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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the year ended December 31, 2004

OR

Commission File Number 1-16417

VALERO L.P.

(Exact name of registrant as specified in its charter)

One Valero Way

San Antonio, Texas

(Address of principal executive offices)

78249

(Zip Code)

Telephone number: (210) 345-2000

(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, 2004, 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 $626.5 million.

The number of common and subordinated units outstanding as of February 1, 2005 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 (NYSE) under the symbol “VLI.” Valero L.P.’s principal executive offices are located at One Valero Way, San Antonio, Texas 78249 and its telephone number is (210) 345-2000.

When used in this report, the term “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, Valero Logistics Operations, L.P. (Valero Logistics), and its operations are controlled and managed by Valero GP, LLC. Valero GP, LLC is the general partner of Riverwalk Logistics, L.P. (Riverwalk Logistics), the general partner of Valero L.P. and an indirect wholly owned subsidiary of Valero Energy Corporation. Valero Energy Corporation, a publicly traded Delaware corporation (NYSE symbol “VLO”), currently owns an aggregate 43.7% limited partner interest, as well as the 2% general 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 with (or furnished to) the Securities and Exchange Commission (the SEC) are available free of charge on Valero L.P.’s website at http://www.valerolp.com (in the “Investor Relations” section) as soon as reasonably practicable after Valero L.P. files or furnishes such material. Valero L.P. also posts its corporate governance guidelines, code of business conduct and ethics, code of ethics for senior financial officers and the charter of the audit committee of Valero GP, LLC in the same website location. Valero L.P.’s governance documents are also available in print to any unitholder of record that makes a written request to Corporate Secretary, Valero L.P., P.O. Box 696000, San Antonio, Texas 78269.

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 99% of Valero L.P.’s $220.8 million in revenues for the year ended December 31, 2004. 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 nine 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 Denver refinery in Colorado, the Ardmore refinery in Oklahoma and the Benicia refinery in California.

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 other Valero L.P. pipelines (for which separate tariffs are 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 24 refined product pipelines with an aggregate length of 3,795 miles, and it also owns a 25-mile 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 to 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, 2004, gasoline and distillates represented approximately 61% and 30%, respectively, of the total throughput in Valero L.P.’s refined product pipelines. Valero L.P. charges tariffs on a per barrel basis 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.

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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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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 four crude oil storage facilities in Texas and Oklahoma that are located along the crude oil pipelines and in which crude oil may be stored and batched prior to shipment in the crude oil pipelines. Valero L.P. charges tariffs on a per barrel basis for transporting crude oil and other feedstocks in its crude oil pipelines. With the exception of the crude oil storage tanks at Corpus Christi discussed below in Crude Oil Storage Tanks, Valero L.P. does not generate any separate revenue from the 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:

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The following table sets forth information about Valero L.P.’s crude oil storage facilities associated with the crude oil pipeline segment:

CRUDE OIL STORAGE TANKS

Valero L.P. owns 60 crude oil and intermediate feedstock storage tanks and related assets with aggregate storage capacity of approximately 12.5 million barrels. The land underlying these tanks is subject to long-term operating leases. Valero L.P.’s storage tanks serve the needs of Valero Energy’s Benicia, Corpus Christi and Texas City refineries. 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 and Texas City refineries.

The following table sets forth the average daily number of barrels of crude oil and other feedstocks Valero L.P. delivered to Valero Energy’s Benicia, Corpus Christi West and Texas City refineries, in the aggregate, in each of the years presented:

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

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REFINED PRODUCT TERMINALS

Valero L.P. owns 22 refined product terminals in Texas, Colorado, New Mexico, California, Oklahoma, New Jersey and Nuevo Laredo, Mexico. These terminals have a total of 204 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:

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. During the year ended December 31, 2004, Valero Energy accounted for 99% of Valero L.P.’s revenues.

As of December 31, 2004, Valero Energy, through its wholly owned subsidiaries, owned 9,599,322 subordinated units, 664,119 common units and the 2% general partner interest in Valero L.P., representing an aggregate 45.7% ownership interest.

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VALERO ENERGY’S BUSINESS

Valero Energy owns and operates 15 refineries in the United States, Canada and the island of Aruba, nine of which are served by Valero L.P.’s pipelines, terminals or storage assets. As of December 31, 2004, the total throughput capacity of each of those nine 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 wholesale and spot market sales and exchange agreements, as well as through a network of company-operated and dealer-operated convenience stores.

MAJOR AGREEMENTS WITH VALERO ENERGY

Valero L.P.’s relationship with Valero Energy is governed by several significant agreements, which are described in Note 11 of Notes to Consolidated Financial Statements.

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RECENT DEVELOPMENTS

PROPOSED KANEB MERGERS

On October 31, 2004, Valero L.P. and Kaneb Services LLC (KSL), a Delaware limited liability company (and parent company of the general partner of Kaneb Pipe Line Partners, L.P.), and certain of Valero L.P.’s affiliated parties entered into a definitive merger agreement (the KSL Agreement), pursuant to which a wholly owned subsidiary of Valero L.P. will merge with KSL, with the surviving entity being a wholly owned subsidiary of Valero L.P. (the KSL Merger). Under the terms of the KSL Agreement, upon completion of the KSL Merger each KSL common share will be converted into the right to receive $43.31 in cash.

Also on October 31, 2004, Valero L.P. and Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (KPP) and certain of their respective affiliated parties entered into a separate definitive merger agreement (the KPP Agreement), pursuant to which a wholly owned subsidiary of Valero L.P. will merge with KPP, with the surviving entity being a wholly owned subsidiary of Valero L.P. (the KPP Merger, and, together with the KSL Merger, the Kaneb Mergers). Under the terms of the KPP Agreement, upon completion of the KPP Merger each KPP unit will be converted into the right to receive a number of Valero L.P. common units based on an exchange ratio formula providing Valero L.P. common units worth $61.50 per KPP unit within a specified “collar” range of Valero L.P. common unit market prices (plus or minus five percent of $57.25), measured over a period prior to closing. Should Valero L.P.’s average per unit price during the measurement period be equal to or less than $54.39 per unit, the exchange ratio will be fixed at 1.1307 Valero L.P. common units for each KPP unit. Should Valero L.P.’s average per unit price during the measurement period be equal to or greater than $60.11 per unit, the exchange ratio will be fixed at 1.0231 Valero L.P. common units for each KPP unit.

On March 11, 2005, Valero L.P. unitholders holding a majority of Valero L.P.’s outstanding units voted to approve the issuance of the Valero L.P. common units in the KPP Merger. Also on March 11, 2005, the KPP unitholders and the KSL shareholders (other than Valero L.P., KSL, KPP and their respective affiliates) holding a majority of the oustanding KPP units and the KSL shares voted to approve the Kaneb Mergers.

Both of the Kaneb Mergers are contingent upon the completion of the other and are subject to customary regulatory approvals, including those under the Hart-Scott-Rodino Antitrust Improvements Act, as well as other customary conditions. There can be no assurances as to whether, or on what date, Valero L.P., KSL and KPP will obtain the required regulatory approvals or satisfy the other conditions to the Kaneb Mergers, or that Valero L.P., KSL or KPP will complete the Kaneb Mergers on the contemplated schedule.

REGISTRATION OF COMMON UNITS

On January 25, 2005, the SEC declared effective an amended registration statement on Form S-4 filed by Valero L.P. to register 26,268,524 Valero L.P. common units to be issued to the unitholders of KPP as described above in “Proposed Kaneb Mergers” if the KPP Merger is completed as planned.

2005 REVOLVING CREDIT AGREEMENT

On December 20, 2004, Valero Logistics and Valero L.P. entered into a 5-Year Revolving Credit Agreement (the 2005 Revolving Credit Agreement) with certain lenders with an initial aggregate commitment of $400 million, subject to completion of the Kaneb Mergers. Valero Logistics’ obligations under the 2005 Revolving Credit Agreement are unsecured and will be guaranteed by Valero L.P. and certain subsidiaries of Valero L.P. Generally, the lenders will not be obligated to make any loans under the 2005 Revolving Credit Agreement until the Kaneb Mergers are completed. Upon the closing of the 2005 Revolving Credit Agreement, the amounts outstanding under Valero L.P.’s $175.0 million revolving credit facility (described in Note 7 of Notes to Consolidated Financial Statements) will be paid in full, and that facility will be terminated.

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ACQUISITION

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.

AMENDMENT TO SERVICES AGREEMENT

Under the Services Agreement, the costs related to employees of Valero Energy who perform services directly on Valero L.P.’s behalf, including salary, wages and employee benefits, are charged by Valero Energy to Valero L.P. In addition, Valero L.P. receives certain administrative services such as legal, accounting, treasury, engineering, information technology and other corporate functions from Valero Energy. Due to Valero L.P.’s significant growth and increased need for personnel to work directly on its behalf, the Services Agreement was amended effective April 1, 2004. The amended Services Agreement is described in detail in Note 11 of Notes to Consolidated Financial Statements.

AMENDMENTS TO PARTNERSHIP AGREEMENT

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 (excluding any units held by the general partner or its affiliates). In addition, the 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’s 2% distribution was not affected by this amendment). Cash distributions are discussed in Note 13 of Notes to Consolidated Financial Statements.

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 served by Valero L.P.’s assets, particularly during the terms of the various agreements between Valero L.P. and Valero Energy described in Note 11 to Notes to Consolidated Financial Statements.

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.

While Valero L.P. believes the capital requirements, tariff regulation, environmental and safety considerations and problems acquiring rights-of-way associated with its business decrease the likelihood that competitors will build pipeline systems of comparable size and scope in the near future, competing pipelines may be built in markets where growing demand and attractive tariffs support such additional capacity.

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REGULATION

RATE REGULATION

Several of Valero L.P.’s pipelines are interstate common carrier pipelines, which are subject to regulation by the Federal Energy Regulatory Commission (the FERC) under the Interstate Commerce Act (ICA) and the Energy Policy Act of 1992 (the EP Act). The ICA and its implementing regulations generally require the rates and practices of interstate oil pipelines to be reasonable and nondiscriminatory. The EP Act deemed certain rates in effect prior to its passage to be reasonable and allows interstate common carrier oil pipelines to change their rates within a defined range. 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. Shippers may challenge Valero L.P.’s tariff rates and practices on its pipelines in certain instances.

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 currently the only shipper in the majority of Valero L.P.’s pipelines. Valero Energy has committed to refrain from challenging 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. 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 and who could potentially 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.

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, pipeline integrity, operator qualifications, public relations and education, product safety, occupational health and the handling, storage, use and disposal of hazardous materials that are designed to prevent material environmental or other damage, to ensure the safety of its pipelines, its employees, the public and the environment and to limit the financial liability that could result from such events. 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 accordance 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.

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Air Emissions

Valero L.P.’s operations are subject to the Federal Clean Air Act and analogous 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.

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 its financial condition or results of 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 analogous 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 FRCRA 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 Integrity and Safety

Valero L.P.’s pipelines are subject to extensive laws and regulations governing pipeline integrity and safety. The Pipeline Safety Improvement Act of 2002 and its implementing regulations (collectively, PSIA) generally require pipeline operators to maintain qualification programs for key pipeline operating personnel, to review and update their existing pipeline safety public education programs, to provide information for the National Pipeline Mapping System, to maintain spill response plans and conduct spill response training and to implement integrity management programs for pipelines that could affect high consequence areas (i.e., areas with concentrated populations, navigable waterways and other unusually sensitive areas). While compliance with PSIA may affect Valero L.P.’s capital expenditures and operating expenses, Valero L.P. believes that the cost of such compliance will 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. 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.

EMPLOYEES

Valero L.P. has no 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 1, 2005, Valero GP, LLC employed approximately 285 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 will 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, 2004.

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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, 2005, Valero L.P. had 135 holders of record of its common units. The high and low sales prices (composite transactions) by quarter for the years ended December 31, 2004 and 2003 were as follows:

The cash distributions applicable to each of the quarters in the years ended December 31, 2004 and 2003 were as follows:

Valero L.P. has also issued and outstanding 9,599,322 subordinated units, all of which are held by UDS Logistics, LLC, the limited partner of Riverwalk Logistics and a wholly owned subsidiary of Valero Energy, 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 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

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longer be subordinated to the rights of the holders of common units and the subordinated units will be converted into common units, on a one-for-one basis.

During the subordination period, Valero L.P.’s cash is first distributed 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 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, 2004 and 2003 totaled $4.4 million and $2.6 million, respectively. The general partner’s share of Valero L.P.’s net income for the years ended December 31, 2004 and 2003 was 7.6% and 5.7%, respectively, due to the impact of the incentive 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.

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The following table contains selected financial data derived from the audited financial statements of Valero L.P. and its predecessor (as defined below). The selected financial data for the years ended December 31, 2004, 2003, 2002 and 2001 and the six months ended December 31, 2000 represent the consolidated operations of Valero L.P.

Effective July 1, 2000, UDS transferred the Ultramar Diamond Shamrock Logistics Business to Shamrock Logistics Operations, L.P. (Shamrock Logistics Operations), a wholly owned subsidiary of Shamrock Logistics, L.P. (Shamrock Logistics). Shamrock Logistics was wholly owned by UDS. Shamrock Logistics is referred to as the “Successor” in the above table. 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.

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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. That acquisition included the acquisition of UDS’ majority ownership interest in Shamrock Logistics. The consolidated balance sheet of Shamrock Logistics 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 became Valero L.P.

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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 nine of Valero Energy’s refineries.

Valero L.P. completed the following acquisitions, which have more than doubled its size in the past three years:

To fund these acquisitions as well as the redemption of $134.1 million of common units (3,809,750 common units) in March 2003, Valero L.P. used a combination of sources as follows:

Proposed Transaction

On October 31, 2004, Valero L.P. and Kaneb Services LLC (KSL), a Delaware limited liability company (and parent company of the general partner of Kaneb Pipe Line Partners, L.P.), and certain of Valero L.P.’s affiliated parties entered into a definitive merger agreement (the KSL Agreement), pursuant to which a wholly owned subsidiary of Valero L.P. will merge with KSL, with the surviving entity being a wholly owned subsidiary of Valero L.P. (the KSL Merger) Under the terms of the KSL Agreement, upon completion of the KSL Merger each KSL common share will be converted into the right to receive $43.31 in cash.

Also on October 31, 2004, Valero L.P. and Kaneb Pipe Line Partners, L.P., a Delaware limited partnership (KPP) and certain of their respective affiliated parties entered into a separate definitive merger agreement (the KPP Agreement), pursuant to which a wholly owned subsidiary of Valero L.P. will merge with KPP, with the surviving entity being a wholly owned subsidiary of Valero L.P. (the KPP Merger, and, together with the KSL Merger, the Kaneb Mergers) Under the terms of the KPP Agreement, upon completion of the KPP Merger each KPP unit will be converted into the right to receive a number of Valero L.P. common units based on an exchange ratio formula providing Valero L.P. common units worth $61.50 per KPP unit within a specified “collar” range of Valero L.P. common unit market prices (plus or minus five percent of $57.25), measured over a period prior to closing. Should Valero L.P.’s average per unit price during the measurement period be equal to or less than $54.39 per unit, the exchange ratio will be fixed at 1.1307 Valero L.P. common units for each KPP unit. Should Valero L.P.’s average per unit price during the measurement period be equal to or greater than $60.11 per unit, the exchange ratio will be fixed at 1.0231 Valero L.P. common units for each KPP unit.

On March 11, 2005, Valero L.P. unitholders holding a majority of Valero L.P.’s outstanding units voted to approve the issuance of the Valero L.P. common units in the KPP Merger. Also on March 11, 2005, the KPP unitholders and the KSL shareholders (other than Valero L.P., KSL, KPP and their respective affiliates) holding a majority of the oustanding KPP units and the KSL shares voted to approve the Kaneb Mergers.

Both of the Kaneb Mergers are contingent upon the completion of the other and are subject to customary regulatory approvals, including those under the Hart-Scott-Rodino Antitrust Improvements Act, as well as other customary conditions. There can be no assurances as to whether, or on what date, Valero L.P., KSL and KPP will obtain the required regulatory approvals or satisfy the other conditions to the Kaneb Mergers, or that Valero L.P., KSL or KPP will complete the Kaneb Mergers on the contemplated schedule.

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Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Financial Highlights

(in thousands)

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Segment Operating Highlights

(in thousands, except barrel/day information)

Annual Highlights

Net income for the year ended December 31, 2004 increased $8.8 million or 13% compared to the year ended December 31, 2003. This increase was primarily attributable to the following:

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Partially offsetting the above increases to net income were the following:

On a per unit basis, net income per unit applicable to the limited partners’ interest increased 4% or $0.13 per limited partner unit for the year ended December 31, 2004 compared to the year ended December 31, 2003. This per unit increase was attributable to the above reasons, however, the increase in the per unit amount was partially offset by an increase in the number of common units outstanding as a result of the equity offerings completed in 2003.

Crude Oil Pipelines

Although Valero Energy’s McKee refinery had a crude unit down during a portion of the second and third quarter of 2004, throughput for the crude oil pipelines that supply the McKee refinery were slightly higher for 2004 compared to 2003. Throughputs were reduced in 2003 because Valero Energy initiated economic-based refinery production cuts at its McKee refinery in the first quarter of 2003, which contributed to lower throughputs for the crude oil pipelines that supply the McKee refinery.

Revenues for the crude oil pipelines increased $1.7 million or 3% for the year ended December 31, 2004 compared to the year ended December 31, 2003 due primarily to increased revenues related to the Ardmore crude oil pipelines. During the second quarter of 2003, Valero Energy’s Ardmore refinery experienced a major refinery turnaround for most of April, resulting in lower throughput and revenues in the Ringgold to Wasson to Ardmore crude oil pipelines for 2003 as compared to 2004.

Although operating expenses for the crude oil pipelines segment were comparable in the aggregate for the year ended December 31, 2004 and the year ended December 31, 2003, certain components of operating expenses increased while others decreased. Power costs were higher during 2004 due to higher electricity rates as a result of higher natural gas prices and an expansion of the Wichita Falls crude oil pipeline by adding a pump station in the fourth quarter of 2003. In addition, higher employee benefit costs in 2004 were related to higher incentive compensation. These operating expense increases were offset by the transfer of the Corpus Christi North Beach storage facility, including its operating expense, from the crude oil pipeline segment to the crude oil storage tank segment effective January 1, 2004.

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Depreciation and amortization expense for the crude oil pipelines decreased due to the transfer of the Corpus Christi North Beach storage facility from the crude oil pipeline segment to the crude oil storage tank segment effective January 1, 2004.

Refined Product Pipelines

Revenues for the refined product pipelines segment increased $14.1 million or 20% for the year ended December 31, 2004 compared to the year ended December 31, 2003 due to a 13% increase in throughput resulting primarily from Valero L.P.’s acquisition of the South Texas Pipelines on March 18, 2003 and the Southlake refined product pipeline on August 1, 2003. Revenues for the South Texas Pipelines and Southlake refined product pipeline were $31.6 million for the year ended December 31, 2004 compared to revenue of $22.5 million from the dates of acquisition through December 31, 2003. In addition, the Dos Laredos pipeline system, which began shipping propane to the Nuevo Laredo, Mexico propane terminal on June 1, 2004, contributed revenues of $2.6 million in 2004.

Operating expenses for the refined product pipelines segment increased $8.4 million or 29% for the year ended December 31, 2004 compared to the year ended December 31, 2003 primarily due to expenses associated with a full year of operations of the South Texas Pipelines acquired on March 18, 2003 and the Southlake refined product pipeline acquired on August 1, 2003, in addition to higher power costs and increased employee benefit costs related to higher incentive compensation.

Depreciation and amortization expense for the refined product pipelines segment increased $2.3 million or 19% for the year ended December 31, 2004 compared to the year ended December 31, 2003 due to the acquisition of the South Texas Pipelines on March 18, 2003 and the Southlake refined product pipeline effective August 1, 2003 as well as the commencement of operations of the Dos Laredos pipeline system on June 1, 2004.

Refined Product Terminals

Revenues for the refined product terminals segment increased $8.7 million or 28% for the year ended December 31, 2004 compared to the year ended December 31, 2003 primarily due to a full year of operations of the South Texas Terminals acquired on March 18, 2003 and the Paulsboro refined product terminal acquired on September 3, 2003 and due to the acquisition of the Royal Trading asphalt terminals on February 20, 2004. Revenues for the above-mentioned acquired terminals were $15.5 million for the year ended December 31, 2004 compared to revenues of $6.5 million from dates of acquisition through December 31, 2003.

Operating expenses for the refined product terminals segment increased $2.9 million or 19% for the year ended December 31, 2004 compared to the year ended December 31, 2003 due primarily to expenses associated with the 2003 and 2004 acquisitions. Operating expenses for the above-mentioned acquired terminals were $6.1 million for the year ended December 31, 2004 compared to $2.9 from the dates of acquisition through December 31, 2003.

Depreciation and amortization expense for the refined product terminals segment increased $3.0 million for the year ended December 31, 2004 compared to the year ended December 31, 2003 due to the acquisitions completed in 2003 and 2004 as well as the June 1, 2004 startup of the Nuevo Laredo terminal, which is connected to the Dos Laredos pipeline system.

Crude Oil Storage Tanks

Revenues for the crude oil storage tanks segment increased $14.8 million or 54% for the year ended December 31, 2004 compared to the year ended December 31, 2003 due to a 29% increase in throughput attributable to the following:

Partially offsetting the above increases in 2004 was a plant-wide turnaround at Valero Energy’s Benicia refinery in the fourth quarter of 2004, which lowered throughput in 2004.

In addition, effective January 1, 2004, Valero L.P. transferred the operations of its Corpus Christi North Beach storage facility to the crude oil storage tanks segment from the crude oil pipelines segment. Prior to the transfer, Valero L.P. had included the use of this storage facility as a part of the crude oil pipeline tariff for the Corpus Christi to Three Rivers crude oil pipeline. Valero L.P. and Valero Energy entered into a one-year shell barrel capacity lease agreement, which is

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renewable for one-year terms, for the l.6 million barrels of capacity at the facility and raised the dockage and wharfage fees. Revenues for the year ended December 31, 2004 for the Corpus Christi North Beach storage facility totaled $7.7 million, which included $5.7 million of rental income and $2.0 million of dockage and wharfage fees.

Operating expenses and depreciation and amortization expense for the crude oil storage tanks segment increased by $2.1 million and $2.5 million, respectively, due to Valero L.P.’s ownership of the crude oil storage tanks for the full year of 2004 and the transfer of the Corpus Christi North Beach storage facility for the year ended December 31, 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Financial Highlights

(in thousands)