product pipelines. The Investment in Skelly-Belvieu Pipeline Company is included in the refined product pipelines segment.

NOTE 8: Subsequent Event

On November 1, 2004, Valero L.P. announced a proposed merger with Kaneb Services LLC (Kaneb Services) and Kaneb Pipe Line Partners, L.P. (Kaneb Partners). The boards of directors of the respective entities have approved the terms of the proposed transaction. The completion of the merger is subject to the approval of the unitholders of Valero L.P. and Kaneb Partners and the shareholders of Kaneb Services as well as customary regulatory approvals. The transaction is expected to close in the first quarter of 2005.

Under the terms of the merger agreement, Valero L.P. will acquire all of the equity securities of Kaneb Services for $525 million in cash. In addition, each unitholder of Kaneb Partners will exchange their common units for a number of newly issued Valero L.P. common units based on an exchange ratio measured over a period prior to closing.

In order to maintain its 2% general partner interest, Riverwalk Logistics, L.P. expects to contribute approximately $28 million to Valero L.P. Valero L.P. furnished a copy of its press release together with additional investor information for the proposed transaction in its Current Report on Form 8-K dated November 1, 2004.

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

Cautionary Statement Regarding Forward-Looking Information

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

If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, Valero L.P.‘s actual results may vary materially from those described in any forward-looking statement. Valero L.P. does not intend to update its forward-looking statements unless it is required by the securities laws to do so, and it undertakes no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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Results of Operations

         Overview
Valero L.P.‘s operations provide transportation and storage services to Valero Energy and other unrelated customers. Valero L.P. provides these services with its crude oil and refined product pipelines, refined product terminals and crude oil storage tanks located near or connected to eight of Valero Energy’s refineries. As a result of the significant relationship with Valero Energy, the operating results of Valero L.P. are affected by factors affecting the business of Valero Energy, including refinery utilization rates, refinery maintenance turnarounds, crude oil prices, the demand for refined products and industry refining capacity.

On February 20, 2004, Valero L.P. acquired two asphalt terminals, one in Catoosa, Oklahoma near Tulsa and one in Rosario, New Mexico near Santa Fe, from Royal Trading for $28.1 million. Valero L.P. funded this acquisition with proceeds from borrowings under Valero Logistics’ $175.0 million revolving credit facility.

These acquisitions improved Valero L.P.‘s results of operations in 2004 by contributing $2.8 million and $12.2 million, respectively, to the increase in operating income for the three and nine months ended September 30, 2004, compared to the corresponding periods in 2003.

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         Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003
The results of operations for the three months ended September 30, 2004, presented in the following table, are derived from the unaudited consolidated statement of income for Valero L.P. and subsidiaries for the three months ended September 30, 2004, which include the results of operations of the Royal Trading asphalt terminals for the full quarter. The results of operations for the three months ended September 30, 2003, presented in the following table, are derived from the unaudited consolidated statement of income for Valero L.P. and subsidiaries for the three months ended September 30, 2003, which include the results of operations of the South Texas Pipelines and Terminals, the Crude Oil Storage Tanks, the Telfer asphalt terminal and the Shell pipeline undivided interests for the full quarter, in addition to the results of operations of the McKee to Southlake refined product pipeline from August 1, 2003 through September 30, 2003 and the Paulsboro refined product terminal from September 4, 2003 through September 30, 2003.

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         Segment Operating Data for the Three Months Ended September 30, 2004 and 2003
The following table reflects the results of operations for each of Valero L.P.‘s operating segments and a reconciliation of the combined segments to the consolidated statements of income.

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Net income applicable to limited partners decreased $0.6 million for the third quarter of 2004 compared to the third quarter of 2003. Earnings per limited partner unit were $0.78 for the third quarter of 2004 and $0.82 for the third quarter of 2003. Net income applicable to the general partner for the third quarter of 2004 includes the effect of $1.1 million of incentive distributions compared to $0.8 million of incentive distributions for the third quarter of 2003.

         Crude Oil Pipelines
Revenues for the crude oil pipelines segment decreased $0.9 million for the third quarter of 2004 compared to the third quarter of 2003 due primarily to a 7% decrease in combined throughput for the crude oil pipelines feeding Valero Energy’s McKee refinery system. A unit at the McKee refinery experienced an unplanned outage in the third quarter of 2004 resulting in lower throughputs and revenues.

Operating expenses for the third quarter of 2004 increased compared to the third quarter of 2003 as a result of higher power costs and higher regulatory inspection and repair costs primarily associated with the Wichita Falls crude oil pipeline and increased employee benefit costs related to higher accruals for incentive compensation. This increase in operating expenses is almost entirely offset by the transfer of the Corpus Christi North Beach storage facility to the crude oil storage tanks segment effective January 1, 2004.

Depreciation and amortization expense for the crude oil pipelines segment decreased for the third quarter of 2004 compared to the third quarter of 2003 due to the transfer of the Corpus Christi North Beach storage facility to the crude oil storage tanks segment effective January 1, 2004.

         Refined Product Pipelines
Revenues for the refined product pipelines segment increased $1.5 million or 7% for the third quarter of 2004 compared to the third quarter of 2003. The Dos Laredos pipeline system, which started operations on June 1, 2004 ships propane to the Nuevo Laredo, Mexico propane terminal, and contributed revenues of $1.1 million to the third quarter of 2004. The increase in revenues is also due to the Southlake refined product pipeline acquisition on August 1, 2003, which contributed $1.6 million to revenues during the third quarter of 2004 compared to $1.4 million during the period from August 1, 2003 to September 30, 2003.

The August crude unit outage at Valero Energy’s McKee refinery resulted in a 14% decrease in combined throughput for the refined product pipelines related to the McKee refinery system for the third quarter of 2004 compared to the third quarter of 2003. This decrease is offset by increasing throughputs on the McKee to Colorado Springs to Denver and the McKee to Denver refined product pipelines which had experienced lower throughputs in the third quarter of 2003.

         Refined Product Terminals
Revenues for the refined product terminals segment increased $2.7 million or 32% for the third quarter of 2004 compared to the third quarter of 2003 due primarily to the acquisitions of the Paulsboro refined product terminal on September 3, 2003 and the Royal Trading asphalt terminals on February 20, 2004. Revenues for these acquired terminals were $2.7 million for the third quarter of 2004. During the third quarter of 2003, revenues for the Paulsboro refined product terminal were $0.1 million, which included operations for the period from September 4, 2003 to September 30, 2003.

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Operating expenses for the refined product terminals segment increased $0.1 million or 3% for the third quarter of 2004 compared to the third quarter of 2003 due to expenses associated with the operations of the Paulsboro refined product terminal and the Royal Trading asphalt terminals, which was partially offset by lower maintenance costs in the third quarter of 2004 as compared to the third quarter of 2003.

Depreciation and amortization expense for the refined product terminals segment increased $0.9 million for the third quarter of 2004 compared to the third quarter of 2003 due to the acquisitions completed in 2003 and early 2004.

         Crude Oil Storage Tanks
Revenues for the crude oil storage tanks segment increased $3.1 million or 37% for the third quarter of 2004 compared to the third quarter of 2003 due primarily to an increase in the throughput at the Texas City crude oil storage tanks and the operations of the Corpus Christi North Beach storage facility. The increase in throughput at Valero Energy’s Texas City refinery was partially due to a new crude unit added in the fourth quarter of 2003, which allows the refinery to process more throughput. In addition, throughput was lower in 2003 due to several planned and unplanned crude unit outages at the Texas City refinery which lowered the amount of throughput processed in 2003.

Effective January 1, 2004, Valero L.P. transferred the operations of the Corpus Christi North Beach storage facility to the crude oil storage tanks segment from the crude oil pipelines segment. Valero L.P. and Valero Energy entered into a one-year shell barrel capacity lease agreement for the l.6 million barrels of capacity at the facility. Revenues for the third quarter of 2004 for the Corpus Christi North Beach storage facility totaled $1.9 million, which included $1.4 million of rental income and $0.5 million of dockage and wharfage fees. The use of this storage facility was previously included as a part of the crude oil pipeline tariff for the Corpus Christi to Three Rivers crude oil pipeline.

Operating expenses for the crude oil storage tanks segment increased $0.4 million for the third quarter of 2004 compared to the third quarter of 2003 due primarily to the inclusion of the Corpus Christi North Beach storage facility in this segment in 2004.

Depreciation and amortization expense for the crude oil storage tanks segment increased $0.2 million for the third quarter of 2004 compared to the third quarter of 2003 due to the inclusion of the Corpus Christi North Beach storage facility in this segment in 2004.

         Other
General and administrative expenses increased $2.0 million for the third quarter of 2004 compared to the third quarter of 2003 partially due to the revision to the Services Agreement, effective April 1, 2004, between Valero L.P. and Valero Energy for services rendered by Valero Energy corporate employees. In addition, general and administrative expenses in 2004 were higher due to increased external public company expenses and increased headcount. These higher costs have been offset by higher revenues resulting from increased tariff rates and the Corpus Christi North Beach storage facility lease agreement.

Equity income from Skelly-Belvieu Pipeline Company for the third quarter of 2004 decreased by $0.3 million compared to the third quarter of 2003 primarily due to a 25% decline in throughput barrels in the Skellytown to Mont Belvieu refined product pipeline.

Interest and other expense for the third quarter of 2004 was $5.4 million, net of investment income and capitalized interest of $0.1 million and interest income related to interest rate swaps of $0.8 million. Interest expense for the third quarter of 2003 was $4.5 million, net of investment income and capitalized interest of $0.1 million and interest income related to interest rate swaps of $1.6 million. Interest expense was higher in 2004 due primarily to interest expense related to the $43.0 million of borrowings during the first quarter of 2004 under Valero Logistics’ $175.0 million revolving credit facility to fund the acquisition of the Royal Trading asphalt terminals and to fund a portion of the construction costs related to the Nuevo Laredo, Mexico propane terminal and related pipelines.

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Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003
The results of operations for the nine months ended September 30, 2004 presented in the following table are derived from the unaudited consolidated statement of income for Valero L.P. and subsidiaries for the nine months ended September 30, 2004, which include the results of operations of the Royal Trading asphalt terminals for the period February 20, 2004 through September 30, 2004. The results of operations for the nine months ended September 30, 2003 presented in the following table are derived from the unaudited consolidated statement of income for Valero L.P. and subsidiaries for the nine months ended September 30, 2003, which include the results of operations of the South Texas Pipelines and Terminals and the Crude Oil Storage Tanks for the period from March 19, 2003 through September 30, 2003, the Telfer asphalt terminal from January 7, 2003 through September 30, 2003, the Shell pipeline undivided interests from May 1, 2003 through September 30, 2003, the McKee to Southlake refined product pipeline from August 1, 2003 through September 30, 2003 and the Paulsboro refined product terminal from September 4, 2003 through September 30, 2003.

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The amount of distributable cash flow allocated to the general partner includes the general partner’s 2% interest in distributions plus the amount of incentive distributions that would be allocated to the general partner assuming 100% of the distributable cash flow is distributed.

Valero L.P. utilizes two financial measures, EBITDA and distributable cash flow, which are not defined in GAAP. Management uses these financial measures because they are widely accepted financial indicators used by investors to compare partnership performance. In addition, management believes that these measures provide investors an enhanced perspective of the operating performance of Valero L.P.‘s assets and the cash flow the business is generating. Neither EBITDA nor distributable cash flow are intended to represent cash flows for the period, nor are they presented as an alternative to net income. They should not be considered in isolation or as substitutes for a measure of performance prepared in accordance with GAAP.

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         Segment Operating Data for the Nine Months Ended September 30, 2004 and 2003
The following table reflects the results of operations for each of Valero L.P.‘s operating segments and a reconciliation of the combined segments to the consolidated statements of income.