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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the year ended December 31, 2003

OR

For the transition period from                      to                     

Commission File Number 1-16417

VALERO L.P.

(Exact name of registrant as specified in its charter)

One Valero Place

San Antonio, Texas

(Address of principal executive offices)

78212

(Zip Code)

Telephone number: (210) 370-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common Units representing limited partnership interests listed on the New York Stock Exchange.

Securities registered pursuant to 12(g) of the Act: None.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x

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

As of June 30, 2003, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common units held by non-affiliates based on the last sales price as quoted on the New York Stock Exchange was $500.6 million.

The number of common and subordinated units outstanding as of February 1, 2004 was 13,442,072 and 9,599,322, respectively.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-K contains certain estimates, predictions, projections, assumptions and other forward-looking statements that involve various risks and uncertainties. While 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 can generally be identified by the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “forecasts,” “budgets,” “projects,” “will,” “could,” “should,” “may” and similar expressions. These statements reflect Valero L.P.’s current views with regard 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. Readers are cautioned not to place undue reliance on this forward-looking information, which is as of the date of the Form 10-K. Valero L.P. does not intend to update these statements unless it is required by the securities laws to do so, and it undertakes no obligation to publicly release the result 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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PART I

ITEMS 1. & 2. BUSINESS AND PROPERTIES

Valero L.P.¹ is a Delaware limited partnership formed in 1999 that completed its initial public offering of common units on April 16, 2001. Valero L.P.’s common units are traded on the New York Stock Exchange under the symbol “VLI.” Valero L.P.’s principal executive offices are located at One Valero Place, San Antonio, Texas 78212 and its telephone number is (210) 370-2000.

When used in this report, the terms “Valero L.P.” may refer, depending on the context, to Valero L.P., to one or more of its consolidated subsidiaries, or to all of them taken as a whole. Valero L.P.’s operations are conducted through a subsidiary entity, Valero Logistics Operations, L.P. (Valero Logistics). Valero L.P.’s operations are controlled and managed by Valero GP, LLC, the general partner of its general partner, Riverwalk Logistics, L.P. (Riverwalk Logistics), an indirect wholly owned subsidiary of Valero Energy Corporation. Valero Energy Corporation, a publicly traded Delaware corporation (New York Stock Exchange symbol “VLO”), also currently owns an aggregate 43.7% limited partner interest in Valero L.P. As used in this report, the term “Valero Energy” may refer, depending on the context, to Valero Energy Corporation, to one or more of its consolidated subsidiaries or to all of them taken as a whole, but excludes Valero L.P. and its subsidiaries.

Valero L.P.’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge on Valero L.P.’s website at http://www.valerolp.com as soon as reasonably practicable after Valero L.P. files such material with, or furnishes it to, the Securities and Exchange Commission (SEC).

Valero L.P. generates revenue by charging tariffs for transporting crude oil and refined products through its pipelines and by charging a fee for use of its terminals and the services provided by its crude oil storage tanks. Valero L.P.’s primary customer for its crude oil pipelines, refined product pipelines, refined product terminals and crude oil storage tank operations is Valero Energy, which accounted for 98% of Valero L.P.’s $181.5 million in revenues for the year ended December 31, 2003. Valero Energy is discussed further in this Item under the caption “Valero L.P.’s Relationship with Valero Energy.” Valero L.P.’s assets support eight of Valero Energy’s refineries, including the McKee, Three Rivers, Texas City, Corpus Christi East and Corpus Christ West refineries in Texas, the Paulsboro refinery in New Jersey, the Ardmore refinery in Oklahoma and the Benicia refinery in California.

Valero L.P.’s operations have grown significantly since 2001. Valero L.P.’s net income has increased 51.7% and its revenues have increased 83.6% from the year ended December 31, 2001 to the year ended December 31, 2003.

The term “throughput” as used in this document generally refers to the crude oil or refined product barrels, as applicable, that pass through each pipeline, even if those barrels are also transported in another of Valero L.P.’s pipelines (for which a separate tariff is charged).

SEGMENTS

Valero L.P.’s four reportable business segments are refined product pipelines, crude oil pipelines, crude oil storage tanks and refined product terminals.

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REFINED PRODUCT PIPELINES

Valero L.P. has an ownership interest in 23 refined product pipelines with an aggregate length of 3,717 miles. Valero L.P. also owns a 25-mile-long crude hydrogen pipeline. Valero L.P.’s refined product pipelines transport refined products from Valero Energy’s McKee, Three Rivers, Corpus Christi East, Corpus Christi West and Ardmore refineries to Valero L.P.’s terminals or to interconnections with third-party pipelines for distribution in markets in Texas, Oklahoma, Colorado, New Mexico, Arizona and other mid-continent states. The refined products transported in these pipelines include gasoline, distillates (including diesel and jet fuel), natural gas liquids (such as propane and butane), blendstocks and petrochemicals such as toluene, xylene and raffinate. During the year ended December 31, 2003, gasoline and distillates represented approximately 69% and 23%, respectively, of the total throughput in Valero L.P.’s refined product pipelines. Valero L.P. charges tariffs for transporting refined products in its refined product pipelines.

The following table sets forth the average number of barrels of refined products Valero L.P. transported daily through its refined product pipelines, in the aggregate, in each of the years presented.

The following table sets forth information about each of Valero L.P.’s refined product pipelines. In instances where Valero L.P. owns less than 100% of a pipeline, its ownership percentage is indicated, and the capacity, throughput and capacity utilization information reflects only its ownership interest in these pipelines.

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The throughput barrels in the above table represent the total throughput from the date of acquisition divided by 365 days.

CRUDE OIL PIPELINES

Valero L.P. has an ownership interest in nine crude oil pipelines with an aggregate length of 783 miles. Valero L.P.’s crude oil pipelines deliver crude oil and other feedstocks, such as gas oil, from various points in Texas, Oklahoma, Kansas and Colorado to Valero Energy’s McKee, Three Rivers and Ardmore refineries. Also included in this segment are Valero L.P.’s five crude oil storage facilities in Texas and Oklahoma, which allow for crude oil to be stored and batched prior to shipment in the crude oil pipelines. Valero L.P. charges tariffs for transporting crude oil and other feedstocks in its crude oil pipelines. Valero L.P. does not generate any separate revenue from its crude oil storage facilities. Instead, the costs associated with the storage facilities are considered in establishing the tariffs charged for transporting crude oil from the storage facilities to the refineries.

The following table sets forth the average daily number of barrels of crude oil and other feedstocks Valero L.P. transported through its crude oil pipelines, in the aggregate, in each of the years presented:

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The following table sets forth information about each of Valero L.P.’s crude oil pipelines.

The following table sets forth information about Valero L.P.’s crude oil storage facilities:

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CRUDE OIL STORAGE TANKS

Valero L.P. owns 58 crude oil and intermediate feedstock storage tanks and related assets with aggregate storage capacity of approximately 11.0 million barrels. Valero L.P.’s crude oil storage tanks serve the needs of Valero Energy’s Benicia, Corpus Christi West and Texas City refineries. Valero L.P. acquired the crude oil storage tanks on March 18, 2003 from Valero Energy. The land underlying these tanks is subject to long-term operating leases with Valero Energy. Valero L.P. charges a fee for each barrel of crude oil or certain other feedstocks that it delivers to Valero Energy’s Benicia, Corpus Christi West and Texas City refineries.

The following table sets forth information about Valero L.P.’s crude oil storage tanks:

REFINED PRODUCT TERMINALS

Valero L.P. owns 21 refined product terminals in Texas, Colorado, New Mexico, California, Oklahoma and New Jersey. These terminals have a total of 199 tanks with a combined capacity of 4.5 million barrels. Most of Valero L.P.’s refined product terminals have automated loading facilities and are available 24 hours a day. At its terminals, Valero L.P. charges a per-barrel handling fee, as well as a per-barrel fee for refined product blending or filtering.

The following table sets forth the average daily number of barrels of refined products Valero L.P. handled at its refined product terminals, in the aggregate, in each of the years presented.

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The following table sets forth information about each of Valero L.P.’s refined product terminals:

The throughput barrels in the above table represent the total throughput from the date of acquisition divided by 365 days.

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VALERO L.P.’S RELATIONSHIP WITH VALERO ENERGY

Valero L.P.’s operations are strategically located within Valero Energy’s refining and marketing supply chain in Texas, Oklahoma, California, Colorado, New Jersey, New Mexico, Arizona and other mid-continent states in the United States. Valero L.P. itself does not own or operate any refining or marketing operations. Valero L.P. is dependent on Valero Energy to provide substantially all the throughput for Valero L.P.’s pipelines, terminals and storage tanks and the ability of Valero Energy’s refineries to maintain their production of refined products. Although Valero L.P. intends to pursue third-party business as opportunities arise, Valero L.P. expects to continue to derive most of its revenues from Valero Energy for the foreseeable future. During the year ended December 31, 2003, Valero Energy accounted for 98% of Valero L.P.’s revenues.

As of December 31, 2003, Valero Energy, through its wholly owned subsidiaries, owned 9,599,322 subordinated units, 679,226 common units and the 2% general partner interest in Valero L.P., representing an aggregate 45.7% ownership interest.

VALERO ENERGY’S BUSINESS

Valero Energy is one of the top three U.S. refining companies in terms of refining capacity. Valero Energy owns and operates 15 refineries in the United States, Canada and the island of Aruba, eight of which are served by Valero L.P.’s pipelines, terminals or storage assets. As of December 31, 2003, the total throughput capacity of each of those eight refineries was as follows:

Valero Energy markets the refined products produced by these refineries primarily in Texas, Oklahoma, Colorado, New Mexico, Arizona, California, New Jersey and several other mid-continent states through a network of company-operated and dealer-operated convenience stores, as well as through other wholesale and spot market sales and exchange agreements.

MAJOR AGREEMENTS WITH VALERO ENERGY

Valero L.P.’s relationship with Valero Energy is governed by the following significant agreements.

Omnibus Agreement

The Omnibus Agreement governs potential competition between Valero Energy and Valero L.P. It contains the agreement by Valero Energy, subject to certain exceptions, not to engage in the business of transporting crude oil and refined petroleum products and to indemnify Valero L.P. for certain environmental liabilities that arose prior to April 16, 2001 related to the assets transferred to Valero L.P. in connection with Valero L.P.’s initial public offering.

Services Agreement

Under a Services Agreement with Valero Energy, employees of Valero Energy perform certain operational services on Valero L.P.’s behalf, and Valero Energy is reimbursed for those services. In addition, Valero L.P. pays Valero Energy and its affiliates an annual administrative fee of $5.2 million to perform and provide other services, including legal, accounting, treasury, engineering and information technology. The conflicts committee of the board of directors of Valero GP, LLC must approve any change to the Services Agreement fee. The Services Agreement will be amended effective April 1, 2004. The amendment is discussed below under the caption “Recent Developments-Amendment to Services Agreement in April ‘04.”

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Pipelines and Terminals Usage Agreement- McKee, Three Rivers and Ardmore

Under the terms of the Pipelines and Terminals Usage Agreement, Valero L.P. provides transportation services that support Valero Energy’s refining and marketing operations in the markets relating to the McKee, Three Rivers and Ardmore refineries. Under this agreement, Valero Energy has agreed through April 2008 to:

Valero Energy met and exceeded its obligations under the Pipelines and Terminals Usage Agreement during the year ended December 31, 2003. In addition, Valero Energy has agreed to remain the shipper for crude oil and refined products owned by it that are transported through Valero L.P.’s pipelines, and neither challenge, nor cause others to challenge, Valero L.P.’s interstate or intrastate tariffs for the transportation of crude oil and refined products through April 2008.

Crude Oil Storage Tank Agreements

In connection with the crude oil storage tank contribution described below in this Item under the caption “Recent Developments- Contribution Transactions,” Valero L.P. and Valero Energy entered into several agreements related to the operations of the crude oil storage tanks, including:

South Texas Pipelines and Terminals Agreements

In connection with the South Texas Pipelines and Terminals contribution described below in this Item under the caption “Recent Developments-Contribution Transactions,” Valero L.P. and Valero Energy entered into agreements related to the operations of these assets, including:

Valero Energy will be required to make a cash payment based on the amount of any shortfall in committed volumes or usage.

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RECENT DEVELOPMENTS

AMENDMENT TO SERVICES AGREEMENT IN APRIL ‘04

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 have agreed to amend the terms of the Services Agreement, effective April 1, 2004, to change the annual services fee. Under the terms of the amended Services Agreement, the annual services fee will be $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. Additionally, Valero L.P. will reimburse Valero Energy for the cost of corporate employees dedicated to Valero L.P. matters (currently estimated to be approximately $5.6 million a year, excluding employee bonus costs). The conflicts committee of the board of directors of Valero GP, LLC approved the amendment to the Services Agreement in March 2004.

AMENDMENTS TO PARTNERSHIP AGREEMENT IN MARCH ‘04

In March 2004, various amendments to Valero L.P.’s partnership agreement were approved. Effective March 11, 2004, the partnership agreement has been amended to reduce the percentage of the vote required to remove Valero L.P.’s general partner from 58% to a simple majority (excluding any units held by the general partner or its affiliates). In addition, the partnership agreement has been 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 also receives a 2% distribution with respect to its general partner interest. Cash distributions are discussed in Note 14 of Notes to Consolidated Financial Statements.

ROYAL TRADING

On February 20, 2004, Valero L.P. acquired two asphalt terminals located in Catoosa, Oklahoma (near Tulsa) and Rosario, New Mexico (near Santa Fe) from Royal Trading Company (Royal) for $28.1 million. These terminals have an aggregate storage capacity of 500,000 barrels in 32 tanks and six loading stations.

PAULSBORO REFINED PRODUCT TERMINAL ACQUISITION

In September 2003, Valero L.P. acquired a refined product terminal in Paulsboro, New Jersey, next to Valero Energy’s Paulsboro refinery, from ExxonMobil Oil Corporation for $14.1 million. This terminal has a storage capacity of 90,800 barrels.

SOUTHLAKE REFINED PRODUCT PIPELINE ACQUISITION

In August 2003, Valero L.P. acquired the Southlake refined product pipeline from Valero Energy for $29.9 million. This pipeline has a capacity of 27,300 barrels per day and extends 375 miles from Valero Energy’s McKee refinery to Valero L.P.’s Southlake refined product terminal near Dallas, Texas.

VALERO L.P. COMMON UNIT OFFERING

On August 11, 2003, Valero L.P. consummated a public offering of common units, selling 1,236,250 common units, which included 161,250 common units pursuant to the underwriter’s exercise of its over-allotment option, for net proceeds of $48.6 million. In order to maintain its 2% general partnership interest, Riverwalk Logistics made a cash contribution to Valero L.P. of $1.0 million.

SHELL PIPELINE ACQUISITION

In May 2003, Valero L.P. acquired Shell Pipeline Company, L.P.’s (Shell) 28% undivided interest in the Amarillo to Abernathy refined product pipeline and Shell’s 46% undivided interest in the Abernathy to Lubbock refined product pipeline for $1.6 million. After this acquisition, Valero L.P. owns a 67% undivided interest and ConocoPhillips owns the remaining 33% interest in the Amarillo to Abernathy refined product pipeline, and Valero L.P. owns a 46% undivided interest and ConocoPhillips owns the remaining 54% interest in the Abernathy to Lubbock refined product pipeline.

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CONTRIBUTION TRANSACTIONS

On March 18, 2003, Valero L.P. entered into contribution agreements with Valero Energy for certain crude oil storage tanks and for Valero Energy’s South Texas pipeline system. Valero Energy contributed 58 crude oil and intermediate feedstock storage tanks and related assets with aggregate storage capacity of approximately 11.0 million barrels to Valero L.P. for $200.2 million. These assets are located at Valero Energy’s Corpus Christi West, Texas City and Benicia refineries.

Valero Energy also contributed its South Texas pipeline system, comprised of the Houston pipeline system, the Valley pipeline system and the San Antonio pipeline system (together referred to as the South Texas Pipelines and Terminals) to Valero L.P. for $150.1 million. The three pipeline systems that make up the South Texas pipeline system are intrastate common carrier refined product pipelines that connect Valero Energy’s Corpus Christi East and Corpus Christi West refineries to the Houston and Rio Grande Valley, Texas markets and Valero Energy’s Three Rivers refinery to the San Antonio, Texas market and to Valero Energy’s Corpus Christi refineries. The three pipeline systems also include six refined product terminals located in Edinburg, Placedo, Houston (Hobby Airport and asphalt), San Antonio (east) and Almeda (idle).

VALERO L.P. COMMON UNIT OFFERINGS AND VALERO LOGISTICS SENIOR NOTES OFFERING

In connection with the contribution transactions described above, effective March 18, 2003, Valero L.P. issued 5,750,000 common units to the public and on April 16, 2003, Valero L.P. issued an additional 581,000 common units pursuant to the underwriters’ over-allotment option, for net proceeds of $222.8 million. Riverwalk Logistics made a $4.7 million capital contribution to Valero L.P. to maintain its 2% general partner interest.

Also on March 18, 2003, Valero Logistics issued $250.0 million of 6.05% senior notes due 2013 in a private placement to institutional investors. In July 2003, the 6.05% senior notes were exchanged for $250.0 million of 6.05% senior notes due 2013 that were registered under the Securities Act of 1933. The proceeds of the equity and debt offerings were used to finance the contributed assets and redemption of common units.

REDEMPTION OF COMMON UNITS OWNED BY VALERO ENERGY AND AMENDMENT TO VALERO L.P.’S PARTNERSHIP AGREEMENT

Common Unit Redemption: On March 18, 2003, immediately following Valero L.P.’s common unit offering and the offering by Valero Logistics of its 6.05% senior notes, Valero L.P. redeemed from Valero Energy 3,809,750 of Valero L.P.’s common units, for $134.1 million. Immediately following this redemption, Valero L.P. canceled the common units redeemed from Valero Energy and redeemed a corresponding portion of Riverwalk Logistics’ general partner interest for $2.9 million so that it maintained its 2% general partner interest.

Amendment to Partnership Agreement: Also on March 18, 2003, immediately upon the closing of the offerings, Valero L.P. amended its partnership agreement to reduce the percentage of the vote of holders of Valero L.P.’s outstanding common units and subordinated units necessary to remove Valero L.P’s general partner from 66 2/3% to 58% (excluding any vote by the general partner or its affiliates). Prior to this amendment, Valero Energy was allowed to vote its units and thus effectively block removal of the general partner. Valero L.P. further amended its partnership agreement to provide that the election of a successor general partner upon any such removal be approved by the holders of a majority of the common units, excluding the common units held by affiliates of Valero L.P.’s general partner. As a result of the partnership agreement changes and the issuance and redemption of Valero L.P. common units, Valero Energy ceased consolidation of Valero L.P. in its financial statements.

TELFER ASPHALT TERMINAL ACQUISITION

In January 2003, Valero L.P. purchased an asphalt terminal in Pittsburg, California from Telfer Oil Company (Telfer) for $15.3 million. The asphalt terminal assets include two storage tanks with a combined storage capacity of 350,000 barrels, six 5,000-barrel polymer modified asphalt tanks, a truck rack, rail facilities and various other tanks and equipment. In conjunction with the Telfer acquisition, Valero L.P. entered into a six-year terminal storage and throughput agreement with Valero Energy.

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PIPELINE AND TERMINAL CONTROL OPERATIONS AND MAINTENANCE

All of Valero L.P.’s crude oil and refined product pipelines are operated via satellite communication systems from one of two central control rooms located in San Antonio, Texas. Each control center can provide backup capability for the other, and each center is capable of monitoring and controlling the pipelines. The control centers operate with modern, state-of-the-art System Control and Data Acquisition systems (SCADA). The control centers are equipped with computer systems designed to continuously monitor real time operational data, including crude oil and refined product throughput, flow rates and pressures. In addition, the control centers monitor alarms and throughput balances. The control centers operate remote pumps, motors, engines and valves associated with the delivery of crude oil and refined products. The computer systems are designed to enhance leak-detection capabilities, sound automatic alarms if operational conditions outside pre-established parameters occur and provide for remote-controlled shutdown of pump stations on the pipelines. Pump stations, crude oil storage facilities and meter-measurement points along the pipelines are linked by satellite or telephone communication systems for remote monitoring and control.

A number of Valero L.P.’s crude oil storage facilities and refined product terminals are also operated through the central control centers. Other crude oil storage facilities and refined product terminals are modern, automated facilities but are locally controlled.

Billing of customers is electronic and the automatic system provides for control of allocations, credit and carrier certification by remote input of data by customers. All terminals have an electronic monitoring and control system that monitors the effectiveness of the ground protection and vapor control and will cause an automated shutdown of the terminal operations if necessary. For environmental and safety protection, all terminals have primary vapor control systems consisting of flares, vapor combustors or carbon absorption vapor recovery units.

Valero L.P. performs scheduled maintenance on all of its pipelines, terminals, crude oil tanks and related equipment and makes repairs and replacements when necessary or appropriate. Valero L.P. believes that all of its pipelines, terminals, crude oil tanks and related equipment have been constructed and are maintained in all material respects in accordance with applicable federal, state and local laws and the regulations and standards prescribed by the American Petroleum Institute, the Department of Transportation and accepted industry practice.

COMPETITION

As a result of Valero L.P.’s physical integration with Valero Energy’s refining and marketing operations and its contractual relationships with Valero Energy, management of Valero L.P. believes that it will not face significant competition for barrels of crude oil transported to, and barrels of refined products transported from, the various Valero Energy refineries serviced by Valero L.P.’s assets, particularly during the terms of the various agreements between Valero L.P. and Valero Energy described in this report.

However, Valero L.P. faces competition from other pipelines that may be able to supply Valero Energy’s end-user markets with refined products on a more competitive basis. If Valero Energy reduced its retail sales of refined products or its wholesale customers reduced their purchases of refined products, the volumes transported through Valero L.P.’s pipelines would be reduced, which would cause a decrease in cash and revenues generated from its operations.

Valero L.P. believes that high capital requirements, environmental and safety considerations and the difficulty in acquiring rights-of-way and related permits make it difficult for other entities to build competing pipelines in areas served by its pipelines. As a result, competing pipelines are likely to be built only in those cases in which strong market demand and attractive tariffs support additional capacity in an area.

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REGULATION

RATE REGULATION

Several of Valero L.P.’s pipelines are interstate common carrier pipelines, subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Interstate Commerce Act (ICA). Additionally, the rates and practices for Valero L.P.’s intrastate common carrier pipelines are subject to regulation by state commissions. The applicable state statutes and regulations generally require that pipeline rates and practices be reasonable and nondiscriminatory.

Valero L.P.’s Pipelines Rates

Neither the FERC nor the state commissions have investigated Valero L.P.’s rates or practices. Valero L.P. does not believe that it is likely that there will be a challenge to its tariffs by a current shipper that would materially affect its revenues or cash flows because Valero Energy is the only current shipper in the majority of Valero L.P.’s pipelines. Valero Energy has committed not to challenge Valero L.P.’s tariffs until at least April 2008. Valero Energy has also agreed to be responsible for any ICA liabilities with respect to activities or conduct occurring during periods prior to April 16, 2001, and Valero L.P. will be responsible for ICA liabilities with respect to activities or conduct occurring after April 16, 2001. However, the FERC or a state regulatory commission could investigate Valero L.P.’s tariffs at the urging of a third party. Also, because Valero L.P.’s pipelines are common carrier pipelines, Valero L.P. may be required to accept new shippers who wish to transport in its pipelines. It is possible that any new shippers may decide to challenge Valero L.P.’s tariffs. If any tariff challenge or challenges are successful, cash available for distribution to unitholders could be materially reduced accordingly.

ENVIRONMENTAL AND SAFETY REGULATION

General

Valero L.P.’s operations are subject to extensive federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management and pollution prevention measures, and to environmental regulation by several federal, state and local authorities. The principal environmental risks associated with Valero L.P.’s operations relate to unauthorized emissions into the air and unauthorized releases into soil, surface water or groundwater. Valero L.P.’s operations are also subject to extensive federal and state health and safety laws and regulations, including those relating to pipeline safety. Compliance with these laws, regulations and permits increases Valero L.P.’s capital expenditures and its overall cost of business, and violations of these laws, regulations and/or permits can result in significant civil and criminal liabilities, injunctions or other penalties. Accordingly, Valero L.P. has adopted policies, practices and procedures in the areas of pollution control, product safety, occupational health and the handling, storage, use and disposal of hazardous materials in an effort to prevent material environmental or other damage, and to ensure the safety of its pipelines, its employees, the public and the environment. Future governmental action and regulatory initiatives could result in changes to expected operating permits, additional remedial actions or increased capital expenditures and operating costs that cannot be assessed with certainty at this time. In addition, contamination resulting from spills of crude oil and refined products occurs within the industry. Risks of additional costs and liabilities are inherent within the industry, and there can be no assurances that significant costs and liabilities will not be incurred in the future.

Water

The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act, and analogous state statutes impose restrictions and strict controls regarding the discharge of pollutants into state waters or waters of the United States. The discharge of pollutants into state waters or waters of the United States is prohibited, except in accord with the terms of a permit issued by applicable federal or state authorities. The Oil Pollution Act, enacted in 1990, amends provisions of the Clean Water Act as they pertain to prevention and response to oil spills. Spill prevention control and countermeasure requirements of the Clean Water Act and some state laws require diking and similar structures to help prevent contamination of navigable waters in the event of overflow or release.

Air Emissions

Valero L.P.’s operations are subject to the Federal Clean Air Act and comparable state and local statutes. Numerous amendments to the Federal Clean Air Act were enacted in 1990. These amendments may result in the imposition over the next several years of certain pollution control requirements with respect to air emissions from the operations of Valero L.P.’s pipelines, storage tanks and terminals. The Environmental Protection Agency (EPA) is developing, over a period of many years, regulations to implement these requirements. Depending on the nature of those regulations, and upon requirements that may be imposed by state and local regulatory authorities, Valero L.P. may be required to incur certain capital expenditures over the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals and addressing other air emission-related issues.

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Due to the broad scope of the issues involved and the complex nature of the regulations, full development and implementation of many Clean Air Act regulations have been delayed. Until such time as the new Clean Air Act requirements are implemented, Valero L.P. is unable to estimate the effect on net income or operations or the amount and timing of such required expenditures. At this time, however, Valero L.P. does not believe that it will be materially affected by any such requirements.

Solid Waste

Valero L.P. generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act (FRCRA) and comparable state statutes. FRCRA also governs the disposal of hazardous wastes. Valero L.P. is not currently required to comply with a substantial portion of FRCRA requirements because its operations generate minimal quantities of hazardous wastes. However, it is possible that additional wastes, which could include wastes currently generated during operations, will in the future be designated as “hazardous wastes.” Hazardous wastes are subject to more rigorous and costly disposal requirements than are non-hazardous wastes.

Hazardous Substances

The Comprehensive Environmental Response, Compensation and Liability Act, referred to as CERCLA and also known as Superfund, and analogous state laws, imposes liability, without regard to fault or the legality of the original act, on some classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site and entities that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs that they incur. In the course of Valero L.P.’s ordinary operations, it may generate waste that falls within CERCLA’s definition of a “hazardous substance.” While Valero L.P. responsibly manages the hazardous substances that it controls, the intervening acts of third parties may expose Valero L.P. to joint and several liability under CERCLA for all or part of the costs required to clean up sites at which these hazardous substances have been disposed of or released into the environment.

Valero L.P. currently owns or leases, and has in the past owned or leased, properties where hydrocarbons are being or have been handled. Although Valero L.P. has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by Valero L.P. or on or under other locations where these wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under Valero L.P.’s control. These properties and wastes disposed thereon may be subject to CERCLA, the Federal Resource Conservation and Recovery Act and analogous state laws. Under these laws, Valero L.P. could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial operations to prevent future contamination.

Pipeline Safety Improvement Act of 2002

The Pipeline Safety Improvement Act of 2002 (PSIA) requires pipeline operators to maintain qualification programs for key pipeline operating personnel, to review and update their existing pipeline safety public education programs and to provide information for the National Pipeline Mapping System. Some of PSIA’s requirements are effective immediately, while other requirements will become effective during 2004. While PSIA may affect Valero L.P.’s reliability capital expenditures and operating expenses, Valero L.P. believes that PSIA does not materially affect its competitive position and will not have a material effect on its financial condition or results of operations.

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PROPERTIES

Valero L.P.’s principal properties are described above under the caption “Segments.” Valero L.P. believes that it has satisfactory title to all of its assets. Although title to these properties is subject to encumbrances in some cases, such as customary interests generally retained in connection with acquisition of real property, liens related to environmental liabilities associated with historical operations, liens for current taxes and other burdens and minor easements, restrictions and other encumbrances to which the underlying properties were subject at the time of acquisition by Valero L.P. or its predecessors, Valero L.P. believes that none of these burdens will materially detract from the value of these properties or from its interest in these properties or will materially interfere with their use in the operation of Valero L.P.’s business. In addition, Valero L.P. believes that it has obtained sufficient right-of-way grants and permits from public authorities and private parties for it to operate its business in all material respects as described in this report.

EMPLOYEES

Riverwalk Logistics, the general partner of Valero L.P., is responsible for the management of Valero L.P. Valero GP, LLC, the general partner of Riverwalk Logistics, is responsible for managing the affairs of Riverwalk Logistics, and through it, the affairs of Valero L.P. and Valero Logistics. As of February 29, 2004, Valero GP, LLC employed approximately 207 individuals who perform services for Valero L.P.

Valero L.P. is a party to various claims and legal actions that have arisen in the ordinary course of its business. Valero L.P. believes it is unlikely that the final outcome of any claims or proceedings to which it is a party would have a material adverse effect on its financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, the range of any possible loss cannot be estimated with a reasonable degree of precision and Valero L.P. cannot provide assurance that the resolution of any particular claim or proceeding would not have an adverse effect on its results of operations, financial position or liquidity.

No matters were submitted to a vote of the unitholders, through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2003.

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PART II

Market Information, Holders and Distributions

Valero L.P.’s common units are listed and traded on the New York Stock Exchange under the symbol “VLI.” At the close of business on February 1, 2004, Valero L.P. had 107 holders of record of its common units. The high and low sales prices (composite transactions) by quarter for the years ended December 31, 2003 and 2002 were as follows:

The cash distributions applicable to each of the quarters in the years ended December 31, 2003 and 2002 were as follows:

Valero L.P. has also issued 9,599,322 subordinated units, all of which are held by UDS Logistics, LLC, the limited partner of Riverwalk Logistics, for which there is no established public trading market. The issuance of subordinated units was exempt from registration with the SEC under Section 4(2) of the Securities Act of 1933. During the subordination period, the holders of the common units are entitled to receive each quarter a minimum quarterly distribution of $0.60 per unit ($2.40 annualized) prior to any distribution of available cash to holders of the subordinated units. The subordination period is defined generally as the period that will end on the first day of any quarter beginning after March 31, 2006 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 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. 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, on a one-for-one basis.

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

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distribution and arrearages in the payment of the minimum quarterly distribution on the common units for any prior quarter. Secondly, cash is distributed 98% to the holders of subordinated units and 2% to the general partner until there has been distributed to the holders of subordinated units an amount equal to the minimum quarterly distribution. Thirdly, cash in excess of the minimum quarterly distributions is distributed to the unitholders and the general partner based on the percentages shown below.

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

The general partner’s incentive distributions for the years ended December 31, 2003 and 2002 totaled $2.6 million and $1.1 million, respectively. The general partner’s share of Valero L.P.’s net income for the years ended December 31, 2003 and 2002 was 5.7% and 4.0%, respectively, due to the impact of the incentive distributions.

Effective March 11, 2004, Valero L.P.’s partnership agreement has been 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.

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The following table provides selected financial data that was derived from the audited financial statements of Valero L.P. and its predecessor (as defined below), as well as selected operating data. The following table should be read together with the consolidated financial statements and accompanying notes included in Item 8. Financial Statements and Supplementary Data and with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Prior to July 1, 2000, Valero L.P.’s pipeline, terminalling and storage assets were owned and operated by Ultramar Diamond Shamrock Corporation (UDS, now part of Valero Energy), and such assets serviced UDS’ McKee and Three Rivers refineries located in Texas, and the Ardmore refinery located in Oklahoma. These assets and their related operations are referred to herein as the Ultramar Diamond Shamrock Logistics Business. Effective July 1, 2000, UDS transferred the Ultramar Diamond Shamrock Logistics Business along with certain liabilities to Shamrock Logistics Operations, L.P. (Shamrock Logistics Operations), a wholly owned subsidiary of Shamrock Logistics, L.P. (Shamrock Logistics). Shamrock Logistics was also wholly owned by UDS. Data in the following table prior to the July 1, 2000 transfer is indicated as “Predecessor” and data subsequent thereto is indicated as “Successor.”

On April 16, 2001, Shamrock Logistics completed its initial public offering of common units, which represented 26.4% of its outstanding partnership interests.

Effective on December 31, 2001, UDS merged with and into Valero Energy. This acquisition included the acquisition of UDS’ majority ownership interest in Shamrock Logistics and subsidiary. The consolidated balance sheet of Shamrock Logistics and subsidiary as of December 31, 2001 was not adjusted to fair value due to the significant level of public ownership interest in Shamrock Logistics. Effective January 1, 2002, Shamrock Logistics changed its name to Valero L.P., and Shamrock Logistics Operations changed its name to Valero Logistics Operations, L.P. (Valero Logistics).

The selected financial data and operating data for the year ended December 31, 1999, and for the six months ended June 30, 2000, reflect the operations of the Ultramar Diamond Shamrock Logistics Business (the predecessor to Shamrock Logistics Operations) as if it had existed as a single separate entity from UDS. The transfer of the Ultramar Diamond Shamrock Logistics Business to Shamrock Logistics Operations represented a reorganization of entities under common control and was recorded at historical cost. The selected financial data and operating data for the six months ended December 31, 2000, and for the years ended December 31, 2001, 2002 and 2003, represent the consolidated operations of Valero L.P. and Valero Logistics. The selected financial data as of December 31, 2001, includes the acquisition of the Wichita Falls Business, which Valero L.P. acquired on February 1, 2002 from Valero Energy. Because Valero L.P. and the Wichita Falls Business came under the common control of Valero Energy commencing on December 31, 2001, the acquisition represented a reorganization of entities under common control.

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