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SEC Filings
10-Q
NUSTAR ENERGY L.P. filed this Form 10-Q on 05/15/2002
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                      For the quarter ended March 31, 2002


                         Commission File Number 1-16417



                                   VALERO L.P.

                Organized under the laws of the State of Delaware
                  I.R.S. Employer Identification No. 74-2958817

                                One Valero Place
                            San Antonio, Texas 78212
                        Telephone number: (210) 370-2000




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
                                     ---     ---


As of April 30, 2002, 9,654,572 common units were outstanding.





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<PAGE>



                                   VALERO L.P.
                                    FORM 10-Q
                                 MARCH 31, 2002

                                TABLE OF CONTENTS


                                                                            Page


                         PART I - FINANCIAL INFORMATION


 Item 1. Financial Statements

         Consolidated and Combined Balance Sheets
             as of March 31, 2002 and December 31, 2001...................... 3

         Consolidated and Combined Statements of Income
             for the Three Months Ended March 31, 2002 and 2001.............. 4

         Consolidated and Combined Statements of Cash Flows
             for the Three Months Ended March 31, 2002 and 2001.............. 5

         Notes to Consolidated and Combined Financial Statements............. 6


 Item 2. Management's Discussion and Analysis of Financial Condition and
             Results of Operations...........................................13


 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........19


                           PART II - OTHER INFORMATION


 Item 1. Legal Proceedings...................................................19


 Item 2. Changes in Securities and Use of Proceeds...........................19


 Item 3. Defaults Upon Senior Securities.....................................19


 Item 4. Submission of Matters to a Vote of Security Holders.................19


 Item 5. Other Information...................................................19


 Item 6. Exhibits and Reports on Form 8-K....................................20

         SIGNATURE...........................................................20




                                       2

<PAGE>




PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements

<TABLE>
<CAPTION>

                VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
                    CONSOLIDATED AND COMBINED BALANCE SHEETS
                   (unaudited, in thousands, except unit data)

                                                                                             Restated
                                                                             March 31,      December 31,
                                                                               2002             2001
                                                                               ----             ---
                                                                                              (note 2)
                                Assets
Current assets:
<S>                                                                        <C>              <C>
   Cash and cash equivalents........................................        $   7,689        $   7,796
   Receivable from parent...........................................            6,327            6,292
   Accounts receivable..............................................            2,596            2,855
   Other current assets.............................................              460                -
                                                                              -------         -------
      Total current assets..........................................           17,072           16,943
                                                                              -------         -------

Property, plant and equipment.......................................          472,039          470,401
Less accumulated depreciation and amortization......................         (125,584)        (121,389)
                                                                              -------          -------
   Property, plant and equipment, net...............................          346,455          349,012
Goodwill, net.......................................................            4,715            4,715
Investment in Skelly-Belvieu Pipeline Company.......................           16,399           16,492
Other noncurrent assets, net........................................              384              384
                                                                              -------          -------
    Total assets....................................................        $ 385,025        $ 387,546
                                                                              =======          =======


                   Liabilities and Partners' Equity
Current liabilities:
   Current portion of long-term debt................................        $     416        $     462
   Accounts payable and accrued liabilities.........................            4,107            4,215
   Taxes other than income taxes....................................            1,190            1,894
                                                                              -------          -------
      Total current liabilities.....................................            5,713            6,571

Long-term debt, less current portion................................           89,660           25,660
Other long-term liabilities.........................................                -                2
Deferred income tax liabilities.....................................                -           13,147
Commitments and contingencies

Partners' equity:
   Common units (9,654,572 and 9,599,322 outstanding as of 2002
     and 2001, respectively)........................................          168,433          169,305
   Subordinated units (9,599,322 outstanding as of 2002 and 2001)...          115,429          116,399
   General partner's equity.........................................            5,790            5,831
   Net parent investment in the Wichita Falls Business..............                -           50,631
                                                                              -------          -------
     Total partners' equity.........................................          289,652          342,166
                                                                              -------          -------
     Total liabilities and partners' equity.........................        $ 385,025        $ 387,546
                                                                              =======          =======
</TABLE>

    See accompanying notes to consolidated and combined financial statements.



                                       3

<PAGE>


<TABLE>
<CAPTION>



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

                                                                       Three Months Ended March 31,
                                                                       ----------------------------
                                                                          2002               2001
                                                                          ----               ----
<S>                                                                    <C>                <C>
Revenues.......................................................        $ 26,024           $ 23,422
                                                                         ------             ------
Costs and expenses:
   Operating expenses..........................................           9,184              8,651
   General and administrative expenses.........................           1,789              1,172
   Depreciation and amortization...............................           4,355              3,238
                                                                         ------             ------
      Total costs and expenses.................................          15,328             13,061
                                                                         ------             ------
Operating income...............................................          10,696             10,361
  Equity income from Skelly-Belvieu Pipeline Company...........             678                669
  Interest expense, net........................................            (556)            (2,244)
                                                                         ------             ------
Income before income tax expense...............................          10,818              8,786
  Income tax expense...........................................             395                  -
                                                                         ------             ------
Net income.....................................................        $ 10,423           $  8,786
                                                                         ======             ======
Allocation of net income:
General partner's interest in net income.......................        $    195
Limited partners' interest in net income.......................           9,578
Net income applicable to the Wichita Falls Business
  for the month ended January 31, 2002.........................             650
                                                                         ------
  Net income...................................................        $ 10,423
                                                                         ======
Basic and diluted net income per limited
    partnership unit...........................................        $   0.50
                                                                         ======
Weighted average number of limited partnership
    units outstanding..........................................      19,241,617
                                                                     ==========
</TABLE>


    See accompanying notes to consolidated and combined financial statements.



                                       4

<PAGE>


<TABLE>
<CAPTION>


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

                                                                          Three Months Ended March 31,
                                                                          ----------------------------
                                                                          2002                    2001
                                                                          ----                    ----
Cash Flows from Operating Activities:
<S>                                                                     <C>                      <C>
Net income .......................................................     $  10,423              $  8,786
Adjustments to reconcile net income to
   net cash provided by operating activities:
   Depreciation and amortization..................................         4,355                 3,238
   Equity income from Skelly-Belvieu Pipeline Company.............          (678)                 (669)
   Deferred income tax expense....................................            54                     -
   Compensation recognized under the restricted unit plan.........           132                     -
   Changes in operating assets and liabilities:
     Increase in receivable from parent...........................           (35)               (7,780)
     Decrease (increase) in accounts receivable...................           259                  (674)
     Increase in other current assets.............................          (460)                 (555)
     Decrease in accounts payable, accrued liabilities
      and taxes other than income taxes...........................          (782)               (2,078)
   Distributions received from Skelly-Belvieu Pipeline Company....           771                   639
   Decrease in other long-term liabilities........................            (2)                    -
                                                                         -------                ------
         Net cash provided by operating activities................        14,037                   907
                                                                         -------                ------
Cash Flows from Investing Activities:
Maintenance capital expenditures..................................          (789)                 (745)
Expansion capital expenditures....................................        (1,009)                 (162)
Acquisition of the Wichita Falls Business.........................       (64,000)                    -
                                                                         -------                ------
         Net cash used in investing activities....................       (65,798)                 (907)
                                                                         -------                ------
Cash Flows from Financing Activities:
Proceeds from long-term debt borrowings...........................        64,000                     -
Repayment of long-term debt.......................................           (46)                    -
Distribution to Valero Energy in January 2002 related to the
  Wichita Falls Business..........................................          (512)                    -
Payment of distributions to unitholders...........................       (11,788)                    -
                                                                         -------                ------
         Net cash provided by financing activities................        51,654                     -
                                                                         -------                ------

Net decrease in cash and cash equivalents.........................          (107)                    -
Cash and cash equivalents as of the beginning of the period.......         7,796                     4
                                                                         -------                ------
Cash and cash equivalents as of the end of the period.............     $   7,689              $      4
                                                                         =======                ======

</TABLE>


    See accompanying notes to consolidated and combined financial statements.



                                       5

<PAGE>


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


NOTE 1: Organization

Valero L.P. is a Delaware limited  partnership owned approximately 73% by Valero
Energy Corporation  (Valero Energy) and approximately 27% by public unitholders.
Valero  Logistics  Operations,  L.P.  (Valero  Logistics  Operations)  is also a
Delaware limited  partnership and is a subsidiary of Valero L.P. As used in this
report,  the term  Partnership  may refer,  depending on the context,  to Valero
L.P., Valero Logistics Operations or both of them taken as a whole.

The  Partnership  owns and  operates  most of the crude oil and refined  product
pipeline, terminalling and storage assets located in Texas, Oklahoma, New Mexico
and Colorado  that support  Valero  Energy's  McKee and Three Rivers  refineries
located in Texas and its Ardmore refinery located in Oklahoma.

Valero  Energy is a  refining  and  marketing  company  with 12  refineries  and
approximately 4,600  company-operated  and  dealer-operated  convenience stores.
Valero Energy's refining operations include various logistics assets (pipelines,
terminals,  marine dock facilities,  bulk storage facilities,  refinery delivery
racks,  rail car loading  equipment and shipping and trucking  operations)  that
support the refining and retail  operations.  A portion of the logistics  assets
consists of crude oil and refined product  pipelines,  refined product terminals
and crude oil  storage  facilities  located in Texas,  Oklahoma,  New Mexico and
Colorado  that  support the McKee,  Three Rivers and Ardmore  refineries.  These
pipeline,  terminalling  and  storage  assets  transport  crude  oil  and  other
feedstocks to the refineries and transport  refined products from the refineries
to  terminals  for  further  distribution.  Valero  Energy  markets  the refined
products produced by these refineries  primarily in Texas,  Oklahoma,  Colorado,
New Mexico and Arizona through a network of approximately 2,700 company-operated
and  dealer-operated  convenience  stores,  as well as other  wholesale and spot
market sales and exchange agreements.

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

NOTE 2: Basis of Presentation

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

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

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


                                       6

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

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

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

The Wichita Falls Business consists of the following assets:
o    A 271.7 mile pipeline  originating  in Wichita  Falls,  Texas and ending at
     Valero  Energy's  McKee  refinery in Dumas,  Texas.  The  pipeline  has the
     capacity to  transport  110,000  barrels  per day of crude oil  gathered or
     acquired by Valero  Energy at Wichita  Falls.  The Wichita  Falls crude oil
     pipeline  connects to third party  pipelines that originate along the Texas
     Gulf Coast.
o    Four storage tanks located in Wichita Falls, Texas with a total capacity of
     660,000 barrels.

In the fourth  quarter of 2001,  UDS completed an expansion  project to increase
the  capacity of the crude oil pipeline  from 85,000  barrels per day to 110,000
barrels  per day and to increase  the  capacity  of the  storage  facility  from
360,000 barrels to 660,000 barrels.

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

                                                           Wichita Falls
                                                             Business
                                                         December 31, 2001
                                                         -----------------
                                                           (in thousands)
       Balance Sheet Caption
        Property, plant and equipment...................     $ 64,160
        Accrued liabilities.............................          131
        Taxes other than income taxes...................          251
        Deferred income tax liabilities.................       13,147
        Net parent investment...........................       50,631


                                       7

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

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

                                                            Three Months
                                                                Ended
                                                              March 31,
                                                                 2001
                                                                 ----
                                                            (in thousands)
       Pro Forma Income Statement Information
        Revenues........................................      $ 27,298
        Costs and expenses..............................        14,642
        Operating income................................        12,656
        Net income......................................        10,331

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

The financial  statements  included in this Form 10-Q represent the consolidated
and combined  financial  statements of Valero L.P., Valero Logistics  Operations
and the Wichita Falls Business as follows:
o    consolidated financial statements of the Partnership, including the Wichita
     Falls Business, as of March 31, 2002 and for the two months ended March 31,
     2002;
o    combined  financial  statements  of the  Partnership  and the Wichita Falls
     Business  as of December  31, 2001 and for the one month ended  January 31,
     2002; and
o    combined   financial   statements  of  Valero  L.P.  and  Valero  Logistics
     Operations for the three months ended March 31, 2001.

NOTE 3: Accounting Pronouncements

FASB Statement No. 144
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial  Accounting  Standard No. 144,  "Accounting  for the  Impairment or
Disposal of Long-Lived Assets." Statement No. 144 addresses financial accounting
and reporting for the impairment of long-lived  assets and for long-lived assets
to be disposed of. This Statement supersedes FASB Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" but retains Statement No. 121's  fundamental  provisions for recognition and
measurement  of  impairment  of  long-lived  assets  to be  held  and  used  and
measurement of long-lived  assets to be disposed of by sale. This statement also
supersedes APB Opinion No. 30,  "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and  Infrequently  Occurring  Events and  Transactions"  for the  disposal  of a
segment of a  business.  Statement  No. 144 does not apply to  goodwill or other
intangible  assets,  the accounting and reporting of which is addressed in newly
issued Statement No. 142, "Goodwill and Other Intangible Assets." The provisions
of Statement No. 144 are effective  for  financial  statements  for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years,  with  early  application   encouraged.   There  was  no  impact  to  the
Partnership's  financial  position  or  results  of  operations  as a result  of
adopting this statement effective January 1, 2002.

FASB Statement No. 145
In April 2002, the FASB issued  Statement of Financial  Accounting  Standard No.
145,  "Rescission  of FASB  Statements  No.  4, 44,  and 64,  Amendment  of FASB
Statement No. 13, and Technical Corrections." This statement:
o    rescinds  Statement No. 4, "Reporting Gains and Losses from  Extinguishment
     of Debt,"
o    rescinds  Statement  No.  64,  "Extinguishments  of Debt  Made  to  Satisfy
     Sinking-Fund Requirements,"
o    rescinds  Statement  No. 44,  "Accounting  for  Intangible  Assets of Motor
     Carriers," and

                                       8

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

o    amends  Statement  No.  13,   "Accounting  for  Leases,"  to  eliminate  an
     inconsistency   between  the   required   accounting   for   sale-leaseback
     transactions  and the required  accounting for certain lease  modifications
     that have economic effects that are similar to sale-leaseback transactions.


This statement also amends other existing  authoritative  pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under  changed  conditions.  The  provisions of Statement No. 145 related to the
rescission of Statement No. 4 shall be applied in fiscal years  beginning  after
May 15, 2002 and the provisions of this  statement  related to the Statement No.
13 sale-leaseback  inconsistency  shall be effective for transactions  occurring
after May 15, 2002, with early application  encouraged.  All other provisions of
this statement  shall be effective for financial  statements  issued on or after
May 15, 2002, with earlier  application  encouraged.  The  Partnership  does not
expect that the adoption of this  statement  will have a material  impact on its
financial position or results of operations.

NOTE 4: Commitments and Contingencies

The Partnership's  operations are subject to environmental  laws and regulations
adopted by various  federal,  state and local  governmental  authorities  in the
jurisdictions  in which it  operates.  Although  the  Partnership  believes  its
operations are in general compliance with applicable environmental  regulations,
risks of additional costs and liabilities are inherent in pipeline, terminalling
and storage operations, and there can be no assurance that significant costs and
liabilities  will  not  be  incurred.   Moreover,  it  is  possible  that  other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies  thereunder,  and claims for damages to property or persons
resulting  from  the   operations,   could  result  in  substantial   costs  and
liabilities.  Accordingly,  the Partnership 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 to
prevent  material  environmental  or other  damage,  and to limit the  financial
liability  which  could  result  from  such  events.   However,   some  risk  of
environmental or other damage is inherent in pipeline,  terminalling and storage
operations, as it is with other entities engaged in similar businesses. Although
environmental  costs may have a significant  impact on results of operations for
any single  period,  the  Partnership  believes  that such costs will not have a
material adverse effect on its financial position.

In connection  with the initial  public  offering of Valero L.P.,  UDS agreed to
indemnify  Valero L.P. for  environmental  liabilities that arose prior to April
16, 2001 and are discovered within 10 years after April 16, 2001.  Excluded from
this  indemnification are liabilities that result from a change in environmental
law after  April  16,  2001.  Effective  with the  acquisition  of UDS by Valero
Energy,  Valero  Energy  has  assumed  this  environmental  indemnification.  In
addition,  as an operator or owner of the assets,  the Partnership could be held
liable for  pre-April  16, 2001  environmental  damage  should  Valero Energy be
unable to fulfill its obligation.  However, the Partnership believes that such a
situation is remote given Valero Energy's financial condition.

In  conjunction  with the sale of the Wichita  Falls  Business  to Valero  L.P.,
Valero  Energy  has  agreed  to  indemnify  Valero  L.P.  for any  environmental
liabilities that arose prior to February 1, 2002 and are discovered by April 15,
2011. As of and for the years ended December 31, 2001,  2000 and 1999, and as of
and for the one month ended January 31, 2002, the Wichita Falls Business did not
incur any  environmental  liability;  thus there was no  accrual on January  31,
2002.

The  Partnership  is  involved  in  various  lawsuits,   claims  and  regulatory
proceedings  incidental  to its  business.  In the  opinion of  management,  the
outcome  of  such  matters  will  not  have a  material  adverse  effect  on the
Partnership's financial position or results of operations.




                                       9

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

NOTE 5: Related Party Transactions

The Partnership has related party  transactions  with Valero Energy for pipeline
tariff and terminalling fee revenues,  certain employee costs,  insurance costs,
administrative  costs and  interest  expense on the debt due to parent  (for the
period January 1, 2001 to April 15, 2001). The receivable from parent represents
the net amount due from Valero Energy for these related party  transactions  and
the net cash collected under Valero Energy's centralized cash management program
on the Partnership's behalf.

The following table summarizes transactions with Valero Energy:

                                                         Three Months Ended
                                                              March 31,
                                                              ---------
                                                       2002               2001
                                                       ----               ----
                                                            (in thousands)

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

Under the Services  Agreement with the Partnership,  Valero Energy has agreed to
provide the  corporate  functions of legal,  accounting,  treasury,  information
technology and other  services for an annual fee of $5,200,000  until July 2008.
The  $5,200,000  is  adjustable  annually  based  on the  Consumer  Price  Index
published by the U.S. Department of Labor, and may also be adjusted to take into
account   additional   service  levels   necessitated   by  the  acquisition  or
construction  of  additional  assets.  This  annual  fee is in  addition  to the
incremental  general and administrative  costs to be incurred from third parties
as a result of the Partnership being a publicly held entity.

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

Under the Pipelines and Terminals Usage Agreement with the  Partnership,  Valero
Energy has agreed to use the  Partnership's  pipelines to transport at least 75%
of the crude oil  shipped to and at least 75% of the  refined  products  shipped
from the McKee, Three Rivers and Ardmore refineries and to use the Partnership's
refined  product  terminals  for  terminalling  services for at least 50% of all
refined  products  shipped from these  refineries until at least April 2008. For
the three  months  ended March 31, 2002,  Valero  Energy used the  Partnership's
pipelines  to  transport  91% of its crude oil shipped to and 79% of the refined
products shipped from the McKee,  Three Rivers and Ardmore refineries and Valero
Energy  used the  Partnership's  terminalling  services  for 63% of all  refined
products shipped from these refineries.

If market conditions change,  either with respect to the transportation of crude
oil or refined  products  or to the end  markets in which  Valero  Energy  sells
refined  products,  in a material  manner such that Valero Energy would suffer a
material  adverse  effect  if it  were  to  continue  to use  the  Partnership's
pipelines and terminals at the required  levels,  Valero Energy's  obligation to
the  Partnership  will be  suspended  during  the period of the change in market
conditions  to the extent  required to avoid the material  adverse  effect.  The
economic-based  production  cutbacks  at the McKee,  Three  Rivers and  Ardmore
refineries  during the first  quarter of 2002 were not  considered  a triggering
event under the Pipelines and Terminals Usage Agreement.


                                       10

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

NOTE 6: Long-term Debt

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

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

The revolving  credit facility  requires that the Partnership  maintain  certain
financial  ratios  and  includes  other  restrictive   covenants,   including  a
prohibition on distributions if any default,  as defined in the revolving credit
facility, exists or would result from the distribution. Management believes that
the Partnership is in compliance with all of these ratios and covenants.

NOTE 7: Net Income per Limited Partnership Unit

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

<TABLE>
<CAPTION>

                                                                       Three Months Ended March 31, 2002
                                                                       ---------------------------------
                                                                 Net Income           Units           Per Unit
                                                                (Numerator)       (Denominator)        Amount
                                                                -----------       -------------        ------
                                                                        (in thousands)
<S>                                                               <C>                  <C>              <C>
    Limited partners' interest in net income..................   $ 9,578
                                                                   =====

    Basic net income per common and subordinated unit.........   $ 9,578              19,242           $ 0.50
                                                                  ======              ======             ====

    Dilutive net income per common and subordinated unit......   $ 9,578              19,242           $ 0.50
                                                                   =====              ======             ====
</TABLE>


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

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

NOTE 8: Restricted Units

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


                                       11

<PAGE>
               VALERO L.P. AND VALERO LOGISTICS OPERATIONS, L.P.
      NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued)

NOTE 9: Distributions

The  Partnership  makes quarterly  distributions  of 100% of its available cash,
generally  defined as cash  receipts less cash  disbursements  and cash reserves
established  by the  general  partner in its sole  discretion.  Pursuant  to the
partnership   agreement,   the  general   partner  is   entitled  to   incentive
distributions  if the amount the  Partnership  distributes  with  respect to any
quarter exceeds specified target levels shown below:

                                                 Percentage of Distribution
                                                 --------------------------
   Quarterly Distribution Amount per Unit      Unitholders      General Partner
   --------------------------------------      -----------      ---------------

   Up to $0.60                                    98%                 2%
   Above $0.60 up to $0.66                        90%                10%
   Above $0.66 up to $0.90                        75%                25%
   Above $0.90                                    50%                50%

On February 14, 2002, the Partnership paid the fourth quarter cash  distribution
of $0.60 per unit for a total  distribution of $11,788,000,  including  $236,000
paid to the general partner.

On April 19, 2002, the  Partnership  declared a quarterly  distribution of $0.65
per unit payable on May 15, 2002 to unitholders  of record on May 1, 2002.  This
distribution,  related  to the  first  quarter  of 2002,  is  expected  to total
$12,858,000,  of which  $1,070,000  is an  incentive  distribution.  The general
partner's share of the total  distribution is expected to be $343,000,  of which
$107,000 is an incentive distribution.



                                       12

<PAGE>


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

Certain Forward-Looking Statements

This quarterly report on Form 10-Q contains certain "forward-looking" statements
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the  Securities  Exchange Act of 1934,  and  information  relating to the
Partnership  that is based on the beliefs of management  as well as  assumptions
made by and  information  currently  available to management.  When used in this
report, the words "anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar  expressions,  as they relate to the  Partnership or
management,  identify  forward-looking  statements.  Such statements reflect the
current  views of  management  with respect to future  events and are subject to
certain  risks,  uncertainties  and  assumptions  relating to the operations and
results of operations,  including those relating to competitive  factors such as
competing pipelines, pricing pressures, changes in market conditions, reductions
in production at the refineries that the Partnership supplies with crude oil and
whose  refined  production  it  transports,   inability  to  acquire  additional
non-affiliated pipeline entities or assets, reductions in space allocated to the
Partnership in  interconnecting  third party pipelines,  shifts in market demand
and general economic conditions and other factors.

Should one or more of these risks or  uncertainties  materialize,  or should any
underlying  assumptions  prove  incorrect,  actual  results or outcomes may vary
materially from the forward-looking statements described herein.

Introduction

The  Partnership's  results of operations  may be affected by seasonal  factors,
such as the demand  for  petroleum  products,  which  vary  during the year,  or
industry factors that may be specific to a particular period, such as the demand
for  refined  products,   industry  supply  capacity  and  refinery  maintenance
turnarounds.

On February  1, 2002,  the  Partnership  acquired  the  Wichita  Falls Crude Oil
Pipeline and Storage  Business (the Wichita Falls  Business)  from Valero Energy
for a total cost of  $64,000,000.  Since the  acquisition  of the Wichita  Falls
Business  represents  the  transfer  of a business  under the common  control of
Valero  Energy,  the balance sheet as of December 31, 2001 (the earliest date on
which common  control  existed) and the  statements of income and cash flows for
the month ended  January 31, 2002  (preceding  the  acquisition  date) have been
restated to include the Wichita Falls Business.  As a result, the financial data
and  operating  data which follow under  "Results of  Operations"  represent the
consolidated  and combined results of Valero L.P.,  Valero Logistics  Operations
and the Wichita Falls Business as follows:
o    consolidated  results of the  Partnership  as of March 31, 2002 and for the
     two months ended March 31, 2002;
o    combined  results of the  Partnership  and the Wichita Falls Business as of
     December 31, 2001 and for the one month ended January 31, 2002; and
o    combined  results of Valero L.P. and Valero  Logistics  Operations  for the
     three months ended March 31, 2001.




                                       13

<PAGE>



Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Financial Data:

                                                       Three Months Ended
                                                           March 31,
                                                           ---------
                                                       2002              2001
                                                       ----              ----
                                                          (in thousands)
Statement of Income Data:
Revenues...........................................  $ 26,024         $ 23,422
                                                       ------           ------
Costs and expenses:
  Operating expenses...............................     9,184            8,651
  General and administrative expenses..............     1,789            1,172
  Depreciation and amortization....................     4,355            3,238
                                                       ------           ------
     Total costs and expenses......................    15,328           13,061
                                                       ------           ------

Operating income...................................    10,696           10,361
  Equity income from Skelly-Belvieu
   Pipeline Company................................       678              669
  Interest expense, net............................      (556)          (2,244)
                                                       ------           ------
 Income before income tax expense..................    10,818            8,786
  Income tax expense...............................       395                -
                                                       ------           ------
Net income.........................................  $ 10,423         $  8,786
                                                       ======           ======


                                                                      Restated
                                                     March 31,      December 31,
                                                       2002              2001
                                                       ----              ----
                                                           (in thousands)
Balance Sheet Data:
Property, plant and equipment, net................. $ 346,455        $ 349,012
Total assets.......................................   385,025          387,546
Long-term debt, including current portion..........    90,076           26,122
Partners' equity...................................   289,652          342,166



                                       14

<PAGE>



Operating Data:

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

<TABLE>
<CAPTION>

                                                                      Three Months Ended
                                                                          March 31,
                                                                          ---------
                                                                    2002                 2001          % Change
                                                                    ----                 ----          --------
                                                                    (in thousands of barrels)
<S>                                                                <C>                  <C>                 <C>
        Crude oil pipeline throughput:
           Dixon to McKee..................................         4,179                5,459            (23)%
           Wichita Falls to McKee..........................         5,441                    -              -
           Wasson to Ardmore...............................         5,699                7,393            (23)%
           Ringgold to Wasson..............................         1,949                2,911            (33)%
           Corpus Christi to Three Rivers..................         5,558                7,973            (30)%
           Other crude oil pipelines.......................         5,289                4,012             32 %
                                                                   ------               ------
             Total crude oil pipelines.....................        28,115               27,748              1 %
                                                                   ======               ======

        Refined product pipeline throughput:
           McKee to Colorado Springs to Denver.............         1,630                2,261            (28)%
           McKee to El Paso................................         5,616                5,758             (2)%
           McKee to Amarillo to Abernathy..................         3,172                3,846            (18)%
           Amarillo to Albuquerque.........................           965                1,176            (18)%
           McKee to Denver.................................         1,025                1,081             (5)%
           Ardmore to Wynnewood............................         3,813                5,487            (31)%
           Three Rivers to Laredo..........................         1,098                1,085              1 %
           Three Rivers to San Antonio.....................         2,258                2,455             (8)%
           Other refined product pipelines.................         4,081                5,423            (25)%
                                                                   ------               ------
             Total refined product pipelines...............        23,658               28,572            (17)%
                                                                   ======               ======

        Refined product terminal throughput................        15,823               15,103              5 %
                                                                   ======               ======
</TABLE>


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

Revenues for the quarter  ended March 31, 2002 were  $26,024,000  as compared to
$23,422,000  for the  quarter  ended  March 31,  2001,  an  increase  of 11%, or
$2,602,000.  This increase is due primarily to the addition of the Wichita Falls
crude oil pipeline  revenues in the first quarter of 2002,  partially  offset by
decreases in revenues on most of the  Partnership's  other pipelines  during the
quarter. The following discusses  significant revenue increases and decreases by
pipeline:

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

                                       15

<PAGE>

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

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

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

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

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

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

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

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

                                       16

<PAGE>

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

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

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

Outlook for the Second Quarter and Remainder of 2002

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

Based on the throughput  improvements,  the additional  cash flow generated from
the Wichita Falls Business  acquired on February 1, 2002 and the additional cash
flow anticipated from a crude hydrogen pipeline to be acquired in late May 2002,
the Partnership expects to generate higher levels of distributable cash flow for
the balance of 2002.

Liquidity and Capital Resources

Financing
As of March 31, 2002, the  Partnership  had  $80,000,000  outstanding  under its
$120,000,000  revolving credit  facility.  During the first quarter of 2002, the
Partnership borrowed $64,000,000 under the revolving credit facility to purchase
the Wichita Falls  Business from Valero  Energy.  In addition,  the  Partnership
expects to fund the acquisition of an $11,000,000  crude hydrogen  pipeline from
Praxair, Inc. in May 2002 with borrowings under the revolving credit facility.

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

The revolving  credit facility  requires that the Partnership  maintain  certain
financial  ratios  and  includes  other  restrictive   covenants,   including  a
prohibition on  distributions  by the Partnership if any default,  as defined in
the revolving  credit  facility,  exists or would result from the  distribution.
Management  believes that the  Partnership  is in  compliance  with all of these
ratios and covenants.

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


                                       17

<PAGE>

Distributions
Valero L.P.'s partnership  agreement,  as amended, sets forth the calculation to
be used to  determine  the amount and  priority of cash  distributions  that the
common unitholders,  subordinated  unitholders and general partner will receive.
During the subordination  period,  the holders of Valero L.P.'s common units are
entitled to receive each quarter a minimum  quarterly  distribution of $0.60 per
unit ($2.40  annualized)  prior to any distribution of available cash to holders
of Valero  L.P.'s  subordinated  units.  The  subordination  period  is  defined
generally as the period that will end on the first day of any quarter  beginning
after  December 31, 2005 if (1) the  Partnership  has  distributed  at least the
minimum quarterly  distribution on all outstanding units with respect to each of
the  immediately  preceding  three  consecutive,   non-overlapping  four-quarter
periods and (2) the Partnership's  adjusted operating surplus, as defined in the
partnership  agreement,  during such  periods  equals or exceeds the amount that
would have been  sufficient to enable the  Partnership to distribute the minimum
quarterly distribution on all outstanding units on a fully diluted basis and the
related distribution on the 2% general partner interest during those periods.

In  addition,  all of the  subordinated  units may convert to common  units on a
one-for-one  basis on the first day following the record date for  distributions
for the quarter ending December 31, 2005, if the Partnership meets the tests set
forth in the partnership agreement. If the subordination period ends, the rights
of the  holders  of  subordinated  units will no longer be  subordinated  to the
rights  of the  holders  of  common  units  and the  subordinated  units  may be
converted into common units.

On February 14, 2002, the  Partnership  paid a distribution of $0.60 per unit or
$11,552,000  to  unitholders  representing  the  distribution  of available cash
generated in the fourth quarter of 2001. The general partner's cash distribution
applicable to the fourth quarter of 2001 was $236,000.

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

Capital Requirements
The petroleum  pipeline  industry is  capital-intensive,  requiring  significant
investments to upgrade or enhance existing  operations and to meet environmental
regulations. The Partnership's capital expenditures consist primarily of:
o    maintenance  capital  expenditures,  such as  those  required  to  maintain
     equipment reliability and safety and to address environmental  regulations;
     and
o    expansion  capital  expenditures,  such as  those  to  expand  and  upgrade
     pipeline  capacity and to construct  new  pipelines,  terminals and storage
     facilities to meet Valero Energy's needs.  In addition,  expansion  capital
     expenditures will include  acquisitions of pipelines,  terminals or storage
     assets owned by Valero Energy or other parties.
The Partnership  expects to fund its capital  expenditures from cash provided by
operations and, to the extent  necessary,  from proceeds of borrowings under the
revolving credit facility or debt and equity offerings.

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


                                       18

<PAGE>

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

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

The Partnership  anticipates that it will continue to have adequate liquidity to
fund future  recurring  operating,  investing  and  financing  activities.  Cash
distributions are expected to be funded with internally generated cash.


I
tem 3.  Quantitative and Qualitative Disclosures About Market Risk

The  Partnership  currently does not engage in interest rate,  foreign  currency
exchange rate or commodity price hedging transactions.

The principal  market risk (i.e.,  the risk of loss arising from adverse changes
in market rates and prices) to which the Partnership is exposed is interest rate
risk on its debt. The Partnership manages its debt considering various financing
alternatives  available in the market.  Borrowings  under the  revolving  credit
facility do not give rise to significant interest rate risk because the interest
rate on borrowings under the facility float with market rates. Thus the carrying
amount  of  outstanding   borrowings   under  the  revolving   credit   facility
approximates fair value.

The  Partnership's  remaining  debt is fixed rate debt with an 8% interest rate.
The  estimated  fair  value of the  fixed  rate  debt as of March  31,  2002 was
$10,300,000 as compared to the carrying value of $10,076,000. The fair value was
estimated  using  discounted  cash flow analysis,  based on current  incremental
borrowing rates for similar types of borrowing arrangements.  Since the total of
this fixed rate debt is not material to the Partnership's  financial position or
performance, there is currently minimal exposure to market interest rate risk.


PART II - OTHER INFORMATION


Item 1. Legal Proceedings

No material  litigation has been filed or is pending  against the Partnership as
of March 31, 2002.


Item 2.  Changes in Securities and Use of Proceeds

None.


Item 3. Defaults Upon Senior Securities

None.


Item 4.  Submission of Matters to a Vote of Security Holders

None.


Item 5.  Other Information

None.

                                       19

<PAGE>




Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

     10.1 Form of Unit Option Agreement

(b) Reports on Form 8-K

Valero L.P. filed a Form 8-K dated February 1, 2002  announcing its  acquisition
of the Wichita Falls crude oil pipeline and storage  facility from Valero Energy
Corporation  and on April 16,  2002 filed a Form 8-K/A  dated  February 1, 2002,
which included the audited  financial  statements of the Wichita Falls Crude Oil
Pipeline and Storage  Business and pro forma  financial  information  for Valero
L.P.




                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, Valero L.P.
has duly  caused  this  report  to be signed  on its  behalf by the  undersigned
thereunto duly authorized.


VALERO L.P.
By: Riverwalk Logistics, L.P., its general partner
       By: Valero GP, LLC, its general partner


By:             /s/ Curtis V. Anastasio
         ---------------------------------
         Curtis V. Anastasio
         Chief Executive Officer
         May 15, 2002


                                       20

<PAGE>

Notice of Grant of Unit Option                       Valero GP, LLC
and Unit Option Agreement                            ID: 74-2958816
                                                     P. O. Box 696000
                                                     San Antonio, TX  78269-6000

Name                                                 Option Number:
                                                     Plan:                  VUOP
                                                     ID:

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

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


Effective  _________________,  you have been granted a Non-Qualified Unit Option
to buy _____ units of the Valero L.P. at $__________  per unit.

The total option price of the units granted is $      .

Your options to purchase units will vest on the dates shown below.

      Units       Grant Date         Vest Type         Full Vest     Expiration
      -------------------------------------------------------------------------


By your signature and the Company's  signature  below, you and the Company agree
that the Option  referenced above is granted under and governed by the terms and
conditions  of the  Valero  GP, LLC 2002 Unit  Option  Plan and the Unit  Option
Agreement attached hereto, all of which are made a part of this agreement.

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



      VALERO GP, LLC


     By:
        -------------------------                      -------------------------
     Curtis Anastasio                                  Date
     President and COO


     ----------------------------                      -------------------------
     Name                                              Date
     Participant




<PAGE>


                                 Valero GP, LLC
                              Unit Option Agreement

         THIS AGREEMENT is between Valero GP, LLC, a Delaware Limited  Liability
company  (the  "Company")  and the person  whose  signature  is set forth on the
signature page hereof ("Participant").

                                    RECITALS

       WHEREAS, the Company has adopted the Valero GP, LLC 2002 Unit Option Plan
(the "Plan")  which  provides for the grant of Options to certain key  employees
and non-employee directors of the Company and its Affiliates.

       WHEREAS,  Participant is a key employee or  non-employee  director and in
such capacity is in a position to contribute  materially to the continued growth
and  development  and  the  future  financial  success  of the  Company  and its
controlled Affiliates; and

       WHEREAS, the Company wishes to grant to Participant an option to purchase
Units of Valero L.P. (the  "Partnership") on the terms and conditions  specified
herein to  provide a means for the  Participant  to  participate  in the  future
growth of the Company and to increase the  Participant's  incentive and personal
interest in the continued success and growth of the Company;

         NOW THEREFORE, the parties agree as follows (any capitalized terms used
herein but not defined  herein shall have the  respective  meanings given in the
Plan):

     1. Option

          a. Grant.  Subject to the terms and  conditions of this  Agreement and
     the Plan,  the Company  hereby  -----  grants to  Participant  an Option to
     purchase  all or any part of the  Units  set  forth on the  signature  page
     hereof, at the exercise price set forth on the signature page hereof.

          b. Term.  The term of the  Option  shall  expire at 11:59 p.m.  on the
     tenth anniversary of the Date ---- of Grant of the Option.

     2. Exercise.  Participant may, subject to the limitations of this Agreement
and the Plan,  exercise  all or any portion of the Option by  providing  written
notice of exercise to the Company specifying the number of Units with respect to
which the Option is being  exercised and  accompanied by payment of the exercise
price for such  Units.  The method or methods by which  payment of the  exercise
price may be made will  include  any method  acceptable  to the  Company and the
Partnership at the time of exercise of the option.

3. Securities Restrictions.  Participant agrees and acknowledges with respect to
any Units  issued  under the  Options  that have not been  registered  under the
Securities  Act of 1933 as amended (the "Act"),  that (i)  Participant  will not
sell or  otherwise  dispose  of  such  Units  except  pursuant  to an  effective
registration statement under the Act and any applicable state securities laws or
in a transaction which in the opinion of counsel for the Company, is exempt from
such registration,  and (ii) a legend will be placed on the certificates for the
Units to such effect.

       4.     Limited Interest.
          a.  The  grant  of  the  Option  shall  not  be  construed  as  giving
     Participant any interest other than as provided in this Agreement.

     b.  Participant  shall  have no rights as a Unit  holder as a result of the
grant of the Option, until the Option is exercised,  the exercise price is paid,
and the Units issued thereunder.

     c. The grant of the  Option  shall not affect in any way the right or power
of the Company to make or authorize any or all  adjustments,  recapitalizations,
reorganizations,  or other  changes in the  Company's  capital  structure or its
business,  or any merger,  consolidation or business combination of the Company,
or any issuance or modification of any term, condition, or covenant of any bond,
debenture,  debt,  preferred stock or other instrument ahead of or affecting the
Units or the rights of the holders thereof, or the dissolution or liquidation of
the  Company,  or any  sale or  transfer  of all or any  part of its  assets  or
business or any other Company act or proceeding,  whether of a similar character
or otherwise.

     5.  Incorporation  by  Reference.  The terms of the Plan to the  extent not
stated herein are expressly incorporated herein by reference and in the event of
any conflict between this Agreement and the Plan, the Plan shall govern.

     6. Amendment.  This Agreement may not be amended,  modified,  terminated or
otherwise altered except by the written consent of the parties thereto.