VALERO GP HOLDINGS LLC (Form: S-1, Received: 03/31/2006 17:44:17)

Exhibit

Number

Description

Incorporated by Reference to the Following Document

Consent of Ernst & Young LLP, dated March 30, 2006

Powers of Attorney (included on signature page to this registration statement)

As filed with the Securities and Exchange Commission on March 31, 2006

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

Valero GP Holdings, LLC

(Exact name of registrant as specified in its charter)


Delaware	4610	84-0470977
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

One Valero Way

San Antonio, Texas 78249

(210) 345-2000

(Address, including zip code, and telephone number, including area code, of

registrant’s principal executive offices)

Bradley C. Barron

Vice President — General Counsel and Secretary

Valero GP Holdings, LLC

One Valero Way

San Antonio, Texas 78249

(210) 345-2000

(Name, address, including zip code, and telephone number, including area code,

of agent for service)

Copies to:


Gislar Donnenberg Andrews Kurth LLP 600 Travis, Suite 4200 Houston, Texas 77002 (713) 220-4200		R. Joel Swanson Joshua Davidson Baker Botts L.L.P. One Shell Plaza 910 Louisiana Street Houston, Texas 77002 (713) 229-1234

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE



	Proposed Maximum
Title of Each Class of	Aggregate Offering	Amount of
Securities to be Registered	Price (1)(2)	Registration Fee

Units representing limited liability company interests	$474,375,000	$50,759


(1)	Includes units issuable upon exercise of the underwriters’ option to purchase additional units.

(2)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated March 31, 2006

PROSPECTUS

16,500,000 Units

Representing Limited Liability Company Interests

This is an initial public offering of our units. We expect the initial public offering price of these units to be between $ and $ per unit. We indirectly own the 2% general partner interest, 100% of the incentive distribution rights and a 21.4% limited partner interest in Valero L.P., a publicly traded Delaware limited partnership engaged in the crude oil and refined product transportation, terminalling and storage business. Before this offering, there has been no public market for our units. We intend to apply to list our units on the New York Stock Exchange under the symbol “VEH.”

All of the units being sold in this offering are being offered by subsidiaries of Valero Energy Corporation. We will receive none of the proceeds from this offering. Following the offering, subsidiaries of Valero Energy Corporation will own 28,010,258 of our units, or approximately 63% of our outstanding membership interests.

Investing in our units involves risks. Please read “Risk Factors” beginning on page 20.

These risks include the following:


•	Our only cash generating assets are our indirect ownership interests in Valero L.P., and our cash flow is therefore completely dependent upon the ability of Valero L.P. to make cash distributions to its partners, including us.

•	Valero L.P.’s unitholders, excluding the owner of Valero L.P.’s general partner, have the right to remove Valero L.P.’s general partner by a simple majority vote, which would cause us to divest our indirect general partner interest and incentive distribution rights in Valero L.P. in exchange for cash or common units of Valero L.P. and cause us to lose our ability to manage Valero L.P.

•	Assuming an initial public offering price of $ per unit, you will experience immediate and substantial dilution of $14.79 per unit.

•	Although we manage Valero L.P. through our indirect ownership of its general partner, Valero L.P.’s general partner owes fiduciary duties to Valero L.P. and Valero L.P.’s unitholders, which may conflict with our interests.

•	If we or Valero L.P. were treated as a corporation for federal or state income tax purposes, then our cash available for distribution to you would be substantially reduced.

•	Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.


	Per Unit	Total

Initial public offering price	$	$
Underwriting discount	$	$
Proceeds to selling unitholders (before expenses)	$	$

Subsidiaries of Valero Energy Corporation have granted the underwriters a 30-day option to purchase up to an additional 2,475,000 units on the same terms and conditions as set forth in this prospectus if the underwriters sell more than 16,500,000 units in this offering. We will not receive any proceeds from any units to be sold by the selling unitholders upon any exercise of the underwriters’ option to purchase additional units.

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

Lehman Brothers, on behalf of the underwriters, expects to deliver the units on or about , 2006.

Lehman Brothers

, 2006

We own the general partner of Valero L.P., as well as the incentive distribution rights and a 21.4% limited partner interest in Valero L.P. We do not own any operating assets directly. The map below identifies Valero L.P.’s assets and their locations.

Valero L.P. System Overview

TABLE OF CONTENTS


PROSPECTUS SUMMARY			1
	Valero GP Holdings, LLC		1
	Our Structure and Management		4
	The Offering		7
	Valero L.P.		9
	Comparison of Rights of Holders of Valero L.P.’s Common Units and Our Units		10
	Summary of Risk Factors		12
		Risks Inherent in an Investment in Us	12
		Risks Related to Conflicts of Interest	12
		Risks Related to Valero L.P.’s Business	13
		Tax Risks to Our Unitholders	13
	Summary of Conflicts of Interest		14
	Summary Historical and Pro Forma Financial Data — Valero GP Holdings, LLC		16
	Summary Historical and Pro Forma Financial Data — Valero L.P.		18
RISK FACTORS			20
	Risks Inherent in an Investment in Us		20
	Risks Related to Conflicts of Interest		28
	Risks Related to Valero L.P.’s Business		29
	Tax Risks to Our Unitholders		38
USE OF PROCEEDS			42
CAPITALIZATION			42
DILUTION			43
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS			44
	General		44
	Our Initial Distribution Rate		45
	Our Initial Quarterly Distribution		47
	Valero GP Holdings, LLC Pro Forma Cash Available for Distribution		49
	Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.		51
	Our Sources of Distributable Cash		58
HOW WE MAKE CASH DISTRIBUTIONS			60
	General		60
	Definition of Available Cash		60
	Adjustments to Capital Accounts		60
	Distributions of Cash upon Liquidation		60
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA — VALERO GP HOLDINGS, LLC			61
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA — VALERO L.P.			63
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			65
	Valero GP Holdings, LLC		65
		Overview	65
		Results of Operations	67
		Liquidity and Capital Resources	68
		Critical Accounting Policies	69
	Valero L.P.		69
		Recent Developments	69
		Overview	70
		Results of Operations	72
		Liquidity and Capital Resources	81
		Related Party Transactions	86
		Critical Accounting Policies	91
BUSINESS OF VALERO GP HOLDINGS, LLC			93
	General		93
	Employees		96
	Environmental and Safety Regulation		96
	Title to Properties		96
	Legal Proceedings		96
BUSINESS OF VALERO L.P.			97
	General		97
	Business Segments		98
		Refined Product Terminals	98
		Refined Product Pipelines	103
		Crude Oil Pipelines	110
		Crude Oil Storage Tanks	111
	Employees		112
	Rate Regulation		112
	Environmental and Safety Regulation		113
	Title to Properties		115
	Legal Proceedings and Other Contingencies		115
MANAGEMENT			117
	Valero GP Holdings, LLC		117
		Our Board of Directors	117
		Our Board of Directors and Executive Officers	117
		Executive Compensation	118
		Employment Agreements	118
		Compensation of Directors	118
		Long-Term Incentive Plan	118
	Valero L.P.		119


		Directors and Executive Officers of Valero GP, LLC	119
		Audit Committee	121
		Executive Compensation	122
		Option Grants and Related Information	123
		Retirement Benefits	125
		Compensation of Directors	126
		Compensation Committee Interlocks and Insider Participation	126
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			127
	Valero GP Holdings, LLC		127
	Valero L.P.		127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			130
	Our Relationship with Valero L.P. and its General Partner, Riverwalk Logistics, L.P.		130
	Indemnification of Directors and Officers		130
	Related Party Transactions		130
	Valero L.P.’s Relationship with Valero Energy		131
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES			136
	General		136
	Potential Future Conflicts		136
DESCRIPTION OF OUR UNITS			138
	Transfer Agent and Registrar		138
	Transfer of Units		138
DESCRIPTION OF OUR LIMITED LIABILITY COMPANY AGREEMENT			139
	Organization and Duration		139
	Purpose		139
	Fiduciary Duties		139
	Agreement to be Bound by Limited Liability Company Agreement; Power of Attorney		139
	Capital Contributions		140
	Limited Liability		140
	Voting Rights		140
	Issuance of Additional Securities		141
	Election of Members of Our Board of Directors		141
	Removal of Members of Our Board of Directors		141
	Amendment of Our Limited Liability Company Agreement		141
	Merger, Sale or Other Disposition of Assets		143
	Termination and Dissolution		143
	Liquidation and Distribution of Proceeds		143
	Anti-Takeover Provisions		144
	Limited Call Right		144
	Meetings; Voting		145
	Non-Citizen Assignees; Redemption		145
	Indemnification		146
	Books and Reports		146
	Right to Inspect Our Books and Records		146
	Registration Rights		147
MATERIAL PROVISIONS OF VALERO L.P.’S PARTNERSHIP AGREEMENT			148
	Organization and Duration		148
	Purpose		148
	Power of Attorney		148
	Capital Contributions		148
	Limited Liability		148
	Issuance of Additional Securities		149
	Amendment of the Partnership Agreement		150
	Termination and Dissolution		152
	Liquidation and Distribution of Proceeds		153
	Withdrawal or Removal of the General Partner		153
	Transfer of General Partner Interests		154
	Change of Management Provisions		155
	Limited Call Right		155
	Meetings; Voting		155
	Transfer of Units and Status as a Limited Partner or Assignee		156
	Non-Citizen Assignees; Redemption		156
	Indemnification		157
	Books and Reports		157
	Right to Inspect Valero L.P.’s Books and Records		157
	Registration Rights		158
CASH DISTRIBUTION POLICY OF VALERO L.P.			159
	Distributions of Available Cash		159
	Operating Surplus and Capital Surplus		159
	Subordination Period		160
	Distributions of Available Cash from Operating Surplus		161


	Distributions of Available Cash from Capital Surplus	162
	Incentive Distribution Rights	163
	Adjustment of the Minimum Quarterly Distribution and Target Distribution Levels	163
	Distributions of Cash upon Liquidation	164
UNITS ELIGIBLE FOR FUTURE SALE		166
MATERIAL TAX CONSEQUENCES		167
	Partnership Status	167
	Limited Partner Status	169
	Tax Consequences of Unit Ownership	169
	Tax Treatment of Operations	174
	Disposition of Units	175
	Uniformity of Units	177
	Tax-Exempt Organizations and Other Investors	177
	Administrative Matters	178
	State, Local, Foreign and Other Tax Considerations	180
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS		181
SELLING UNITHOLDERS		182
UNDERWRITING		183
	Commissions and Expenses	183
	Option to Purchase Additional Units	183
	Directed Unit Program	183
	Lock-Up Agreements	184
	Offering Price Determination	184
	Indemnification	184
	Stabilization, Short Positions and Penalty Bids	185
	Electronic Distribution	185
	New York Stock Exchange	186
	Discretionary Sales	186
	Stamp Taxes	186
	Relationships	186
	NASD Conduct Rules	186
VALIDITY OF THE UNITS		186
EXPERTS		186
FORWARD-LOOKING STATEMENTS		187
WHERE YOU CAN FIND MORE INFORMATION		188
INDEX TO FINANCIAL STATEMENTS		F-1
Appendix A — Form of Amended and Restated Limited Liability Company Agreement of Valero GP Holdings, LLC		A-1
Omnibus Agreement
Third Amendment to Services Agreement
Terminalling Agreement
Terminal Storage and Throughput Agreement
Consent of KPMG LLP
Consent of Ernst & Young LLP

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling unitholders are not, and the underwriters are not, offering to sell units or seeking offers to buy units in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the units offered hereby.

Until , 2006 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

iii

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes an initial public offering price of $24.00 per unit and that the underwriters do not exercise their option to purchase additional units. Furthermore, you should carefully read “— Summary of Risk Factors” and “Risk Factors” for information about important risks that you should consider before making a decision to purchase units in this offering.

References in this prospectus to “we,” “us,” “Valero GP Holdings” and “our” refer to Valero GP Holdings, LLC and its wholly owned subsidiaries. References in this prospectus to “Valero L.P.” refer to Valero L.P. and its wholly owned subsidiaries. References to “Valero Energy” refer to Valero Energy Corporation and its subsidiaries, unless the context indicates otherwise. References in this prospectus to our “combined financial statements,” “combined financial data,” and “combined balance sheet data” refer to data or information derived from the combined and consolidated financial statements of Valero GP Holdings.

Valero GP Holdings, LLC

Our only cash generating assets are our indirect ownership interests in Valero L.P., a publicly traded Delaware limited partnership (New York Stock Exchange symbol: VLI). Valero L.P., through its subsidiaries, operates one of the largest independent terminal and petroleum liquids pipeline systems in the United States. Our aggregate ownership interests in Valero L.P. consist of the following:


	•	the 2% general partner interest in Valero L.P., which we hold through our 100% ownership interest in Riverwalk Logistics, L.P.;

	•	100% of the incentive distribution rights issued by Valero L.P., which entitle us to receive increasing percentages of the cash distributed by Valero L.P., currently at the maximum percentage of 23%; and

	•	617,339 common units and 9,599,322 subordinated units of Valero L.P. representing a 21.4% limited partner interest in Valero L.P. We expect the subordinated units to convert on a one-for-one basis to common units during the second quarter of 2006.

We are currently 100% owned by subsidiaries of Valero Energy. After this offering, Valero Energy will indirectly own approximately 63% of our outstanding units. It is Valero Energy’s intent to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions.

Our primary objective is to increase per unit distributions to our unitholders by actively supporting Valero L.P. in executing its business strategy, which includes continued growth through expansion projects and strategic acquisitions. We may facilitate Valero L.P.’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

Valero L.P. is required by its partnership agreement to distribute all of its available cash at the end of each quarter, less reserves established by its general partner in its sole discretion to provide for the proper conduct of Valero L.P.’s business or to provide funds for future distributions. Similarly, we are required by our limited liability company agreement to distribute all of our available cash at the end of each quarter, less reserves established by our board of directors. However, unlike Valero L.P., we do not have a general partner or incentive distribution rights. Therefore, all of our distributions are made on our units, which are the only class of security outstanding.

Valero L.P. has an established historical record of paying quarterly cash distributions to its partners. Since its initial public offering in 2001, Valero L.P. has increased its quarterly cash distribution by approximately 42.5%, from $0.60 per unit, or $2.40 per unit on an annualized basis, to a current level of $0.855 per unit, or $3.42 per unit on an annualized basis. For the fourth quarter of 2005, we received a cash distribution from Valero L.P. of approximately $12.7 million (representing approximately $50.7 million on an annualized basis), consisting of $0.9 million on our 2% general partner interest, $3.1 million on the incentive distribution rights and $8.7 million on the units of Valero L.P. that we own. Based on this current distribution level, we expect that our initial quarterly cash distribution will be $0.27 per unit, or $1.08 per unit on an annualized basis.

The graph set forth below shows the adjusted historical cash distributions declared and paid during the periods shown with respect to our ownership interests in Valero L.P. On March 18, 2003, Valero L.P. redeemed 3,809,750 common units indirectly owned by us. For comparability purposes, the amounts presented in the table for the quarters in 2001 and 2002 have been adjusted to reflect the reduced amount of distributions that would have been paid to us if the redemption had occurred on April 16, 2001, the effective date of Valero L.P.’s initial public offering.

From April 16, 2001 through the fourth quarter of 2005, the total quarterly cash distributions declared and paid by Valero L.P. with respect to all of its partnership interests increased 457%, from approximately $7.9 million (adjusted to reflect the reduced amount of distributions that would have been paid had the common unit redemption discussed above occurred on April 16, 2001) to approximately $44.0 million. Over the same period, the adjusted quarterly cash distributions declared and paid by Valero L.P. with respect to our ownership interests increased 140%, from approximately $5.3 million, or 67% of Valero L.P.’s adjusted total quarterly distributions, to approximately $12.7 million, or 28.9% of Valero L.P.’s total quarterly distributions. The changes in the adjusted historical cash distributions on our ownership interests reflected in the graph set forth below generally resulted from the following:


	•	the increases in Valero L.P.’s per unit quarterly distribution from $0.60 declared and paid for the third quarter of 2001 to $0.855 declared and paid for the fourth quarter of 2005; and

	•	the increases in Valero L.P.’s distributions with respect to the 2% general partner interest resulting from the issuance of a total of 31,420,855 common units by Valero L.P. during such period to finance acquisitions and capital improvements.

Adjusted Quarterly Valero L.P. Distributions to Valero GP Holdings, LLC (a)


(a)		Actual distributions paid to Valero GP Holdings for quarters prior to the March 18, 2003 redemption were as follows (in millions, except per unit amounts):


				Total Distribution Paid to
	Per Unit Distribution			Valero GP Holdings, LLC

2001:
Second Quarter	$	0.501	(b)	$	7.2
Third Quarter		0.600			8.6
Fourth Quarter		0.600			8.7
2002:
First Quarter		0.650			9.5
Second Quarter		0.700			10.5
Third Quarter		0.700			10.5
Fourth Quarter		0.700			10.5


(b)		The second quarter 2001 distribution was prorated for the period from April 16, 2001, the effective date of Valero L.P.’s initial public offering, to June 30, 2001.

Our ownership of Valero L.P.’s incentive distribution rights entitles us to receive the following percentages of cash distributed by Valero L.P. as the following target cash distribution levels are reached:


	•	8.0% of all cash distributed in a quarter after $0.60 per unit has been distributed with respect to all units of Valero L.P. for that quarter until $0.66 per unit has been distributed; and

	•	23.0% of all cash distributed in a quarter after $0.66 per unit has been distributed with respect to all units of Valero L.P. for that quarter.

For the quarter ended December 31, 2005, Valero L.P. paid a distribution of $0.855 per unit, which meant we received 23.0% of the $0.195 incremental cash distribution per unit in excess of the maximum target distribution level of $0.66. Because the incentive distribution rights currently participate at the maximum 23% target cash distribution level, future growth in distributions we receive from Valero L.P. will not result from an increase in the percentage of incremental cash distributed on the incentive distribution rights.

The graph set forth below shows hypothetical cash distributions payable with respect to our ownership interests in Valero L.P. across an illustrative range of annualized distributions per unit made by Valero L.P. The graph shows the impact to us of Valero L.P. raising or lowering its per unit distribution from its current quarterly distribution of $0.855 per unit, or $3.42 per unit on an annualized basis, and is based upon the following assumptions:


	•	Valero L.P.’s 37,210,427 common units and 9,599,322 subordinated units outstanding as of December 31, 2005; and

	•	our ownership of the 2% general partner interest in Valero L.P., the incentive distribution rights, 617,339 common units and 9,599,322 subordinated units.

This information is presented for illustrative purposes only and is not intended to be a prediction of future performance. Valero L.P.’s cash distributions with respect to our ownership interests will vary depending on several factors, including Valero L.P.’s outstanding partnership interests on the record date for distribution, the per unit distribution and our relative ownership of partnership interests. In addition, the level of distributions we receive may be affected by the various risks associated with an investment in us and the underlying business of Valero L.P. Please read “Risk Factors.”

Hypothetical Annual Cash Distributions to Valero GP Holdings, LLC


(a)		This represents the most recent distribution (fourth quarter 2005) presented on an annualized basis.

Based on Valero L.P.’s current quarterly distribution, the number of our units that will be outstanding and our expected level of expenses and reserves that our board of directors believes prudent to maintain, we expect to make an initial quarterly cash distribution of $0.27 per unit, or $1.08 per unit on an annualized basis. Due to our indirect ownership of Valero L.P.’s incentive distribution rights, our cash flows are affected by changes in Valero L.P.’s distributions to a greater extent than those of Valero L.P.’s common unitholders. If Valero L.P. is successful in implementing its business strategy and increasing distributions to its partners, including us, we generally would expect to increase distributions to our unitholders. The timing and amount of any such increase in our distributions will not necessarily be comparable to any increase in Valero L.P.’s distributions. In August 2006, we expect to pay you a distribution equal to the initial quarterly distribution prorated for the portion of the quarter ending June 30, 2006 that we are a publicly traded limited liability company. However, we cannot assure you that any distributions will be declared or paid. Please read “Our Cash Distribution Policy and Restrictions on Distributions — Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.”

Our Structure and Management

We were formed in June 2000 as a Delaware limited liability company. The chart below depicts our organization and ownership upon completion of this offering and the related transactions. Upon the consummation of this offering:


	•	our public unitholders will own an approximate 37% limited liability company interest in us represented by 16,500,000 units;

	•	our current owners, subsidiaries of Valero Energy, will own an approximate 63% limited liability company interest in us represented by 28,010,258 units; and


	•	we will continue to own a 100% membership interest in Valero GP, LLC and Riverwalk Holdings, LLC, which own the 2% general partner interest, 100% of the incentive distribution rights and a 21.4% limited partner interest in Valero L.P.

Effective with the closing of this offering, we will enter into an Administration Agreement with Valero GP, LLC. Pursuant to the Administration Agreement:


	•	Valero GP, LLC will provide all employees for us; and

	•	Valero GP, LLC will provide us with all executive management, accounting, legal, cash management, corporate finance and other administrative services.

The annual charges to be paid under the Administration Agreement will be $500,000. This amount will be increased annually to reflect Valero GP, LLC’s annual merit increases. Any other adjustments to the annual fee, such as adjustments to reflect changes in the levels of service provided to us or Valero GP, LLC’s actual payroll cost, are subject to the approval of Valero GP, LLC’s conflicts committee. We will also reimburse Valero GP, LLC for all direct public company costs and any other direct costs, such as outside legal and accounting fees, that Valero GP, LLC incurs while providing us services pursuant to the Administration Agreement.

The initial term of the Administration Agreement will commence with the closing of this offering and terminate on December 31, 2011, with automatic two year renewals unless terminated by either party on six months’ written notice. We may cancel or reduce the services received under this agreement on 60 days’ written notice. The Administration Agreement will terminate on the change of control of either us or Valero GP, LLC. For a more detailed description of this agreement, please read “Certain Relationships and Related Transactions — Related Party Transactions.”

Our board of directors will manage our operations and activities, including, among other things, establishing the quarterly cash distribution levels for our units and reserves that it believes prudent to maintain for the proper conduct of our business.

We manage Valero L.P. through our ownership of Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., which in turn is the general partner of Valero L.P. We appoint the directors of Valero GP, LLC. Our officers are also officers of Valero GP, LLC. William E. Greehey is our Chairman of the Board as well as the Chairman of the Boards of Valero GP, LLC and Valero Energy. We will appoint additional directors, at least three of which will be independent of Valero GP, LLC and Valero L.P., as defined by the New York Stock Exchange. The board of Valero GP, LLC is responsible for overseeing Valero GP, LLC’s role as the general partner of Riverwalk Logistics, L.P., the general partner of Valero L.P. We, as the sole owner of Valero GP, LLC, must also approve matters that have or would be reasonably expected to have a material effect on our interest as the sole member of Valero GP, LLC. Please read “Management.”

Our principal executive offices are located at One Valero Way, San Antonio, Texas 78249, and our telephone number is (210) 345-2000. Our website is located at www.valerogpholdings.com. Information contained on our website is not incorporated by reference into and does not constitute a part of this prospectus.

Ownership of Valero GP Holdings, LLC

The Offering


Units offered by subsidiaries of Valero Energy Corporation		16,500,000 units or 18,975,000 units if the underwriters exercise their option to purchase additional units in full.

Units outstanding after this offering		44,510,258 units. Immediately prior to the closing of this offering, we will issue 44,510,258 units to subsidiaries of Valero Energy in exchange for their current ownership interests in us. These subsidiaries of Valero Energy will then offer 16,500,000 of their units to the public (or 18,975,000 if the underwriters exercise their option to purchase additional units in full).

Use of proceeds		We will not receive any of the proceeds of this offering. Subsidiaries of Valero Energy will receive all the proceeds of this offering.

Cash distributions		We expect to make an initial quarterly cash distribution of $0.27 per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses. Please read “Our Cash Distribution Policy and Restrictions on Distributions — Our Initial Distribution Rate.”

		We expect to pay you a prorated distribution for the initial quarter during which we are a publicly traded limited liability company. This distribution will be paid for the period beginning on the closing date of this offering and ending on the last day of that fiscal quarter. For example, in August 2006, we expect to pay you a distribution for the period from the closing date of this offering to and including June 30, 2006. However, we cannot assure you that we will declare or pay any distributions.

Limited call right		If at any time our affiliates own more than 80% of our outstanding units, our affiliates have the right, but not the obligation, to purchase all of the remaining units at a price not less than the then current market price of the units. At the completion of this offering, our current owners will own approximately 63% of our units.

Limited voting rights		If any person or group other than our affiliates acquires beneficial ownership of 20% or more of any class of our units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires all of its units from our affiliates and any transferees of that person or group approved by our board of directors or to any person or group who acquires the units with the prior approval of our board of directors.

Staggered board		We will have a staggered board of directors as a result of which only a portion of the members of our board of directors will be elected each year. Removal of directors will require a meeting of unitholders and cannot be done by written consent.

Preferred unit purchase rights		Upon closing of this offering, we expect to adopt a preferred unit purchase rights plan, which will be designed to cause substantial dilution to anyone who may attempt to acquire us on terms not approved by our board of directors upon any triggering event, such as the acquisition of 15% of our outstanding units.


Estimated ratio of taxable income to distributions		We estimate that if you own the units you purchase in this offering through the record date for distributions for the period ending December 31, 2008, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than % of the cash distributed with respect to that period. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership” for the basis of this estimate.

Exchange listing		We intend to apply to list our units on the New York Stock Exchange under the symbol “VEH.”

Valero L.P.

Valero L.P. is a publicly traded Delaware limited partnership based in San Antonio, Texas, engaged in the crude oil and refined product transportation, terminalling and storage business. On July 1, 2005, Valero L.P. completed the acquisition of Kaneb Services LLC and Kaneb Pipe Line Partners, L.P. (collectively, “Kaneb”) and became one of the largest independent terminal and petroleum liquids pipeline operators in the United States. Valero L.P. has terminal facilities in the United States, Canada, Mexico, the Netherlands Antilles, the Netherlands and the United Kingdom. On March 30, 2006, Valero L.P. sold its subsidiaries in Australia and New Zealand, which own eight terminals with a storage capacity of 1.1 million barrels.

Valero L.P. has four business segments, consisting of refined product terminals, refined product pipelines, crude oil pipelines, and crude oil storage tanks. As of December 31, 2005, Valero L.P.’s assets consisted of a diversified portfolio of logistics assets, including:


	•	76 refined product terminal facilities providing approximately 59.7 million barrels of storage capacity;

	•	8,389 miles of refined product pipelines, including 2,000 miles of anhydrous ammonia pipelines, with 21 associated terminals providing storage capacity of 4.9 million barrels;

	•	797 miles of crude oil pipelines with 11 associated storage tanks providing storage capacity of 1.7 million barrels; and

	•	60 crude oil storage tanks providing storage capacity of 12.5 million barrels.

For a more detailed description of each segment’s assets and operations, please read “Business of Valero L.P. — Business Segments.” For a description of each segment’s results of operations and revenues, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Valero L.P.”

Valero L.P.’s business strategy is to increase per unit cash distributions to its partners through three primary strategic initiatives:


	•	continuous improvement of its operations through initiatives focused on matters such as improving safety and environmental stewardship, cost controls and asset reliability and integrity;

	•	internal growth initiatives comprised of enhancing the utilization of its existing assets by expanding its business with current and new customers as well as investing in accretive expansion projects; and

	•	external growth initiatives from acquisitions that meet its financial and strategic criteria.

Valero L.P.’s principal executive offices are located at One Valero Way, San Antonio, Texas 78249, and its phone number is (210) 345-2000. Valero L.P. maintains a website at www.valerolp.com that provides information about its business and operations. Valero L.P. also files annual, quarterly and current reports and other information with the Securities and Exchange Commission, or SEC. Valero L.P.’s SEC filings are available to the public at the SEC’s website at www.sec.gov. You may also read and copy any document Valero L.P. files at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. Information contained on these websites, and the reports filed by Valero L.P. with the SEC are not incorporated by reference into and do not constitute a part of this prospectus.

Comparison of Rights of Holders of Valero L.P.’s Common Units and Our Units

While the trading prices of our units and Valero L.P.’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things, we participate in Valero L.P.’s incentive distribution rights and Valero L.P.’s common unitholders do not.

The following table compares certain features of Valero L.P.’s common units and our units.


	Valero L.P.’s Common Units	Our Units

Distributions and Incentive Distribution Rights	Valero L.P. pays its limited partners and general partner quarterly distributions equal to the cash it receives from its operations, less certain reserves for expenses and other uses of cash. Valero L.P.’s general partner currently has a 2% general partner interest in Valero L.P. and owns the incentive distribution rights in Valero L.P.	We expect to pay our unitholders quarterly distributions equal to the cash we receive from Valero L.P., less certain reserves for expenses and other uses of cash.

Subordinated Units	At its initial public offering, Valero L.P. issued subordinated units. During the subordination period, Valero L.P.’s common units have priority over the subordinated units to the minimum quarterly distribution from Valero L.P.’s distributable cash flow. In addition, during the subordination period, Valero L.P.’s common units carry arrearage rights, which are similar to cumulative rights on preferred stock. We expect the subordinated units to convert to common units during the second quarter of 2006.	We do not have subordinated units. As a result, our units carry no rights to arrearages.

Taxation of Entity and Entity Owners	Valero L.P. is a pass-through entity that is not subject to an entity-level federal income tax.	Similarly, we are a pass-through entity that is not subject to an entity-level federal income tax.
	Valero L.P. expects that holders of its common units will benefit for a period of time from tax basis adjustments and remedial allocations of deductions so that they will be allocated a relatively small amount of federal taxable income compared to the cash distributed to them.	We also expect that our unitholders will benefit for a period of time from tax basis adjustments as a result of our indirect ownership of interests in Valero L.P. However, our ownership of the incentive distribution rights will cause more taxable income to be allocated to us from Valero L.P. Therefore, we expect the ratio of our taxable income to the distributions you will receive to be higher than the ratio of taxable income to the


	Valero L.P.’s Common Units	Our Units

		distributions received by the common unitholders of Valero L.P. Moreover, if Valero L.P. is successful in increasing its distributable cash flow over time, we expect the ratio of our taxable income to distributions will increase.
	Valero L.P. common unitholders receive Schedule K-1s from Valero L.P. reflecting the unitholders’ share of Valero L.P.’s items of income, gain, loss and deduction at the end of each fiscal year.	Similarly, our unitholders will receive Schedule K-1s from us reflecting the unitholders’ share of our items of income, gain, loss and deduction at the end of each fiscal year.

Assets and Operations	Valero L.P. is a publicly traded Delaware limited partnership based in San Antonio, Texas, engaged in the crude oil and refined product transportation, terminalling and storage business. As one of the largest independent terminal and petroleum liquids pipeline operators in the United States, Valero L.P. has terminal facilities in the United States, Canada, Mexico, the Netherlands Antilles, the Netherlands and the United Kingdom.	Our only cash generating assets are our indirect ownership interests in Valero L.P. We currently have no independent operations. Accordingly, our financial performance and our ability to pay cash distributions to our unitholders is completely dependent upon the ability of Valero L.P. to make cash distributions to its partners, including us.

Limitation on Issuance of Additional Units	Following the completion of the subordination period, Valero L.P. may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.	Similarly, we may issue an unlimited number of additional limited liability company interests and other equity securities without obtaining unitholder approval.

Summary of Risk Factors

An investment in our units involves risks associated with us and Valero L.P. and the tax characteristics associated with our units. You should consider carefully all the risk factors together with all of the other information included in this prospectus before you invest in our units. The risks related to an investment in us, conflicts of interest, Valero L.P.’s business and tax consequences to our unitholders are described under the caption “Risk Factors.” These risks include, but are not limited to, those described below:

Risks Inherent in an Investment in Us


	•	Our only cash generating assets are our ownership interests in Valero GP, LLC and Riverwalk Holdings, LLC, which own the 2% general partner interest, 100% of the incentive distribution rights and a 21.4% limited partner interest in Valero L.P. Our cash flow is therefore completely dependent upon the ability of Valero L.P. to make cash distributions to its partners, including us.

	•	In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

	•	Valero L.P.’s unitholders, excluding the owner of Valero L.P.’s general partner, have the right to remove Valero L.P.’s general partner by a simple majority vote, which would cause us to divest our indirect general partner interest and incentive distribution rights in Valero L.P. in exchange for cash or common units of Valero L.P. and cause us to lose our ability to manage Valero L.P.

	•	Valero L.P.’s general partner, with our consent, may limit or modify the incentive distributions we are entitled to receive in order to facilitate the growth strategy of Valero L.P. Our board of directors can give this consent without a vote of our unitholders.

	•	The amount of cash distributions that we will be able to distribute to you will be reduced by the costs associated with our being a public company, other general and administrative expenses and any reserves that our board of directors believes prudent to maintain for the proper conduct of our business and for future distributions.

	•	Restrictions in our anticipated credit facility could limit our ability to make distributions to our unitholders.

	•	Our ability to sell our ownership interests in Valero L.P. may be limited by securities laws restrictions and liquidity constraints.

	•	The market price of our units could be adversely affected by sales of substantial amounts of our units into the public markets, including sales by our existing unitholders.

	•	Distributions on our incentive distribution rights and subordinated units in Valero L.P. are more uncertain than distributions on the common units we hold.

	•	Assuming an initial public offering price of $24.00 per unit, you will experience immediate and substantial dilution of $14.79 per unit.

Risks Related to Conflicts of Interest


	•	Although we manage Valero L.P. through our indirect ownership of its general partner, Valero L.P.’s general partner owes fiduciary duties to Valero L.P. and Valero L.P.’s unitholders, which may conflict with our interests.

	•	The fiduciary duties of our officers and directors may conflict with those of Valero L.P.’s general partner’s officers and directors.

	•	When Valero Energy reduces its ownership interest such that it owns less than 20% of us or Valero GP, LLC, Valero Energy and its affiliates may directly compete with Valero L.P., which could cause conflicts of interest and may adversely impact Valero L.P., and as a result, our results of operations and cash available for distribution.


	•	Subsidiaries of Valero Energy will control us and will own a sufficient number of our units to block any attempt to remove or replace our board of directors.

Risks Related to Valero L.P.’s Business


	•	A decline in production at the Valero Energy refineries Valero L.P. serves or the Tesoro Mandan refinery could materially reduce the volume of crude oil and refined petroleum products Valero L.P. transports or stores in its assets.

	•	Valero L.P.’s future financial and operating flexibility may be adversely affected by restrictions in its debt agreements and by its, our and Valero Energy’s leverage.

	•	Valero L.P.’s subsidiary, Valero Logistics Operations, L.P. (Valero Logistics Operations), may be unable to purchase its senior notes upon a change of control of Valero GP Holdings.

	•	Valero L.P. may not be able to generate sufficient cash from operations to enable it to pay expected quarterly distributions on its units every quarter.

	•	Valero L.P. depends on Valero Energy for a significant portion of its revenues and throughputs of crude oil and refined products. Any reduction in the crude oil and refined products that Valero L.P. transports or stores for Valero Energy, as a result of scheduled or unscheduled refinery maintenance, upgrades or shutdowns or otherwise, could result in a decline in Valero L.P.’s revenues, earnings and cash available to pay distributions.

	•	Under the pipelines and terminals usage agreement, Valero Energy may use other transportation methods or providers for up to 25% of the crude oil processed and refined products produced at the Ardmore, McKee and Three Rivers refineries. Furthermore, Valero Energy is not required to use Valero L.P.’s pipelines if there is a change in market conditions that has a material adverse effect on Valero Energy for the transportation of crude oil and refined products, or in the markets for refined products served by these refineries. These factors could adversely affect Valero L.P.’s ability to make distributions to its unitholders, including us.

	•	Increases in natural gas and power prices could adversely affect Valero L.P.’s ability to make distributions to its unitholders, including us.

	•	Valero L.P.’s operations are subject to federal, state and local laws and regulations relating to environmental protection and operational safety that could require Valero L.P. to make substantial expenditures.

Tax Risks to Our Unitholders


	•	If we or Valero L.P. were treated as a corporation for federal or state income tax purposes, then our cash available for distribution to you would be substantially reduced.

	•	A successful IRS contest of the federal income tax positions we or Valero L.P. take may adversely impact the market for our or Valero L.P.’s units, and the costs of any contest will reduce cash available for distribution to our unitholders.

	•	Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

	•	The sale or exchange of 50% or more of our or Valero L.P.’s capital and profits interests, within a twelve-month period, will result in the termination of our or Valero L.P.’s partnership for federal income tax purposes. Valero Energy currently intends to sell its interests in us, pending market conditions, such that 50% or more of the total interests in our capital and profits may be sold within a twelve-month period after the completion of this offering.

Summary of Conflicts of Interest

Conflicts of interest exist and may arise in the future as a result of the relationships among us, Valero Energy, Valero L.P. and its general partner, and their affiliates. Valero Energy has the ability to elect, remove and replace our directors and officers. Valero Energy also has the ability to elect, remove and replace the directors and officers of Valero GP, LLC, the general partner of Valero L.P. Our directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. At the same time, Valero GP, LLC and its directors and officers have fiduciary duties to manage Valero L.P.’s business in a manner beneficial to Valero L.P. and its partners, including us. William E. Greehey is our Chairman of the Board as well as the Chairman of the Boards of Valero GP, LLC and Valero Energy. Additionally, all of our executive officers also serve as executive officers of Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., and, as a result, have fiduciary duties to manage the business of Valero L.P. in a manner beneficial to Valero L.P. and its partners. Mr. Greehey and these officers may encounter situations in which their fiduciary obligations to Valero L.P., on the one hand, and us, on the other hand, are in conflict. Valero Energy, which will retain an approximate 63% ownership interest in us after giving effect to this offering, may face conflicts of interest if it is confronted with decisions that would have an impact on us, on the one hand, and itself, on the other hand. The partnership agreement of Valero L.P. and our limited liability company agreement provide several ways of resolving these conflicts of interest, including the approval of the conflicts committees of independent directors of Valero GP, LLC and us. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For a more detailed description of the conflicts of interest involving us and the resolution of these conflicts, please read “Conflicts of Interest and Fiduciary Duties.”

Valero Energy currently intends to reduce and ultimately sell all of its ownership interest in us, pending market conditions.

Under Valero L.P.’s Amended and Restated Omnibus Agreement, if Valero Energy reduces its ownership interest such that it owns less than 20% of us or Valero GP, LLC, Valero Energy and its affiliates will no longer be prohibited from engaging in the business of transporting crude oil or refined petroleum products (including petrochemicals) or operating crude oil storage or refined petroleum products terminalling assets in the United States. Valero Energy could then directly compete with Valero L.P., which could cause conflicts of interest among these entities and adversely impact Valero L.P.’s results of operations and cash available for distribution and therefore our cash available for distribution.

We will enter into a Non-Compete Agreement with Valero L.P. upon the closing of this offering. This Non-Compete Agreement will not be effective until we are no longer subject to the Amended and Restated Omnibus Agreement described above. Under the Non-Compete Agreement, we will have a right of first refusal with respect to the potential acquisition of general partner and other equity interests in publicly traded partnerships under common ownership with the general partner interest. Valero L.P. will have a right of first refusal with respect to the potential acquisition of assets that relate to the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals) in the United States and internationally. With respect to any other business opportunities, neither we nor Valero L.P. are prohibited from engaging in any business, even if we and Valero L.P. would have a conflict of interest with respect to such other business opportunity.

If Valero Energy’s or an investment grade entity’s ownership interest in us decreases below 51%, the indentures for Valero Logistics Operations’ senior notes require Valero Logistics Operations to offer to repurchase all outstanding senior notes at a price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest.

Our limited liability company agreement provides that the authority and function of our board of directors and officers shall be identical to the authority and functions of a board of directors and officers of a corporation organized under the Delaware General Corporation Law, or DGCL. Furthermore, our limited liability company agreement provides that, except as specifically provided therein, the fiduciary duties and obligations owed to our company and our members shall be the same as the respective duties and obligations owed by officers and directors of a corporation organized under the DGCL to their corporation and stockholders, respectively. Our limited liability company agreement permits affiliates of our directors to invest or engage in other businesses or

activities that compete with us. Our limited liability company agreement authorizes our board of directors to establish a conflicts committee, consisting solely of independent directors, which will be responsible for reviewing transactions involving potential conflicts of interest on behalf of our public unitholders. Our independent directors will not be the same as the independent directors who serve on the conflicts committee of Valero GP, LLC. If our conflicts committee approves a transaction involving a potential conflict, you will not be able to assert that such approval constituted a breach of fiduciary duties owed to you by our directors and officers. By purchasing our units, you are treated as having consented to various actions contemplated in the limited liability company agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable state law.

For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Transactions.”

Summary Historical and Pro Forma Financial Data — Valero GP Holdings, LLC

The following table sets forth, for the periods and at the dates indicated, summary historical and pro forma financial data for Valero GP Holdings (in thousands, except per unit amounts). The historical financial statements of Valero GP Holdings combine the financial statements of Valero GP Holdings and Valero GP, LLC and consolidate the financial statements of Riverwalk Logistics, L.P. Prior to March 18, 2003, the financial statements of Valero GP Holdings also consolidated the financial statements of Valero L.P. On March 18, 2003, Valero GP Holdings began accounting for its investment in Valero L.P. under the equity method, which is discussed in note 2 to the audited financial statements of Valero GP Holdings included elsewhere in this prospectus. The summary historical financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 should be read in conjunction with the audited financial statements of Valero GP Holdings, Valero L.P. and Kaneb included elsewhere in this prospectus. The summary pro forma financial data as of and for the year ended December 31, 2005 should be read in conjunction with the unaudited pro forma financial statements of Valero GP Holdings included elsewhere in this prospectus.

The summary pro forma statement of income data for the year ended December 31, 2005 reflects the pro forma effect of two separate transactions. First, Valero GP Holdings’ equity in income of Valero L.P. is adjusted to reflect the effect of the acquisition of Kaneb by Valero L.P., including the effect of the sale of certain assets acquired from Kaneb, as if those transactions occurred on January 1, 2005. Second, the effect of this offering is reflected as if it had occurred on January 1, 2005, including (a) the elimination of interest expense on Valero GP Holdings’ notes payable to affiliates resulting from a capital contribution by Valero Energy subsidiaries to Valero GP Holdings of notes issued by Valero GP Holdings and held by Valero Energy subsidiaries and (b) the incurrence of an incremental $2.3 million of general and administrative expenses that Valero GP Holdings is expected to incur as a publicly traded limited liability company, including costs under a new Administration Agreement with Valero GP, LLC, pursuant to which Valero GP, LLC will provide certain administrative services to Valero GP Holdings for a fee. The summary pro forma balance sheet data reflects the effect of the capital contribution discussed above as well as a capital contribution by Valero Energy subsidiaries to fund certain employee benefit plan liabilities of Valero GP Holdings as if those transactions occurred on December 31, 2005.


				Historical															Pro Forma

				Years Ended December 31,															Year Ended
																			December 31,
				2001			2002			2003			2004			2005			2005

				(unaudited)															(unaudited)
Statement of Income Data:
	Total revenues, including equity in earnings of Valero L.P.			$	98,827		$	118,458		$	52,286		$	35,314		$	37,646		$	25,951

	Costs and expenses:
		Operating expenses			33,583			37,838			9,484			—			—			—
		General and administrative expenses			5,349			7,023			1,562			91			28			2,350
		Depreciation and amortization expense			13,390			13,708			2,975			—			—			—

			Total costs and expenses		52,322			58,569			14,021			91			28			2,350

	Operating income				46,505			59,889			38,265			35,223			37,618			23,601
	Other income				3,179			3,190			705			401			567			456
	Interest expense				(3,811	)		(21,686	)		(20,283	)		(17,110	)		(17,778	)		—
	Minority interest (a)				(9,393	)		(14,109	)		(2,400	)		—			—			—

	Income before income tax expense				36,480			27,284			16,287			18,514			20,407			24,057
	Income tax expense				—			396			33			67			114			53

	Net income			$	36,480		$	26,888		$	16,254		$	18,447		$	20,293		$	24,004

	Pro forma earnings per unit																		$	0.54

Balance Sheet Data (at period end):
	Total assets			$	729,188		$	760,256		$	392,937		$	388,991		$	410,314		$	419,707
	Total debt (b)				285,519			386,816			283,797			270,597			265,961			—
	Members’ equity (c)				309,278			244,771			105,960			113,975			141,780			410,034
Other Financial Data:
	Net cash provided by operating activities			$	77,132		$	60,369		$	23,033		$	22,183		$	16,731
	Net cash provided by (used in) investing activities				(17,926	)		(80,607	)		(17,060	)		1,521			(19,606	)
	Net cash provided by (used in) financing activities				(51,414	)		45,975			296,679			(23,632	)		2,876
	Distributions received from Valero L.P. (d)				15,872			39,130			36,013			37,964			44,745


(a)		Minority interest represents the proportionate interest of public unitholders in the net income of Valero L.P. during the period that Valero GP Holdings consolidated Valero L.P.

(b)		Total debt as of December 31, 2001 and 2002 includes $26.9 million and $110.4 million, respectively, of Valero L.P.’s outstanding debt, prior to the ceasing of consolidation of Valero L.P. on March 18, 2003. The remainder of the debt at the end of 2001 and 2002 and all of the debt as of December 31, 2003, 2004 and 2005 represents notes payable by Valero GP Holdings to subsidiaries of Valero Energy. The pro forma total debt as of December 31, 2005 is zero as the result of a capital contribution to Valero GP Holdings by Valero Energy subsidiaries of such notes.

(c)		Members’ equity in the historical balance sheet decreased from December 31, 2002 to December 31, 2003 as a result of the distribution to Valero GP Holdings’ members of the proceeds received from the redemption by Valero L.P. of 3,809,750 common units held by Valero GP Holdings. Members’ equity in the pro forma balance sheet as of December 31, 2005 is significantly higher than the members’ equity in the historical balance sheet as of the same date due to the capital contribution of notes from Valero Energy subsidiaries discussed in footnote (b) above.

(d)		Distributions received from Valero L.P. for the years ended December 31, 2001, 2002 and 2003 include distributions received by Valero GP Holdings prior to the ceasing of consolidation of Valero L.P. on March 18, 2003, which were eliminated in the combined statements of cash flows.

Summary Historical and Pro Forma Financial Data — Valero L.P.

The following table sets forth, for the periods and at the dates indicated, summary historical and pro forma financial data for Valero L.P. as of December 31, 2004 and 2005 (dollars in thousands, except per unit data). The summary historical financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 should be read in conjunction with the audited financial statements of Valero L.P. included elsewhere in this prospectus. The summary pro forma financial data for the year ended December 31, 2005 should be read in conjunction with the unaudited pro forma financial statements of Valero L.P. included elsewhere in this prospectus.

The summary pro forma statement of income data for the year ended December 31, 2005 assumes:


	•	the acquisition of Kaneb by Valero L.P. occurred on January 1, 2005;

	•	the sale of certain assets acquired as part of the acquisition of Kaneb for $455 million occurred on January 1, 2005 and that the proceeds from such sale were used to repay debt;

	•	the sale of Martin Oil LLC, a wholly owned subsidiary of Kaneb that was acquired as part of the acquisition of Kaneb, to Valero Energy for $26.8 million occurred on January 1, 2005 and that the proceeds were used to repay debt; and

	•	the sale of Valero L.P.’s subsidiaries in Australia and New Zealand, which were acquired in connection with the acquisition of Kaneb and which Valero L.P. sold on March 30, 2006 for $65 million plus working capital adjustments, occurred on January 1, 2005 and that the proceeds were used to repay debt.

Summary pro forma balance sheet data as of December 31, 2005 is not presented because the transactions discussed above are reflected in Valero L.P.’s historical balance sheet as of December 31, 2005, other than the sale of Valero L.P.’s Australian and New Zealand subsidiaries, the effect of which is immaterial.


			Historical															Pro Forma

			Years Ended December 31,															Year Ended
																		December 31,
			2001			2002			2003			2004			2005(e)			2005

																		(unaudited)
Statement of Income Data:
Revenues			$	98,827		$	118,458		$	181,450		$	220,792		$	659,557		$	1,005,662

Costs and expenses:
	Cost of sales (a)			—			—			—			—			229,806			401,357
	Operating expenses			33,583			37,838			64,609			78,298			184,609			272,250
	General and administrative expenses			5,349			6,950			7,537			11,321			26,553			65,528
	Depreciation and amortization expense			13,390			16,440			26,267			33,149			64,895			94,180
	Provision for loss contingencies (b)			—			—			—			—			—			42,000

		Total costs and expenses		52,322			61,228			98,413			122,768			505,863			875,315

Operating income				46,505			57,230			83,037			98,024			153,694			130,347
	Equity earnings in joint ventures			3,179			3,188			2,416			1,344			2,319			5,116
	Interest and other expense, net			(3,811	)		(4,880	)		(15,860	)		(20,950	)		(43,625	)		(61,121	)

Income from continuing operations before income tax (expense) benefit				45,873			55,538			69,593			78,418			112,388			74,342
Income tax (expense) benefit (c)				—			(395	)		—			—			(4,713	)		8,742

Income from continuing operations				45,873			55,143			69,593			78,418			107,675		$	83,084

Income from discontinued operations (d)				—			—			—			—			3,398

Net income			$	45,873		$	55,143		$	69,593		$	78,418		$	111,073

Net income per unit applicable to limited partners:
Continuing operations			$	1.82		$	2.72		$	3.02		$	3.15		$	2.76		$	1.48

Discontinued operations (d)				—			—			—			—			0.10

Net income			$	1.82		$	2.72		$	3.02		$	3.15		$	2.86

Cash distributions per unit applicable to limited partners			$	1.70		$	2.75		$	2.95		$	3.20		$	3.365

Balance Sheet Data (at period end):
Total assets			$	387,070		$	415,508		$	827,557		$	857,507		$	3,366,992
Long-term debt, less current portion				25,660			108,911			353,257			384,171			1,169,659
Partners’ equity				342,166			293,895			438,163			438,311			1,900,779
Operating Data (barrels/day):
Crude oil pipeline throughput				303,811			348,023			355,008			381,358			358,965
Refined product pipeline throughput				308,047			295,456			392,145			442,596			556,654
Refined product terminal throughput				189,172			175,559			225,426			256,576			245,084
Crude oil storage tank throughput				253,402			293,925			366,986			473,714			517,409
Other Financial Data:
Net cash provided by operating activities			$	77,132		$	77,656		$	106,108		$	108,503		$	186,430
Net cash used in investing activities				(17,926	)		(80,607	)		(442,350	)		(58,511	)		(89,000	)
Net cash provided by (used in) financing activities				(51,414	)		28,688			318,454			(49,590	)		(77,178	)


(a)		Cost of sales relates to the sale of bunker fuel. Valero L.P. purchases bunker fuel for resale and records cost of sales for barrels of fuel sold.

(b)		For the quarter ended June 30, 2005, Kaneb recorded a provision for loss contingencies associated with certain legal matters. Please read “Kaneb Services LLC and Subsidiaries — Condensed Notes to Consolidated Financial Statements — Note 6 — Contingencies” included elsewhere in this prospectus.

(c)		Valero L.P. is not a taxable entity for federal and state income tax purposes. For 2002, income tax expense relates to the acquisition by Valero L.P. of the Wichita Falls Business from Valero Energy. For 2005, historical and pro forma income tax amounts relate to taxable, wholly owned corporate subsidiaries of Valero L.P. that were acquired as part of the acquisition of Kaneb. The corporate subsidiaries are primarily international subsidiaries.

(d)		On September 30, 2005, Valero L.P. sold certain assets it acquired as part of the acquisition of Kaneb for $455 million, and on March 30, 2006 Valero L.P. sold its subsidiaries in Australia and New Zealand, which were acquired in connection with the Kaneb acquisition, for $65 million plus working capital adjustments. The results of operations of these assets and subsidiaries are included in income from discontinued operations.

(e)		The historical statement of income data for the year ended December 31, 2005 includes the results of operations of Kaneb from the date of acquisition, July 1, 2005, through December 31, 2005.

RISK FACTORS

You should consider carefully the risk factors included below, together with all of the other information included in this prospectus, when evaluating an investment in our units. If any of the circumstances described in this section were to occur, Valero GP Holdings’ business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our units could decline, and you could lose all or part of your investment.

Limited liability company interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business.

Risks Inherent in an Investment in Us


	Our only cash generating assets are our ownership interests in Valero GP, LLC and Riverwalk Holdings, LLC, which own the 2% general partner interest, 100% of the incentive distribution rights and a 21.4% limited partner interest in Valero L.P. Our cash flow is therefore completely dependent upon the ability of Valero L.P. to make cash distributions to its partners, including us.

Our operating cash flow is currently completely dependent upon Valero L.P. making cash distributions to its partners, including us. The amount of cash that Valero L.P. can distribute to its partners each quarter principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:


	•	the amount of crude oil and refined product transported in its pipelines;

	•	throughput volumes in its terminals and storage facilities;

	•	tariff rates and fees it charges and the margins it realizes for its services;

	•	the level of its operating costs;

	•	weather conditions;

	•	domestic and foreign governmental regulations and taxes;

	•	the effect of worldwide energy conservation measures; and

	•	prevailing economic conditions.

In addition, the actual amount of cash that Valero L.P. will have available for distribution will depend on other factors, including:


	•	its debt service requirements and restrictions on distributions contained in its current or future debt agreements;

	•	receipts or payments under interest rate swaps;

	•	the sources of cash used to fund its acquisitions;

	•	the level of capital expenditures it makes;

	•	fluctuations in its working capital needs;

	•	issuances of debt and equity securities; and

	•	adjustments in cash reserves made by Valero L.P.’s general partner in its discretion.

Because of these factors, Valero L.P. may not have sufficient available cash each quarter to continue paying distributions at their current level or at all. Furthermore, cash distributions to Valero L.P. unitholders depend primarily upon cash flow, including cash flow from financial reserves and working capital borrowings, and not solely on profitability, which is affected by non-cash items. Therefore, Valero L.P. may make cash distributions during periods when it records losses and may not make cash distributions during periods when it records net

income. Please read “— Risks Related to Valero L.P.’s Business” for a discussion of further risks affecting Valero L.P.’s ability to generate cash for distribution.


	*In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.*

Because our only source of operating cash flow consists of cash distributions from Valero L.P., the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions Valero L.P. makes to its unitholders, including us. We cannot assure you that Valero L.P. will continue to make quarterly distributions at its current level of $0.855 per unit, or any other amount, or increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if Valero L.P. increases or decreases distributions to us, the timing and amount of such changes in distributions, if any, will not necessarily be comparable to the timing and amount of any changes in distributions made by Valero L.P. to us. Our ability to distribute cash received from Valero L.P. to our unitholders is limited by a number of factors, including:


	•	interest expense and principal payments on any indebtedness we may incur;

	•	restrictions on distributions contained in any future debt agreements;

	•	our general and administrative expenses, including expenses we will incur as a result of being a public company;

	•	expenses of our subsidiaries, including tax liabilities of our corporate subsidiaries, if any;

	•	reserves necessary for us to make the necessary capital contributions to maintain our 2% general partner interest in Valero L.P., as required by the partnership agreement of Valero L.P. upon the issuance of additional partnership securities by Valero L.P.; and

	•	reserves our board of directors believes prudent for us to maintain for the proper conduct of our business or to provide for future distributions.

We cannot guarantee that in the future we will be able to pay distributions or that any distributions Valero L.P. does pay to us will allow us to pay distributions at or above our estimated initial quarterly distribution of $0.27 per unit. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of Valero L.P. Our estimated minimum cash available to pay distributions for the year ending December 31, 2006 represents the minimum amount of cash we need to pay our estimated minimum initial distribution of $0.27 per unit, or $1.08 per unit on an annualized basis. Therefore, a reduction in the amount of cash distributed by Valero L.P. per unit or on the incentive distribution rights, or an increase in our expenses, may result in our not being able to pay our estimated initial quarterly distribution of $0.27 per unit.


	Valero L.P.’s unitholders, excluding the owner of Valero L.P.’s general partner, have the right to remove Valero L.P.’s general partner by a simple majority vote, which would cause us to divest our indirect general partner interest and incentive distribution rights in Valero L.P. in exchange for cash or common units of Valero L.P. and cause us to lose our ability to manage Valero L.P.

We currently manage Valero L.P. through Riverwalk Logistics, L.P., Valero L.P.’s general partner and our indirect, wholly owned subsidiary. Valero L.P.’s partnership agreement, however, gives unitholders of Valero L.P. the right to remove the general partner of Valero L.P. upon the affirmative vote of holders of a majority of outstanding Valero L.P. common units, excluding the common units owned by us. We own a 21.4% limited partner interest in Valero L.P., and the public unitholders own 76.6%. If Riverwalk Logistics, L.P. were removed as the general partner of Valero L.P., it would receive cash or common units in exchange for its 2% general partner interest and the incentive distribution rights and would lose its ability to manage Valero L.P. While the common units or cash that Riverwalk Logistics, L.P. would receive are intended under the terms of Valero L.P.’s partnership agreement to fully compensate it in the event it is removed as general partner, the value of these

common units or the investments made with the cash over time may not be equivalent to the value of the 2% general partner interest and incentive distribution rights had we retained them.


	Valero L.P.’s general partner, with our consent, may limit or modify the incentive distributions we are entitled to receive in order to facilitate the growth strategy of Valero L.P. Our board of directors can give this consent without a vote of our unitholders.

We indirectly own Valero L.P.’s general partner, which owns the incentive distribution rights in Valero L.P. that entitle us to receive increasing percentages, up to a maximum of 23%, of any cash distributed by Valero L.P. as it reaches a distribution of $0.66 per Valero L.P. common unit in any quarter. A substantial portion of the cash flows we receive from Valero L.P. is provided by these incentive distributions. Our limited liability company agreement provides that our board of directors may consent to the elimination, reduction or modification of the incentive distribution rights without your approval if it determines that the elimination, reduction or modification will not adversely effect our unitholders in any material respect.


	The amount of cash distributions that we will be able to distribute to you will be reduced by the costs associated with our being a public company, other general and administrative expenses and any reserves that our board of directors believes prudent to maintain for the proper conduct of our business and for future distributions.

Before we can pay distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a public company, which we expect to be approximately $2.4 million per year, and other operating expenses, reserves to satisfy debt service requirements, if any, and reserves for future distributions. Prior to this offering, we have been a private company and have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended.

In addition, we may reserve funds to allow our indirect wholly owned subsidiary, Riverwalk Logistics, L.P., to maintain its 2% general partner interest in Valero L.P. by making capital contributions to Valero L.P. when Valero L.P. issues additional common units.


	*Restrictions in our anticipated credit facility could limit our ability to make distributions to our unitholders.*

In connection with this offering we anticipate entering into a bank credit facility with a borrowing capacity of up to $20 million to enable us to manage our cash flow obligations. This new credit facility may contain covenants limiting our ability to incur indebtedness, grant liens, engage in transactions with affiliates and make distributions to our unitholders. Any such facility may also contain covenants requiring us to maintain certain financial ratios. Our ability to comply with any restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we are unable to comply with these restrictions and covenants, a significant portion of any future indebtedness under a credit facility may become immediately due and payable, and our lenders’ commitment to make further loans to us under a credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under a credit facility may be secured by substantially all of our assets, and if we are unable to repay any future indebtedness under this proposed credit facility, the lenders could seek to foreclose on such assets.

Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution on our units. We anticipate that any credit facility will limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distribution.

In addition, any future levels of indebtedness may:


	•	adversely affect our ability to obtain additional financing for future operations or capital needs;

	•	limit our ability to pursue acquisitions and other business opportunities; or

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

Various limitations in any future financing agreements may reduce our ability to incur additional indebtedness, to engage in some transactions or to capitalize on business opportunities.


	*Our ability to sell our ownership interests in Valero L.P. may be limited by securities laws restrictions and liquidity constraints.*

All of the units of Valero L.P. that we own are unregistered, restricted securities, within the meaning of Rule 144 under the Securities Act of 1933. Unless we exercise our registration rights with respect to these units, we are limited to selling into the market in any three-month period an amount of Valero L.P. common units that does not exceed the greater of 1% of the total number of common units outstanding or the average weekly reported trading volume of the common units for the four calendar weeks prior to the sale. We face contractual limitations on our ability to sell our 2% general partner interest and incentive distribution rights and the market for such interests is illiquid.


	*The market price of our units could be adversely affected by sales of substantial amounts of our units into the public markets, including sales by our existing unitholders.*

Sales by us or any of our existing unitholders, including subsidiaries of Valero Energy, of a substantial number of our units in the public markets following this offering, or the perception that such sales might occur, could have a material adverse effect on the price of our units or could impair our ability to obtain capital through an offering of equity securities. In addition, we have agreed to provide registration rights to those holders, subject to certain limitations. Valero Energy and its subsidiaries will own 28,010,258 units, or approximately 63% of our outstanding units, upon completion of this offering. Upon the expiration of the 180 day lock-up period, Valero Energy and its subsidiaries intend to further reduce and ultimately sell all of their units pending market conditions. We do not know whether any such sales would be made in the public market or in private placements, nor do we know what impact such potential or actual sales would have on our unit price in the future.


	*Distributions on our incentive distribution rights and subordinated units in Valero L.P. are more uncertain than distributions on the common units we hold.*

Our indirect ownership of the incentive distribution rights in Valero L.P. entitles us to receive our pro rata share of specified percentages of total cash distributions made by Valero L.P. with respect to any particular quarter only in the event that Valero L.P. distributes more than $0.60 per unit for such quarter. As a result, the holders of Valero L.P.’s common units and subordinated units have a priority over the holders of Valero L.P.’s incentive distribution rights to the extent of cash distributions by Valero L.P. up to and including $0.60 per unit for any quarter.

Our incentive distribution rights entitle us to receive increasing percentages, up to 23%, of all cash distributed by Valero L.P. Because the incentive distribution rights currently participate at the maximum 23% target cash distribution level in all distributions made by Valero L.P. at or above the current distribution level, future growth in distributions we receive from Valero L.P. will not result from an increase in the target cash distribution level associated with the incentive distribution rights.

Additionally, during the subordination period, Valero L.P.’s common units have a priority over the 9,599,322 subordinated units, that we indirectly own, to the minimum quarterly distribution of $0.60 per common unit.

Furthermore, a decrease in the amount of distributions by Valero L.P. to less than $0.66 per common unit per quarter would reduce our percentage of the incremental cash distributions above $0.60 per common unit per quarter from 23% to 8%. As a result, any such reduction in quarterly cash distributions from Valero L.P. would have the effect of disproportionately reducing the amount of all distributions that we receive from Valero L.P. based on our ownership interest in the incentive distribution rights and subordinated units in Valero L.P. as compared to cash distributions we receive from Valero L.P. on our 2% general partner interest in Valero L.P. and our Valero L.P. common units.


	*Assuming an initial public offering price of $24.00 per unit, you will experience immediate and substantial dilution of $14.79 per unit.*

The assumed initial public offering price of $24.00 per unit exceeds our pro forma net tangible book value of $9.21 per unit after the offering. Based on these amounts, you will incur immediate and substantial dilution of $14.79 per unit. This dilution results primarily because the market value of our investment in Valero L.P. is significantly in excess of the historical carrying amount of that investment. Please read “Dilution.”


	*If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.*

Prior to this offering, we have been a private company and have not filed reports with the SEC. We will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, upon the completion of this offering. We produce our consolidated financial statements in accordance with the requirements of generally accepted accounting principles in the United States (GAAP), but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports to prevent fraud and to operate successfully as a company with publicly traded securities. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain adequate controls over our financial processes and reporting in the future, including compliance with the obligations under Section 404 of the Sarbanes-Oxley Act of 2002. For example, Section 404 will require us, among other things, annually to review and report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting. We must comply with Section 404 for our fiscal year ending December 31, 2007. Any failure to develop or maintain effective controls, or difficulties encountered in their implementation or other effective improvement of our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our conclusions about the effectiveness of our internal controls. Ineffective internal controls subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the market price of our units.


	If Valero L.P.’s general partner is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of Valero L.P., it may not be able to satisfy its obligations and its cash flows will be reduced.

The general partner of Valero L.P. and its affiliates may make expenditures on behalf of Valero L.P. for which they will seek reimbursement from Valero L.P. In addition, under Delaware law, the general partner, in its capacity as the general partner of Valero L.P., has unlimited liability for the obligations of Valero L.P., such as its debts and environmental liabilities, except for those contractual obligations of Valero L.P. that are expressly made without recourse to the general partner. To the extent Riverwalk Logistics, L.P. incurs obligations on behalf of Valero L.P., it is entitled to be reimbursed or indemnified by Valero L.P. If Valero L.P. does not reimburse or indemnify its general partner, Riverwalk Logistics, L.P. may be unable to satisfy these liabilities or obligations, which would reduce its cash flows. In turn, Riverwalk Logistics, L.P. would have less cash to distribute to us.


	If distributions on our units are not paid with respect to any fiscal quarter, including those at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future.

Our distributions to our unitholders will not be cumulative. Consequently, if distributions on our units are not paid with respect to any fiscal quarter at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future. Any distributions received by us from Valero L.P. related to periods prior to the closing of this offering will be distributed entirely to our current investors.


	*Our cash distribution policy limits our ability to grow.*

Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. In fact, our growth initially will be completely dependent upon Valero L.P.’s ability to increase its quarterly distributions because our only cash-generating assets are indirect ownership interests in Valero L.P. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

Consistent with the terms of its partnership agreement, Valero L.P. distributes to its partners its available cash each quarter. In determining the amount of cash available for distribution, Valero L.P. sets aside cash reserves, which it uses to fund its growth capital expenditures. Additionally, it has relied upon external financing sources, including commercial borrowings and other debt and equity issuances, to fund its acquisition capital expenditures. Accordingly, to the extent Valero L.P. does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent Valero L.P. issues additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that Valero L.P. will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to Valero L.P., which in turn may impact the available cash that we have to distribute to our unitholders.


	If in the future we cease to manage Valero L.P., we may be deemed to be an investment company under the Investment Company Act of 1940, which would cause us either have to register as an investment company, obtain exemptive relief from the SEC, or modify our organizational structure or our contract rights.

If we cease to manage Valero L.P. as a consequence of Riverwalk Logistics, L.P.’s removal or withdrawal as Valero L.P.’s general partner or otherwise, and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership of Valero L.P. partnership interests, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC, or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the sale and purchase of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage.


	*An increase in interest rates may cause the market price of our units to decline resulting in the loss of a portion of your investment in us.*

As interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as limited liability company membership interests. Reduced demand for our units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our units to decline. As a result, you may lose a portion of your investment in us.


	We may issue an unlimited number of additional securities without the consent of our unitholders, which will dilute your ownership interest in us and may increase the risk that we will not have sufficient available cash to maintain or increase our per unit distribution level.

At any time we may issue an unlimited number of additional securities without the approval of our unitholders on terms and conditions determined by our board of directors. The issuance by us of additional units or other equity securities of equal or senior rank will have the following effects:


	•	our unitholders’ proportionate ownership interest in us will decrease;

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


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

	•	the ratio of taxable income to distributions may increase; and

	•	the market price of the units may decline.

Please read “Description of Our Limited Liability Company Agreement — Issuance of Additional Securities.”


	Valero L.P. may issue additional Valero L.P. units, which may increase the risk that Valero L.P. will not have sufficient available cash to maintain or increase its per unit cash distribution level and that we will have to make a capital contribution to Valero L.P.

Valero L.P. may issue additional Valero L.P. units, including units that rank senior to the Valero L.P. common units and the incentive distribution rights as to quarterly cash distributions, on the terms and conditions established by its general partner. Additionally, we are required to make additional capital contributions to Valero L.P. upon Valero L.P.’s issuance of additional units in order to maintain our 2% general partner interest in Valero L.P. Furthermore, to the extent Valero L.P. issues units that are senior to the Valero L.P. common units and the incentive distribution rights, their issuance will render more uncertain the payment of distributions on the common units and the incentive distribution rights. Neither the common units nor the incentive distribution rights are entitled to any arrearages from prior quarters. The payment of distributions on any additional Valero L.P. units may increase the risk that Valero L.P. will be unable to maintain or increase its per unit cash distribution level and the requirement that we make capital contributions to Valero L.P. to maintain our 2% general partner interest may impact the available cash that we have to distribute to our unitholders.


	The initial public offering price of our units may not be indicative of the market price of our units after this offering, and our unit price may be volatile. In addition, you may not be able to resell our units at or above the initial public offering price.

Prior to this offering there has been no public market for our units. An active market for our units may not develop or may not be sustained after this offering. The initial public offering price of our units will be determined by negotiations between us and the underwriters based on numerous factors that we discuss in the “Underwriting — Offering Price Determination” section of this prospectus. This price may not be indicative of the market price for our units after this initial public offering. The market price of our units could be subject to significant fluctuations after this offering and may decline below the initial public offering price. You may not be able to resell your units at or above the initial public offering price. Our unit price could be affected by a number of factors, including:


	•	Valero L.P.’s operating and financial performance and prospects;

	•	quarterly variations in the rate of growth of our distributions per unit;

	•	changes in revenue or earnings estimates or publication of research reports by analysts;

	•	speculation in the press or investment community;

	•	level of investor interest in purchasing our units due to the very limited number of publicly traded entities whose assets consist exclusively of ownership interests in a publicly traded limited partnership;

	•	sales of our units by our unitholders;

	•	announcements by Valero L.P. or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;

	•	general market conditions; and

	•	domestic and international economic, legal and regulatory factors unrelated to Valero L.P.’s performance.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies and partnerships. These broad market fluctuations may adversely affect the trading price of our units.

Our units and Valero L.P.’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our units and Valero L.P.’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:


	•	Valero L.P.’s cash distributions to its common unitholders have a priority over distributions on its incentive distribution rights;

	•	we participate in the distributions on the 2% general partner interest and the incentive distribution rights in Valero L.P. while Valero L.P.’s common unitholders do not; and

	•	we may enter into other businesses separate and apart from Valero L.P. or any of its affiliates.


	Anti-takeover provisions in our limited liability company agreement may make an acquisition of us more complicated and the removal and replacement of our directors and executive officers more difficult.

Our limited liability company agreement contains provisions that may delay or prevent a change in control. These provisions may also make it difficult for unitholders to remove and replace our board of directors and executive officers.

Section 203. Our limited liability company agreement effectively adopts Section 203 of the DGCL. Section 203 of the DGCL as it applies to us prevents an interested unitholder, defined as a person who owns 15% or more of our outstanding units, from engaging in business combinations with us for three years following the time such person becomes an interested unitholder. Section 203 broadly defines “business combination” to encompass a wide variety of transactions with or caused by an interested unitholder, including mergers, asset sales and other transactions in which the interested unitholder receives a benefit on other than a pro rata basis with other unitholders. This provision of our limited liability company agreement could have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for our units.

Limited Voting Rights. Our limited liability company agreement provides that if any person or group other than our affiliates acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to any person or group that acquires all of its units from our affiliates or any transferees of that person or group approved by our board of directors or to any person or group who acquires the units with the prior approval of our board of directors.

Staggered Board. In addition, our limited liability company agreement provides for a staggered board of directors as a result of which only a portion of the members of the board of directors is elected each year. Removal of directors will require a meeting of unitholders and cannot be done by written consent.

Preferred Unit Purchase Rights. Further, upon completion of this offering, we intend to issue preferred unit purchase rights which will have the effect of diluting any potential acquirer of us not authorized by the board of directors upon any triggering event, such as the purchase of 15% of our outstanding units.

These provisions may delay or prevent a third party from acquiring us and any such delay or prevention could cause the market price of our units to decline.


	*Valero L.P.’s common unitholders may not have limited liability if a court finds that limited partner actions constitute control of Valero L.P.’s business.*

Under Delaware law, common unitholders could be held liable for Valero L.P.’s obligations to the same extent as a general partner if a court determined that actions of a common unitholder constituted participation in the “control” of Valero L.P.’s business.

Under Delaware law, the general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the

partnership that are expressly made without recourse to the general partner. In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a limited partner may be liable to Valero L.P. for the amount of a distribution for a period of three years from the date of the distribution.

Risks Related to Conflicts of Interest


	Although we manage Valero L.P. through our indirect ownership of its general partner, Valero L.P.’s general partner owes fiduciary duties to Valero L.P. and Valero L.P.’s unitholders, which may conflict with our interests.

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including Valero L.P.’s general partner, on the one hand, and Valero L.P. and its limited partners, on the other hand. The directors and officers of Valero GP, LLC have fiduciary duties to manage Valero L.P.’s business in a manner beneficial to us, its owner. At the same time, Valero GP, LLC has a fiduciary duty to manage Valero L.P. in a manner beneficial to Valero L.P. and its unitholders. The board of directors of Valero GP, LLC or its conflicts committee will resolve any such conflict and have broad latitude to consider the interests of all parties to the conflict. Our independent directors will not be the same as the independent directors who serve on the conflicts committee of Valero GP, LLC. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

For example, conflicts of interest may arise in the following situations:


	•	the allocation of shared overhead expenses to Valero L.P. and us;

	•	the entering into, interpretation and enforcement of contractual obligations between us and our affiliates, including Valero Energy, on the one hand, and Valero L.P., on the other hand;

	•	the determination and timing of the amount of cash to be distributed to Valero L.P.’s partners and the amount of cash to be reserved for the future conduct of Valero L.P.’s business;

	•	any proposal by Valero GP, LLC to eliminate, reduce or modify the incentive distribution rights;

	•	the decision whether Valero L.P. should make acquisitions, and on what terms;

	•	the determination of whether Valero L.P. should use cash on hand, borrow or issue equity to raise cash to finance acquisitions or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions to Valero L.P.’s partners or otherwise; and

	•	any decision we make in the future to engage in business activities independent of, or in competition with, Valero L.P.


	*The fiduciary duties of our officers and directors may conflict with those of Valero L.P.’s general partner’s officers and directors.*

Our directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Simultaneously, a majority of our directors and all of our officers are also directors and officers of Valero GP, LLC, the general partner of Valero L.P.’s general partner, and have fiduciary duties to manage the business of Valero L.P. in a manner beneficial to Valero L.P. and its unitholders. For instance, William E. Greehey is our Chairman of the Board as well as the Chairman of the Boards of Valero GP, LLC and Valero Energy. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to Valero L.P., on the one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For example, we share executive officers and administrative personnel with Valero L.P.’s general partner to operate both our business and Valero L.P.’s business. Our executive officers, who are also the executive officers of Valero L.P.’s general partner, will allocate, in their reasonable and sole discretion, their time spent on our behalf and on behalf of Valero L.P. These allocations may not be the result of arms-length negotiations between Valero L.P.’s general partner and us, and therefore the allocations may not exactly match the actual time and overhead spent. For a more detailed

description of the potential conflicts of interest between us and our affiliates and the methods for resolving such conflicts of interest, please read “Conflicts of Interest and Fiduciary Duties.”


	When Valero Energy reduces its ownership interest such that it owns less than 20% of us or Valero GP, LLC, Valero Energy and its affiliates may directly compete with Valero L.P., which could cause conflicts of interest and may adversely impact Valero L.P., and as a result, our results of operations and cash available for distribution.

Under Valero L.P.’s Amended and Restated Omnibus Agreement, when Valero Energy reduces its ownership interest such that it owns less than 20% of us or Valero GP, LLC, Valero Energy and its affiliates will no longer be prohibited from engaging in the business of transporting crude oil or refined petroleum products (including petrochemicals) or operating crude oil storage or refined petroleum products terminalling assets in the United States. As a result, Valero Energy could directly compete with Valero L.P., which could cause conflicts of interest among these entities and adversely impact Valero L.P., and as a result, our results of operations and cash available for distribution. It is Valero Energy’s intent to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions. Please read “Conflicts of Interest and Fiduciary Duties — Potential Future Conflicts.”


	*Subsidiaries of Valero Energy will control us and will own a sufficient number of our units to block any attempt to remove or replace our board of directors.*

Upon completion of this offering, subsidiaries of Valero Energy will own an aggregate of approximately 63% of the outstanding units, or approximately 57% if the underwriters’ option to purchase additional units is exercised in full. Accordingly, Valero Energy will be able to determine all matters requiring the majority approval of the holders of our units. As long as Valero Energy beneficially owns a majority interest in us, it will have the ability to elect all members of our board of directors and to manage our affairs. Valero Energy will be able to cause or prevent a change of control of our company. This concentration of ownership may have the effect of preventing or discouraging transactions involving an actual or potential change of control of our company, regardless of whether a premium is offered over then current market prices.


	*Our affiliates have a limited call right that may require you to sell your units at an undesirable time or price.*

If at any time our affiliates own more than 80% of our outstanding units, we will have the right, but not the obligation, which we may assign to any of our affiliates, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than the then current market price. As a result, you may be required to sell your units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering, Valero Energy, our current indirect owner, will own approximately 63% of our units. Please read “Description of Our Limited Liability Company Agreement — Limited Call Right.”

Risks Related to Valero L.P.’s Business


	A decline in production at the Valero Energy refineries Valero L.P. serves or the Tesoro Mandan refinery could materially reduce the volume of crude oil and refined petroleum products Valero L.P. transports or stores in its assets.

A decline in production at the Valero Energy refineries Valero L.P. serves, or at the Tesoro Mandan refinery, could materially reduce the volume of crude oil and refined petroleum products Valero L.P. transports on those pipelines that are connected to these refineries or the volumes of refined petroleum products Valero L.P. stores in related terminals. As a result, Valero L.P.’s financial position and results of operations and its ability to make distributions to its partners could be adversely affected. The Valero Energy refineries served by Valero L.P.’s

assets or the Tesoro Mandan refinery could partially or completely shut down its operations, temporarily or permanently, due to factors affecting its ability to produce refined petroleum products such as:


	•	scheduled upgrades or maintenance;

	•	unscheduled maintenance or catastrophic events, such as a fire, flood, explosion or power outage;

	•	labor difficulties that result in a work stoppage or slowdown;

	•	environmental proceedings or other litigation that require the halting of all or a portion of the operations of the refinery; or

	•	legislation or regulation that adversely impacts the economics of refinery operations.

For example, Valero L.P.’s operations are expected to be negatively impacted by lower throughput volumes in 2006 due to scheduled maintenance turnarounds at some of the Valero Energy refineries Valero L.P. serves.


	*Valero L.P.’s future financial and operating flexibility may be adversely affected by restrictions in its debt agreements and by its, our and Valero Energy’s leverage.*

As of December 31, 2005, Valero L.P.’s consolidated debt was approximately $1.2 billion. Among other things, this amount of debt may be viewed negatively by credit rating agencies, which could result in increased costs to Valero L.P. in accessing the capital markets. In August 2005, Moody’s Investor Service confirmed Valero Logistics Operations, L.P.’s and upgraded Kaneb Pipe Line Operating Partnership, L.P.’s senior unsecured ratings at Baa3 with a stable outlook. In July 2005, Standard & Poors lowered its ratings on Valero Logistics Operations, L.P.’s and Kaneb Pipe Line Operating Partnership, L.P.’s senior unsecured ratings to BBB minus with a stable outlook. In July 2005, Fitch lowered its rating of Kaneb Pipe Line Operating Partnership, L.P.’s senior unsecured rating to BBB minus with a stable outlook. Any future downgrade of the debt held by these wholly owned subsidiaries of Valero L.P. could significantly increase Valero L.P.’s capital costs or adversely affect Valero L.P.’s ability to raise capital in the future.

Debt service obligations, restrictive covenants in its credit facilities and the indentures governing its outstanding senior notes and maturities resulting from this leverage may adversely affect Valero L.P.’s ability to finance future operations, pursue acquisitions and fund other capital needs and Valero L.P.’s ability to pay cash distributions to unitholders. In addition, this leverage may make Valero L.P.’s results of operations more susceptible to adverse economic or operating conditions. For example, during an event of default under any of its debt agreements, Valero L.P. would be prohibited from making cash distributions to its unitholders.

Additionally, Valero L.P. may not be able to access the capital markets in the future at economically attractive terms, which may adversely affect its future financial and operating flexibility and its ability to pay cash distributions at current rates.

Further, if one or more credit rating agencies were to downgrade the outstanding indebtedness of Valero Energy, Valero L.P. could experience a similar downgrade of its outstanding indebtedness, an increase in its borrowing costs, difficulty accessing capital markets or a reduction in the market price of its common units. Such a development could adversely affect Valero L.P.’s ability to finance acquisitions, refinance existing indebtedness and make cash distributions to its partners, including us.


	*Valero L.P.’s subsidiary, Valero Logistics Operations, L.P., may be unable to purchase its senior notes upon a change of control of Valero GP Holdings.*

It is Valero Energy’s intent to reduce and ultimately sell all of its ownership interest in us, pending market conditions. If Valero Energy’s or an investment grade entity’s ownership interest in us decreases below 51%, Valero Logistics Operations will be obligated to offer to repurchase its $350 million outstanding senior notes at a price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest. At the completion of this offering, Valero Energy will indirectly own an approximate 63% membership interest in us.

If Valero Logistics Operations is required to make such an offer, it may not have sufficient funds to pay the purchase price, and it may be required to secure third-party financing to do so. Valero Logistics Operations may

not be able to obtain such financing on commercially reasonable terms, on terms acceptable to Valero Logistics Operations or at all. Valero Logistics Operations’ and its subsidiaries’ current and future credit agreements and other indebtedness may contain restrictions on the ability of Valero Logistics Operations to repurchase the notes upon such a change in control. The failure of Valero Logistics Operations to repurchase the notes tendered to it upon a change in control would constitute an event of default under the indentures governing its senior notes, and thus an event of default under Valero Logistics Operations’ credit agreements, and would have a material adverse effect on Valero L.P.’s financial condition.


	*Valero L.P. may not be able to generate sufficient cash from operations to enable it to pay expected quarterly distributions on its units every quarter.*

The amount of cash Valero L.P. is able to distribute to its partners is principally dependent on the amount of cash it is able to generate from operations, which fluctuates from quarter to quarter based on, among other things:


	•	the amount of crude oil and refined product transported in its pipelines;

	•	throughput volumes in its terminals and storage facilities;

	•	tariff rates and fees it charges and the margins it realizes for its services;

	•	the level of its operating cost;

	•	weather conditions;

	•	domestic and foreign governmental regulations and taxes;

	•	the effect of worldwide energy conservation measures; and

	•	prevailing economic conditions.

In determining the expected cash available for distribution, Valero L.P. makes assumptions about throughput, tariffs and fees and operating costs. Whether these assumptions are realized is not entirely within Valero L.P.’s control or the control of its general partner. If these assumptions are not realized, Valero L.P. may not generate sufficient cash to make a quarterly distribution on its units at the current level.

Valero L.P. depends on Valero Energy for a significant portion of its revenues and throughputs of crude oil and refined products. Any reduction in the crude oil and refined products that Valero L.P. transports or stores for Valero Energy, as a result of scheduled or unscheduled refinery maintenance, upgrades or shutdowns or otherwise, could result in a decline in Valero L.P.’s revenues, earnings and cash available to pay distributions.

Valero L.P. acquired Kaneb effective July 1, 2005, however, it continues to rely on Valero Energy for a significant portion of its revenues. For the year ended December 31, 2005, Valero Energy accounted for approximately 34% of Valero L.P.’s revenues. While some of Valero L.P.’s relationships with Valero Energy are subject to long-term contracts, Valero L.P. may be unable to negotiate extensions or replacements of these contacts on favorable terms, if at all. Because of the geographic location of certain of Valero L.P.’s pipelines, terminals and storage facilities, Valero L.P. depends largely upon Valero Energy to provide throughput for its assets. Any decrease in throughputs would cause Valero L.P.’s revenues to decline and adversely affect Valero L.P.’s ability to make cash distributions to its unitholders. A decrease in throughputs could result from a temporary or permanent decline in the amount of crude oil transported to and stored at or refined products stored at and transported from the refineries Valero L.P. serves. Factors that could result in such a decline include:


	•	a material decrease in the supply of crude oil;

	•	a material increase in the price of crude oil;

	•	a material decrease in demand for refined products in the markets served by Valero L.P.’s pipelines and terminals;


	•	scheduled turnarounds or unscheduled maintenance;

	•	operational problems or catastrophic events at a refinery;

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

	•	a decision by Valero Energy to redirect refined products transported in Valero L.P.’s pipelines to markets not served by Valero L.P.’s pipelines or to transport crude oil by means other than Valero L.P.’s pipelines;

	•	increasingly stringent environmental regulations, including new EPA fuels content regulations requiring refinery upgrades; or

	•	a decision by Valero Energy to sell one or more of the refineries Valero L.P. serves to a purchaser that elects not to use Valero L.P.’s pipelines and terminals.

The loss of all or even a portion of the volumes of crude oil and refined petroleum products supplied by Valero Energy would have a material adverse effect on Valero L.P.’s business, results of operations and financial condition and Valero L.P.’s ability to make cash distributions, unless Valero L.P. were able to acquire comparable volumes from other sources.

Under the pipelines and terminals usage agreement, Valero Energy may use other transportation methods or providers for up to 25% of the crude oil processed and refined products produced at the Ardmore, McKee and Three Rivers refineries. Furthermore, Valero Energy is not required to use Valero L.P.’s pipelines if there is a change in market conditions that has a material adverse effect on Valero Energy for the transportation of crude oil and refined products, or in the markets for refined products served by these refineries. These factors could adversely affect Valero L.P.’s ability to make distributions to its unitholders, including us.

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


	*Increases in natural gas and power prices could adversely affect Valero L.P.’s ability to make distributions to its partners, including us.*

Power costs constitute a significant portion of Valero L.P.’s operating expenses. Power costs represented approximately 17.3% of Valero L.P.’s operating expenses for the year ended December 31, 2005. Valero L.P. uses mainly electric power at its pipeline pump stations and terminals and such electric power is furnished by various utility companies that use primarily natural gas to generate electricity. Accordingly, Valero L.P.’s power costs typically fluctuate with natural gas prices. Increases in natural gas prices may cause Valero L.P.’s power costs to increase further. If natural gas prices remain high or increase further, Valero L.P.’s cash flows may be adversely affected, which could adversely affect Valero L.P.’s ability to make distributions to Valero L.P.’s partners, including us.


	Valero L.P.’s operations are subject to federal, state and local laws and regulations relating to environmental protection and operational safety that could require Valero L.P. to make substantial expenditures.

Valero L.P.’s operations are subject to increasingly strict environmental and safety laws and regulations. The transportation and storage of petroleum and other products, such as specialty liquids, produces a risk that these products may be suddenly released into the environment, potentially causing substantial expenditures for a

response action, significant government penalties, liability to government agencies for natural resources damages, personal injury or property damages to private parties and significant business interruption. Valero L.P. owns or leases a number of properties that have been used to store or distribute refined products for many years. Many of these properties, such as the recently acquired assets from Kaneb, were operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes was not under Valero L.P.’s control. If Valero L.P. were to incur a significant liability pursuant to environmental or safety laws or regulations, such a liability could have a material adverse effect on its financial position and its ability to make distributions to its unitholders, including us, and its ability to meet its debt service requirements. As of December 31, 2005, Valero L.P. has recorded liabilities for contingent losses totaling $59.1 million, including environmental liabilities. For a more detailed discussion of Valero L.P.’s contingent liabilities, please read “Valero L.P. and Subsidiaries — Notes to Financial Statements — Note 12. Commitments and Contingencies” beginning on page F-52.


	*Increases in interest rates could adversely affect Valero L.P.’s business and the trading price of Valero L.P.’s units.*

Valero L.P. has significant exposure to increases in interest rates. As of December 31, 2005, Valero L.P. had approximately $1.2 billion of consolidated debt, of which $0.8 billion was at fixed interest rates and $0.4 billion was at variable interest rates after giving effect to interest rate swap agreements. Valero L.P.’s results of operations, cash flows and financial position could be materially adversely affected by significant increases in interest rates above current levels. Further, the trading price of Valero L.P.’s units will be sensitive to changes in interest rates and any rise in interest rates could adversely impact such trading price.


	*Valero L.P.’s pipeline integrity program may subject it to significant costs and liabilities.*

Effective as of May 29, 2001, the U.S. Department of Transportation issued a final rule requiring pipeline operators with more than 500 miles of pipelines to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect the integrity of pipeline segments located in what the rule refers to as “high consequence areas” where a leak or rupture could potentially do the most harm. Subsequently, the Pipeline Safety Improvement Act of 2002 was enacted, which further enhanced pipeline safety requirements. Valero L.P. has developed and will continue its pipeline integrity management programs, which are intended to assess and maintain the integrity of its pipelines. While the costs associated with the pipeline integrity testing itself are not large, the results of these tests could cause Valero L.P. to incur significant and unanticipated operating and capital expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of its pipelines. Further, the rule or an increase in public expectations for pipeline safety may require additional reporting, the replacement of some of Valero L.P.’s pipeline segments, additional monitoring equipment, and more frequent inspection or testing of Valero L.P.’s pipeline facilities. Any repair, remediation, preventative or mitigating actions may require significant capital and operating expenditures. Should Valero L.P. fail to comply with the U.S. Department of Transportation rules, and related regulations and orders, it could be subject to penalties and fines, which could have a material adverse effect on its ability to make distributions to its unitholders, including us.


	*Valero L.P.’s operations are subject to operational hazards and unforeseen interruptions for which it may not be adequately insured.*

Valero L.P.’s operations are subject to operational hazards and unforeseen interruptions such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materials releases, mechanical failures and other events beyond its control. These events might result in a loss of equipment or life, injury or extensive property damage, as well as an interruption in Valero L.P.’s operations. Valero L.P. may not be able to maintain or obtain insurance of the type and amount it desires at reasonable rates. As a result of market conditions, premiums and deductibles for certain of Valero L.P.’s insurance policies have increased substantially, and could escalate further. Valero L.P. currently benefits from coverage under insurance procured by Valero Energy under an annual policy that runs through May 2006. Valero L.P. may be unable to continue to benefit from such insurance procured by Valero Energy and in some instances, certain insurance could become unavailable or available only for reduced amounts of coverage and at higher rates. For example, Valero L.P.’s insurance carriers require broad exclusions for

losses due to terrorist acts. If Valero L.P. were to incur a significant liability for which it was not fully insured, such a liability could have a material adverse effect on Valero L.P.’s financial position and its ability to make distributions to its unitholders, including us, and to meet its debt service requirements.


	*Valero L.P.’s exposure to a diversified national and international geographic asset and product mix may have an adverse impact on its results of operations.*

Valero L.P.’s business is geographically diversified both in the United States and internationally, which exposes Valero L.P. to supply and demand risks in different markets. A significant overall decrease in supply or demand for refined petroleum products or anhydrous ammonia may have an adverse effect on Valero L.P.’s financial condition. Also, the product mix handled by Valero L.P. is significantly diversified, and the transportation or the terminalling of specialty liquids may expose Valero L.P. to significant environmental risks, which could have a material adverse impact on Valero L.P.’s results of operations. Further, Valero L.P. has significant international terminalling operations, which exposes it to risks particular to such operations. A significant decrease in supply or demand at Valero L.P.’s main international terminals in Point Tupper, Nova Scotia or St. Eustatius, the Netherlands Antilles, as well as foreign currency risks and other risks associated with operations in foreign legal and political environments, could have an adverse impact on Valero L.P.’s financial results.


	*Reduced demand for refined products could affect Valero L.P.’s results of operations and ability to make distributions to its partners, including us.*

Any sustained decrease in demand for refined products in the markets served by Valero L.P.’s pipelines could result in a significant reduction in throughput in our crude oil and refined product pipelines and therefore in Valero L.P.’s cash flow, reducing Valero L.P.’s ability to make distributions to its partners, including us. Factors that could lead to a decrease in market demand include:


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

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

	•	an increase in fuel economy, whether as a result of a shift by consumers to more fuel-efficient vehicles or technological advances by manufacturers;

	•	an increase in the market price of crude oil that leads to higher refined product prices, which may reduce demand for gasoline. Market prices for crude oil and refined products are subject to wide fluctuation in response to changes in global and regional supply that are beyond Valero L.P.’s control, and recent significant increases in the price of crude oil may result in a lower demand for refined products; and

	•	the increased use of alternative fuel sources, such as battery-powered engines. Several state and federal initiatives mandate this increased use. For example, the Energy Policy Act of 1992 requires 75% of new vehicles purchased by federal agencies since 1999, 75% of all new vehicles purchased by state governments since 2000, and 70% of all new vehicles purchased for private fleets in 2006 and thereafter to use alternative fuels.


	Valero L.P. may not be able to integrate effectively and efficiently with Kaneb or any future businesses or operations it may acquire. Any future acquisitions may substantially increase the levels of Valero L.P.’s indebtedness and contingent liabilities.

Valero L.P. is integrating the operations of Valero L.P. with those of Kaneb. Such integration of operations is a complex, time-consuming and costly process. Valero L.P. may not be able to realize the operating efficiencies, cost savings and other benefits expected. In addition, the costs Valero L.P. incurs in implementing these efficiencies, cost savings and other benefits may be greater than expected.

Part of Valero L.P.’s business strategy includes acquiring additional pipelines and terminalling and storage facilities that complement Valero L.P.’s existing asset base and distribution capabilities or provide entry into new markets. Valero L.P. may not be able to identify suitable acquisitions, or it may not be able to purchase or finance any acquisitions on terms that it finds acceptable. Additionally, Valero L.P. competes against other companies for acquisitions, and we cannot assure you that Valero L.P. will be successful in the acquisition of any assets or businesses appropriate for its growth strategy. Valero L.P.’s capitalization and results of operations may change significantly as a result of future acquisitions, and you will not have the opportunity to evaluate the economic, financial and other relevant information that Valero L.P. will consider in connection with any future acquisitions. Unexpected costs or challenges may arise whenever businesses with different operations and management are combined. For example, the incurrence of substantial unforeseen environmental and other liabilities, including liabilities arising from the operation of an acquired business or asset prior to Valero L.P.’s acquisition for which it is not indemnified or for which indemnity is inadequate, may adversely affect Valero L.P.’s ability to realize the anticipated benefit from an acquisition. Inefficiencies and difficulties may arise because of unfamiliarity with new assets and new geographic areas of any acquired businesses. Successful business combinations will require Valero L.P.’s management and other personnel to devote significant amounts of time to integrating the acquired businesses with Valero L.P.’s existing operations. These efforts may temporarily distract their attention from day-to -day business, the development or acquisition of new properties and other business opportunities. If Valero L.P. does not successfully integrate any future acquisitions, or if there is any significant delay in achieving such integration, Valero L.P.’s business and financial condition could be adversely affected.


	*Valero L.P. may sell additional limited partnership units, diluting existing interests of its unitholders, including us.*

Valero L.P.’s partnership agreement allows it to issue additional limited partnership units and certain other equity securities without unitholder approval. After the subordination period, which is expected to end after the first quarter of 2006, there will be no limit on the total number of limited partnership units and other equity securities Valero L.P. may issue. When Valero L.P. issues additional limited partnership units or other equity securities, the proportionate partnership interest of its existing unitholders will decrease. The issuance could negatively affect the amount of cash distributed to unitholders and the market price of the limited partnership units. Issuance of additional units will also diminish the relative voting strength of the previously outstanding units.


	Valero Energy and its affiliates have conflicts of interest and limited fiduciary responsibilities, which may permit them to favor their own interests to the detriment of Valero L.P.’s unitholders.

Valero Energy and its affiliates will own approximately 63% of Valero GP Holdings after the completion of this offering, and we own Valero L.P.’s general partner. As a result, conflicts of interest may arise between Valero Energy and its affiliates, including Valero L.P.’s general partner, on the one hand, and Valero L.P. and its limited partners, on the other hand. As a result of these conflicts, the general partner may favor its own interests and the interests of its affiliates over the interests of Valero L.P.’s unitholders. These conflicts include, among others, the following situations:


	•	Valero Energy, as the primary shipper in certain of Valero L.P.’s pipelines, has an economic incentive to seek lower tariff rates for these pipelines, lower terminalling fees and lower storage fees;

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

	•	Valero Energy and its affiliates may engage in limited competition with Valero L.P.;

	•	Valero Energy may use other transportation methods or providers for up to 25% of the crude oil processed and refined products produced at its Ardmore, McKee and Three Rivers refineries and is not required to

use Valero L.P.’s pipelines if there is a material change in the market conditions for the transportation of crude oil and refined products, or in the markets for refined products served by these refineries, that has a material adverse effect on Valero Energy;

• For some of the refined product pipelines and terminals connected to Valero Energy’s Corpus Christi East, Corpus Christi West and Three Rivers refineries, Valero Energy has agreed to specified minimum commitment percentages for certain pipelines and terminals, which generally represent approximately 75% of 2002 historical volumes, but may use other transportation and storage methods and providers for any volumes exceeding such minimum commitments;

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

• Valero L.P.’s general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to unitholders. As a result of purchasing Valero L.P.’s common units, unitholders have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;

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

• Valero L.P.’s general partner determines in its sole discretion which costs incurred by Valero Energy and its affiliates are reimbursable by Valero L.P.;

• Valero L.P.’s general partner may cause Valero L.P. to pay the general partner or its affiliates for any services rendered on terms that are fair and reasonable to Valero L.P. or enter into additional contractual arrangements with any of these entities on Valero L.P.’s behalf;

• Valero L.P.’s general partner controls the enforcement of obligations owed to Valero L.P. by Valero Energy and its affiliates, including under the handling and throughput agreement, the throughput commitment agreement, the terminalling agreements and the pipelines and terminals usage agreement with Valero Energy;

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

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

Valero L.P.’s partnership agreement gives the general partner broad discretion in establishing financial reserves for the proper conduct of Valero L.P.’s business, including interest payments. These reserves also will affect the amount of cash available for distribution.


	*The rates that Valero L.P. may charge on its interstate pipelines are subject to regulation by various federal and state agencies, such as FERC and the STB.*

Pursuant to the Interstate Commerce Act, or ICA, the Federal Energy Regulatory Commission, or FERC, regulates the tariff rates for Valero L.P.’s interstate common carrier pipeline operations. Under the ICA, tariff rates must be published, just and reasonable and not unduly discriminatory. Shippers may protest or challenge, and the FERC may investigate, the lawfulness of any existing, new or changed tariff rates. The FERC can suspend new or changed tariff rates for up to seven months. The FERC can also require refunds of amounts collected under rates ultimately found to be unlawful.

Valero L.P. uses various FERC-authorized rate methodologies for its interstate pipelines, including cost-of -service rates, market-based rates and settlement rates. Typically, Valero L.P. annually adjusts its rates in

accordance with FERC indexing methodology, which currently allows a pipeline to increase its rates by a percentage equal to the producer price index for finished goods. If the index results in a negative adjustment, Valero L.P. will typically be required to reduce any rates that exceed the new maximum allowable rate. In addition, changes in the index might not be large enough to fully reflect actual increases in Valero L.P.’s costs. The FERC’s authorized rate-making methodologies may also delay the use or implementation of rates that reflect increased costs. If the FERC’s rate-making methodologies change, any such change or new methodologies could result in rates that generate lower revenues and cash flow and could adversely affect Valero L.P.’s ability to make distributions to its unitholders, including us, and to meet its debt service requirements. Any of the foregoing would adversely affect Valero L.P.’s revenues and cash flow and could affect Valero L.P.’s ability to make distributions to its partners, including us, and to meet its debt service requirements. Additionally, competition constrains Valero L.P.’s rates in various Valero L.P. markets. As a result, Valero L.P. may from time to time be forced to reduce some of its rates to remain competitive.

Other federal regulatory bodies, including the Surface Transportation Board, or STB, impose additional rate regulations on Valero L.P.’s operations and typically require that Valero L.P.’s rates be just and reasonable and non-discriminatory.


	Valero L.P.’s pipeline operations are subject to FERC rate-making principles that could have an adverse impact on Valero L.P.’s ability to recover the full cost of operating its pipeline facilities and its ability to make distributions to its partners.

In a decision issued in 2004 involving an oil pipeline limited partnership, BP West Coast Products, LLC v. FERC, the United States Court of Appeals for the District of Columbia Circuit rejected FERC’s Lakehead policy. Under that policy, the FERC had allowed an oil pipeline limited partnership to include in its cost of service an income tax allowance only to the extent that its unitholders were corporations. In May 2005, the FERC issued a new Policy Statement on Income Tax Allowances (Policy Statement), stating that a pipeline organized as a tax pass-through entity may include in its cost of service-based rates an income tax allowance to reflect actual or potential tax liability on its public utility income attributable to all entities or individuals owning public utility assets, if the pipeline proves that the ultimate owner of the interest has an actual or potential income tax liability on such income. The Policy Statement also provides that whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by the FERC on a case-by-case basis. In August 2005, the FERC also dismissed requests for rehearing of its new Policy Statement. Since June 2005, FERC has also issued several orders applying its new policy on income tax allowance, two of which involved the remanded BP West Coast case. Although the new policy affords pipelines organized as pass-through entities an opportunity to recover a tax allowance, these recent orders vary with regard to the type of evidence or related burden of proof necessary to establish whether an actual or potential income tax liability exists for all owners. Application of the Policy Statement in these and other individual cases will also be subject to further FERC action and/or review in the appropriate Court of Appeals. In addition, multiple petitions for review of the Policy Statement and FERC’s application of the Policy Statement on remand of the BP West Coast decision have already been filed at the United States Court of Appeals for the District of Columbia Circuit. Therefore, the ultimate outcome of these proceedings is not certain and could result in changes to the FERC’s treatment of income tax allowances in cost of service. If Valero L.P. was to file for a cost of service-based rate increase, it would likely be permitted to include an income tax allowance in such rates only to the extent it could show, pursuant to the Policy Statement, that the ultimate owners of Valero L.P.’s units have actual or potential income tax liability on Valero L.P.’s income. There is not yet a definitive ruling from FERC concerning the type of evidence Valero L.P. would have to produce to prevail on a request to include a tax allowance. If the FERC were to disallow a substantial portion of Valero L.P.’s income tax allowance, it is likely that the maximum rates that could be charged could decrease from current levels.


	Terrorist attacks and the threat of terrorist attacks have resulted in increased costs to Valero L.P.’s business. Continued hostilities in the Middle East or other sustained military campaigns may adversely impact Valero L.P.’s results of operations.

The long-term impact of terrorist attacks, such as the attacks that occurred on September 11, 2001, and the threat of future terrorist attacks, on the energy transportation industry in general, and on Valero L.P. in particular, is not known at this time. Increased security measures taken by Valero L.P. as a precaution against possible terrorist attacks have resulted in increased costs to its business. Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect Valero L.P.’s operations in unpredictable ways, including disruptions of crude oil supplies and markets for refined products, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror.

Changes in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for Valero L.P. to obtain. Moreover, the insurance that may be available to Valero L.P. may be significantly more expensive than its existing insurance coverage. Instability in the financial markets as a result of terrorism or war could also affect Valero L.P.’s ability to raise capital.

Tax Risks to Our Unitholders

You should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of our units.


	*If we or Valero L.P. were treated as a corporation for federal or state income tax purposes, then our cash available for distribution to you would be substantially reduced.*

The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this matter. The value of our investment in Valero L.P. depends largely on Valero L.P. being treated as a partnership for federal income tax purposes.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Thus, treatment of us as a corporation would result in a material reduction in our anticipated cash flow and after-tax return to you, likely causing a substantial reduction in the value of our units.

If Valero L.P. were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow, likely causing a substantial reduction in the value of our units.

Current law may change, causing us or Valero L.P. to be treated as a corporation for federal income tax purposes or otherwise subjecting us or Valero L.P. to entity level taxation. In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. For example, the State of New Jersey imposes a state level tax which Valero L.P. currently pays at the maximum amount of $250,000. If any additional states were to impose a tax upon us or Valero L.P. as an entity, the cash available for distribution to you would be reduced.


	A successful IRS contest of the federal income tax positions we or Valero L.P. take may adversely impact the market for our or Valero L.P.’s units, and the costs of any contest will reduce cash available for distribution to our unitholders.

The IRS may adopt positions that differ from the positions we or Valero L.P. take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or Valero L.P. take. A court may not agree with all of the positions we or Valero L.P. take. Any contest with the IRS may materially and adversely impact the market for our or Valero L.P.’s units and the prices at which they trade. In addition, the costs of any contest between Valero L.P. and the IRS will result in a reduction in cash available for distribution to Valero L.P. unitholders and thus will be borne indirectly by us, as a unitholder and as the owner of the general partner of Valero L.P., and by the other unitholders of Valero L.P. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.


	*Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.*

You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from your share of our taxable income.

The sale or exchange of 50% or more of our or Valero L.P.’s capital and profits interests, within a twelve-month period, will result in the termination of our or Valero L.P.’s partnership for federal income tax purposes. Valero Energy currently intends to sell its interests in us, pending market conditions, such that 50% or more of the total interests in our capital and profits may be sold within a twelve-month period after the completion of this offering.

We will be considered to have terminated our partnership for federal income tax purposes if, within a twelve-month period, there is a sale or exchange for federal income tax purposes of 50% or more of the total interests in our capital and profits, including sales by subsidiaries of Valero Energy, together with all other units sold during such period. Likewise, Valero L.P. will be considered to have terminated its partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in Valero L.P.’s capital and profits within a twelve-month period. A termination of our partnership would result in a deemed sale or exchange of our interest in Valero L.P.’s capital and profits. This deemed sale or exchange of our interests in Valero L.P.’s capital and profits may also cause the termination of Valero L.P.’s partnership if this deemed sale, together with all other sales of interests in Valero L.P., results in a sale or exchange of 50% or more of Valero L.P.’s capital and profits interests within a twelve-month period. A termination would, among other things, result in the closing of our or Valero L.P.’s taxable year for all unitholders and would result in a deferral of depreciation and cost recovery deductions allowable in computing our or Valero L.P.’s taxable income. Thus, if this occurs you will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated, and for future years, as a percentage of the cash distributed to you with respect to that period. It is Valero Energy’s intent to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions, such that 50% or more of the total interests in our capital and profits may be sold within a twelve-month period after the completion of this offering. Please read “Material Tax Consequences — Disposition of Units” for a discussion of the consequences of our termination for federal income tax purposes.


	*Tax gain or loss on the disposition of our units could be different than expected.*

If you sell your units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those units. Prior distributions to you in excess of the total net taxable income you were allocated for a unit, which decreased your tax basis in that unit, will, in effect, become taxable income to you if the unit is sold at a price greater than your tax basis in that unit, even if the price you receive is less than your

original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you.


	*Tax-exempt entities and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.*

Investment in units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.


	We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.

Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of units and could have a negative impact on the value of our units or result in audit adjustments to your tax returns. Please read “Material Tax Consequences — Uniformity of Units” for a further discussion of the effect of the depreciation and amortization positions we will adopt.


	*You will likely be subject to state and local taxes and return filing requirements as a result of investing in our units.*

In addition to federal income taxes, you will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or Valero L.P. do business or own property. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We or Valero L.P. may own property or conduct business in other states or foreign countries in the future. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our units. Please read “Material Tax Consequences — State, Local, Foreign and Other Tax Considerations.”


	*We expect that our ratio of taxable income to cash distributions will be higher than the ratio applicable to holders of common units in Valero L.P.*

We expect that our ratio of taxable income to cash distributions will be higher than the ratio applicable to holders of common units in Valero L.P. Other holders of common units in Valero L.P. will receive remedial allocations of deductions from Valero L.P. Any remedial allocations of deductions to us from Valero L.P. will be very limited. In addition, our ownership of Valero L.P. incentive distribution rights will cause more taxable income to be allocated to us from Valero L.P. If Valero L.P. is successful in increasing its distributions over time, our income allocations from our Valero L.P. incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will increase.


	Items of our income, gain, loss and deduction will be allocated among our unitholders to account for the difference between the fair market value and tax basis of our assets at the time of an offering.

Specified items of income, gain, loss and deduction will be allocated to us from Valero L.P. and among our unitholders to account for the difference between the fair market value and tax basis of Valero L.P.’s assets and our assets at the time the assets were contributed to Valero L.P. (or its predecessors) or at the time of this and any other offering. The effect of these allocations will be to allocate to us from Valero L.P. and to our unitholders, gain attributable to our share of the difference between the fair market value and the tax basis of Valero L.P.’s assets at these times (including gain attributable to our ownership of the incentive distribution rights). The effect of these allocations to a unitholder purchasing units in this offering will be essentially the same as if the tax basis of our and Valero L.P.’s assets were equal to their fair market values at the time of the offering, with the result that a unitholder purchasing units in this offering will not bear the federal income tax burden associated with any existing difference between the fair market value and tax basis of our or Valero L.P.’s assets. The federal income tax burden associated with the difference between the fair market value and tax basis of our assets immediately prior to an offering will be borne by our existing unitholders as of that time. Please read “Material Tax Consequences — Tax Treatment of Operations — Tax Basis, Depreciation and Amortization.”

USE OF PROCEEDS

We will not receive any proceeds from the sale of the units in this offering. All of the units being sold in this offering are being offered by other subsidiaries of Valero Energy.

CAPITALIZATION

The following table sets forth our cash and our capitalization as of December 31, 2005 (in thousands) on a historical basis and as adjusted to reflect (i) a capital contribution by Valero Energy subsidiaries to fund certain employee benefit plan liabilities of ours and (ii) a capital contribution by Valero Energy subsidiaries to us of notes issued by us and held by Valero Energy subsidiaries. These transactions will occur prior to the sale of the units being offered in this prospectus. You should read our financial statements and notes that are included elsewhere in this prospectus for additional information.


		December 31, 2005

				Offering			As Adjusted
		Historical		Adjustments			for Offering

Cash		$	121	$	3,886		$	4,007

Notes payable to affiliates		$	265,961	$	(265,961	)	$	—
Members’ equity			141,780		268,254			410,034

	Total capitalization	$	407,741	$	2,293		$	410,034

DILUTION

Dilution is the amount by which the offering price paid by purchasers of units sold in this offering will exceed our net tangible book value per unit after the offering. On a pro forma basis as of December 31, 2005, our net tangible book value was $410.0 million, or $9.21 per unit. This remains unchanged when adjusted for the sale by the selling unitholders of 16,500,000 units at an assumed initial public offering price of $24.00 per unit. Purchasers of units in this offering will experience substantial and immediate dilution in net tangible book value per unit for financial accounting purposes, as illustrated in the following table.


Assumed initial public offering price per unit	$	24.00
Less: Net tangible book value per unit before and after the offering (a)		9.21

Immediate dilution in net tangible book value per unit to purchasers in this offering	$	14.79


(a)	Determined by dividing the total number of units outstanding after this offering (44,510,258 units) into our net tangible book value.

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with the assumptions and considerations included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “— Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P. — Assumptions and Considerations Related to the Estimated Minimum EBITDA of Valero L.P.” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and for certain risks inherent in our and Valero L.P.’s business.

For additional information regarding our and Valero L.P.’s historical and pro forma operating results, you should refer to the historical financial statements of Valero GP Holdings and Valero L.P. for the years ended December 31, 2005, 2004 and 2003, the historical financial statements of Kaneb for the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004 and 2003, and the pro forma combined financial statements of each of Valero GP Holdings and Valero L.P. for the year ended December 31, 2005 included elsewhere in this prospectus.

General


	*Rationale for Our Cash Distribution Policy*

Our cash distribution policy reflects a basic judgment that our unitholders will be better served if we distribute our available cash rather than retain it. Our cash-generating assets consist entirely of our ownership interests in Valero GP, LLC and Riverwalk Holdings, LLC which own the 2% general partner interest, 100% of the incentive distribution rights and a 21.4% limited partner interest in Valero L.P., from which we receive quarterly distributions. We currently have no operations separate from those of Valero L.P. and do not currently intend to conduct operations separate from those of Valero L.P. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to you than would be the case if we were subject to income tax. Our distribution policy is consistent with the terms of our limited liability company agreement, which requires that we distribute all of our available cash quarterly.


	*Restrictions and Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy*

There is no guarantee that our unitholders will receive quarterly distributions from us. Our cash distribution policy may be changed at any time and is subject to certain restrictions, including:


	•	Valero L.P.’s distribution policy is subject to restrictions on distributions under its credit agreements, which contain material financial tests and covenants it must satisfy. Should it be unable to comply with the restrictions under its credit agreements, Valero L.P. would be prohibited from making cash distributions to us, which in turn would prevent us from making cash distributions to you notwithstanding our stated cash distribution policy.

	•	Our cash distribution policy may be subject to restrictions on distributions under our anticipated credit facility. Our credit facility may contain material financial tests and covenants that we must satisfy. Should we be unable to comply with the restrictions, if any, under our anticipated credit facility, we would be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

	•	Valero L.P.’s general partner has broad discretion under Valero L.P.’s partnership agreement to establish reserves for the prudent conduct of Valero L.P.’s business and for future cash distributions to Valero L.P.’s unitholders, and the establishment of those reserves could result in a reduction in cash distributions that we would otherwise anticipate receiving from Valero L.P., which in turn could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy.

	•	Our board of directors has discretion under our limited liability company agreement to establish reserves for the prudent conduct of our business and for future distributions to our unitholders, and the

establishment of those reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

• While our limited liability company agreement requires us to distribute our available cash, our limited liability company agreement, including our cash distribution policy contained therein, may be amended by a vote of the holders of a majority of our units.

• Under Section 18-607 of the Delaware Limited Liability Company Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

• Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, Valero L.P. may not make a distribution to us if the distribution would cause its liabilities to exceed the fair value of its assets.

• We may lack sufficient cash to pay distributions to our unitholders due to increases in general and administrative expenses, principal and interest payments required under any outstanding debt, working capital requirements and anticipated cash needs of us or Valero L.P. and its subsidiaries.


	*Our Cash Distribution Policy Limits Our Ability to Grow*

Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash. Since our only cash generating assets are our indirect ownership interests in Valero L.P., our growth will initially be completely dependent upon Valero L.P.’s ability to increase quarterly cash distributions per unit. If we issue additional units or incur debt, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.


	*Valero L.P.’s Ability to Grow is Dependent on its Ability to Access External Growth Capital*

Valero L.P. distributes to its partners all of its available cash. As a result, it relies on external financing sources, including commercial borrowings and debt and equity issuances, to fund its acquisitions and growth capital expenditures. As a result, to the extent Valero L.P. does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent Valero L.P. issues additional units and maintains or increases its distribution level per unit, the payment of distributions on those additional units may increase the risk that Valero L.P. will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to Valero L.P., which in turn may impact the distributions to us and the available cash that we have to distribute to our unitholders.

Our Initial Distribution Rate


	*Our Cash Distribution Policy*

Upon the closing of this offering, our board of directors will adopt a cash distribution policy for our units pursuant to which we will declare an initial quarterly distribution of $0.27 per unit, or $1.08 per unit on an annualized basis, to be paid no later than 50 days after the end of each fiscal quarter. This equates to an aggregate cash distribution of approximately $12.0 million per complete quarter or $48.1 million per year.

Any distributions received by us from Valero L.P. related to periods prior to the closing of this offering will be distributed entirely to Valero Energy or its subsidiaries. In August 2006, we expect to pay a prorated quarterly distribution to you (based on our initial quarterly distribution of $0.27 per unit) for the period between the consummation of this offering and June 30, 2006.

The following table sets forth the assumed number of our units outstanding upon the closing of this offering and the estimated aggregate distribution amounts to be paid on such units during the first four quarters following the closing of this offering at our initial quarterly distribution of $0.27 per unit, or $1.08 per unit on an annualized basis.


				Distributions

		Number		One		Four
		of Units		Quarter		Quarters

Publicly held units			16,500,000	$	4,455,000	$	17,820,000
Units held by subsidiaries of Valero Energy			28,010,258		7,562,770		30,251,079

	Total		44,510,258	$	12,017,770	$	48,071,079

Our distributions will not be cumulative. Consequently, if distributions on our units are not paid at the targeted levels, our unitholders will not be entitled to receive such payments in the future.

Our distribution policy is consistent with the terms of our limited liability company agreement, which requires that we distribute all of our available cash quarterly. Under our limited liability company agreement, available cash is defined to generally mean, for each fiscal quarter, the amount of cash generated from our business in excess of the amount of cash reserves established by our board of directors to, among other things:


	•	provide for the conduct of our business;

	•	comply with applicable law or any debt instrument or other agreement applicable to us;

	•	provide funds for distributions to our unitholders with respect to any one or more of the next four quarters; or

	•	permit Riverwalk Logistics, L.P. to make capital contributions to Valero L.P. to maintain its 2% general partner interest upon the issuance of partnership securities by Valero L.P.


	*Valero L.P.’s Cash Distribution Policy*

Like us, Valero L.P. has adopted a cash distribution policy that requires it to distribute its available cash to unitholders on a quarterly basis. Under Valero L.P.’s partnership agreement, available cash is defined to mean generally, for each fiscal quarter, the sum of all cash and cash equivalents at the end of such quarter, plus any working capital borrowings made subsequent to the end of such quarter, in excess of the amount its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law or any of its debt instruments or other agreements, or to provide for future distributions to its unitholders for any one or more of the next four quarters. In providing for the conduct of its business, Valero L.P.’s definition of available cash in its partnership agreement also allows it to maintain reserves for future capital expenditures and anticipated credit needs. Valero L.P. makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as Valero L.P.’s business has grown, primarily as a result of acquisitions and internal growth projects.

The following table shows the actual cash distributions (i.e., payments) that Valero L.P. has paid to its partners, including us, on all of its outstanding partnership interests with respect to the quarter indicated (in thousands, except per unit amounts). Payments are made within 45 days after the end of each quarter based on the partnership interests outstanding as of a record date that is set after the end of each quarter. Valero L.P. has an established historical record of paying quarterly cash distributions to its partners.


			Paid to
			Limited
			Partners,		Paid to Valero GP Holdings, LLC
			Excluding										Total
			Valero GP		Limited		General		Incentive				Paid to
	Distribution		Holdings,		Partner		Partner		Distribution				All
	Per Unit		LLC		Units		Interest		Rights		Total		Partners

2003
1st Quarter	$	0.700	$	8,063	$	7,201	$	319	$	384	$	7,904	$	15,967
2nd Quarter		0.750		8,638		7,716		348		718		8,782		17,420
3rd Quarter		0.750		9,570		7,710		369		759		8,838		18,408
4th Quarter		0.750		9,587		7,693		369		759		8,821		18,408
2004
1st Quarter		0.800		10,228		8,205		399		1,112		9,716		19,944
2nd Quarter		0.800		10,230		8,203		399		1,112		9,714		19,944
3rd Quarter		0.800		10,230		8,203		399		1,112		9,714		19,944
4th Quarter		0.800		10,240		8,193		399		1,112		9,704		19,944
2005
1st Quarter		0.800		10,243		8,190		399		1,112		9,701		19,944
2nd Quarter (a)		0.855		31,279		8,744		879		3,049		12,672		43,951
3rd Quarter		0.855		31,282		8,740		879		3,049		12,668		43,950
4th Quarter		0.855		31,282		8,740		879		3,049		12,668		43,950

(a)

For the second quarter of 2005, Valero L.P.’s financial statements reflected a total cash distribution of approximately $21.6 million, which was based on the partnership interests outstanding as of June 30, 2005. On July 1, 2005, Valero L.P. issued approximately 23.8 million of its common units in exchange for all outstanding units of Kaneb Pipe Line Partners, L.P. in connection with its acquisition of Kaneb. Pursuant to the terms of the merger agreement and because actual payments are made within 45 days after the end of each quarter based on the partnership interests outstanding as of a record date that is set after the end of each quarter, the actual cash payment made with respect to the second quarter was approximately $44.0 million, which includes the distributions paid to former Kaneb unitholders with respect to the second quarter of 2005.

Our Initial Quarterly Distribution

In the sections that follow, we present the basis for our belief that we will be able to fully fund our initial quarterly distribution of $0.27 per unit for the year ending December 31, 2006. In those sections, we present two tables, including:


	•	our “Pro Forma Cash Available for Distribution” in which we present the amount of available cash that we would have had for the year ended December 31, 2005, giving effect to the following transactions as if these transactions had occurred on January 1, 2005:


	—	the acquisition of Kaneb by Valero L.P., and the sale of certain assets acquired in such acquisition as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Valero L.P. — Recent Developments”;


	—	the existence of the Administration Agreement to be entered into between Valero GP Holdings and Valero GP, LLC, which will provide for the payment by Valero GP Holdings of certain costs incurred by Valero GP, LLC personnel on behalf of Valero GP Holdings;

	—	the incurrence of certain third party costs by Valero GP Holdings related to its being a publicly held entity; and

	—	Valero L.P.’s current quarterly cash distribution of $0.855 per limited partner unit, or $3.42 per limited partner unit on an annualized basis.


	•	our “Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.” in which we present the calculation of estimated minimum EBITDA of Valero L.P. necessary for Valero L.P. to pay distributions to its partners, including us, which will enable us to have sufficient cash available for distribution to fully fund our expected distribution for the year ending December 31, 2006.

Our tables entitled “Pro Forma Cash Available for Distribution” and “Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.” used in this section as described below, have been prepared by and are the responsibility of our management. Neither our independent registered public accounting firm, KPMG LLP, nor our previous independent registered public accounting firm, Ernst & Young LLP, have examined, compiled or otherwise applied procedures to this information and, accordingly, do not express an opinion or any other form of assurance on the information or its achievability, and they assume no responsibility for, and disclaim any association with, the prospective financial information. In addition, such tables and information were not prepared with a view toward compliance with published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, and were not prepared in accordance with accounting principles generally accepted in the United States of America nor were procedures applied pursuant to auditing standards of the Public Company Accounting Oversight Board (United States).


	*Pro Forma Cash Available for Distribution*

Our pro forma cash available for distribution for the year ended December 31, 2005 would have been sufficient to pay the initial quarterly distribution of $0.27 per unit on all units to be outstanding following the completion of this offering. Our ability to pay our initial distribution of approximately $48.1 million on all our units for the year ended December 31, 2005 is predicated primarily on Valero L.P.’s ability to pay a pro forma distribution of $3.42 per unit for 2005. If Valero L.P. had completed the transactions described in this prospectus at the beginning of 2005, it would have generated sufficient cash available for distribution to pay the full $3.42 per unit for the year ended December 31, 2005, net of cash reserves withheld at the discretion of Valero L.P.’s general partner of $33.5 million.

Our pro forma cash available for distribution includes estimated general and administrative expenses we will incur as a result of being a publicly traded limited liability company, such as costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, director compensation and incremental insurance costs, including director and officer liability insurance. We expect these general and administrative expenses initially to total approximately $2.4 million per year, which includes $0.5 million per year related to the Administration Agreement.

The pro forma financial statements of Valero GP Holdings and Valero L.P., upon which pro forma cash available for distribution is based, do not purport to present the results of operations had the pro forma transactions described in this prospectus actually been completed as of the dates indicated. Furthermore, cash available for distribution is a cash accounting concept, while the pro forma financial statements of Valero GP Holdings and Valero L.P. have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution shown above in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had the transactions described in this prospectus actually been completed as of the dates indicated.

The following table illustrates, on a pro forma basis for the year ended December 31, 2005, the amount of cash available for distribution to our unitholders, assuming that the transactions described in this prospectus had been consummated at the beginning of 2005 (in thousands, except unit and per unit amounts).

Valero GP Holdings, LLC

Pro Forma Cash Available for Distribution

For the Year Ended December 31, 2005

(unaudited)


Valero L.P. Data:
	Pro Forma Income from Continuing Operations			$	83,084
		Plus:
			Interest expense, net		61,121
			Income tax benefit		(8,742	)
			Depreciation and amortization expense		94,180
			Provision for loss contingencies		42,000
			Other non-cash charges		4,000
			Cash payments by Kaneb related to acquisition costs (a)		23,022

	Pro Forma Adjusted EBITDA (b)				298,665
		Plus:
			Distributions from joint ventures		6,841
			Borrowings to fund strategic capital expenditures		51,436
		Less:
			Equity income from joint ventures		(5,116	)
			Interest expense, net		(61,121	)
			Income tax benefit		8,742
			Strategic capital expenditures		(51,436	)
			Reliability capital expenditures		(38,680	)

	Pro Forma Cash Available for Distribution Prior to Cash Reserves				209,331
		Less:
			Cash reserves (c)		(33,530	)

	Pro Forma Cash Available for Distribution to All Valero L.P. Partners			$	175,801


	Pro Forma Cash Distributed to All Valero L.P. Partners (d):
		Distributions to Valero GP Holdings, LLC:
			2% general partner interest		$	3,516
			Incentive distribution rights			12,195
			Common and subordinated units			34,960

				Total distributions to Valero GP Holdings, LLC		50,671
			Distributions to public unitholders			125,130

				Total pro forma cash distributed to all Valero L.P. partners	$	175,801

	Debt Covenant Ratios Calculated Pursuant to Credit Agreements (e):
		Debt-to-EBITDA				3.99	x
		EBITDA-to-Interest				4.80	x
Valero GP Holdings, LLC Data:
	Pro Forma Cash Distributions Received from Valero L.P.				$	50,671
		Less:
			General and administrative expenses (f)			(2,350	)
			Income tax expense			(53	)
			Cash reserves (c)			(197	)

	Pro Forma Cash Available for Distribution				$	48,071

	Expected Cash Distributions by Valero GP Holdings, LLC:
		Expected distribution per unit			$	1.08

		Distributions paid to public unitholders (based on 16,500,000 units)			$	17,820
		Distributions paid to Valero Energy (based on 28,010,258 units)				30,251

			Total expected cash distributions paid to our unitholders		$	48,071


(a)		Represents cash paid by Kaneb for certain costs incurred in connection with Valero L.P.’s acquisition of Kaneb, which were charged to expense.

(b)		Valero L.P. does not report EBITDA as a measure of the operating performance of its assets. However, Valero L.P. recognizes that EBITDA is a widely accepted financial measure used by investors to compare partnership performance, even though it is not defined in GAAP, and has therefore reconciled pro forma income from continuing operations to pro forma adjusted EBITDA. Pro forma adjusted EBITDA excludes the charges described in footnote (a), even though these charges relate to cash charges, because the inclusion of such amount would result in pro forma adjusted EBITDA that is not indicative of Valero L.P.’s ability to generate cash from its operations. The payment of cash related to this charge has been removed from pro forma adjusted EBITDA to arrive at pro forma cash available for distribution to all Valero L.P. partners.

(c)		Valero L.P.’s partnership agreement permits and Valero GP Holdings’ limited liability company agreement permits the board of directors to establish cash reserves that are necessary or appropriate to satisfy general and administrative and other expenses and debt service requirements, to comply with any debt instrument or other agreements, or to provide for other requirements. The amounts reflected in this table are those amounts that are assumed to be reserved such that the cash available for distribution equals the quarterly distribution of $0.855 per unit and $0.27 per unit for Valero L.P. and Valero GP Holdings, respectively.

(d)		Based on units outstanding as of December 31, 2005 and a Valero L.P. distribution of $0.855 per quarter.

(e)		Valero Logistics Operations and Kaneb Terminals Limited, both wholly owned subsidiaries of Valero L.P., are parties to various credit agreements that require Valero L.P. to maintain certain financial ratios. Specifically, prior to June 30, 2006, Valero L.P. may not allow its ratio of consolidated indebtedness (as

defined in the credit agreements) to consolidated EBITDA (as defined in the credit agreements) to exceed 5.0 for the four fiscal quarters most recently ended. Subsequent to June 30, 2006, that ratio may not exceed 4.75. However, in periods subsequent to an acquisition of at least $100 million, the credit agreements permit the maximum ratios indicated above to increase by 0.5. Additionally, the credit agreements require that Valero L.P.’s ratio of consolidated EBITDA (as defined in the credit agreements) to consolidated interest expense (as defined in the credit agreements) remain in excess of 3.0 for the four fiscal quarters most recently ended.

(f) Represents general and administrative expenses of $2.4 million that we expect to incur as a public company, including $0.5 million related to the Administration Agreement.

Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.

In the table below entitled “Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.,” we estimate that Valero L.P.’s EBITDA must be no less than $293.4 million in order to provide us with the minimum amount of cash distributions from Valero L.P. for the year ending December 31, 2006 of $50.7 million which is necessary to permit us to fund our initial quarterly cash distribution of $0.27 per unit for each of the four quarters ending December 31, 2006. We refer to this amount of minimum cash distributions from Valero L.P. as our “Estimated Minimum Cash Distributions to be Received from Valero L.P.” We have estimated that if cash distributions from Valero L.P. meet or exceed this amount, we will have sufficient cash available to pay our initial cash quarterly distribution for the year ending December 31, 2006, and additionally, that we and Valero L.P. will not be restricted under our credit agreements from paying cash distributions to our unitholders at that level.

Valero L.P.’s estimated minimum EBITDA of $293.4 million for the year ending December 31, 2006 is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of EBITDA needed to generate sufficient available cash to make cash distributions to our unitholders at our initial distribution rate of $0.27 per unit per quarter (or $1.08 per unit on an annualized basis) for the year ending December 31, 2006. Valero L.P.’s estimated minimum EBITDA should not be viewed as management’s projection of operating earnings of Valero L.P. Our management believes that Valero L.P.’s actual EBITDA during the year ending December 31, 2006 will exceed the estimated minimum EBITDA of $293.4 million.

You should read “— Assumptions and Considerations Related to the Estimated Minimum EBITDA of Valero L.P.” for a discussion of the material assumptions underlying our belief that Valero L.P. will be able to generate sufficient EBITDA to provide us with our estimated minimum cash distributions to be received from Valero L.P. While we believe that these assumptions are reasonable in light of our current expectations regarding future events, the assumptions underlying the estimated minimum cash distributions to be received from Valero L.P. are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If the estimated minimum EBITDA of Valero L.P. is not achieved, we may not be able to pay the minimum quarterly distribution on our units. Consequently, the statement that we believe that cash distributions from Valero L.P. will be sufficient to allow us to pay the initial quarterly distribution on our units for the four consecutive quarters ending December 31, 2006 should not be regarded as a representation by us or the underwriters or any other person that we will declare and make such a distribution.

When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial condition and results of operations to vary significantly from those set forth in the following table (in thousands, except unit and per unit amounts).

Valero GP Holdings, LLC

Estimated Minimum Cash Available for Distribution

Based upon Estimated Minimum EBITDA of Valero L.P.

For the Year Ending December 31, 2006

(unaudited)


Valero L.P. Data:
	Estimated Minimum Income from Continuing Operations				$	124,131
		Plus:
			Interest expense, net			63,209
			Income tax expense			8,857
			Depreciation and amortization expense			97,250

	Estimated Minimum EBITDA (a)					293,447

		Plus:
			Distributions from joint ventures			7,167
			Borrowings to fund strategic capital expenditures			14,689
			Proceeds from the sale of the Australia and New Zealand subsidiaries			65,376
		Less:
			Equity income from joint ventures			(7,030	)
			Interest expense, net			(63,209	)
			Income tax expense			(8,857	)
			Strategic capital expenditures			(80,065	)
			Reliability capital expenditures			(45,717	)
			Cash reserves			—

	Estimated Minimum Cash Available for Distribution to All Valero L.P. Partners				$	175,801

	Estimated Minimum Cash Distributions to All Valero L.P. Partners (b):
		Estimated Minimum Cash Distributions to Valero GP Holdings, LLC:
			2% general partner interest		$	3,516
			Incentive distribution rights			12,195
			Common and subordinated units			34,960

				Total estimated minimum cash distributions to Valero GP Holdings, LLC		50,671
		Estimated minimum cash distributions to public unitholders				125,130

				Total estimated minimum cash distributions by Valero L.P.	$	175,801

	Debt Covenant Ratios Calculated Pursuant to Credit Agreements (c):
			Debt-to-EBITDA			4.00	x
			EBITDA-to-Interest			4.60	x

Valero GP Holdings, LLC Data:
	Estimated Minimum Cash Distributions to be Received from Valero L.P.				$	50,671
		Less:
			General and administrative expenses (d)			(2,350	)
			Income tax expense			(53	)
			Cash reserves (e)			(197	)

	Estimated Minimum Cash Available for Distribution				$	48,071


Expected Minimum Cash Distributions by Valero GP Holdings, LLC:
	Expected distribution per unit		$	1.08

	Distributions paid to public unitholders (based on 16,500,000 units)		$	17,820
	Distributions paid to Valero Energy (based on 28,010,258 units)			30,251

		Total distributions paid to our unitholders	$	48,071


(a)		Valero L.P. does not report EBITDA as a measure of the operating performance of its assets. However, Valero L.P. recognizes that EBITDA is a widely accepted financial measure used by investors to compare partnership performance, even though it is not defined in GAAP, and has therefore reconciled estimated minimum income from continuing operations to EBITDA.

(b)		Based on units outstanding as of December 31, 2005 and a Valero L.P. distribution of $0.855 per quarter.

(c)		Valero Logistics Operations and Kaneb Terminals Limited, both wholly owned subsidiaries of Valero L.P., are parties to various credit agreements that require Valero L.P. to maintain certain financial ratios. Specifically, prior to June 30, 2006, Valero L.P. may not allow its ratio of consolidated indebtedness (as defined in the credit agreements) to consolidated EBITDA (as defined in the credit agreements) to exceed 5.0 for the four fiscal quarters most recently ended. Subsequent to June 30, 2006, that ratio may not exceed 4.75. However, in periods subsequent to an acquisition of at least $100 million, the credit agreements permit the maximum ratios indicated above to increase by 0.5. Additionally, the credit agreements require that Valero L.P.’s ratio of consolidated EBITDA (as defined in the credit agreements) to consolidated interest expense (as defined in the credit agreements) remain in excess of 3.0 for the four fiscal quarters most recently ended.

(d)		Represents general and administrative expenses of $2.4 million that we expect to incur as a public company, including $0.5 million related to the Administration Agreement.

(e)		Valero GP Holdings’ limited liability company agreement permits the board of directors to establish cash reserves that are necessary or appropriate to satisfy general and administrative and other expenses and debt service requirements, to comply with any debt instrument or other agreements or to provide for other requirements. The amount reflected on this table is that amount which is assumed to be reserved such that the cash available for distribution equals the quarterly distribution of $0.27 per unit, or $1.08 per unit on an annualized basis.


	*Assumptions and Considerations Related to the Estimated Minimum EBITDA of Valero L.P.*

We believe that our ownership interests in Valero L.P. will generate sufficient cash flow to enable us to pay our initial quarterly distribution of $0.27 per unit on all of our units for the four quarters ending December 31, 2006. Our ability to make these distributions assumes that Valero L.P. will pay its recently declared quarterly distribution of $0.855 per common unit for each of the four quarters ending December 31, 2006, which means that the total amount of cash distributions we receive from Valero L.P. during that period would be $50.7 million.

The primary determinant in Valero L.P.’s ability to pay a distribution of $0.855 per common unit for each of the four quarters ending December 31, 2006, is its ability to generate EBITDA of at least $293.4 million during that period, which in turn is dependent upon its ability to generate income from continuing operations of at least $124.1 million. Valero L.P.’s ability to generate at least this amount of income from continuing operations is based on a number of assumptions which are set forth below.

While we believe that these assumptions are generally consistent with the actual performance of Valero L.P. and are reasonable in light of our current beliefs concerning future events, the assumptions are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If these assumptions are not realized, the actual available cash that Valero L.P. generates, and thus the cash we would receive from our ownership interests in Valero L.P., could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make our initial quarterly distribution on our units for the forecasted period. In that event, the market price of our units may decline materially. Consequently, the statement that we believe that we

will have sufficient cash available to pay the initial distribution on our units for each quarter through December 31, 2006, should not be regarded as a representation by us or the underwriters or any other person that we will make such a distribution. When reading this section, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” in this prospectus.


	•	Estimated Minimum Income from Continuing Operations of Valero L.P. We believe that Valero L.P. must achieve a minimum of $124.1 million in income from continuing operations, which is based on a minimum of $228.7 million in operating income from its business segments (before general and administrative expenses). This minimum estimate of $124.1 million in income from continuing operations is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of operating results needed by Valero L.P. to derive its estimated minimum EBITDA of $293.4 million. The estimate of minimum income from continuing operations should not be viewed as Valero L.P.’s projection of its earnings. Valero L.P.’s management believes that the actual income from continuing operations of Valero L.P. during the year ending December 31, 2006 will exceed $124.1 million. The minimum operating income by business segment (before general and administrative expenses and provision for loss contingencies) is provided in the table below for the year ending December 31, 2006 and those amounts are compared to pro forma amounts for the year ended December 31, 2005 (in thousands).


					Estimated
		Pro Forma			Minimum
		for the			for the
		Year Ended			Year Ending
		December 31,			December 31,
		2005			2006

Valero L.P.’s Operating Income by Business Segment (Before General and Administrative Expenses and Provision for Loss Contingencies):
	Crude oil pipelines	$	30,439		$	30,168
	Refined products pipelines		80,350			77,083
	Refined products terminals		96,593			93,462
	Crude oil storage tanks		30,493			27,979

			237,875			228,692
Plus:
	Equity income from joint ventures		5,116			7,030
Less:
	General and administrative expenses		(65,528	)		(39,525	)
	Provision for loss contingencies		(42,000	)		—
	Interest expense, net		(61,121	)		(63,209	)
	Income tax (expense) benefit		8,742			(8,857	)

Valero L.P.’s Income from Continuing Operations		$	83,084		$	124,131


	The minimum operating income by business segment is determined based on estimates of revenues to be generated by each of Valero L.P.’s business segments and estimates of the related operating expenses. The assumptions for estimated revenues and operating expenses are outlined below.

	Assumptions for Estimated Revenues by Business Segment

	Approximately 60% of Valero L.P.’s operating income results from throughput arrangements with its customers. Under throughput arrangements, a customer agrees to pay a certain throughput fee or tariff for volumes moving through Valero L.P.’s terminals, pipelines or storage facilities. The majority of the remaining 40% of Valero L.P.’s operating income results from storage fee arrangements in which a customer agrees to pay a certain amount for the right to store their products in Valero L.P.’s storage tanks for a specified period of time. The average term of these agreements is approximately one year. Valero

L.P. also generates operating income from the sale of bunker fuel to marine vessels, but such operating income is not significant.


	—	Crude oil pipelines. Revenue generated in the crude oil pipelines segment is generated entirely from throughput fees. The average throughput fee per barrel is estimated to be $0.42 for the year ending December 31, 2006, as compared to $0.39 for the year ended December 31, 2005. The estimated $0.03 average increase is primarily the result of a fee increase that is effective July 1, 2006. This throughput fee increase is based on the estimated change in the producer price index which is allowed under Valero L.P.’s throughput agreements. Estimated revenues for this segment were then determined by applying this average throughput fee to an estimated minimum number of barrels of crude oil to be transported per day during the year ending December 31, 2006. Valero L.P. management believes that Valero L.P. will transport at least this volume of crude oil per day because such volume is less than pro forma amounts transported during the year ended December 31, 2005, and management does not anticipate any significant change in volumes transported, except for reductions relating to temporary shut downs at certain Valero Energy refineries during 2006 for upgrades, catalyst changes and maintenance activities. The following table provides Valero L.P.’s assumptions for the average throughput fee per barrel and estimated minimum throughput volumes for the year ending December 31, 2006 compared to pro forma throughput volumes for the year ended December 31, 2005.

Pro Forma for

Estimated Minimum for

the Year Ended

the Year Ending

December 31, 2005

December 31, 2006

Throughput

Average

Throughput

Average

(Barrels

Throughput

(Barrels

Throughput

per Day)

Fees/Barrel

per Day)

Fees/Barrel

358,965

0.39

330,584

0.42


	—	Refined product pipelines. Revenue generated in the refined product pipelines segment is generated entirely from throughput fees. The average throughput fee per barrel is estimated to be $0.88 for the year ending December 31, 2006, as compared to $0.83 for the year ended December 31, 2005. The estimated $0.05 average increase is primarily the result of a fee increase that is effective July 1, 2006. This throughput fee increase is based on the estimated change in the producer price index. Estimated revenues for this segment were then determined by applying this average throughput fee to an estimated minimum number of barrels of refined products to be transported per day during the year ending December 31, 2006. Valero L.P. management believes that Valero L.P. will transport at least this volume of refined products per day because such volume is less than pro forma amounts transported during the year ended December 31, 2005, and management does not anticipate any significant change in volumes transported, except for reductions related to temporary shut downs at certain Valero Energy refineries which is discussed above. The following table provides Valero L.P.’s assumptions for the average throughput fee per barrel and estimated minimum throughput volumes for the year ending December 31, 2006 compared to pro forma throughput volumes for the year ended December 31, 2005.

Pro Forma for

Estimated Minimum for

the Year Ended

the Year Ending

December 31, 2005

December 31, 2006

Throughput

Average

Throughput

Average

(Barrels

Throughput

(Barrels

Throughput

per Day)

Fee/Barrel

per Day)

Fee/Barrel

670,761

0.83

661,426

0.88


	—	Refined product terminals. Revenue generated in the refined product terminals segment is generated from storage and throughput fees. Storage fee revenue is estimated to be $237.6 million for the year ending December 31, 2006 as compared to $228.6 million on a pro forma basis for the year ended December 31, 2005. The estimated $9.0 million increase is primarily the result of fee increases that are effective on the anniversary dates of the various storage agreements. For throughput fee revenue, the average fee per barrel is estimated to be $0.50 for the year ending December 31, 2006, as compared to $0.49 for the year ended December 31, 2005. The estimated $0.01 average increase is

primarily the result of fee increases that were effective January 1, 2006. These terminalling fee increases are based primarily on the estimated change in the consumer price index and producer price index which are allowed under Valero L.P.’s terminals usage agreements. Estimated throughput revenues for this segment were then determined by applying this average terminalling fee to an estimated minimum number of barrels per day of refined products to be throughput during the year ending December 31, 2006. Valero L.P. management believes that Valero L.P. will throughput at least this volume of refined products per day because such volume is less than the pro forma amounts throughput during the year ended December 31, 2005, and management does not anticipate any significant change in volumes throughput, except for reductions related to temporary shutdowns at certain Valero Energy refineries which is discussed above. The following table provides Valero L.P.’s assumptions for the average terminalling fee per barrel and estimated minimum throughput volumes for the year ending December 31, 2006 compared to pro forma throughput volumes for the year ended December 31, 2005. The table also compares estimated storage fee revenues for the year ending December 31, 2006 to pro forma amounts for the year ended December 31, 2005 (dollars in thousands, except per barrel amounts).

Pro Forma for

Estimated Minimum for

the Year Ended

the Year Ending

December 31, 2005

December 31, 2006

Throughput

Average

Storage

Throughput

Average

Storage

(Barrels

Throughput

Fee

(Barrels

Throughput

Fee

per Day)

Fee/Barrel

Revenues

per Day)

Fee/Barrel

Revenues

245,084

0.49

228,600

180,088

0.50

237,611


	—	Crude oil storage tanks. Revenue generated in the crude oil storage tanks segment is generated entirely from throughput fees. For throughput fee revenue, the average fee per barrel is estimated to be $0.251 for the year ending December 31, 2006, as compared to $0.249 for the year ended December 31, 2005. The estimated $0.002 average increase is primarily the result of fee increases that were effective January 1, 2006 and others that will be effective April 1, 2006. These throughput fee increases are based on the estimated change in the consumer price index which is allowed under Valero L.P.’s throughput agreements for crude oil storage tanks. Estimated revenues for this segment were then determined by applying this average throughput fee to an estimated minimum number of barrels of crude oil to be received at various Valero Energy refineries during the year ending December 31, 2006. Valero L.P. management believes that Valero L.P. will throughput at least this volume of crude oil per day because such volume is less than the pro forma amounts throughput during the year ended December 31, 2005, and management does not anticipate any significant change in volumes throughput, except for reductions related to temporary shutdowns at certain Valero Energy refineries which is discussed above. The following table provides Valero L.P.’s assumptions for the average throughput fee per barrel and estimated minimum throughput volumes for the year ending December 31, 2006 compared to the pro forma throughput volumes for the year ended December 31, 2005.

Pro Forma for

Estimated Minimum for

the Year Ended

the Year Ending

December 31, 2005

December 31, 2006

Throughput

Average

Throughput

Average

(Barrels

Throughput

(Barrels

Throughput

per Day)

Fee/Barrel

per Day)

Fee/Barrel

517,409

0.249

503,574

0.251


	Assumptions for Estimated Operating Costs (Except for General and Administrative Expenses and Provision for Loss Contingencies)

	Valero L.P.’s most significant operating costs are employee salary and wage costs, power costs and maintenance expenses. The following are Valero L.P.’s assumptions regarding these estimated operating costs:


	—	Employee salary and wage costs are estimated to be approximately $107.7 million for the year ending December 31, 2006, as compared to approximately $102.5 million on a pro forma basis for the year ended December 31, 2005. Valero L.P.’s estimate for 2006 assumes no significant changes in the average number of employees as compared to the average number of employees during the year ended December 31, 2005, and that salaries and wages will increase approximately 4.25%, which is consistent with the actual increase reflected in the pro forma amounts for the year ended December 31, 2005.

	—	Power costs are estimated to be approximately $46.3 million for the year ending December 31, 2006, as compared to approximately $41.5 million on a pro forma basis for the year ended December 31, 2005. Valero L.P. primarily uses electric power at its pipeline pump stations and terminals and such electric power is furnished by various utility companies that primarily use natural gas to generate the electricity. Accordingly, Valero L.P.’s power costs typically fluctuate with natural gas prices, which can vary widely. Electric power usage during 2006 is expected to be consistent with the usage during the year ended December 31, 2005. Valero L.P. assumed that natural gas prices will average $7.15 per MMBTU during the year ending December 31, 2006.

	—	Maintenance expenses are estimated to be approximately $42.9 million for the year ending December 31, 2006, as compared to approximately $28.7 million on a pro forma basis for the year ended December 31, 2005. Valero L.P. assumed that maintenance requirements during 2006 will increase in scope and frequency compared to those encountered during the year ended December 31, 2005. Valero L.P. also assumed that primary maintenance costs incurred, such as contract labor and materials, will increase 3% in 2006. This increase is consistent with actual increases Valero L.P. experienced for these costs during the year ended December 31, 2005.


	•	General and Administrative Expenses. General and administrative expenses are estimated to be approximately $39.5 million for the year ending December 31, 2006 compared to $65.5 million included in the pro forma amounts for the year ended December 31, 2005. The decrease of $26 million is primarily the result of $23.0 million of non-recurring merger related expenses incurred by Kaneb, which were included in general and administrative expenses. In addition, Valero L.P. expects to benefit from cost reductions resulting from its acquisition of Kaneb on July 1, 2005. The 2006 estimate of $39.5 million includes estimated cost reductions of approximately $5 million. Valero L.P. believes that these cost reductions will be realized as a result of the elimination of duplicate corporate office expenses and duplicate professional services. Valero L.P. has also considered the impact of the new Services Agreement between Valero L.P. and Valero GP, LLC, which will increase Valero L.P.’s general and administrative expenses by approximately $1.1 million in 2006.

	•	Provision for Loss Contingencies. In the second quarter of 2005, Kaneb recorded a provision for loss contingencies for various litigation, claims and commitments. No amount has been included in the estimated minimum income from continuing operations for 2006 because Valero L.P. does not expect to fund any recorded amounts in 2006.

	•	Interest Expense, Net. Valero L.P. estimated that interest expense will increase due to higher interest rates and higher debt balances. Valero L.P. assumed that the LIBOR rate would average 4.88% for the year ending December 31, 2006. This interest rate assumption is consistent with the one year yield curve for 30 day LIBOR rates at the time the minimum income from operations calculation was performed. Debt balances are estimated to increase by approximately $15 million during 2006, to fund a portion of Valero L.P.’s $80 million strategic capital expenditures program.


	•	Income Tax Expense. Valero L.P. estimated income tax expense based on current statutory tax rates and estimated taxable income for each of its tax paying subsidiaries. The majority of Valero L.P.’s tax paying subsidiaries are international subsidiaries. Estimated income tax expense resulted in a 5.3% effective income tax rate for 2006. Valero L.P.’s pro forma income from continuing operations for the year ended December 31, 2005 reflects a benefit of approximately $8.7 million for income taxes as a result of Kaneb recording a pre-tax loss in the first half of 2005. The pre-tax loss resulted primarily from merger-related costs and the provision for loss contingencies.

	•	Distributions from Joint Ventures and Equity Income from Joint Ventures. Valero L.P. currently owns equity interests in a refined products pipeline and multiple refined products terminals. Based on the 2006 earnings expectations for these joint ventures, Valero L.P. assumed it will receive cash distributions of approximately $7 million for the year ending December 31, 2006.

	•	Strategic Capital. Strategic capital expenditures are made to expand the operating capacity of Valero L.P.’s current operations. Valero L.P. estimated strategic capital expenditures of approximately $80 million for the year ending December 31, 2006. Valero L.P. assumed that it will fund $15 million of these expenditures with borrowings under its existing revolving credit agreement and the remaining $65 million with proceeds from the sale of Valero L.P.’s Australia and New Zealand subsidiaries.

	•	Reliability Capital. Reliability capital expenditures are made on an ongoing basis to maintain current operations. These expenditures do not increase operating capacity or operating income. Valero L.P. estimated reliability capital expenditures of approximately $46 million for the year ending December 31, 2006. The projects expected to be completed during 2006 are consistent with Valero L.P.’s ongoing program of asset improvements to maintain the reliability and integrity of its assets. Valero L.P. assumed that it will fund these expenditures with cash generated from operating activities.

Our Sources of Distributable Cash

Our only cash-generating assets are our ownership interests in Valero GP, LLC and Riverwalk Holdings, LLC, which own the following:


	•	the 2% general partner interest in Valero L.P., which we hold through our 100% ownership interest in Riverwalk Logistics, L.P.;

	•	100% of the incentive distribution rights issued by Valero L.P., described in more detail below; and

	•	617,339 common units and 9,599,322 subordinated units of Valero L.P. representing a 21.4% limited partner interest in Valero L.P. We expect the subordinated units to convert on a one-for-one basis to common units during the second quarter of 2006.


	*Incentive Distribution Rights — Hypothetical Allocations of Distributions to Us and Valero L.P.’s Other Unitholders*

Our assets include 100% of the incentive distribution rights in Valero L.P. The incentive distribution rights represent our right to receive an increasing percentage of Valero L.P.’s quarterly distributions after certain target distribution levels have been achieved. The table set forth below illustrates the percentage allocations of distributions among the owners of Valero L.P., including us, at the target distribution levels contained in Valero L.P.’s partnership agreement. This information assumes that we continue to own a 2% general partner interest in Valero L.P. and 100% of the incentive distribution rights of Valero L.P.

The percentage interests shown for us and the other Valero L.P. unitholders for the minimum quarterly distribution amounts are also applicable to distribution amounts that are less than the minimum quarterly distribution. Valero L.P.’s current distribution rate is $0.855 per unit. The amounts presented below are intended to be illustrative of the way in which we are entitled to an increasing share of distributions from Valero L.P. as total distributions from Valero L.P. increase and are not intended to represent a prediction of future performance.

Distributions

on our

General

Incentive

Unitholders,

Partner

Distribution

Valero L.P. Quarterly Distribution Per Unit

Including Us

Interest

Rights

Up to $0.60

98%

With respect to amounts above $0.60 up to $0.66

90%

With respect to amounts above $0.66

75%

23%

The table set forth below illustrates the percentage allocations among us and the other Valero L.P. unitholders as a result of certain assumed quarterly distribution payments per unit made by Valero L.P., including the target distribution levels contained in Valero L.P.’s partnership agreement. This information is based upon:


	•	Valero L.P.’s 37,210,427 common units and 9,599,322 subordinated units outstanding as of December 31, 2005; and

	•	our ownership of (i) the 2% general partner interest, (ii) the incentive distribution rights, (iii) 617,339 of Valero L.P.’s common units and (iv) 9,599,322 of Valero L.P.’s subordinated units.

The amounts presented below are intended to be illustrative of the way in which we are entitled to an increasing share of distributions from Valero L.P. as total distributions from Valero L.P. increase, assuming conversion of the subordinated units, and are not intended to represent a prediction of future performance (dollars in thousands).


				Distributions to				Distributions to Us from Interests in Valero L.P.
				Owners of Valero
Valero L.P.’s				L.P. Other Than Us
Quarterly		Total						General		Incentive		Limited
Distribution		Annual		Distribution		% of		Partner		Distribution		Partner		Distribution		% of
per Unit		Distributions		Amount		Total		Interest		Rights		Units		Amount		Total

	$0.600	$	114,636	$	87,823		77%	$	2,293	$	—	$	24,520	$	26,813		23%
	0.660		127,119		96,606		76%		2,542		999		26,972		30,513		24%
	0.855		175,801		125,148		71%		3,516		12,196		34,941		50,653		29%
	0.925		193,276		135,394		70%		3,866		16,215		37,801		57,882		30%
	0.970		204,511		141,981		69%		4,090		18,799		39,641		62,530		31%

Valero L.P. made incentive cash distributions to Riverwalk Logistics, L.P. of $2.6 million, $4.4 million and $8.7 million during the years ended December 31, 2003, 2004 and 2005, respectively. For a further description of Valero L.P.’s cash distribution policy, please read “— Our Initial Distribution Rate.”

HOW WE MAKE CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our limited liability company agreement that relate to cash distributions.

General

Our limited liability company agreement requires that, within 50 days after the end of each quarter beginning with the quarter ending June 30, 2006, we distribute all of our available cash to the holders of record of our units on the applicable record date.

Definition of Available Cash

Available cash is defined in our limited liability company agreement and generally means, with respect to any calendar quarter, all cash on hand at the end of such quarter less the amount of cash reserves necessary or appropriate, as determined in good faith by our board of directors, to:


	•	satisfy general, administrative and other expenses and debt service requirements;

	•	permit Riverwalk Logistics, L.P. to make capital contributions to Valero L.P. to maintain its 2% general partner interest upon the issuance of additional partnership securities by Valero L.P.;

	•	comply with applicable law or any debt instrument or other agreement;

	•	provide funds for distributions to unitholders with respect to any one or more of the next four quarters; and

	•	otherwise provide for the proper conduct of our business.

Adjustments to Capital Accounts

We will make adjustments to capital accounts upon the issuance of additional units. In doing so, we will allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to the unitholders in the same manner as we allocate gain or loss upon liquidation.

Distributions of Cash upon Liquidation

If we dissolve in accordance with the limited liability company agreement, we will sell or otherwise dispose of our assets in a process called a liquidation. We will first apply the proceeds of liquidation to the payment of our creditors in the order of priority provided in the limited liability company agreement and by law and, thereafter, we will distribute any remaining proceeds to the unitholders in accordance with their respective capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

SELECTED HISTORICAL AND PRO FORMA

FINANCIAL DATA — VALERO GP HOLDINGS, LLC

The following table sets forth, for the periods and at the dates indicated, selected historical and pro forma financial data for Valero GP Holdings (in thousands, except per unit amounts). The historical financial statements of Valero GP Holdings combine the financial statements of Valero GP Holdings and Valero GP, LLC and consolidate the financial statements of Riverwalk Logistics, L.P. Prior to March 18, 2003, the financial statements of Valero GP Holdings also consolidated the financial statements of Valero L.P. On March 18, 2003, Valero GP Holdings began accounting for its investment in Valero L.P. under the equity method, which is discussed in note 2 to the audited financial statements of Valero GP Holdings included elsewhere in this prospectus. The selected historical financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 should be read in conjunction with the audited financial statements of Valero GP Holdings, Valero L.P. and Kaneb included elsewhere in this prospectus. The selected pro forma financial data as of and for the year ended December 31, 2005 should be read in conjunction with the unaudited pro forma financial statements of Valero GP Holdings included elsewhere in this prospectus.

The selected pro forma statement of income data for the year ended December 31, 2005 reflects the pro forma effect of two separate transactions. First, Valero GP Holdings’ equity in income of Valero L.P. is adjusted to reflect the effect of the acquisition of Kaneb by Valero L.P., including the effect of the sale of certain assets acquired from Kaneb, as if those transactions occurred on January 1, 2005. Second, the effect of this offering is reflected as if it had occurred on January 1, 2005, including (a) the elimination of interest expense on Valero GP Holdings’ notes payable to affiliates resulting from a capital contribution by Valero Energy subsidiaries to Valero GP Holdings of notes issued by Valero GP Holdings and held by Valero Energy subsidiaries and (b) the incurrence of an incremental $2.3 million of general and administrative expenses that Valero GP Holdings is expected to incur as a publicly traded limited liability company, including costs under a new Administration Agreement with Valero GP, LLC, pursuant to which Valero GP, LLC will provide certain administrative services to Valero GP Holdings for a fee. The selected pro forma balance sheet data reflects the effect of the capital contribution discussed above as well as a capital contribution by Valero Energy subsidiaries to fund certain employee benefit plan liabilities of Valero GP Holdings as if those transactions occurred on December 31, 2005.


				Historical															Pro Forma

				Years Ended December 31,															Year Ended
																			December 31,
				2001			2002			2003			2004			2005			2005

				(unaudited)															(unaudited)
Statement of Income Data:
	Operating revenues			$	98,827		$	118,458		$	24,868		$	—		$	—		$	—
	Equity in earnings of Valero L.P.				—			—			27,418			35,314			37,646			25,951

		Total revenues			98,827			118,458			52,286			35,314			37,646			25,951

	Costs and expenses:
		Operating expenses			33,583			37,838			9,484			—			—			—
		General and administrative expenses			5,349			7,023			1,562			91			28			2,350
		Depreciation and amortization expense			13,390			13,708			2,975			—			—			—

			Total costs and expenses		52,322			58,569			14,021			91			28			2,350

	Operating income				46,505			59,889			38,265			35,223			37,618			23,601
	Equity in earnings of Skelly-Belvieu Pipeline Company				3,179			3,188			633			—			—			—
	Other income				—			—			72			375			456			456
	Interest income — affiliated				—			2			—			26			111			—
	Interest expense:
		Affiliated			—			(16,806	)		(18,691	)		(17,110	)		(17,778	)		—
		Nonaffiliated, net			(3,811	)		(4,880	)		(1,592	)		—			—			—
	Minority interest (a)				(9,393	)		(14,109	)		(2,400	)		—			—			—

	Income before income tax expense				36,480			27,284			16,287			18,514			20,407			24,057
	Income tax expense				—			396			33			67			114			53

	Net income			$	36,480		$	26,888		$	16,254		$	18,447		$	20,293		$	24,004

	Pro forma earnings per unit																		$	0.54


		Historical															Pro Forma

		Years Ended December 31,															Year Ended
																	December 31,
		2001			2002			2003			2004			2005			2005

		(unaudited)															(unaudited)
Balance Sheet Data (at period end):
	Total assets	$	729,188		$	760,256		$	392,937		$	388,991		$	410,314		$	419,707
	Total debt (b)		285,519			386,816			283,797			270,597			265,961			—
	Members’ equity (c)		309,278			244,771			105,960			113,975			141,780			410,034
Other Financial Data:
	Net cash provided by operating activities	$	77,132		$	60,369		$	23,033		$	22,183		$	16,731
	Net cash provided by (used in) investing activities		(17,926	)		(80,607	)		(17,060	)		1,521			(19,606	)
	Net cash provided by (used in) financing activities		(51,414	)		45,975			296,679			(23,632	)		2,876
	Distributions received from Valero L.P. (d)		15,872			39,130			36,013			37,964			44,745

The following information is provided to highlight significant trends and other information regarding the historical operating results, financial position and other financial data of Valero GP Holdings. Each section below represents a footnote to the table above.

Footnotes to Selected Financial Data:


(a)		Minority interest represents the proportionate interest of public unitholders in the net income of Valero L.P. during the period that Valero GP Holdings consolidated Valero L.P.

(b)		Total debt as of December 31, 2001 and 2002 includes $26.9 million and $110.4 million, respectively, of Valero L.P.’s outstanding debt, prior to the ceasing of consolidation of Valero L.P. on March 18, 2003. The remainder of the debt at the end of 2001 and 2002 and all of the debt as of December 31, 2003, 2004 and 2005 represents notes payable by Valero GP Holdings to subsidiaries of Valero Energy. The pro forma total debt as of December 31, 2005 is zero as the result of a capital contribution to Valero GP Holdings by Valero Energy subsidiaries of such notes.

(c)		Members’ equity in the historical balance sheet decreased from December 31, 2002 to December 31, 2003 as a result of the distribution to Valero GP Holdings’ members of the proceeds received from the redemption by Valero L.P. of 3,809,750 common units held by Valero GP Holdings. Members’ equity in the pro forma balance sheet as of December 31, 2005 is significantly higher than the members’ equity in the historical balance sheet as of the same date due to the assumed capital contribution of notes from Valero Energy subsidiaries discussed in footnote (b) above.

(d)		Distributions received from Valero L.P. for the years ended December 31, 2001, 2002 and 2003 include distributions received by Valero GP Holdings prior to the ceasing of consolidation of Valero L.P. on March 18, 2003, which were eliminated in the combined statements of cash flows.

SELECTED HISTORICAL AND

PRO FORMA FINANCIAL DATA — VALERO L.P.

The following table sets forth, for the periods and at the dates indicated, selected historical and pro forma financial data for Valero L.P. (dollars in thousands, except per unit data). The selected historical financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 should be read in conjunction with the audited financial statements of Valero L.P. included elsewhere in this prospectus. The selected pro forma financial data for the year ended December 31, 2005 should be read in conjunction with the unaudited pro forma financial statements of Valero L.P. included elsewhere in this prospectus.

The pro forma statement of income data for the year ended December 31, 2005 assumes:


	•	the acquisition of Kaneb by Valero L.P. occurred on January 1, 2005;

	•	the sale of certain assets acquired as part of the acquisition of Kaneb for $455 million occurred on January 1, 2005 and that the proceeds from such sale were used to repay debt;

	•	the sale of Martin Oil LLC, a wholly owned subsidiary of Kaneb that was acquired as part of the acquisition of Kaneb, to Valero Energy for $26.8 million occurred on January 1, 2005 and that the proceeds were used to repay debt; and

	•	the sale of Valero L.P.’s subsidiaries in Australia and New Zealand, which were acquired in connection with the acquisition of Kaneb and which Valero L.P. sold on March 30, 2006 for $65 million plus working capital adjustments, occurred on January 1, 2005 and that the proceeds were used to repay debt.


			Historical															Pro Forma

			Years Ended December 31,															Year Ended
																		December 31,
			2001			2002			2003			2004			2005(e)			2005

																		(unaudited)
Statement of Income Data:
Revenues			$	98,827		$	118,458		$	181,450		$	220,792		$	659,557		$	1,005,662

Costs and expenses:
	Cost of sales (a)			—			—			—			—			229,806			401,357
	Operating expenses			33,583			37,838			64,609			78,298			184,609			272,250
	General and administrative expenses			5,349			6,950			7,537			11,321			26,553			65,528
	Depreciation and amortization expense			13,390			16,440			26,267			33,149			64,895			94,180
	Provision for loss contingencies (b)			—			—			—			—			—			42,000

		Total costs and expenses		52,322			61,228			98,413			122,768			505,863			875,315

Operating income				46,505			57,230			83,037			98,024			153,694			130,347
	Equity earnings in joint ventures			3,179			3,188			2,416			1,344			2,319			5,116
	Interest and other expense, net			(3,811	)		(4,880	)		(15,860	)		(20,950	)		(43,625	)		(61,121	)

Income from continuing operations before income tax (expense) benefit				45,873			55,538			69,593			78,418			112,388			74,342
Income tax (expense) benefit (c)				—			(395	)		—			—			(4,713	)		8,742

Income from continuing operations				45,873			55,143			69,593			78,418			107,675		$	83,084

Income from discontinued operations (d)				—			—			—			—			3,398

Net income			$	45,873		$	55,143		$	69,593		$	78,418		$	111,073

Net income per unit applicable to limited partners:
Continuing operations			$	1.82		$	2.72		$	3.02		$	3.15		$	2.76		$	1.48

Discontinued operations (d)				—			—			—			—			0.10

Net income			$	1.82		$	2.72		$	3.02		$	3.15		$	2.86

Cash distributions per unit applicable to limited partners			$	1.70		$	2.75		$	2.95		$	3.20		$	3.365


	Historical															Pro Forma

	Years Ended December 31,															Year Ended
																December 31,
	2001			2002			2003			2004			2005(e)			2005

																(unaudited)
Balance Sheet Data(at period end):
Total assets	$	387,070		$	415,508		$	827,557		$	857,507		$	3,366,992
Long-term debt, less current portion		25,660			108,911			353,257			384,171			1,169,659
Partners’ equity		342,166			293,895			438,163			438,311			1,900,779
Operating Data (barrels/day):
Crude oil pipeline throughput		303,811			348,023			355,008			381,358			358,965
Refined product pipeline throughput		308,047			295,456			392,145			442,596			556,654
Refined product terminal throughput		189,172			175,559			225,426			256,576			245,084
Crude oil storage tank throughput		253,402			293,925			366,986			473,714			517,409
Other Financial Data:
Net cash provided by operating activities	$	77,132		$	77,656		$	106,108		$	108,503		$	186,430
Net cash used in investing activities		(17,926	)		(80,607	)		(442,350	)		(58,511	)		(89,000	)
Net cash provided by (used in) financing activities		(51,414	)		28,688			318,454			(49,590	)		(77,178	)


(a)		Cost of sales relates to the sale of bunker fuel. Valero L.P. purchases bunker fuel for resale and records cost of sales for barrels of fuel sold.

(b)		For the quarter ended June 30, 2005, Kaneb recorded a provision for loss contingencies associated with certain legal matters. Please read “Kaneb Services LLC and Subsidiaries — Condensed Notes to Consolidated Financial Statements — Note 6. Contingencies” included elsewhere in this prospectus.

(c)		Valero L.P. is not a taxable entity for federal and state income tax purposes. For 2002, income tax expense relates to the acquisition by Valero L.P. of the Wichita Falls Business from Valero Energy. For 2005, historical and pro forma income tax amounts relate to taxable, wholly owned corporate subsidiaries of Valero L.P. that were acquired as part of the acquisition of Kaneb. The corporate subsidiaries are primarily international subsidiaries.

(d)		On September 30, 2005, Valero L.P. sold certain assets it acquired as part of the acquisition of Kaneb for $455 million, and on March 30, 2006 Valero L.P. sold its subsidiaries in Australia and New Zealand which were acquired in connection with the Kaneb acquisition for $65 million plus working capital adjustments. The results of operations of these assets and subsidiaries are included in income from discontinued operations.

(e)		The historical statement of income data for the year ended December 31, 2005 includes the results of operations of Kaneb from the date of acquisition, July 1, 2005, through December 31, 2005.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the historical and pro forma combined financial statements and notes thereto included elsewhere in this prospectus. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the historical and pro forma financial statements included in this prospectus. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding certain risks inherent in our and Valero L.P.’s business.

Valero GP Holdings, LLC

Overview

Financial Statement Presentation

We reflect our ownership interest in Valero L.P. using the equity method of accounting, which means that our financial results reflect a portion of Valero L.P.’s net income, based on our ownership interest in Valero L.P., and our own administrative costs. We have no separate operating activities apart from those conducted by Valero L.P. and therefore generate no revenues from operations. Our cash flows currently consist of distributions from Valero L.P. on the partnership interests, including incentive distribution rights, that we own. Prior to March 18, 2003, we reflected our ownership interests in Valero L.P. on a consolidated basis, which means that our financial results were combined with Valero L.P.’s financial results through that date, with the portion of the results of operations related to the minority limited partner interests reflected as an expense. Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the operating activities and results of operations of Valero L.P. through March 18, 2003. Subsequent to that date, our financial position and results of operations reflect our ownership interests in Valero L.P. and our portion of Valero L.P.’s net income, respectively.

General

We were formed in June 2000 as UDS Logistics, LLC. We changed our name to Valero GP Holdings, LLC in January 2006. In anticipation of our initial public offering, we transferred our ownership of 614,572 common units and 9,599,322 subordinated units of Valero L.P. to Riverwalk Holdings, LLC, a wholly owned subsidiary.

We own Riverwalk Logistics, L.P., which is the general partner of Valero L.P., a publicly traded Delaware limited partnership (NYSE symbol: VLI). Valero L.P. conducts substantially all of its business through its operating partnerships and wholly owned subsidiaries, Valero Logistics Operations, L.P. and Kaneb Pipe Line Operating Partnership, L.P. Through its subsidiaries, Valero L.P. is engaged in the crude oil and refined product transportation, terminalling and storage business.

Our only cash generating assets are our indirect ownership interests in Valero L.P. Valero L.P., through its subsidiaries, operates one of the largest independent terminal and petroleum liquids pipeline systems in the United States. Our aggregate ownership interests in Valero L.P. consist of the following:


	•	the 2% general partner interest in Valero L.P., which we hold through our 100% ownership interest in Riverwalk Logistics, L.P.;

	•	100% of the incentive distribution rights issued by Valero L.P., which entitle us to receive increasing percentages of the cash distributed by Valero L.P., currently at the maximum percentage of 23%; and

	•	617,339 common units and 9,599,322 subordinated units of Valero L.P. representing a 21.4% limited partner interest in Valero L.P. We expect the subordinated units to convert on a one-for-one basis to common units during the second quarter of 2006.

Our primary objective is to increase per unit distributions to our unitholders by actively supporting Valero L.P. in executing its business strategy, which includes continued growth through expansion projects and strategic acquisitions. For instance, we may facilitate Valero L.P.’s growth through the use of our capital resources, which could involve capital contributions, loans or other forms of financial support.

Valero L.P. has an established historical record of paying quarterly cash distributions to its partners. Since its initial public offering in 2001, Valero L.P. has increased its quarterly distribution by approximately 42.5%, from $0.60 per unit, or $2.40 per unit on an annualized basis, to a current level of $0.855 per unit, or $3.42 per unit on an annualized basis. For the fourth quarter of 2005, we received a cash distribution from Valero L.P. of approximately $12.7 million (representing $50.7 million on an annualized basis), consisting of $0.9 million on our 2% general partner interest, $3.1 million on the incentive distribution rights and $8.7 million on the units of Valero L.P. that we own. Based on this current distribution level, we expect that our initial quarterly cash distribution will be $0.27 per unit, or $1.08 per unit on an annualized basis.

Cash Distributions

We intend to pay our unitholders quarterly cash distributions equal to our available cash. Available cash is defined in our limited liability company agreement and will initially be equal to the cash distributions we receive from Valero L.P., less reserves established by our board of directors for debt we may incur, if any, general and administrative expenses, future distributions and other miscellaneous uses of cash. Please read “Our Cash Distribution Policy and Restrictions on Distributions— General.” Based upon Valero L.P.’s recently declared quarterly distribution and the anticipated level of cash reserves that our board of directors believes is prudent for us to maintain, we expect that our initial quarterly distribution will be $0.27 per unit, or $1.08 per unit on an annualized basis.

The table set forth below shows the historical cash distributions declared and paid for the periods shown with respect to our ownership interests in Valero L.P. and incentive distribution rights (dollars and units in thousands, except per unit amounts). From 2001 through 2004, the aggregate annual cash distributions declared and paid by Valero L.P. with respect to all of its partnership interests increased as set forth in the table below. Over the same period, the aggregate annual cash distributions declared and paid by Valero L.P. with respect to our ownership interests increased as set forth in the table below. The changes in historical cash distributions on our ownership interests reflected in the table set forth below generally resulted from the following:


	•	the increases in Valero L.P.’s per unit quarterly distribution from $0.60 declared and paid for the third quarter of 2001 to $0.855 declared and paid for the fourth quarter of 2005;

	•	the decrease in Valero L.P.’s distributions to Valero Energy resulting from the redemption by Valero L.P. on March 18, 2003 of 3,809,750 common units indirectly owned by Valero Energy; and

	•	the increases in Valero L.P.’s distributions with respect to the 2% general partner interest resulting from the issuance of a total of 31,420,855 common units by Valero L.P. during such period to finance acquisitions and capital improvements.


		Cash Distributions Made by Valero L.P.(a)

		April 16, 2001 to			Years Ended December 31,
		December 31,
		2001			2002			2003			2004			2005

Cash distributions per unit		$	1.70		$	2.75		$	2.95		$	3.20		$	3.365
Average number of Valero L.P. limited partner units outstanding (b)			19,217			19,261			22,423			23,041			40,868
Total cash distributions made by Valero L.P. to all partners (c)		$	33,359		$	55,175		$	70,203		$	79,776		$	151,795
Cash distributions we received from Valero L.P.
	Distributions on general partner interest	$	667		$	1,103		$	1,405		$	1,596		$	3,036
	Distributions on incentive distribution rights (d)		—			1,103			2,620			4,448			10,259
	Distributions on our limited partnership interests		23,856			38,694			30,320			32,804			34,414

Total cash distributions received by us		$	24,523		$	40,900		$	34,345		$	38,848		$	47,709

Distributions to us as a percentage of total cash distributions (e)			73.5	%		74.1	%		48.9	%		48.7	%		31.4	%


(a)	Distributions declared for a quarter are paid by Valero L.P. within 45 days following the end of each quarter based on the partnership interests outstanding as of a record date that is set after the end of each quarter. Distributions for the fourth quarter are declared and paid in the year following such quarter.


(b)	Average number of Valero L.P. limited partner units outstanding on the distribution record dates for the periods presented.

(c)


(d)	Effective March 11, 2004, Valero L.P.’s partnership agreement was amended to reduce the incentive distribution rights to 23% for total distributions in excess of $0.66 per unit. This amendment had no effect on the amount of distributions paid relative to the incentive distribution rights for 2004 and 2005.


(e)	The 2002 percentage increase is based on the $34.6 million of cash distributions that would have been paid to us for 2001 had Valero L.P. issued common units to the public on January 1, 2001. The 2003 percentage decrease results from the redemption by Valero L.P. in March 2003 of 3,809,750 common units held by Valero GP Holdings, LLC.

Results of Operations

As discussed above in “— Overview,” our results of operations after March 18, 2003 consist primarily of our portion of Valero L.P.’s net income, which is based on our ownership interests in Valero L.P. Prior to March 18, 2003, our results of operations and components thereof were primarily those of Valero L.P. because we consolidated the financial statements of Valero L.P. with ours. Please read “— Valero L.P. — Results of Operations.”

Historically, Valero L.P. has from time to time issued common units to the public, which have diluted our ownership percentage in Valero L.P. Such issuances have resulted in increases in our proportionate share of Valero L.P.’s capital because the issuance price per unit exceeded our carrying amount per unit at the time of issuance. SEC Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock by a Subsidiary” (SAB 51), provides guidance on accounting for the effect of issuances of a subsidiary’s stock on the parent’s investment in that subsidiary. SAB 51 allows registrants to elect an accounting policy of recording such increases or decreases in a parent’s investment (SAB 51 credits or charges, respectively) either in income or directly in equity. As of June 30, 2005, prior to Valero L.P.’s acquisition of Kaneb, we had approximately $7 million in accumulated pre-tax SAB 51 credits related to our investment in Valero L.P. On July 1, 2005, the issuance of common units by

Valero L.P. in connection with its acquisition of Kaneb generated an additional pre-tax SAB 51 credit of approximately $151 million for us. We have not recognized any SAB 51 credits in our financial statements through December 31, 2005, and we are not permitted to do so until the Valero L.P. subordinated units that we own convert to common units, which is expected to occur in the second quarter of 2006. We expect to adopt our accounting policy and recognize all of our cumulative SAB 51 credits at that time.

Liquidity and Capital Resources

Our primary cash requirements are for distributions to partners, capital contributions to maintain Riverwalk Logistics, L.P.’s 2% general partner interest in Valero L.P., debt service requirements, if any, and general and administrative expenses. We expect to fund distributions to partners, debt service requirements, if any, and general and administrative expenses primarily with the quarterly cash distributions we receive from Valero L.P.

New Credit Facility

In connection with this offering, we anticipate entering into a bank credit facility with a borrowing capacity of up to $20 million to enable us to manage our cash flow obligations. For example, we expect to fund capital contributions through borrowings under our anticipated credit facility and we may initially meet other liquidity and capital resource requirements through borrowings under our anticipated credit facility.

Because we depend on cash distributions from Valero L.P. to meet our liquidity and capital resource requirements, information regarding Valero L.P.’s liquidity and capital resource requirements have been provided below to assist you in understanding how Valero L.P.’s cash flows are derived. Please read “— Valero L.P. — Liquidity and Capital Resources.”

Administration Agreement

Effective with the closing of this offering, we will enter into an Administration Agreement with Valero GP, LLC. The Administration Agreement will provide, among other things, that:


	•	Valero GP, LLC will provide all employees for us; and

	•	Valero GP, LLC will provide us with all executive management, accounting, legal, cash management, corporate finance and other administrative services.

The initial term of the Administration Agreement will commence with the closing of this offering and terminate on December 31, 2011, with automatic two year renewals unless terminated by either party on six months’ written notice. We may cancel or reduce the services provided under this agreement on 60 days written notice. The Administration Agreement will terminate upon the change of control of either us or Valero GP, LLC. For a more detailed description of this agreement, please read “Certain Relationships and Related Party Transactions — Related Party Transactions.”


	*Employee Benefits*

Prior to the effective date of this offering, the employees of our wholly owned subsidiary, Valero GP, LLC, participate in the employee benefit plans of Valero Energy. These plans include Valero Energy’s Pension Plan, Excess Pension Plan, Supplemental Executive Retirement Plan (SERP), Flex Benefits Plans which provides certain welfare benefits, and a Retiree Benefits Plan which provides post-retirement medical benefits to eligible employees. In addition, Valero GP, LLC maintains various long-term incentive plans (LTIP) which provide Valero L.P. unit options, restricted units and performance units to certain of its officers, directors and employees.

Upon the closing of this offering:


	•	All benefit obligations for benefits payable under the Pension Plan, Excess Pension Plan and SERP associated with employees’ service through the effective date of this offering will be the responsibility of Valero Energy. All benefit obligations related to service after the effective date of this offering will be covered under new and separate benefit plans maintained by Valero GP, LLC. We expect these new plans to provide employee retirement benefits comparable to the benefits previously provided to these employees under the Valero Energy plans.

	•	Medical and other welfare benefits will continue to be provided to Valero GP, LLC employees under the Flex Benefits Plan through December 31, 2006, at which time a new welfare benefit plan will be established by Valero GP, LLC. Valero GP, LLC will reimburse Valero Energy for the medical and other welfare benefits provided to Valero GP, LLC employees from the effective date of this offering through December 31, 2006. We expect the new Valero GP, LLC plan to provide employee welfare benefits comparable to the benefits previously provided to these employees under the Valero Energy plan.

	•	Benefit obligations related to the LTIP and certain long-term disability (LTD) benefits under the Flex Benefits Plan will be retained by Valero GP, LLC. Valero Energy will contribute cash to us on the effective date of this offering that will be sufficient to fund the fair value of these liabilities at that date. We expect the LTD plan to continue to provide similar benefits to Valero GP, LLC employees after the effective date of this offering.

	•	Benefit obligations related to the post-retirement medical benefits will be retained by Valero GP, LLC for those employees that are not “retirement eligible” (employees over 55 years old with 5 years of service and eligible to receive benefits under the Pension Plan). The benefit obligation for retirement eligible employees under the Retiree Benefits Plan will be the responsibility of Valero Energy. Valero Energy will contribute cash and a receivable from Valero L.P. to us on the effective date of this offering that will be sufficient to fund the estimated post-retirement benefit obligation retained by Valero GP, LLC at that date. We expect the post-retirement medical benefits plan to be adopted by Valero GP, LLC will provide comparable benefits to its employees after the effective date of this offering.

Critical Accounting Policies

We evaluate our investment in Valero L.P. for impairment if and when there is evidence that we may not be able to recover the carrying amount of our investment or Valero L.P. is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of our investment that is other than a temporary decline is recognized currently in earnings based on the difference between the estimated current fair value of the investment and our carrying amount. In order to determine fair value, our management must make certain estimates and assumptions regarding Valero L.P.’s operations, including, among other things, an assessment of market conditions, projected cash flows, interest rates and growth rates that could significantly impact the fair value of our investment. Due to the significant subjectivity of the assumptions used to determine fair value, changes in market conditions and/or changes in assumptions could result in significant impairment charges in the future, thus affecting our earnings. Any such unfavorable changes in market conditions could also significantly affect cash distributions we receive from Valero L.P. and thus cash distributions we pay to our unitholders. We believe that the carrying amount of our investment in Valero L.P., as of December 31, 2005, is recoverable. However, providing sensitivity analysis based on using varying assumptions in performing the impairment evaluation is not practicable due to the significant number of assumptions involved in determining fair value.

Valero L.P.

Recent Developments

On July 1, 2005, Valero L.P. completed the acquisition of Kaneb for an aggregate consideration of $2.9 billion. As a result, Valero L.P.’s annual reported results for 2005 only reflect the contribution of the assets acquired in the Kaneb acquisition for the second half of the year. Kaneb operated pipeline and terminal assets in the United States, Canada, Europe, the Netherland Antilles, Australia and New Zealand.

In conjunction with the Kaneb acquisition, Valero L.P. agreed with the United States Federal Trade Commission to divest certain assets. These assets consisted of two California terminals handling refined products, blendstocks, and crude oil, three East Coast refined product terminals, and a 550-mile refined product pipeline with four truck terminals and storage in the U.S. Rocky Mountains (collectively, the Held Separate Businesses). On September 30, 2005, Valero L.P. sold the Held Separate Businesses to Pacific Energy Partners, L.P. for approximately $455.0 million. In a separate transaction that occurred simultaneously with the closing of the Kaneb acquisition, Valero L.P. sold all of its interest in Kaneb’s commodity trading business to Valero Energy for approximately $26.8 million.

Additionally, on March 30, 2006, Valero L.P. sold its subsidiaries located in Australia and New Zealand, which own eight terminals with an aggregate storage capacity of 1.1 million barrels, for approximately $65.0 million, plus working capital adjustments. The results of operations for the Held Separate Businesses and Valero L.P.’s subsidiaries located in Australia and New Zealand are reflected in income from discontinued operations in Valero L.P.’s consolidated statement of income.

Overview

Valero L.P. is a publicly traded Delaware limited partnership formed in 1999 engaged in the crude oil and refined product transportation, terminalling and storage business. Valero L.P. has terminal facilities in the United States, Canada, Mexico, the Netherlands Antilles, the Netherlands and the United Kingdom.

As a result of the Kaneb acquisition, Valero L.P.’s business changed significantly. Geographically, Valero L.P. expanded from operating primarily in Texas and bordering states, to operating across the United States and internationally. Additionally, prior to the Kaneb acquisition Valero L.P. relied on Valero Energy almost exclusively for its revenues and cash flows. The Kaneb acquisition greatly increased Valero L.P.’s volume from customers other than Valero Energy and consequently reduced Valero L.P.’s dependence on that one customer. Also in connection with the Kaneb acquisition, Valero L.P. began selling bunker fuel from the facilities in Canada and the Netherlands Antilles that Valero L.P. acquired. Valero L.P. purchases bunker fuel for resale to its customers at those locations. Principally as a result of the Kaneb acquisition, Valero L.P.’s revenues more than doubled to $659.6 million for the year ended December 31, 2005 compared to $220.8 million for the year ended December 31, 2004. Increased revenues resulted in higher net income of $111.1 million for 2005, compared to $78.4 million for 2004. Despite this significant growth, Valero L.P.’s debt-to-capitalization ratio decreased 8.7% from 46.8% as of December 31, 2004 to 38.1% as of December 31, 2005.

Valero L.P. conducts its operations through its wholly owned subsidiaries, primarily Valero Logistics Operations and Kaneb Pipe Line Operating Partnership, L.P. (KPOP). Valero L.P.’s operations are divided into four reportable business segments: refined product terminals, refined product pipelines, crude oil pipelines and crude oil storage tanks.

Refined Product Terminals. Valero L.P. owns 57 terminals in the United States that provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids. Valero L.P. also owns significant international terminal operations on the island of St. Eustatius, Netherlands Antilles, Point Tupper, Nova Scotia, in the United Kingdom, the Netherlands and in Nuevo Laredo, Mexico.

Refined Product Pipelines. Valero L.P. owns common carrier pipelines in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 6,389 miles, consisting of the Central West System which is connected to Valero Energy refineries and the East Pipeline and the North Pipeline which Valero L.P. acquired from Kaneb. In addition, Valero L.P. owns a 2,000 mile anhydrous ammonia pipeline located in Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and Nebraska.

Crude Oil Pipelines. Valero L.P. owns 797 miles of crude oil pipelines which transport 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 as well as associated crude oil storage facilities in Texas and Oklahoma that are located along the crude oil pipelines.

Crude Oil Storage Tanks. Valero L.P. owns 60 crude oil and intermediate feedstock storage tanks and related assets that store and deliver crude oil to Valero Energy’s refineries in Benicia, Corpus Christi and Texas City.

Valero L.P. provides transportation, storage services and ancillary services to its customers, including Valero Energy, which indirectly owns Valero L.P.’s general partner. Factors that affect the results of Valero L.P.’s operations include:


	•	company-specific factors, such as asset integrity issues and maintenance requirements that impact the throughput rates of its assets;

	•	seasonal factors that affect the demand for refined products and fertilizers transported by and/or stored in its assets;

	•	industry factors, such as changes in the prices of petroleum products that affect demand and operations of its customers; and

	•	other factors such as refinery utilization rates and maintenance turnaround schedules that impact the operations of refineries served by its assets.

Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2005

Valero L.P. Financial Highlights

(dollars in thousands, except unit and per unit data)


			Years Ended December 31,

			2004			2005

Statement of Income Data:
Revenues:
	Services		$	220,792		$	407,194
	Product			—			252,363

		Total revenues		220,792			659,557
Costs and expenses:
	Cost of sales			—			229,806
	Operating expenses			78,298			184,609
	General and administrative expenses			11,321			26,553
	Depreciation and amortization			33,149			64,895

		Total costs and expenses		122,768			505,863

Operating income				98,024			153,694
	Equity income from joint ventures			1,344			2,319
	Interest and other expense, net			(20,950	)		(43,625	)

Income from continuing operations before income tax expense				78,418			112,388
	Income tax expense			—			4,713

Income from continuing operations				78,418			107,675
Income from discontinued operations				—			3,398

Net income				78,418			111,073
	Less general partners’ interest and incentive distributions			(5,927	)		(10,758	)

Limited partners’ interest in net income			$	72,491		$	100,315

Weighted-average units outstanding				23,041,394			35,023,250

Net income per unit applicable to limited partners:
	Continuing operations		$	3.15		$	2.76
	Discontinued operations			—			0.10

	Net income		$	3.15		$	2.86


	December 31,

	2004			2005

Balance Sheet Data:
Long-term debt, including current portion	$	385,161		$	1,170,705
Partners’ equity		438,311			1,900,779
Debt-to-capitalization ratio (a)		46.8	%		38.1	%


(a)	Valero L.P.’s debt-to -capitalization ratio is defined as its long-term debt, including current portion, divided by the sum of its long-term debt, including current portion, and partners’ equity.

Valero L.P. Segment Operating Highlights

(dollars in thousands)


			Years Ended December 31,

			2004		2005

Refined Product Terminals:
	Throughput (barrels/day) (a)			256,576		245,084
	Throughput revenues		$	39,984	$	43,617
	Storage lease revenues			—		115,352
	Bunkering revenues			—		252,363
	Cost of sales			—		229,806
	Operating expenses			18,365		94,607
	Depreciation and amortization			6,471		25,008

	Segment operating income		$	15,148	$	61,911

Refined Product Pipelines:
	Throughput (barrels/day) (a)			442,596		556,654
	Revenues		$	86,418	$	149,853
	Operating expenses			37,332		64,671
	Depreciation and amortization			14,715		27,778

	Segment operating income		$	34,371	$	57,404

Crude Oil Pipelines:
	Throughput (barrels/day)			381,358		358,965
	Revenues		$	52,462	$	51,429
	Operating expenses			15,468		16,378
	Depreciation and amortization			4,499		4,612

	Segment operating income		$	32,495	$	30,439

Crude Oil Storage Tanks:
	Throughput (barrels/day)			473,714		517,409
	Revenues		$	41,928	$	46,943
	Operating expenses			7,133		8,953
	Depreciation and amortization			7,464		7,497

	Segment operating income		$	27,331	$	30,493

Consolidated Information:
	Revenues		$	220,792	$	659,557
	Cost of sales			—		229,806
	Operating expenses			78,298		184,609
	Depreciation and amortization			33,149		64,895

	Segment operating income			109,345		180,247
		General and administrative expenses		11,321		26,553

	Consolidated operating income		$	98,024	$	153,694


(a)	Throughput related to newly acquired assets included in the table above is calculated based on throughput for the period from the date of acquisition through December 31 of the year of acquisition divided by the number of days in the applicable year.


	*Annual Highlights*

Net income for the year ended December 31, 2005 increased $32.7 million compared to the year ended December 31, 2004 due to higher segmental operating income, partially offset by increased general and administrative expense, increased interest expense and increased income tax expense. All of these increases predominantly resulted from the Kaneb acquisition.

Segment operating income for the year ended December 31, 2005 increased $70.9 million compared to the year ended December 31, 2004, primarily due to a $46.8 million increase in operating income for the refined product terminals segment and a $23.0 million increase in operating income for the refined product pipelines segment. These increases relate primarily to the effect of the Kaneb acquisition. Except for storage lease revenues and bunker sales, operating income for Valero L.P.’s segments depends upon the level of throughputs moving through its assets. In addition to the Kaneb acquisition, which impacted only the refined product terminals and refined product pipelines segments, all of Valero L.P.’s segments were affected by lower throughputs in 2005 resulting from scheduled maintenance turnarounds or other operational issues at Valero Energy’s McKee, Three Rivers and Ardmore refineries.


	*Refined Product Terminals*

Revenues increased by $371.3 million for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to the following:


	•	the Kaneb acquisition, which contributed $115.4 million of storage lease revenues and $252.4 million of bunkering revenues; and

	•	higher throughputs at Valero L.P.’s asphalt terminals, which charge a higher terminalling fee than Valero L.P.’s other refined product terminals, resulting in increased revenues of $3.1 million.

Partially offsetting the increases above were lower throughputs resulting from the McKee refinery turnaround, coupled with downtime of a unit at the McKee refinery.

Cost of sales was $229.8 million for the year ended December 31, 2005. Cost of sales reflects the cost of bunker fuel sold to marine vessels at Valero L.P.’s facilities at St. Eustatius, Netherlands Antilles and Point Tupper, Nova Scotia, which Valero L.P. acquired as part of the Kaneb acquisition.

Operating expenses increased $76.2 million for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to the inclusion in 2005 of operating expenses related to the assets acquired in the Kaneb acquisition. Operating expenses further increased compared to 2004 due to increased regulatory and maintenance expense and increased internal overhead expense resulting from increased headcount.

Depreciation and amortization expense increased by $18.5 million primarily due to an increase in Valero L.P.’s property and equipment related to the Kaneb acquisition.


	*Refined Product Pipelines*

Revenues increased by $63.4 million for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to increased throughputs due to the following:


	•	the Kaneb acquisition, which increased throughputs by 115,096 barrels per day, resulting in additional revenues of $57.4 million;

	•	the Dos Laredos pipeline system, which only operated for part of 2004, contributed $3.4 million of additional revenue since it operated for a full year in 2005 and due to a change in the contract terms with Petroleos Mexicanos (PEMEX), allowing for an increase in volumes from 5,000 barrels per day to 10,000 barrels per day;

	•	the supply dynamics in the Denver market resulted in increased throughputs transported on the McKee to Denver refined product pipeline, a high tariff rate pipeline, resulting in higher revenues of $3.3 million, despite the McKee turnaround; and


	•	the expansion of the Corpus Christi to Harlingen to Edinburg refined product pipeline, which commenced operations in October 2005, increased revenue by $0.9 million.

Partially offsetting the increases above were lower throughputs in the refined product pipelines that support Valero Energy’s Ardmore and Three Rivers refineries, which experienced maintenance turnarounds during 2005.

Operating expenses increased by $27.3 million for the year ended December 31, 2005, compared to the year ended December 31, 2004, primarily due to the inclusion in 2005 of operating expenses related to the assets acquired in the Kaneb acquisition. Operating expenses also increased due to higher regulatory and maintenance expenses related to repairs on the McKee to Denver and Houston pipelines.

Depreciation and amortization expense increased $13.1 million for the year ended December 31, 2005, compared to the year ended December 31, 2004, due to increases in Valero L.P.’s property and equipment related to the following:


	•	the Kaneb acquisition, which contributed depreciation and amortization expense of $12.1 million;

	•	the expansion of the Corpus Christi to Harlingen to Edinburg refined product pipeline, which commenced operations in October 2005, resulting in additional depreciation expense of $0.5 million; and

	•	the Dos Laredos pipeline system, which only operated for part of 2004, resulted in higher depreciation expense of $0.2 million for the full year of 2005.


	*Crude Oil Pipelines*

Revenues decreased $1.0 million for the year ended December 31, 2005, compared to the year ended December 31, 2004. Decreased revenues resulted primarily from lower throughputs, due to the scheduled turnarounds at the Three Rivers and McKee refineries, coupled with separate downtime of a unit at the McKee refinery. Revenues increased on the Ringgold to Wasson crude oil pipeline, despite lower overall throughputs to the Ardmore refinery, due to increased throughput in this higher tariff rate pipeline.

Operating expenses increased by $0.9 million for the year ended December 31, 2005, compared to the year ended December 31, 2004 primarily due to higher maintenance expense on the Wasson to Ardmore and the Wichita Falls crude oil pipelines, partially offset by decreased power costs after the removal of pump stations on the Wichita Falls pipeline as part of the power optimization program.


	*Crude Oil Storage Tanks*

Revenues increased $5.0 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, primarily due to a lack of significant operating downtime at the Texas City refinery or the Benicia refinery during 2005, resulting in increased throughput in Valero L.P.’s crude oil storage tanks.

Operating expenses increased by $1.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, due to higher regulatory and maintenance expense on the Corpus Christi and Texas City crude oil storage tanks.


	*General*

General and administrative expenses increased by $15.2 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, partially due to increased headcount as a result of the Kaneb acquisition. Additionally, on July 1, 2005, Valero L.P. amended the services agreement with Valero Energy to reflect the increased level of service resulting from the addition of Kaneb, which increased Valero L.P.’s annual fee to Valero Energy.

Interest expense increased by $20.4 million for the year ended December 31, 2005 compared to the year ended December 31, 2004, due to higher average debt balances resulting from debt assumed as part of the Kaneb acquisition and debt incurred to fund the Kaneb acquisition combined with higher interest rates in 2005. Additionally, in the fourth quarter of 2005, a portion of the Three Rivers to Pettus to Corpus Christi, Texas

refined product pipeline was permanently idled. As a result, Valero L.P. recorded an impairment charge of $2.1 million included in “interest and other expense, net.”

Income tax expense was $4.7 million for the year ended December 31, 2005, all of which related to certain operations acquired in the Kaneb acquisition that are conducted through separate taxable wholly owned corporate subsidiaries.


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

Valero L.P. Financial Highlights

(dollars in thousands, except unit and per unit data)


			Years Ended December 31,

			2003			2004

Statement of Income Data:
Revenues			$	181,450		$	220,792

Costs and expenses:
	Operating expenses			64,609			78,298
	General and administrative expenses			7,537			11,321
	Depreciation and amortization			26,267			33,149

		Total costs and expenses		98,413			122,768

Operating income				83,037			98,024
	Equity income from joint ventures			2,416			1,344
	Interest and other expense, net			(15,860	)		(20,950	)

Net income				69,593			78,418
	Less general partner’s interest and incentive distributions			(3,959	)		(5,927	)

Limited partners’ interest in net income			$	65,634		$	72,491

Weighted-average units outstanding				21,706,164			23,041,394

Net income per unit applicable to limited partners			$	3.02		$	3.15


		December 31,

		2003			2004

Balance Sheet Data:
	Long-term debt, including current portion	$	354,192		$	385,161
	Partners’ equity		438,163			438,311
	Debt-to-capitalization ratio (a)		44.7	%		46.8	%


(a)	Valero L.P.’s debt-to-capitalization ratio is defined as its long-term debt, including current portion, divided by the sum of its long-term debt, including current portion, and partners’ equity.

Valero L.P. Segment Operating Highlights

(dollars in thousands)


			Years Ended December 31,

			2003		2004

Refined Product Terminals:
	Throughput (barrels/day) (a)			225,426		256,576
	Throughput revenues		$	31,269	$	39,984
	Operating expenses			15,447		18,365
	Depreciation and amortization			3,508		6,471

	Segment operating income		$	12,314	$	15,148

Refined Product Pipelines:
	Throughput (barrels/day) (a)			392,145		442,596
	Revenues		$	72,276	$	86,418
	Operating expenses			28,914		37,332
	Depreciation and amortization			12,380		14,715

	Segment operating income		$	30,982	$	34,371

Crude Oil Pipelines:
	Throughput (barrels/day)			355,008		381,358
	Revenues		$	50,741	$	52,462
	Operating expenses			15,196		15,468
	Depreciation and amortization			5,379		4,499

	Segment operating income		$	30,166	$	32,495

Crude Oil Storage Tanks:
	Throughput (barrels/day) (a)			366,986		473,714
	Revenues		$	27,164	$	41,928
	Operating expenses			5,052		7,133
	Depreciation and amortization			5,000		7,464

	Segment operating income		$	17,112	$	27,331

Consolidated Information:
	Revenues		$	181,450	$	220,792
	Operating expenses			64,609		78,298
	Depreciation and amortization			26,267		33,149

	Segment operating income			90,574		109,345
		General and administrative expenses		7,537		11,321

	Consolidated operating income		$	83,037	$	98,024


(a)	During the years ended December 31, 2003 and 2004, Valero L.P. completed several acquisitions as discussed below. The throughput related to these newly acquired assets included in the table above is calculated based on throughput for the period from the date of acquisition through December 31, divided by the number of days in the applicable year.


	*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:


	•	The acquisitions of the South Texas Pipelines and Terminals and the crude oil storage tanks in March 2003, the Southlake pipeline in August 2003 and the Paulsboro terminal in September 2003. These assets were included in the results of operations for a full year in 2004 compared to a partial year in 2003;

	•	The acquisition of the Royal Trading asphalt terminals in February 2004;

	•	The commencement of operations in June 2004 of the Dos Laredos pipeline system, which ships propane to the Nuevo Laredo, Mexico propane terminal;

	•	Valero Energy’s addition of a new crude unit at its Texas City refinery in the fourth quarter of 2003, which allowed that refinery to process more throughput, which benefited Valero L.P.’s storage tank business;

	•	Increased tariff rates effective April 2004 and the implementation of a Corpus Christi North Beach storage facility lease agreement effective January 2004; and

	•	Lower throughput volumes in 2003 due to economic-based production cuts at Valero Energy’s McKee refinery, a major turnaround at Valero Energy’s Ardmore refinery and planned and unplanned crude unit outages at the Texas City refinery.

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


	•	Crude unit outages at Valero Energy’s McKee refinery in the second and third quarters of 2004 and a turnaround at Valero Energy’s Benicia refinery in the fourth quarter of 2004;

	•	Increased operating expense due to the following (excluding the impact of 2003 and 2004 acquisitions):


	•	Higher incentive compensation expense;

	•	Higher power costs as a result of higher natural gas prices; and

	•	Increased internal overhead costs due to the amendment to the Services Agreement, under which overhead previously allocated to Valero Energy is now borne by Valero L.P.


	•	Higher general and administrative expense primarily due to the amendment to the Services Agreement effective April 1, 2004, between Valero L.P. and Valero Energy for services rendered by Valero Energy corporate employees. In addition, general and administrative expenses in 2004 were higher due to increased external public company expenses, incentive compensation and employee headcount;

	•	Less equity income from Skelly-Belvieu Pipeline Company due primarily to a 21% decline in throughput barrels in the Skellytown to Mont Belvieu refined product pipeline in addition to higher maintenance expenses associated with pipeline integrity inspection costs; and

	•	Higher interest expense, which resulted from several factors, including (a) a full year of interest expense in 2004 related to the $250.0 million of 6.05% senior notes issued in March 2003; (b) borrowings of $43.0 million under the revolving credit facility in the first quarter of 2004 to fund the acquisition of the Royal Trading asphalt terminals and a portion of the construction costs related to the Dos Laredos pipelines and terminal; and (c) less interest income from interest rate swaps as interest rates increased in 2004.

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.


	*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 the 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 million 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.


	*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.


	*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.

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.


	*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:


	•	Valero L.P.’s ownership of the crude oil storage tanks for only 288 days of the year ended December 31, 2003, compared to 366 days in the year ended December 31, 2004; and

	•	Valero Energy’s addition of a new crude unit at its Texas City refinery in the fourth quarter of 2003, which allowed that refinery to process more throughput in 2004. In addition, there were several planned and unplanned crude unit outages at the Texas City refinery in 2003 which lowered the amount of throughput processed in 2003.

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. entered into a one-year shell barrel capacity lease agreement with Valero Energy, which is 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 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.


	*Outlook*

The outlook for the refining industry remains positive with refiners expecting to continue to benefit in 2006 from the same industry fundamentals present in 2005. As a result, overall demand for Valero L.P.’s services in 2006 should be strong. However, in the first half of 2006, a number of government mandated environmental regulations become effective. These regulations tighten diesel fuel specifications and effectively eliminate the use of MTBE in gasoline. In response to these regulations, many refineries are expected to undergo maintenance turnarounds in the first half of 2006. Certain of Valero Energy’s refineries served by Valero L.P.’s assets are scheduled to undergo maintenance turnarounds to address these environmental regulations. As a result, Valero L.P. expects this period of high maintenance turnaround activity will negatively impact its throughputs and revenues for the first half of 2006. Additionally, Valero L.P. expects higher maintenance expense will negatively impact the results of its operations for the first half of 2006.

In contrast, Valero L.P. expects the second half of 2006 to have relatively few maintenance turnarounds, particularly at the Valero Energy refineries it serves. Therefore, Valero L.P. expects throughputs and revenues to improve in the second half of 2006 compared to the first half of 2006. Additionally, Valero L.P.’s pipeline tariffs increase annually on July 1, which will further benefit revenues in the second half of 2006. Finally, lower maintenance expenses as projects are completed to upgrade Kaneb assets and the contribution from Valero L.P.’s strategic project in South Texas, which Valero L.P. expects to be fully operational by May 2006, should positively impact its results of operations for the second half of 2006.

Liquidity and Capital Resources


	*General*

Valero L.P.’s primary cash requirements are for distributions to partners, debt service, reliability and expansion capital expenditures, acquisitions and normal operating expenses. Valero L.P. typically generates sufficient cash from its current operations to fund day-to -day operating and general and administrative expenses, reliability capital expenditures and distribution requirements. Valero L.P. also has available borrowing capacity under its existing revolving credit facility and, to the extent necessary, may raise additional funds through equity or debt offerings under its $750 million universal shelf registration statement to fund strategic capital expenditures or other cash requirements not funded from operations. However, there can be no assurance regarding the availability of any additional funds or whether such additional funds can be provided on terms acceptable to Valero L.P.


	*Cash Flows for the Years Ended December 31, 2004 and 2005*

Net cash provided by Valero L.P.’s operating activities for the year ended December 31, 2005 was $186.4 million compared to $108.5 million for the year ended December 31, 2004. The increase in cash generated from operating activities is primarily due to higher net income and depreciation expense and less working capital.

The net cash generated by Valero L.P.’s operating activities for the year ended December 31, 2005, combined with available cash on hand, was used to fund distributions to its unitholders and the general partner in the aggregate amount of $127.8 million. Proceeds from long-term debt borrowings totaling $746.5 million, combined with proceeds from the general partner contribution totaling $29.2 million and proceeds received from the sale of Martin Oil LLC to a subsidiary of Valero Energy totaling $26.8 million were used to fund Valero L.P.’s acquisition of KSL, repay certain outstanding indebtedness of KSL and KPP and to fund capital expenditures and investment of other noncurrent assets of $68.1 million and $3.3 million, respectively. Proceeds received from the sale of the Held Separate Businesses on September 30, 2005 were used to repay debt outstanding under Valero L.P.’s $400 Million Revolving Credit Agreement and Valero L.P.’s $525 Million Term Credit Agreement, which was incurred to partially finance the Kaneb acquisition.

Net cash provided by operating activities for the year ended December 31, 2004 was $108.5 million. The net cash provided by operations, combined with available cash on hand, was used primarily to fund distributions to unitholders and the general partner in the aggregate amount of $78.2 million. Additionally, Valero L.P. used cash from those sources in combination with long-term debt borrowings totaling $43.0 million to fund $57.5 million of capital expenditures, which included construction of the Dos Laredos pipeline project, and the acquisition of asphalt terminals from Royal Trading on February 20, 2004 totaling $28.1 million.


	*Equity*

Common Unit Offerings. On March 18, 2003, Valero L.P. sold 5,750,000 common units in a public offering for net proceeds of $204.6 million, including a $4.3 million general partner contribution from Riverwalk Logistics, L.P. to maintain its 2% general partner interest. Valero L.P. used the net proceeds primarily to fund the acquisition of certain crude oil storage tank assets from Valero Energy. On April 16, 2003, Valero L.P. sold 581,000 common units for net proceeds of $20.9 million, including a $0.5 million general partner contribution, upon the exercise of a portion of the underwriters’ over-allotment option. Valero L.P. used the net proceeds to pay down the then outstanding balance due under its revolving credit facility.

On August 11, 2003, Valero L.P. sold 1,236,250 common units in a public offering, which included 161,250 common units related to an over-allotment option, for net proceeds of $49.3 million, including a $1.0 million general partner contribution. Valero L.P. used the net proceeds primarily to fund the acquisitions of the Southlake refined product pipeline and the Paulsboro refined product terminal.

Shelf Registration Statement. On October 2, 2003, the United States Securities and Exchange Commission (the SEC) declared effective a shelf registration statement on Form S-3 filed by Valero L.P. and Valero Logistics Operations to register $750.0 million of securities for potential future issuance. Valero L.P. may, in one or more offerings, offer and sell common units representing limited partner interests in the Partnership. Valero Logistics Operations may, in one or more offerings, offer and sell debt securities, which will be fully and unconditionally guaranteed by Valero L.P. The full balance of Valero L.P.’s $750.0 million universal shelf registration statement was available as of December 31, 2005.

Distributions. Valero L.P.’s partnership agreement, as amended, determines the amount and priority of cash distributions that Valero L.P.’s common unitholders, subordinated unitholders and general partner may receive. During the subordination period, if there is sufficient available cash, the holders of Valero L.P.’s common units are entitled to receive each quarter a minimum 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. In addition, the general partner is entitled to incentive distributions, as defined below, if the amount Valero L.P. distributes with respect to any quarter exceeds $0.60 per unit. 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. Valero L.P.’s general partner will continue to receive a 2% distribution with respect to its general partner interest.

The following table reflects the allocation of total cash distributions to Valero L.P.’s general and limited partners applicable to the period in which the distributions are earned:


		Years Ended December 31,

		2003		2004		2005

		(Thousands of dollars, except per
		unit data)
General partner interest		$	1,404	$	1,595	$	2,589
General partner incentive distribution			2,620		4,449		8,711

	Total general partner distribution		4,024		6,044		11,300
Limited partners’ distribution			66,179		73,733		118,178

	Total cash distributions	$	70,203	$	79,777	$	129,478

Cash distributions per unit applicable to limited partners		$	2.950	$	3.200	$	3.365

On January 27, 2006, Valero L.P. declared a quarterly distribution of $0.855 per unit, which was paid on February 14, 2006 to unitholders of record on February 7, 2006. This distribution, related to the fourth quarter of 2005, totaled $44.0 million, of which $3.9 million represented Valero L.P.’s general partner’s share. The general partner’s distribution included a $3.0 million incentive distribution.


	*Capital Requirements*

The petroleum pipeline and terminalling industry is capital intensive, requiring significant investments to maintain, upgrade or enhance existing operations and to comply with environmental and safety laws and regulations. Valero L.P.’s capital expenditures consist primarily of:


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

	•	expansion capital expenditures, such as those to expand and upgrade pipeline capacity and to construct new pipelines, terminals and storage tanks. In addition, expansion capital expenditures may include acquisitions of pipelines, terminals or storage tank assets.

During the year ended December 31, 2005, Valero L.P. incurred reliability capital expenditures of $23.7 million primarily related to system automation and maintenance upgrade projects at its terminals and pipelines, and expansion capital expenditures of $44.4 million primarily related to the construction of 110 miles of new pipeline in the northeastern Mexico and South Texas regions (Dos Paises Project).

For 2006, Valero L.P. expects to incur approximately $123.5 million of capital expenditures, including $44.8 million for reliability capital projects and $78.7 million for expansion capital projects. Valero L.P. continuously evaluates its capital budget and makes changes as economic conditions warrant. If conditions warrant, Valero L.P.’s actual capital expenditures for 2006 may exceed the budgeted amounts. Valero L.P. believes cash generated from operations combined with other sources of liquidity previously described will be sufficient to fund its capital expenditures in 2006.


	*Long-Term Contractual Obligations*


	*6.05% Senior Notes*

On March 18, 2003, Valero Logistics Operations, L.P. completed the sale of $250 million of 6.05% senior notes, issued in a private placement to institutional investors, for net proceeds of $247.3 million. Interest on the 6.05% senior notes is payable semi-annually in arrears on March 15 and September 15 of each year beginning September 15, 2003. Although the 6.05% senior notes were not initially registered under the Securities Act of 1933 or any other securities laws, Valero L.P. exchanged the outstanding $250.0 million 6.05% senior notes that were not registered for $250.0 million of 6.05% senior notes that have been registered under the Securities Act of 1933 in July 2003.


	*6.875% Senior Notes*

On July 15, 2002, Valero L.P. completed the sale of $100.0 million of 6.875% senior notes for net proceeds of $98.2 million. The net proceeds were used to repay the $91.0 million then outstanding under Valero L.P.’s revolving credit facility. Interest on the 6.875% senior notes is payable semi-annually in arrears on January 15 and July 15 of each year.

The 6.05% and the 6.875% senior notes do not have sinking fund requirements. These notes rank equally with existing senior unsecured indebtedness of Valero Logistics Operations, including indebtedness under the revolving credit agreement and term loan agreement. Both series of senior notes contain restrictions on Valero Logistics Operations’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the senior notes. In addition, the senior notes limit Valero Logistics Operations’ ability to incur indebtedness secured by certain liens and to engage in certain sale-leaseback transactions.

At the option of Valero Logistics Operations, the 6.05% and the 6.875% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date. The Valero Logistics Operations senior notes also include a change-in -control provision, which requires (1) that Valero Energy or an investment grade entity own, directly or indirectly, 51% of Valero L.P.’s general partner interests and (2) that Valero L.P. (or an investment grade entity) own, directly or indirectly, all of the general partner and limited partner interests in Valero Logistics Operations. Otherwise, Valero Logistics Operations must offer to purchase the senior notes at a price equal to 100% of their outstanding principal balance plus accrued interest through the date of purchase.


	*7.75% and 5.875% Senior Notes*

As a result of the Kaneb acquisition, Valero L.P. assumed the outstanding senior notes issued by KPOP, having an aggregate face value of $500.0 million, and an aggregate fair value of $555.0 million. The difference between the fair value and the face value of the senior notes is being amortized as a reduction of interest expense over the remaining lives of the senior notes using the effective interest method.

The senior notes were issued in two series, the first of which bears interest at 7.75% annually (due semi-annually on February 15 and August 15) and matures February 15, 2012. The second series bears interest at 5.875% annually (due semi-annually on June 1 and December 1) and matures June 1, 2013.

The 7.75% and 5.875% senior notes do not contain sinking fund requirements. These notes contain restrictions on Valero L.P.’s ability to incur indebtedness secured by liens, to engage in certain sale-leaseback transactions, to engage in certain transactions with affiliates, as defined, and to utilize proceeds from the disposition of certain assets. At the option of KPOP, the 7.75% and 5.875% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date.

The senior notes issued by Valero Logistics Operations are fully and unconditionally guaranteed by Valero L.P. In connection with the Kaneb acquisition, effective July 1, 2005, Valero L.P. fully and unconditionally guaranteed the outstanding senior notes issued by KPOP. Additionally, effective July 1, 2005, both Valero Logistics Operations and KPOP fully and unconditionally guaranteed the outstanding senior notes of the other.


	*$525 Million Term Loan Agreement*

On July 1, 2005, Valero L.P. borrowed $525.0 million under its new $525 million term loan agreement dated July 1, 2005 (the $525 Term Loan Agreement), the majority of which was used to fund the Kaneb acquisition. The $525 Million Term Loan Agreement matures on July 1, 2010 and bears interest based on either an alternative base rate or LIBOR, which was 5.2% as of December 31, 2005. The weighted-average interest rate related to outstanding borrowings under the $525 Million Term Loan Agreement for the year ended December 31, 2005 was 4.5%. With a portion of the proceeds received from the sale of the Held Separate Businesses, Valero L.P. repaid $300.0 million of the outstanding balance. As of December 31, 2005, Valero L.P.’s outstanding balance under the $525 Million Term Loan Agreement was $225.0 million. No additional funds may be borrowed under the $525 Million Term Loan Agreement.


	*$400 Million Revolving Credit Agreement*

On July 1, 2005, Valero L.P. borrowed $180.0 million under Valero L.P.’s $400 million revolving credit agreement (the $400 Million Revolving Credit Agreement), dated effective December 20, 2004 as amended on June 30, 2005, which expires on July 1, 2010 and bears interest based on either an alternative base rate or LIBOR, which was 5.2% as of December 31, 2005. Utilizing the $180.0 million borrowing, other proceeds and cash on hand, on July 1, 2005, Valero L.P. repaid approximately $191.5 million of the outstanding indebtedness of Kaneb and repaid $38.0 million of indebtedness outstanding on Valero L.P.’s prior $175 million revolving credit facility.

During the year ended December 31, 2005, Valero L.P. repaid the $209.5 million outstanding under the $400 Million Revolving Credit Agreement, including $160.0 million which was repaid using a portion of the proceeds from the sale of the Held Separate Businesses on September 30, 2005. As of December 31, 2005, Valero L.P. had $395.1 million available for borrowing under the $400 Million Revolving Credit Agreement. The weighted-average interest rate related to outstanding borrowings under the $400 Million Revolving Credit Agreement for the year ended December 31, 2005 was 4.3%.


	*$175 Million Revolving Credit Facility*

Valero L.P. terminated its $175 million revolving credit facility on July 1, 2005 by repaying the $38.0 million outstanding amount using proceeds from its new $400 Million Revolving Credit Agreement. At Valero Logistics Operations’ option, borrowings under the revolving credit facility bore interest based on either an alternative base rate or LIBOR.


	*UK Term Loan*

As a result of the Kaneb acquisition, on July 1, 2005, Valero L.P. amended and restated a term loan agreement of Kaneb’s UK subsidiary dated January 29, 1999 (the UK Term Loan), and assumed the outstanding obligation of 21,000,000 Pounds Sterling ($36.1 million as of December 31, 2005). The UK Term Loan bears interest at 6.65% annually and matures June 30, 2010.

The $525 Million Term Loan Agreement, the $400 Million Revolving Credit Agreement and the UK Term Loan all require that Valero L.P. maintain certain financial ratios and include other restrictive covenants, including a prohibition on distributions if any defaults, as defined in the agreements, exists or would result from the distribution. These agreements include a change in control provision, which requires that Valero Energy continue to own, directly or indirectly, a majority of Valero L.P.’s general partner interest and that Valero Energy and/or Valero L.P. own 100% of the borrower or 100% of the outstanding limited partner interest in the borrower. Management of Valero L.P. believes that it is in compliance with all of these ratios and covenants as of December 31, 2005.

Valero Logistics Operations and KPOP own and operate pipelines, terminals and storage tanks and are issuers of the publicly traded senior notes. Valero L.P. has no operations and has fully and unconditionally guaranteed the senior notes issued by KPOP and Valero Logistics Operations and any obligations under Valero Logistics Operations’ $400 Million Revolving Credit Agreement and $525 Million Term Loan Agreement and the Kaneb UK Term Loan.


	*Port Authority of Corpus Christi Note Payable*

The proceeds from the original $12.0 million note payable due to the Port of Corpus Christi Authority of Nueces County, Texas (Port Authority of Corpus Christi) were used for the construction of a crude oil storage facility in Corpus Christi, Texas. The note payable is due in annual installments of $1.2 million through December 31, 2015 and is collateralized by the crude oil storage facility. Interest on the unpaid principal balance accrues at a rate of 8% per annum. The land on which the crude oil storage facility was constructed is leased from the Port Authority of Corpus Christi.


	*Interest Rate Swaps*

During 2003, Valero L.P. entered into interest rate swap agreements to manage its exposure to changes in interest rates. The interest rate swap agreements have an aggregate notional amount of $167.5 million, of which $60.0 million is tied to the maturity of the 6.875% senior notes and $107.5 million is tied to the maturity of the 6.05% senior notes. Under the terms of the interest rate swap agreements, Valero L.P. will receive a fixed rate (6.875% and 6.05% for the $60.0 million and $107.5 million of interest rate swap agreements, respectively) and will pay a variable rate based on LIBOR plus a percentage that varies with each agreement.

The interest rate swap contracts qualified for the shortcut method of accounting prescribed by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. As a result, changes in the fair value of the derivatives will completely offset the changes in the fair value of the underlying hedged items.

As of December 31, 2004 and 2005, the weighted average effective interest rate for the interest rate swaps was 4.7% and 6.6%, respectively. As of December 31, 2004 and 2005, the aggregate estimated fair value of the interest rate swaps included in other long-term liabilities in the consolidated balance sheet was $1.2 million and $4.0 million, respectively.

The following table presents Valero L.P.’s long-term contractual obligations and commitments and the related payments due, in total and by period, as of December 31, 2005.


	Payments Due by Period

	2006		2007		2008		2009		2010		Thereafter		Total

	(Thousands of dollars)
Long-term debt (stated maturities)	$	1,046	$	611	$	660	$	713	$	265,901	$	901,774	$	1,170,705
Operating leases		9,544		6,424		5,274		4,434		4,217		81,028		110,921
Purchase obligations		216,426		959		25		25		25		77		217,537

A purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum or variable price provisions, and (iii) the approximate timing of the transaction. Valero L.P.’s purchase obligations consist mainly of a bunker fuel purchase agreement with minimum volume requirements, which is based on

market prices. Valero L.P. entered into this agreement to support its operations at St. Eustatius whereby Valero L.P. purchases bunker fuel for resale to its customers.

Valero L.P. does not have any long-term contractual obligations related to its investment in joint ventures, other than the requirement to operate the joint ventures on behalf of the members and to fund its 50% share of capital expenditures as they arise.

Related Party Transactions

Valero L.P. has related party transactions with Valero Energy for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, certain employee costs, insurance costs, administrative costs, and lease expense. Under the terms of a services agreement with Valero Energy (see discussion below under “Services Agreement”), Valero L.P. reimburses Valero Energy for payroll costs of employees working on its behalf. Additionally, Valero Energy charges Valero L.P. an administrative service fee. Valero L.P.’s receivable from Valero Energy as of December 31, 2004 and 2005 represents amounts due for pipeline tariff, terminalling fee and crude oil storage tank fee revenues and Valero L.P.’s payable to Valero Energy represents amounts due for employee costs, insurance costs, operating expenses, administrative costs and lease expense.

The following table summarizes information pertaining to Valero L.P.’s transactions with Valero Energy:


	Years Ended December 31,

	2003		2004		2005(a)

	(Thousands of dollars)
Revenues	$	178,605	$	217,608	$	234,485
Operating expenses		24,196		31,960		60,921
General and administrative expenses		6,110		10,539		19,356


(a)		The amounts reflected in the table include revenues and operating expenses of $1,850 and $1,867, respectively, which are included in income from discontinued operations in the consolidated statement of income.

In addition to owning a combined 23.4% general and limited partner interest in Valero L.P. as of December 31, 2005, Valero L.P. has entered into a number of operating agreements with Valero Energy, which govern the required services provided to and received from Valero Energy. Most of the operating agreements include adjustment provisions, which allow Valero L.P. to increase the handling, storage and throughput fees it charges to Valero Energy based on a consumer price index. In addition, the pipeline tariffs charged by Valero L.P. are reviewed annually and adjusted based on an inflation index and may also be adjusted to take into consideration additional costs incurred to provide the transportation services. The following is a summary of the significant terms of the individual agreements.


	*Services Agreement*

Valero L.P. does not have any employees. Under the Services Agreement, the costs related to employees of Valero Energy who perform services directly on Valero L.P.’s behalf (direct services), including salary, wages and employee benefits are charged by Valero Energy to Valero L.P. Effective July 1, 2005, the Services Agreement (the 2005 Services Agreement) was amended to account for Valero L.P.’s significant growth following the closing of the Kaneb acquisition. The 2005 Services Agreement provided that the annual service fee would be $13.8 million for the first year from July 1, 2005 to June 30, 2006. In addition, Valero L.P. agreed to perform certain services for Valero Energy, including control room services, terminal operations oversight, mapping support and integrity management program planning in exchange for an annual fee.

Effective January 1, 2006, pursuant to the new services agreement (the 2006 Services Agreement), Valero GP, LLC began directly performing many of the services previously provided by Valero Energy under the 2005 Services Agreement, primarily consisting of legal, corporate development and health, safety and environmental functions. As a result, the employees performing these services became employees of Valero GP, LLC, and their costs are now directly charged to Valero L.P. Accordingly, the annual fee charged by Valero Energy to Valero

L.P. for administrative services was reduced to approximately $1.9 million per year. This annual fee will increase to approximately $2.9 million and $3.4 million in 2007 and 2008, respectively. The annual fee will remain at approximately $3.4 million through the term of the agreement. In addition, each annual fee will be subject to adjustments to account for Valero Energy’s annual salary increase. Subject to approval by Valero L.P.’s Conflicts Committee, the amounts may also be adjusted for changed service levels.

The term of the 2006 Services Agreement will expire on December 31, 2010 with automatic two-year renewal options unless terminated by either party at least six months prior to the renewal period. Valero L.P. may cancel or reduce the level of services that Valero Energy provides Valero L.P. on 60 days prior written notice. The 2006 Services Agreement will terminate upon the change of control of either us or Valero L.P.

A portion of Valero L.P.’s general and administrative costs is passed on to third parties, which jointly own certain pipelines and terminals with Valero L.P. The net amount of Valero L.P.’s general and administrative costs allocated to partners of jointly owned pipelines totaled $0.5 million, $0.7 million and $0.6 million for the years ended December 31, 2003, 2004 and 2005, respectively.


	*Amended and Restated Omnibus Agreement*

The Amended and Restated Omnibus Agreement governs potential competition between Valero Energy and Valero L.P. Under the Amended and Restated Omnibus Agreement, Valero Energy has agreed, and will cause its controlled affiliates to agree, for so long as Valero Energy owns 20% or more of Valero L.P. or Valero L.P.’s general partner, not to engage in the business of transporting crude oil and other feedstocks or refined products, including petrochemicals, or operating crude oil storage facilities or refined product terminalling assets in the United States. This restriction does not apply to:


	•	any business retained by Ultramar Diamond Shamrock Corporation (UDS) as of April 16, 2001, the closing of Valero L.P.’s initial public offering, or any business owned by Valero Energy at the date of its acquisition of UDS on December 31, 2001;

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

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

	•	any newly constructed pipeline, terminalling or storage assets that Valero L.P. has not offered to purchase at fair market value within one year of construction.

Also under the Amended and Restated Omnibus Agreement, Valero Energy has agreed to indemnify Valero L.P. for environmental liabilities related to the assets transferred to Valero L.P. in connection with Valero L.P.’s initial public offering, provided that such liabilities arose prior to and are discovered within ten years after that date (excluding liabilities resulting from a change in law after April 16, 2001).


	*Non-Compete Agreement*


	*Pipelines and Terminals Usage Agreement — McKee, Three Rivers and Ardmore*

Under the terms of the Pipeline and Terminals Usage Agreement dated April 16, 2001, Valero L.P. provides transportation services that support Valero Energy’s refining and marketing operations relating to the McKee, Three Rivers and Ardmore refineries. Pursuant to the agreement, Valero Energy has agreed through April 2008:


	•	to transport in Valero L.P.’s crude oil pipelines at least 75% of the aggregate volumes of crude oil shipped to the McKee, Three Rivers and Ardmore refineries;

	•	to transport in Valero L.P.’s refined product pipelines at least 75% of the aggregate volumes of refined products shipped from the McKee, Three Rivers and Ardmore refineries; and

	•	to use Valero L.P.’s refined product terminals for terminalling services for at least 50% of all refined products shipped from the McKee, Three Rivers and Ardmore refineries.

If market conditions change with respect to the transportation of crude oil or refined products, or to the end markets in which Valero Energy sells refined products, in a material manner such that Valero Energy would suffer a material adverse effect if it were to continue to use Valero L.P.’s pipelines and terminals that service the McKee, Three Rivers and Ardmore refineries at the required levels, Valero Energy’s obligation to Valero L.P. will be suspended during the period of the change in market conditions to the extent required to avoid the material adverse effect.

In the event Valero Energy does not transport in Valero L.P.’s pipelines or use Valero L.P.’s terminals to handle the minimum volume requirements and if its obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. For the year ended December 31, 2005, Valero Energy exceeded its obligations under the Pipelines and Terminals Usage Agreement. Additionally, Valero Energy has agreed not to challenge, or cause others to challenge, Valero L.P.’s interstate or intrastate tariffs for the transportation of crude oil and refined products until at least April 2008.


	*Crude Oil Storage Tank Agreements*

In conjunction with the acquisition of the Crude Oil Storage Tanks in March 2003, Valero L.P. entered into the following agreements with Valero Energy:


	•	Handling and Throughput Agreement , dated March 2003, pursuant to which Valero Energy agreed to pay Valero L.P. a fee for 100% of crude oil and certain other feedstocks delivered to each of the Corpus Christi West refinery, the Texas City refinery and the Benicia refinery and to use Valero L.P.’s logistic assets for handling all deliveries to these refineries. The throughput fees are adjustable annually, generally based on 75% of the regional consumer price index applicable to the location of each refinery. The initial term of the handling and throughput agreement is ten years, which may be extended by Valero Energy for up to an additional five years.

	•	Services and Secondment Agreements , dated March 2003, pursuant to which Valero Energy agreed to provide personnel to Valero L.P. who perform operating and routine maintenance services related to the crude oil storage tank operations. The annual reimbursement for those services is an aggregate $3.5 million. The initial term of the services and secondment agreements is ten years which Valero L.P. has the option to extend for an additional five years. In addition to the fees Valero L.P. has agreed to pay Valero Energy under the services and secondment agreements, Valero L.P. is responsible for operating expenses and specified capital expenditures related to the tank assets that are not addressed in the services and secondment agreements. These operating expenses and capital expenditures include tank safety inspections, maintenance and repairs, certain environmental expenses, insurance premiums and ad valorem taxes.

	•	Lease and Access Agreements , dated March 2003, pursuant to which Valero Energy leases to Valero L.P. the land on which the crude oil storage tanks are located for an aggregate amount of $0.7 million per year. The initial term of each lease is 25 years, subject to automatic renewal for successive one-year periods thereafter. Valero L.P. may terminate any of these leases upon 30 days notice after the initial term

or at the end of a renewal period. In addition, Valero L.P. may terminate any of these leases upon 180 days notice prior to the expiration of the current term if Valero L.P. ceases to operate the crude oil storage tanks or cease business operations.


	*South Texas Pipelines and Terminals Agreements*

In conjunction with the acquisition of the South Texas Pipelines and Terminals in March 2003, Valero L.P. entered into the following agreements with Valero Energy:


	•	Terminalling Agreement , dated March 2003, pursuant to which Valero Energy agreed, during the initial period of five years, to pay a terminalling fee for each barrel of refined product stored or handled by or on behalf of Valero Energy at the terminals, including an additive fee for gasoline additive blended at the terminals. At the Houston Hobby Airport terminal, Valero Energy agreed to pay a filtering fee for each barrel of jet fuel stored or handled at the terminal.

	•	Throughput Commitment Agreement , dated March 2003, pursuant to which Valero Energy agreed, for an initial period of seven years:


	•	to transport in the Houston and Valley pipeline systems an aggregate of 40% of the Corpus Christi refineries’ gasoline and distillate production but only if the combined throughput in these pipelines is less than 110,000 barrels per day;

	•	to transport in the Pettus to San Antonio refined product pipeline 25% of the Three Rivers refinery gasoline and distillate production and in the Pettus to Corpus Christi refined product pipeline 90% of the Three Rivers refinery raffinate production;

	•	to use the Houston asphalt terminal for an aggregate of 7% of the asphalt production of the Corpus Christi refineries;

	•	to use the Edinburg refined product terminal for an aggregate of 7% of the gasoline and distillate production of the Corpus Christi refineries, but only if the throughput at this terminal is less than 20,000 barrels per day; and

	•	to use the San Antonio East terminal for 75% of the throughput in the Pettus to San Antonio refined product pipeline.

In the event Valero Energy does not transport in Valero L.P.’s pipelines or use Valero L.P.’s terminals to handle the minimum volume requirements and if Valero Energy’s obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. Valero Energy’s obligation to transport 90% of the Three Rivers refinery raffinate production in the Pettus to Corpus Christi refined product pipeline was suspended in the fourth quarter of 2005 due to the temporary idling of the pipeline in the fourth quarter of 2005.


	*Hydrogen Tolling Agreement*

Valero L.P. is a party to a hydrogen tolling agreement, which provides that Valero Energy will pay Valero L.P. minimum annual revenues of $1.4 million for transporting crude hydrogen from the BOC Group’s chemical facility in Clear Lake, Texas to Valero Energy’s Texas City refinery.


	*Pittsburg Asphalt Terminal Throughput Agreement*

Valero L.P. is a party to a terminal storage and throughput agreement related to the Pittsburg asphalt terminal, which provides that Valero Energy will pay Valero L.P. a monthly lease fee of $0.2 million, a minimum annual throughput fee of $0.4 million and will reimburse Valero L.P. for utility costs.


	*Royal Trading Throughput Agreement*

In conjunction with the Royal Trading acquisition, Valero L.P. entered into a five-year terminal storage and throughput agreement with Valero Energy. The agreement provides a base throughput and blending fee schedule with volume incentive discounts once certain thresholds are met. In addition, Valero Energy has agreed to utilize the acquired terminals for a minimum of 18.5% of the combined McKee and Ardmore refineries’ asphalt production.


	*Corpus Christi North Beach Storage Facility Lease*

Valero L.P. entered into a one-year shell barrel capacity lease agreement with Valero Energy on January 1, 2004 for the 1.6 million barrels of capacity at Valero L.P.’s Corpus Christi North Beach storage facility. This lease automatically renews for additional one-year terms unless either party terminates it with a 90-day written notice. The use of this storage facility was previously included as part of the crude oil pipeline tariff for Valero L.P.’s Corpus Christi to Three Rivers crude oil pipeline.


	*Office Rental Agreement*

In January of 2006, Valero L.P. entered into an Office Rental Agreement (the Rental Agreement) with Valero Energy whereby Valero L.P. agreed to lease approximately 65,000 square feet of office space at an annual cost of approximately $1.6 million per year for the first five years. For years six through ten, the annual fee is subject to adjustment for changes in the Consumer Price Index. For each subsequent five year period under the initial term and during the ten-year renewal option, the annual rent shall be adjusted to reflect the actual market rent of comparable office spaces. Rental payments will commence upon the completion of a new office facility presently being constructed by Valero Energy. The completion of this facility is expected to be in the second half of 2007. The Rental Agreement has an initial term of 25 years with a ten-year renewal option.


	*Other Agreements*

Valero L.P. has other minor storage and throughput contracts with Valero Energy resulting from the Kaneb acquisition.


	*Equity Ownership*

As of December 31, 2005, Valero GP Holdings owned 614,572 of Valero L.P.’s outstanding common units and all 9,599,322 of Valero L.P.’s outstanding subordinated units. In January 2006, in anticipation of our initial public offering, we transferred all of these units to one of our wholly owned subsidiaries. In addition, as of December 31, 2005, Valero GP, LLC, also an indirect wholly owned subsidiary of Valero Energy, owned 8,200 of Valero L.P.’s outstanding common units. As a result, Valero Energy owns a 21.4% limited partner interest in Valero L.P. and the 2% general partner interest held by Riverwalk Logistics.


	*Environmental, Health and Safety*

Valero L.P. is subject to extensive federal, state and local environmental and safety laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures, pipeline integrity and operator qualifications, among others. Because environmental and safety laws and regulations are becoming more complex and stringent and new environmental and safety laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental, health and safety matters is expected to increase.

The balance of and changes in Valero L.P.’s accruals for environmental matters as of and for the years ended December 31, 2003, 2004 and 2005 are included in Valero L.P.’s Notes to Consolidated Financial Statements. Valero L.P. believes that it has adequately accrued for its environmental exposures.

Critical Accounting Policies

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to select accounting policies and to make estimates and assumptions related thereto that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The accounting policies below are considered critical due to judgments made by Valero L.P.’s management and the sensitivity of these estimates to deviations of actual results from management’s assumptions. The critical accounting policies should be read in conjunction with Valero L.P.’s Notes to Consolidated Financial Statements, which summarizes Valero L.P.’s significant accounting policies.


	*Depreciation*

Valero L.P. calculates depreciation expense using the straight-line method over the estimated useful lives of its property and equipment. Because of the expected long useful lives of the property and equipment, Valero L.P. depreciates its property and equipment over periods ranging from 15 years to 40 years. Changes in the estimated useful lives of the property and equipment could have a material adverse effect on Valero L.P.’s results of operations.


	*Impairment of Long-Lived Assets and Goodwill*

Valero L.P. tests long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Goodwill must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the related asset might be impaired. An impairment loss should be recognized only if the carrying amount of the asset/goodwill is not recoverable and exceeds its fair value.

In order to test for recoverability, Valero L.P.’s management must make estimates of projected cash flows related to the asset which include, but are not limited to, assumptions about the use or disposition of the asset, estimated remaining life of the asset, and future expenditures necessary to maintain the asset’s existing service potential. In order to determine fair value, Valero L.P.’s management must make certain estimates and assumptions including, among other things, an assessment of market conditions, projected cash flows, investment rates, interest/equity rates and growth rates, that could significantly impact the fair value of the long-lived asset or goodwill. Due to the subjectivity of the assumptions used to test for recoverability and to determine fair value, significant impairment charges could result in the future, thus affecting Valero L.P.’s future reported net income.


	*Asset Retirement Obligations*

Valero L.P. adopted FASB Interpretation No. 47. “Accounting for Conditional Asset Retirement Obligations” (FIN 47) for the year ended December 31, 2005. FIN 47 clarifies the term “conditional asset retirement obligation” as used in FASB statement No. 143, “Accounting for Asset Retirement Obligations.” Valero L.P. records a liability for asset retirement obligations, including conditional asset retirement obligations, in the period the obligation is incurred if Valero L.P. can make a reasonable estimate of the fair value of the obligation. In order to determine the fair value of an asset retirement obligation, Valero L.P. must make assumptions as to the date the obligation will be settled, the amount and timing of cash flows required to settle the obligation and an appropriate discount rate.

Valero L.P. has asset retirement obligations with respect to certain of its assets due to various legal obligations to clean and/or dispose of those assets at the time they are retired. However, these assets can be used for extended and indeterminate period of time as long as they are properly maintained and/or upgraded. It is Valero L.P.’s practice and current intent to maintain its assets and continue making improvements to those assets based on technological advances. As a result, Valero L.P. believes that its assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which it would retire these assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any asset, Valero L.P. estimates the cost of performing the retirement activities and records a liability for the fair value of that cost using established present value techniques.

Valero L.P. also has legal obligations in the form of leases and right of way agreements, which require Valero L.P. to remove certain of its assets upon termination of the agreement. However, these lease or right of way agreements generally contain automatic renewal provisions that extend Valero L.P.’s rights indefinitely or it has other legal means available to extend its rights. As a result, Valero L.P. has not recorded a liability for asset retirement obligations as the timing of settlement cannot be reasonably determined.


	*Environmental Reserve*

Environmental remediation costs are expensed and an associated accrual established when site restoration and environmental remediation and cleanup obligations are either known or considered probable and can be reasonably estimated. Accrued liabilities are based on estimates of probable undiscounted future costs over a 20-year time period using currently available technology and applying current regulations, as well as Valero L.P.’s own internal environmental policies. Valero L.P.’s environmental liabilities have not been reduced by possible recoveries from third parties. Environmental costs include initial site surveys, costs for remediation and restoration and ongoing monitoring costs, as well as fines, damages and other costs, when estimable. Adjustments to initial estimates are recorded, from time to time, to reflect changing circumstances and estimates based upon additional information developed in subsequent periods. Valero L.P. believes that it has adequately accrued for its environmental exposures.


	*Contingencies*

Valero L.P. accrues for costs relating to litigation, claims and other contingent matters, including tax contingencies, when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and such differences will be charged to income in the period when final determination is made.

BUSINESS OF VALERO GP HOLDINGS, LLC

General


	•	the 2% general partner interest in Valero L.P., which we hold through our 100% ownership interest in Riverwalk Logistics, L.P.;

	•	100% of the incentive distribution rights issued by Valero L.P., which entitle us to receive increasing percentages of the cash distributed by Valero L.P., currently at the maximum percentage of 23%; and

	•	617,339 common units and 9,599,322 subordinated units of Valero L.P. representing a 21.4% limited partner interest in Valero L.P. We expect the subordinated units to convert on a one-for-one basis to common units during the second quarter of 2006.

Valero L.P. has an established historical record of paying quarterly cash distributions to its partners. Since its initial public offering in 2001, Valero L.P. has increased its quarterly cash distribution by approximately 42.5%, from $0.60 per unit, or $2.40 per unit on an annualized basis, to a current level of $0.855 per unit, or $3.42 per unit on an annualized basis. For the fourth quarter of 2005 we received a cash distribution from Valero L.P. of approximately $12.7 million (representing approximately $50.7 million on an annualized basis), consisting of $0.9 million on our 2% general partner interest, $3.1 million on the incentive distribution rights and $8.7 million on the units of Valero L.P. that we own. Based on this current distribution level, we expect that our initial quarterly cash distribution will be $0.27 per unit, or $1.08 per unit on an annualized basis.

From April 16, 2001 through the fourth quarter of 2005, the total quarterly cash distributions declared and paid by Valero L.P. with respect to all of its partnership interests increased 457%, from approximately $7.9 million (adjusted to reflect the reduced amount of distributions that would have been paid had the common unit redemption discussed above occurred on April 16, 2001) to approximately $44.0 million. Over the same period, the adjusted quarterly cash distributions declared and paid by Valero L.P. with respect to our ownership interests increased 140%, from $5.3 million, or 67% of Valero L.P.’s adjusted total quarterly distributions, to

$12.7 million, or 28.9% of Valero L.P.’s total quarterly distributions. The changes in the adjusted historical cash distributions on our ownership interests reflected in the graph set forth below generally resulted from the following:


	•	the increases in Valero L.P.’s per unit quarterly distribution from $0.60 declared and paid for the third quarter of 2001 to $0.855 declared and paid for the fourth quarter of 2005; and

	•	the increases in Valero L.P.’s distributions with respect to the 2% general partner interest resulting from the issuance of a total of 31,420,855 common units by Valero L.P. during such period to finance acquisitions and capital improvements.

Adjusted Quarterly Valero L.P. Distributions to Valero GP Holdings, LLC (a)


(a)	Actual distributions paid to Valero GP Holdings for quarters prior to the March 18, 2003 redemption were as follows (in millions, except per unit amounts):


	Per Unit			Total Distribution Paid to
	Distribution			Valero GP Holdings, LLC

2001:
Second Quarter	$	0.501	(b)	$	7.2
Third Quarter		0.600			8.6
Fourth Quarter		0.600			8.7
2002:
First Quarter		0.650			9.5
Second Quarter		0.700			10.5
Third Quarter		0.700			10.5
Fourth Quarter		0.700			10.5


(b)	The second quarter distribution was prorated for the period from April 16, 2001, the effective date of Valero L.P.’s initial public offering, to June 30, 2001.


	•	8.0% of all cash distributed in a quarter after $0.60 per unit has been distributed with respect to all units of Valero L.P. for that quarter until $0.66 per unit has been distributed; and

	•	23.0% of all cash distributed in a quarter after $0.66 per unit has been distributed with respect to all units of Valero L.P. for that quarter.


	•	Valero L.P.’s 37,210,427 common units and 9,599,322 subordinated units outstanding as of December 31, 2005; and

	•	our ownership of the general partner interest in Valero L.P., the incentive distribution rights, 617,339 common units and 9,599,322 subordinated units.

This information is presented for illustrative purposes only and is not intended to be a prediction of future performance. Valero L.P.’s cash distributions with respect to our partnership interests will vary depending on several factors, including Valero L.P.’s outstanding partnership interests on the record date for distribution, the per unit distribution and our relative ownership of partnership interests. In addition, the level of distributions we receive may be affected by the various risks associated with an investment in us and the underlying business of Valero L.P. Please read “Risk Factors.”

Hypothetical Annual Cash Distributions to Valero GP Holdings, LLC


(a)	This represents the most recent distribution (fourth quarter 2005) presented on an annualized basis.

indirect ownership of Valero L.P.’s incentive distribution rights, our cash flows are affected by changes in Valero L.P.’s distributions to a greater extent than those of Valero L.P.’s common unitholders. If Valero L.P. is successful in implementing its business strategy and increasing distributions to its partners, including us, we generally would expect to increase distributions to our unitholders. The timing and amount of any such increase in our distributions will not necessarily be comparable to any increase in Valero L.P.’s distributions. In August 2006, we expect to pay you a distribution equal to the initial quarterly distribution prorated for the portion of the quarter ending June 30, 2006 that we are a publicly traded limited liability company. However, we cannot assure you that any distributions will be declared or paid. Please read “Our Cash Distribution Policy and Restrictions on Distributions — Estimated Minimum Cash Available for Distribution Based upon Estimated Minimum EBITDA of Valero L.P.”

Employees

We have no employees. Our wholly owned subsidiary, Valero GP, LLC, pursuant to the new Administration Agreement, will provide administrative services to us. As of January 1, 2006, Valero GP, LLC had 1,291 employees. We believe that our relationship with these employees is satisfactory.

For a discussion of how employee benefit plans will be transferred to Valero GP, LLC upon closing of this offering, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Valero GP Holdings, LLC — Liquidity and Capital Resources — Employee Benefits.”

Environmental and Safety Regulation

Our only cash generating assets are our indirect ownership interests in Valero L.P. We have no independent operations. Please read “Business of Valero L.P. — Environmental and Safety Regulation.”

Title to Properties

Our only cash generating assets are our indirect ownership interests in Valero L.P. We have no independent operations. Please read “Business of Valero L.P. — Title to Properties.”

Legal Proceedings

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any legal or governmental proceedings against us. Please read “Business of Valero L.P. — Legal Proceedings and Other Contingencies.”

BUSINESS OF VALERO L.P.

General

Valero L.P. 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 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.

Valero L.P.’s operations are managed by Valero GP, LLC. Valero GP, LLC is the general partner of Riverwalk Logistics, L.P., Valero L.P.’s general partner. Valero GP, LLC is an indirect wholly owned subsidiary of Valero Energy.

Valero L.P. conducts its operations through its wholly owned subsidiaries, primarily Valero Logistics Operations, L.P. (Valero Logistics) and Kaneb Pipe Line Operating Partnership, L.P. (KPOP) Valero L.P. has four business segments: refined product terminals, refined product pipelines, crude oil pipelines, and crude oil storage tanks. As of December 31, 2005, Valero L.P.’s assets included:


	•	76 refined product terminal facilities providing approximately 59.7 million barrels of storage capacity;

	•	8,389 miles of refined product pipelines, including 2,000 miles of anhydrous ammonia pipelines, with 21 associated terminals providing storage capacity of 4.9 million barrels;

	•	797 miles of crude oil pipelines with 11 associated storage tanks providing storage capacity of 1.7 million barrels; and

	•	60 crude oil storage tanks providing storage capacity of 12.5 million barrels.

Valero L.P. generates revenues by:


	•	charging tariffs for transporting crude oil, refined products and ammonia through its pipelines;

	•	charging fees for the use of its terminals and crude oil storage tanks and related ancillary services; and

	•	selling bunker fuel, which is fuel consumed by marine vessels.

Valero L.P.’s business strategy is to increase per unit cash distributions to its partners through:


	•	continuous improvement of its operations, by improving safety and environmental stewardship, cost controls and asset reliability and integrity;

	•	internal growth through enhancing the utilization of its existing assets by expanding its business with current and new customers as well as investing in strategic expansion projects; and

	•	external growth from acquisitions that meet its financial and strategic criteria.

Valero L.P.’s largest customer is Valero Energy, which accounted for 99% and 34% of Valero L.P.’s revenues for the years ended December 31, 2004 and 2005, respectively. Please read “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy.”

On July 1, 2005, Valero L.P. completed its acquisition (the Kaneb Acquisition) of Kaneb Services LLC (KSL) and Kaneb Pipe Line Partners, L.P. (KPP, and, together with KSL, Kaneb) and became one of the largest independent terminal and petroleum liquids pipeline operators in the United States. Valero L.P. has terminal facilities in the United States, the Netherlands Antilles, Canada, Mexico, the Netherlands, and the United Kingdom.

Valero L.P. acquired all of KSL’s outstanding equity securities for approximately $509.0 million in cash, which was primarily funded by borrowings under a $525.0 million term credit agreement. Additionally, Valero L.P. issued approximately 23.8 million of its common units valued at approximately $1.45 billion in exchange for all of the outstanding common units of KPP. Please read the disclosures regarding the Kaneb Acquisition and Valero L.P.’s long-term debt in “Valero L.P. and Subsidiaries — Notes to Consolidated

Financial Statements — Note 3. Acquisitions” and “Valero L.P. and Subsidiaries — Notes to Consolidated Financial Statements — Note 10. Long-Term Debt.”

In conjunction with the Kaneb Acquisition, Valero L.P. agreed with the United States Federal Trade Commission to divest certain assets. These assets consisted of two California terminals handling refined products, blendstocks and crude oil, three East Coast refined product terminals, and a 550-mile refined product pipeline with four truck terminals and storage in the U.S. Rocky Mountains (collectively, the Held Separate Businesses). On September 30, 2005, Valero L.P. sold the Held Separate Businesses to Pacific Energy Partners, L.P. for approximately $455.0 million. In a separate transaction that occurred simultaneously with the closing of the Kaneb Acquisition, Valero L.P. sold all of its interest in KSL’s commodity trading business to Valero Energy for approximately $26.8 million.

On March 30, 2006, Valero L.P. sold its subsidiaries located in Australia and New Zealand, which own eight terminals with an aggregate storage capacity of 1.1 million barrels, for approximately $65.0 million, plus working capital adjustments.

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 SEC are available free of charge on Valero L.P.’s website at http://www.valerolp.com as soon as reasonably practicable after Valero L.P. files 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. Information contained on this website however, is not incorporated by reference into, and does not constitute a part of, this prospectus. 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.

The term “throughput” as used in this document generally refers to the crude oil or refined product barrels or tons of ammonia, as applicable, that pass through each pipeline, terminal or storage tank.

Business Segments

Valero L.P.’s four reportable business segments are refined product terminals, refined product pipelines, crude oil pipelines, and crude oil storage tanks. Detailed financial information about its segments is included in the Notes to Consolidated Financial Statements.

Refined Product Terminals

Valero L.P.’s terminal facilities provide storage and handling services on a fee basis for petroleum products, specialty chemicals and other liquids. In addition, its terminals located on the island of St. Eustatius, Netherlands Antilles and in Point Tupper, Nova Scotia sell bunker fuel, and provide ancillary services, such as pilotage, tug assistance, line handling, launch service, emergency response services and other ship services. As of December 31, 2005, Valero L.P. owned and operated:


	•	57 terminals in the United States, with a total storage capacity of approximately 32.6 million barrels;

	•	A terminal on the island of St. Eustatius, Netherlands Antilles with a tank capacity of 11.3 million barrels and a transshipment facility;

	•	A terminal located in Point Tupper, Nova Scotia with a tank capacity of 7.6 million barrels and a transshipment facility;

	•	Seven terminals located in the United Kingdom and one terminal located in the Netherlands, having a total storage capacity of approximately 7.1 million barrels;

	•	Eight terminals in Australia and New Zealand with a total storage capacity of approximately 1.1 million barrels, which Valero L.P. has sold; and

	•	A terminal located in Nuevo Laredo, Mexico.

Valero L.P.’s five largest terminal facilities are located on the island of St. Eustatius, Netherlands Antilles; in Point Tupper, Nova Scotia; in Piney Point, Maryland; in Linden, New Jersey (50% owned joint venture); and in Selby, California.


	*Description of Largest Terminal Facilities*

St. Eustatius, Netherlands Antilles. Valero L.P. owns and operates an 11.3 million barrel petroleum storage and terminalling facility located on the Netherlands Antilles island of St. Eustatius, which is located at a point of minimal deviation from major shipping routes. This facility is capable of handling a wide range of petroleum products, including crude oil and refined products, and it can accommodate the world’s largest tankers for loading and discharging crude oil and other petroleum products. A two-berth jetty, a two-berth monopile with platform and buoy systems, a floating hose station, and an offshore single point mooring buoy with loading and unloading capabilities serve the terminal’s customers’ vessels. The St. Eustatius facility has a total of 51 tanks. The fuel oil and petroleum product facilities have in-tank and in-line blending capabilities, while the crude tanks have tank-to-tank blending capability as well as in-tank mixers. In addition to the storage and blending services at St. Eustatius, this facility has the flexibility to utilize certain storage capacity for both feedstock and refined products to support its atmospheric distillation unit. This unit is capable of processing up to 25,000 barrels per day of feedstock, ranging from condensates to heavy crude oil. Valero L.P. owns and operates all of the berthing facilities at the St. Eustatius terminal. Separate fees apply for the use of the berthing facilities as well as associated services, including pilotage, tug assistance, line handling, launch service, spill response services and other ship services.

Point Tupper, Nova Scotia. Valero L.P. owns and operates a 7.6 million barrel terminalling and storage facility located at Point Tupper on the Strait of Canso, near Port Hawkesbury, Nova Scotia, Canada, which is located approximately 700 miles from New York City, 850 miles from Philadelphia and 2,500 miles from Mongstad, Norway. This facility is the deepest independent, ice-free marine terminal on the North American Atlantic coast, with access to the East Coast and Canada as well as the Midwestern United States via the St. Lawrence Seaway and the Great Lakes system. With one of the premier jetty facilities in North America, the Point Tupper facility can accommodate substantially all of the world’s largest, fully laden very large crude carriers and ultra large crude carriers for loading and discharging crude oil, petroleum products, and petrochemicals. Crude oil and petroleum product movements at the terminal are fully automated. Separate fees apply for the use of the jetty facility as well as associated services, including pilotage, tug assistance, line handling, launch service, spill response services and other ship services. Valero L.P. also charters tugs, mooring launches, and other vessels to assist with the movement of vessels through the Strait of Canso and the safe berthing of vessels at the terminal facility.

Piney Point, Maryland. Valero L.P.’s terminal and storage facility in Piney Point, Maryland is located on approximately 400 acres on the Potomac River. The Piney Point terminal has approximately 5.4 million barrels of storage capacity in 28 tanks and is the closest deep-water facility to Washington, D.C. This terminal competes with other large petroleum terminals in the East Coast water-borne market extending from New York Harbor to Norfolk, Virginia. The terminal currently stores petroleum products consisting primarily of fuel oils and asphalt. The terminal has a dock with a 36-foot draft for tankers and four berths for barges. It also has truck-loading facilities, product-blending capabilities and is connected to a pipeline that supplies residual fuel oil to two power generating stations.

Linden, New Jersey. Valero L.P. owns 50% of ST Linden Terminal LLC, which owns a terminal and storage facility in Linden, New Jersey. The terminal is located on a 44-acre facility that provides Valero L.P. with deep-water terminalling capabilities at New York Harbor. This terminal primarily stores petroleum products, including gasoline, jet fuel and fuel oils. The facility has a total capacity of approximately 3.9 million barrels in 28 tanks, can receive products via ship, barge and pipeline and delivers product by ship, barge, pipeline and truck. The terminal includes two docks and leases a third with draft limits of 35, 24 and 24 feet, respectively.

Selby, California. Valero L.P.’s terminal located in Selby, California has approximately 3.0 million barrels of tankage and is located in the San Francisco Bay area. The facility provides deep-water access for handling petroleum products and gasoline additives such as ethanol. The terminal offers pipeline connections to various

refineries and pipelines. It receives and delivers product by vessel, barge, pipeline and truck-loading facilities. The terminal also has railroad tank car unloading capability.

The following table outlines Valero L.P.’s terminal locations, capacities, tanks and primary products handled:


	Tankage		No. of
Facility	Capacity		Tanks		Primary Products Handled

Major U.S. Terminals:
Piney Point, MD		5,403,000		28	Petroleum
Linden, NJ (a)		3,906,000		28	Petroleum
Selby, CA		3,042,000		24	Petroleum, ethanol
Jacksonville, FL		2,069,000		30	Petroleum
Texas City, TX		2,008,000		124	Chemicals, petrochemicals, petroleum
Other U.S. Terminals:
Montgomery, AL		162,000		7	Petroleum, jet fuel
Moundville, AL		310,000		6	Petroleum
Tucson, AZ (b)		87,000		4	Petroleum
Los Angeles, CA		607,000		20	Petroleum
Pittsburg, CA		380,000		8	Asphalt
Stockton, CA		706,000		32	Petroleum, ethanol, fertilizer
Colorado Springs, CO		324,000		8	Petroleum
Denver, CO		111,000		10	Petroleum
Bremen, GA		182,000		9	Petroleum
Brunswick, GA		303,000		5	Fertilizer, pulp liquor
Columbus, GA		175,000		24	Petroleum, chemicals, caustic
Macon, GA		307,000		10	Petroleum
Savannah, GA		903,000		28	Petroleum, caustic
Blue Island, IL		752,000		19	Petroleum, ethanol
Chillicothe, IL (a)		270,000		6	Petroleum
Peru, IL (c)		221,000		8	Fertilizer
Indianapolis, IN		410,000		18	Petroleum
Westwego, LA		849,000		53	Molasses, caustic, chemicals, lube oil, fertilizer
Andrews AFB Pipeline, MD		72,000		3	Petroleum
Baltimore, MD		832,000		50	Chemicals, asphalt
Salisbury, MD		177,000		14	Petroleum
Winona, MN		267,000		8	Fertilizer
Reno, NV		107,000		7	Petroleum
Linden, NJ		371,000		13	Petroleum
Paulsboro, NJ		71,000		9	Petroleum
Alamogordo, NM		120,000		5	Petroleum
Albuquerque, NM		248,000		11	Petroleum
Rosario, NM		160,000		8	Asphalt
Catoosa, OK		340,000		24	Asphalt
Drumright, OK (c)		315,000		4	Petroleum
Portland, OR		1,119,000		31	Petroleum, ethanol
Abernathy, TX		171,000		11	Petroleum

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			Tankage		No. of
Facility			Capacity		Tanks		Primary Products Handled

Almeda, TX (c)				106,000		6	Petroleum
Amarillo, TX				270,000		11	Petroleum
Corpus Christi, TX				359,000		12	Petroleum
Edinburg, TX				189,000		7	Petroleum
El Paso, TX (b)				348,000		14	Petroleum
Harlingen, TX				315,000		7	Petroleum
Houston, TX (Hobby Airport)				106,000		6	Petroleum
Houston, TX				90,000		6	Asphalt
Laredo, TX				202,000		6	Petroleum
Placedo, TX				97,000		4	Petroleum
San Antonio (east), TX				151,000		10	Petroleum
San Antonio (south), TX				219,000		8	Petroleum
Southlake, TX				286,000		6	Petroleum
Texas City, TX				153,000		12	Petroleum
Dumfries, VA				554,000		16	Petroleum, asphalt
Virginia Beach, VA				40,000		2	Petroleum
Tacoma, WA				377,000		15	Petroleum, ethanol
Vancouver, WA				227,000		49	Chemicals
Vancouver, WA				316,000		6	Petroleum
Milwaukee, WI				308,000		7	Petroleum, ethanol

		Total U.S. Terminals		32,570,000		917

Foreign Terminals:
St. Eustatius, Netherlands Antilles				11,315,000		51	Petroleum, crude oil
Point Tupper, Canada				7,555,000		37	Petroleum, crude oil
Sydney, Australia (d)				330,000		65	Chemicals, fats and oils
Melbourne, Australia (d)				280,000		72	Specialty chemicals
Geelong, Australia (d)				145,000		14	Specialty chemicals, petroleum
Adelaide, Australia (d)				90,000		24	Chemicals, tallow, petroleum
Auckland, New Zealand (a)(d)				74,000		44	Fats, oils and chemicals
New Plymouth, New Zealand (d)				54,000		12	Fats, oils and chemicals
Mt. Maunganui, New Zealand (d)				85,000		24	Fats, oils and chemicals
Wellington, New Zealand (d)				55,000		14	Fats, oils and chemicals
Grays, England				1,945,000		53	Petroleum
Eastham, England				2,185,000		162	Chemicals, petroleum, animal fats
Runcorn, England				146,000		4	Molten sulfur
Grangemouth, Scotland				530,000		46	Petroleum, chemicals and molasses
Glasgow, Scotland				344,000		16	Petroleum
Leith, Scotland (e)				459,000		34	Petroleum, chemicals
Belfast, Northern Ireland				407,000		41	Petroleum
Amsterdam, the Netherlands				1,129,000		44	Petroleum
Nuevo Laredo, Mexico				34,000		5	Petroleum

	Total Foreign Terminals			27,162,000		762

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(a)	Valero L.P. owns 50% of this terminal through a joint venture.


(b)	Valero L.P. owns a 66.67% undivided interest in the El Paso refined product terminal and a 50% undivided interest in the Tucson refined product terminal. The tankage capacity and number of tanks represent the proportionate share of capacity attributable to Valero L.P.’s ownership interest.


(c)	Terminal is temporarily idled.


(d)	On March 30, 2006, Valero L.P. sold these terminal facilities.


(e)	Terminal is permanently idled.


	*Terminal Operations*

Revenues for Valero L.P.’s refined product terminals segment include fees for tank storage agreements, whereby a customer agrees to pay for a certain amount of storage in a tank over a period of time, and throughput agreements, whereby a customer pays a fee per barrel for volumes moving through our terminals. Revenues for Valero L.P.’s refined product terminals segment also include the sale of bunker fuel at Point Tupper and St. Eustatius, for which Valero L.P. earns revenues based upon a price per barrel applied to the number of barrels delivered to Valero L.P.’s customer. Additionally, Valero L.P.’s terminal facilities earn revenues for ancillary services provided to customers, such as blending and filtering.


	*Demand for Refined Petroleum Products*

The operations of Valero L.P.’s refined product terminals depend in large part on the level of demand for products stored in Valero L.P.’s terminals in the markets served by those assets. The majority of products stored in Valero L.P.’s terminals are refined petroleum products. Demand for Valero L.P.’s terminalling services will generally fluctuate as demand for refined petroleum products fluctuates. The factor that most affects demand for refined petroleum products is the general condition of the economy, with demand increasing in times when the economy is strong.


	*Customers*

Valero L.P. provides terminalling services for crude oil and refined petroleum products to many of the world’s largest producers of crude oil, integrated oil companies, chemical companies, oil traders and refiners. The largest customer of its refined product terminals segment is Valero Energy, which accounted for $46.4 million, or 10.8% of the total revenues of the segment, for the year ended December 31, 2005. No other customer accounted for more than 10% of the revenues of the segment for this period. Valero L.P.’s crude oil transshipment customers include an oil producer that leases and utilizes 5.0 million barrels of storage at St. Eustatius and a major international oil company which leases and utilizes 3.6 million barrels of storage at Point Tupper, both of which have long-term contracts with Valero L.P. In addition, two different international oil companies each lease and utilize 1.0 million barrels of clean products storage at St. Eustatius and Point Tupper, respectively. Also in Canada, a consortium consisting of major oil companies sends natural gas liquids via pipeline to certain processing facilities on land leased from Valero L.P. After processing, certain products are stored at the Point Tupper facility under a long-term contract. In addition, Valero L.P.’s blending capabilities have attracted customers who have leased capacity primarily for blending purposes and who have contributed to Valero L.P.’s bunker fuel and bulk product sales.


	*Competition and Business Considerations*

Many major energy and chemical companies own extensive terminal storage facilities. Although such terminals often have the same capabilities as terminals owned by independent operators, they generally do not provide terminalling services to third parties. In many instances, major energy and chemical companies that own storage and terminalling facilities are also significant customers of independent terminal operators. Such companies typically have strong demand for terminals owned by independent operators when independent terminals have more cost effective locations near key transportation links, such as deep-water ports. Major energy and chemical companies also need independent terminal storage when their owned storage facilities are

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inadequate, either because of size constraints, the nature of the stored material or specialized handling requirements.

Independent terminal owners generally compete on the basis of the location and versatility of terminals, service and price. A favorably located terminal will have access to various cost effective transportation modes both to and from the terminal. Transportation modes typically include waterways, railroads, roadways and pipelines. Terminals located near deep-water port facilities are referred to as “deep-water terminals” and terminals without such facilities are referred to as “inland terminals” although some inland facilities located on or near navigable rivers are served by barges.

Terminal versatility is a function of the operator’s ability to offer complex handling requirements for diverse products. The service function typically provided by the terminal includes, among other things, the safe storage of the product at specified temperature, moisture and other conditions, as well as receipt at and delivery from the terminal, all of which must be in compliance with applicable environmental regulations. A terminal operator’s ability to obtain attractive pricing is often dependent on the quality, versatility and reputation of the facilities owned by the operator. Although many products require modest terminal modification, operators with versatile storage capabilities typically require less modification prior to usage, ultimately making the storage cost to the customer more attractive.

The main competition at Valero L.P.’s St. Eustatius and Point Tupper locations for crude oil handling and storage is from “lightering,” which is the process by which liquid cargo is transferred to smaller vessels, usually while at sea. The price differential between lightering and terminalling is primarily driven by the charter rates for vessels of various sizes. Lightering generally takes significantly longer than discharging at a terminal. Depending on charter rates, the longer charter period associated with lightering is generally offset by various costs associated with terminalling, including storage costs, dock charges and spill response fees. However, terminalling is generally safer and reduces the risk of environmental damage associated with lightering, provides more flexibility in the scheduling of deliveries and allows Valero L.P.’s customers to deliver their products to multiple locations. Lightering in U.S. territorial waters creates a risk of liability for owners and shippers of oil under the U.S. Oil Pollution Act of 1990 and other state and federal legislation. In Canada, similar liability exists under the Canadian Shipping Act. Terminalling also provides customers with the ability to access value-added terminal services.

In the sale of bunker fuel, Valero L.P. competes with ports offering bunker fuels to which, or from which, each vessel travels or are along the route of travel of the vessel. Valero L.P. also competes with bunker fuel delivery locations around the world. In the Western Hemisphere, alternative bunker locations include ports on the U.S. East Coast and Gulf Coast and in Panama, Puerto Rico, the Bahamas, Aruba, Curaçao, and Halifax, Nova Scotia.

Refined Product Pipelines

Valero L.P.’s refined product pipelines operations consist primarily of the transportation of refined petroleum products as a common carrier in Texas, Oklahoma, Colorado, New Mexico, Kansas, Nebraska, Iowa, South Dakota, North Dakota and Minnesota covering approximately 6,389 miles. In addition, Valero L.P. owns a 2,000 mile anhydrous ammonia pipeline located in Louisiana, Arkansas, Missouri, Illinois, Indiana, Iowa and Nebraska. As of December 31, 2005, Valero L.P. operated:


	•	24 refined product pipelines with an aggregate length of 3,834 miles, that connect Valero Energy’s McKee, Three Rivers, Corpus Christi and Ardmore refineries to certain of Valero L.P.’s terminals, or to interconnections with third-party pipelines for further distribution, and a 25-mile crude hydrogen pipeline (collectively, the Central West System);

	•	a 2,090-mile refined product pipeline originating in southern Kansas and terminating at Jamestown, North Dakota, with a western extension to North Platte, Nebraska and an eastern extension into Iowa (collectively, the East Pipeline);

	•	a 440-mile refined product pipeline originating at Tesoro Corporation’s Mandan, North Dakota refinery (the Tesoro Mandan refinery) and terminating in Minneapolis, Minnesota (the North Pipeline); and

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	•	a 2,000-mile anhydrous ammonia pipeline originating at the Louisiana delta area that travels through the midwestern United States and terminates in Nebraska and Indiana (the Ammonia Pipeline).

Valero L.P. charges tariffs on a per barrel basis for transporting refined products in its refined product pipelines and on a per ton basis for transporting anhydrous ammonia in its ammonia pipeline.


	*Description of Valero L.P.’s Pipelines*

Central West System. The pipelines included in the Central West System were constructed to support the refineries to which they are connected. These pipelines are physically integrated with and principally serve refineries owned by Valero Energy. Additionally, Valero L.P. has entered into various agreements with Valero Energy governing the usage of these pipelines. For a description of these agreements, please read “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy.”

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 other products produced by Valero Energy’s refineries. These pipelines connect certain of Valero Energy’s refineries to key markets in Texas, New Mexico and Colorado. The following table lists information about the pipelines included in the Central West System and the Valero Energy refineries that they serve:


								Year Ended
								December 31, 2005

	Valero Energy									Capacity
Origin and Destination	Refinery	Length		Ownership		Capacity		Throughput		Utilization

		(Miles)				(Barrels/Day)		(Barrels/Day)
McKee to El Paso, TX	McKee		408		67%		40,000		29,766		74%
McKee to Colorado Springs, CO (a)	McKee		256		100%		38,000		10,335		69%
Colorado Springs, CO to Airport	McKee		2		100%		14,000		1,211		9%
Colorado Springs to Denver, CO	McKee		101		100%		32,000		16,299		51%
McKee to Denver, CO	McKee		321		30%		9,870		9,524		96%
McKee to Amarillo, TX (6”) (a)(b)	McKee		49		100%		51,000		31,391		74%
McKee to Amarillo, TX (8”) (a)(b)	McKee		49		100%
Amarillo to Abernathy, TX (a)	McKee		102		67%		11,733		7,973		92%
Amarillo, TX to Albuquerque, NM	McKee		293		50%		17,150		9,262		54%
Abernathy to Lubbock, TX (a)	McKee		19		46%		8,029		2,787		35%
McKee to Skellytown, TX	McKee		53		100%		52,000		8,228		16%
Skellytown to Mont Belvieu, TX	McKee		572		50%		26,000		9,859		38%
McKee to Southlake, TX	McKee		375		100%		27,300		18,476		68%
Three Rivers to San Antonio, TX	Three Rivers		81		100%		33,600		26,260		78%
Three Rivers to US/Mexico International Border near Laredo, TX	Three Rivers		108		100%		32,000		21,986		69%
Corpus Christi to Three Rivers, TX	Corpus Christi		68		100%		32,000		6,555		20%
Three Rivers to Corpus Christi, TX	Three Rivers		72		100%		15,000		7,555		50%
Three Rivers to Pettus to San Antonio, TX	Three Rivers		103		100%		24,000		22,445		94%
Three Rivers to Pettus to Corpus Christi, TX (c)	Three Rivers		95		100%		15,000		7,467		50%
Ardmore to Wynnewood, OK (d)	Ardmore		31		100%		90,000		54,143		60%
El Paso, TX to Kinder Morgan	McKee		12		67%		40,000		21,508		54%

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									Year Ended
									December 31, 2005

		Valero Energy									Capacity
Origin and Destination		Refinery	Length		Ownership		Capacity		Throughput		Utilization

			(Miles)				(Barrels/Day)		(Barrels/Day)
Corpus Christi to Pasadena, TX		Corpus Christi		208		100%		105,000		92,638		88%
Corpus Christi to Harlingen, TX		Corpus Christi		167		100%		27,100		25,890		96%
Other refined product pipeline (e)				289		50%		N/A		N/A		N/A

	Total			3,834				740,782		441,558		63%

(a)

This pipeline transports barrels relating to two tariff routes, one of which begins at this pipeline’s origin and ends at this pipeline’s destination and one of which is a longer tariff route with an origin or destination on another pipeline of Valero L.P.’s that connects to this pipeline. Throughput disclosed above for this pipeline reflects only the barrels subject to the tariff route beginning at this pipeline’s origin and ending at this pipeline’s destination. To accurately determine the actual capacity utilization of the pipeline, as well as aggregate capacity utilization, all barrels passing through the pipeline have been taken into account.


(b)	The throughput, capacity and capacity utilization information disclosed above for the McKee to Amarillo, Texas 6-inch pipeline reflects both McKee to Amarillo, Texas pipelines on a combined basis.


(c)	The refined product pipeline from Three Rivers to Pettus to Corpus Christi, Texas is temporarily idled. In the fourth quarter of 2005, an eight-mile portion of this pipeline was permanently idled. As a result, Valero L.P. recorded an impairment charge of $2.1 million included in “interest and other expenses, net” in its consolidated statements of income.


(d)	Included in this segment are two refined product storage tanks with a total capacity of 180,000 barrels located in Wynnewood, Oklahoma. Refined products may be stored and batched prior to shipment into a third-party pipeline.


(e)	This category consists of the temporarily idled 6-inch Amarillo, Texas to Albuquerque, New Mexico refined product pipeline.

East Pipeline. The East Pipeline covers 2,090 miles and moves refined products from south to north in pipelines ranging in size from 6 inches to 16 inches. The East Pipeline system also includes 23 product tanks with total storage capacity of approximately 1.2 million barrels at its tank farm installations at McPherson and El Dorado, Kansas. The East Pipeline transports refined petroleum products to its terminals along the system and to receiving pipeline connections in Kansas. Shippers on the East Pipeline obtain refined petroleum products from refineries in southeast Kansas connected to the East Pipeline or through other pipelines directly connected to the pipeline system. The East Pipeline transported approximately 25.2 million barrels from the date of the Kaneb acquisition through December 31, 2005.

North Pipeline. The North Pipeline runs from west to east approximately 440 miles from its origin at the Tesoro Mandan refinery to the Minneapolis, Minnesota area. The North Pipeline crosses Valero L.P.’s East Pipeline near Jamestown, North Dakota where the two pipelines are connected. While the North Pipeline is currently supplied exclusively by the Tesoro Mandan refinery, it is capable of delivering or receiving products to or from the East Pipeline. The North Pipeline transported approximately 8.9 million barrels from the date of the Kaneb acquisition through December 31, 2005.

The East and North Pipelines also include 21 truck-loading terminals through which refined petroleum products are delivered to storage tanks and then loaded into petroleum transport trucks. Revenues earned at these terminals relate solely to the volumes transported on the pipeline. In the case of the North Pipeline, separate fees are not charged for the use of these terminals. Instead, the terminalling fees are a portion of the transportation rate included in the pipeline tariff. In the case of the East Pipeline, separate fees are charged for the use of the terminals, but such fees are separately stated within the filed pipeline tariff. As a result, these terminals are included in this segment instead of the refined product terminals segment.

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The following table shows the number of tanks Valero L.P. owned at each of the 21 refined petroleum product terminals connected to the East or North Pipelines, the storage capacity in barrels and the pipeline to which each such terminal was connected.


						Related Pipeline
Location of Terminals		Number of Tanks		Tank Capacity		System

Iowa:
	LeMars		9		103,000	East
	Milford		11		172,000	East
	Rock Rapids		12		366,000	East
Kansas:
	Concordia		7		79,000	East
	Hutchinson		9		161,000	East
	Salina		10		98,000	East
Minnesota:
	Moorhead		17		498,000	North
	Sauk Centre		11		114,000	North
	Roseville		13		594,000	North
Nebraska:
	Columbus		12		191,000	East
	Geneva		39		678,000	East
	Norfolk		16		187,000	East
	North Platte		22		197,000	East
	Osceola		8		79,000	East
North Dakota:
	Jamestown (North)		6		141,000	North
	Jamestown (East)		13		188,000	East
South Dakota:
	Aberdeen		12		181,000	East
	Mitchell		8		72,000	East
	Sioux Falls		9		381,000	East
	Wolsey		21		149,000	East
	Yankton		25		246,000	East

Totals			290		4,875,000

Ammonia Pipeline. The 2,000 mile pipeline originates in the Louisiana delta area where it has access to three marine terminals on the Mississippi River. It runs north through Louisiana and Arkansas into Missouri, where at Hermann, Missouri, one branch splits and goes east into Illinois and Indiana, while the other branch continues north into Iowa and then turns west into Nebraska. The Ammonia Pipeline is connected to 22 other third-party owned terminals, which include two industrial facility delivery locations. Product is supplied to the pipeline from plants in Louisiana and foreign-source product delivered through the marine terminals. Anhydrous ammonia is primarily used as agricultural fertilizer through direct application. It is also used as a component of various types of dry fertilizer, explosives and as a cleaning agent in power plant scrubbers. The Ammonia Pipeline transported approximately 5.9 million barrels (converted from tons) from the date of the Kaneb acquisition through December 31, 2005.

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	*Other Systems*

Valero L.P. also owns three single-use pipelines, located near Umatilla, Oregon, Rawlings, Wyoming and Pasco, Washington, each of which supplies diesel fuel to a railroad fueling facility.


	*Pipeline Operations*

Revenues for the Central West System are based upon throughput volumes traveling through Valero L.P.’s system and the related tariffs.

The revenues for the East Pipeline, North Pipeline, and Ammonia Pipeline are based upon volumes and the distance the product is shipped and the related tariffs.

Pipelines are generally the lowest cost method for intermediate and long-haul overland transportation of refined petroleum products. In general, a shipper on one of Valero L.P.’s refined petroleum product pipelines delivers products to the pipeline from refineries or third party pipelines that connect to the pipelines. Each shipper transporting product on a pipeline is required to supply Valero L.P. with a notice of shipment indicating sources of products and destinations. All shipments are tested or receive refinery certifications to ensure compliance with Valero L.P.’s specifications. Petroleum shippers are generally invoiced by Valero L.P. immediately upon the product entering one of its pipelines.

The Ammonia Pipeline receives product from anhydrous ammonia plants or from the marine terminals for imported product. Tariffs for transportation are charged to shippers based upon transportation from the origination point on the pipeline to the point of delivery.

The pipelines in the Central West System, the East Pipeline, the North Pipeline and the Ammonia Pipeline are subject to federal regulation by one or more of the following governmental agencies or laws: the Federal Energy Regulatory Commission (the FERC), the Surface Transportation Board (the STB), the Department of Transportation (DOT), the Environmental Protection Agency (EPA), and the Homeland Security Act. Additionally, the operations and integrity of the Pipelines are subject to the respective state jurisdictions along the route of the systems.

Except for three single-use pipelines and certain ethanol facilities, all of Valero L.P.’s pipeline operations constitute common carrier operations and are subject to federal tariff regulation. Valero L.P. is authorized by the FERC to adopt market-based rates in approximately one-half of its markets on the East Pipeline system. Common carrier activities are those for which transportation through its pipelines is available at published tariffs filed, in the case of interstate petroleum product shipments, with the FERC or, in the case of intrastate petroleum product shipments in Colorado, Kansas, Louisiana, North Dakota, Oklahoma and Texas, with the relevant state authority, to any shipper of refined petroleum products who requests such services and satisfies the conditions and specifications for transportation. The Ammonia Pipeline is subject to federal regulation by the STB, rather than the FERC, and state regulation by the Louisiana Public Service Commission.

Valero L.P. uses Supervisory Control and Data Acquisition remote supervisory control software programs to continuously monitor and control the pipelines. The system monitors quantities of products injected in and delivered through the pipelines and automatically signals the appropriate personnel upon deviations from normal operations that require attention.


	*Demand for and Sources of Refined Products*

The operations of Valero L.P.’s Central West, East and North Pipelines depend in large part on the level of demand for refined products in the markets served by the pipelines and the ability and willingness of refiners and marketers having access to the pipelines to supply such demand by deliveries through the pipelines.

Virtually all of the refined products delivered through the pipelines in the Central West System are gasoline and diesel fuel that originate at refineries owned by Valero Energy. Demand for these products fluctuates as prices for these products fluctuate. Prices fluctuate for a variety of reasons including the overall balance in supply and demand, which is affected by refinery utilization rates, among other factors. Prices for gasoline and diesel fuel tend to increase in the warm weather months as more people drive automobiles.

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The majority of the refined products delivered through the North Pipeline are delivered to the Minneapolis, Minnesota metropolitan area and consist primarily of gasoline and diesel fuel. Demand for those products fluctuates based on general economic conditions and with changes in the weather as more people tend to drive during the warmer months.

Much of the refined products delivered through the East Pipeline and volumes on the North Pipeline that are not delivered to Minneapolis are ultimately used as fuel for railroads or in agricultural operations, including fuel for farm equipment, irrigation systems, trucks used for transporting crops and crop drying facilities. Demand for refined products for agricultural use, and the relative mix of products required, is affected by weather conditions in the markets served by the East and North Pipelines. The agricultural sector is also affected by government agricultural policies and crop prices. Although periods of drought suppress agricultural demand for some refined products, particularly those used for fueling farm equipment, the demand for fuel for irrigation systems often increases during such times. The mix of refined products delivered varies seasonally, with gasoline demand peaking in early summer, diesel fuel demand peaking in late summer and propane demand higher in the fall. In addition, weather conditions in the areas served by the East Pipeline affect the mix of the refined products delivered through the East Pipeline, although historically any overall impact on the total volumes shipped has not been significant.

Valero L.P.’s refined product pipelines are also dependent upon adequate levels of production of refined products by refineries connected to the pipelines, directly or through connecting pipelines. The refineries are, in turn, dependent upon adequate supplies of suitable grades of crude oil. The pipelines in the Central West System are connected to refineries owned by Valero Energy and generally are subject to long-term throughput agreements with Valero Energy. Valero Energy’s refineries connected directly to Valero L.P.’s pipelines obtain crude oil from a variety of foreign and domestic sources. The refineries connected directly to the East Pipeline obtain crude oil from producing fields located primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from other domestic or foreign sources. In addition, refineries in Kansas, Oklahoma and Texas are also connected to the East Pipeline through other pipelines. These refineries obtain their supplies of crude oil from a variety of sources. The pipelines in Valero L.P.’s Central West System are dependent upon the refineries owned by Valero Energy to which they connect. If operations at one of these refineries were discontinued or reduced, it could be material to Valero L.P.’s operations, although it would endeavor to minimize the impact by seeking alternative customers for those pipelines. The North Pipeline is heavily dependent on the Tesoro Mandan refinery, which primarily operates on North Dakota crude oil although it has the ability to access other crude oils. If operations at the Tesoro Mandan refinery were interrupted, it could have a material adverse effect on Valero L.P.’s operations. Other than the refineries owned by Valero Energy to which Valero L.P.’s pipelines connect and the Tesoro Mandan refinery, if operations at any one refinery were discontinued, Valero L.P. believes (assuming unchanged demand for refined products in markets served by the refined product pipelines) that the effects thereof would be short-term in nature and its business would not be materially adversely affected over the long-term because such discontinued production could be replaced by other refineries or by other sources.

Virtually all of the refined products transported through the pipelines in the Central West System are produced by refineries owned by Valero Energy. The majority of the refined products transported through the East Pipeline is produced at three refineries located at McPherson and El Dorado, Kansas and Ponca City, Oklahoma, which are operated by the National Cooperative Refining Association (NCRA), Frontier Refining and ConocoPhillips Company, respectively. The NCRA and Frontier Oil Corporation refineries are connected directly to the East Pipeline. The McPherson, Kansas refinery operated by NCRA accounted for approximately 33.8% of the total amount of product shipped over the East Pipeline in 2005. The East Pipeline also has direct access by third party pipelines to four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies of products through connecting pipelines that receive products from pipelines originating on the Gulf Coast.


	*Demand for and Sources of Anhydrous Ammonia*

The Ammonia Pipeline is one of two major anhydrous ammonia pipelines in the United States and the only one that has the capability of receiving foreign production directly into the system and transporting anhydrous ammonia into the nation’s corn belt. This ability to receive either domestic or foreign anhydrous ammonia is a

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competitive advantage over the next largest ammonia system, which originates in Oklahoma and Texas, then extends into Iowa.

Valero L.P.’s Ammonia Pipeline operations depend on overall nitrogen fertilizer use, management practice, the level of demand for direct application of anhydrous ammonia as a fertilizer for crop production (Direct Application), the weather, as Direct Application is not effective if the ground is too wet or too dry, and the price of natural gas, the primary component of anhydrous ammonia.

Corn producers have several fertilizer alternatives such as liquid, dry or Direct Application. Liquid and dry fertilizers are both upgrades of anhydrous ammonia and therefore are generally more costly but are less sensitive to weather conditions during application. Direct Application is the cheapest method of fertilizer application.


	*Customers*

The largest customer of Valero L.P.’s refined product pipeline segment was Valero Energy, which accounted for $89.7 million, or 57.9% of the total segment revenues, for the year ended December 31, 2005. In addition to Valero Energy, Valero L.P. had a total of approximately 57 shippers for the year ended December 31, 2005, including integrated oil companies, refining companies, farm cooperatives and a railroad. No other customer accounted for more than 10% of the total revenues of the segment for the year ended December 31, 2005.


	*Competition and Business Considerations*

Because pipelines are generally the lowest cost method for intermediate and long-haul movement of refined petroleum products, Valero L.P.’s more significant competitors are common carrier and proprietary pipelines owned and operated by major integrated and large independent oil companies and other companies in the areas where Valero L.P. delivers products. Competition between common carrier pipelines is based primarily on transportation charges, quality of customer service and proximity to end users. Valero L.P. believes high capital costs, tariff regulation, environmental considerations and problems in acquiring rights-of-way make it unlikely that other competing pipeline systems comparable in size and scope to Valero L.P.’s pipelines will be built in the near future, provided Valero L.P.’s pipelines have available capacity to satisfy demand and its tariffs remain at reasonable levels.

The costs associated with transporting products from a loading terminal to end users limit the geographic size of the market that can be served economically by any terminal. Transportation to end users from Valero L.P.’s loading terminals is conducted primarily by trucking operations of unrelated third parties. Trucks may competitively deliver products in some of the areas served by Valero L.P.’s pipelines. However, trucking costs render that mode of transportation uncompetitive for longer hauls or larger volumes. Valero L.P. does not believe that trucks are, or will be, effective competition to its long-haul volumes over the long-term.

The pipelines within the Central West System are physically integrated with and principally serve refineries owned by Valero Energy. Additionally, Valero L.P. has entered into various agreements with Valero Energy governing the usage of these pipelines. As a result, Valero L.P. believes that it will not face significant competition for transportation services provided to the Valero Energy refineries Valero L.P. serves. For a description of the various agreements between Valero Energy and Valero L.P., refer to “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy.”

The East and North Pipelines’ major competitor is an independent, regulated common carrier pipeline system owned by Magellan Midstream Partners, L.P. (Magellan), formerly the Williams Companies, Inc., that operates approximately 100 miles east of and parallel to the East Pipeline and in close proximity to the North Pipeline. The Magellan system is a substantially more extensive system than the East and North Pipelines. Competition with Magellan is based primarily on transportation charges, quality of customer service and proximity to end users. In addition, refined product pricing at either the origin or terminal point on a pipeline may outweigh transportation costs. Seventeen of the East Pipeline’s and all four of the North Pipeline’s delivery terminals are located within two to 145 miles of, and in direct competition with, Magellan’s terminals.

Competitors of the Ammonia Pipeline include another anhydrous ammonia pipeline that originates in Oklahoma and Texas, and terminates in Iowa. The competitor pipeline has the same Direct Application demand

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and weather issues as the Ammonia Pipeline but is restricted to domestically produced anhydrous ammonia. Midwest production barges and railroads represent other forms of direct competition to the pipeline under certain market conditions.

Crude Oil Pipelines

Valero L.P.’s crude oil pipeline operations consist primarily of the transportation of 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. 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 these four crude oil storage facilities. The costs associated with the crude oil storage facilities are considered in establishing the tariffs charged for transporting crude oil from the crude oil storage facilities to the refineries.

As of December 31, 2005, Valero L.P. had an ownership interest in ten crude oil pipelines with an aggregate length of 797 miles. Valero L.P. charges tariffs on a per barrel basis for transporting crude oil and other feedstocks in its crude oil pipelines.

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


										Year Ended
										December 31, 2005

		Valero Energy						Capacity				Capacity
Origin and Destination		Refinery		Length		Ownership		(Barrels/Day)		Throughput		Utilization

				(Miles)				(Barrels/Day)		(Barrels/Day)
Cheyenne Wells, CO to McKee			McKee		252		100%		17,500		11,474		66%
Dixon, TX to McKee			McKee		44		100%		85,000		36,714		43%
Hooker, OK to Clawson, TX(a)			McKee		41		50%		22,000		18,723		85%
Clawson, TX to McKee(b)			McKee		31		100%		36,000		13,115		88%
Wichita Falls, TX to McKee			McKee		272		100%		110,000		70,538		64%
Corpus Christi, TX to Three Rivers			Three Rivers		70		100%		120,000		71,609		60%
Ringgold, TX to Wasson, OK(b)			Ardmore		44		100%		90,000		48,027		53%
Healdton to Ringling, OK			Ardmore		4		100%		52,000		12,436		24%
Wasson, OK to Ardmore (8”-10”)(c)			Ardmore		24		100%		90,000		61,324		68%
Wasson, OK to Ardmore (8”)(c)			Ardmore		15		100%		40,000		15,006		38%

	Total				797				662,500		358,966		57%


(a)	Valero L.P. receives 50% of the tariff with respect to 100% of the barrels transported in the Hooker, Oklahoma to Clawson, Texas pipeline. Accordingly, the capacity, throughput and capacity utilization are given with respect to 100% of the pipeline.

(b)

This pipeline transports barrels relating to two tariff routes, one beginning at the pipeline’s origin and ending at its destination, and one with an origin or destination on another connecting Valero L.P. pipeline. Throughput disclosed above for this pipeline reflects only the barrels subject to the tariff route beginning at this pipeline’s origin and ending at this pipeline’s destination. To accurately determine the actual capacity utilization of the pipeline, as well as aggregate capacity utilization, all barrels passing through the pipeline have been taken into account.


(c)	The Wasson, Oklahoma to Ardmore (8” - 10”) pipelines referred to above originate at Wasson as two pipelines but merge into one pipeline prior to reaching Ardmore.

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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:

Valero Energy

Number

Mode of

Throughput Year Ended

Location

Refinery

Capacity

of Tanks

Receipt

Delivery

December 31, 2005

(Barrels)

(Barrels/Day)

Dixon, TX

McKee

240,000

pipeline

36,714

Ringgold, TX

Ardmore

600,000

pipeline

48,027

Wichita Falls, TX

McKee

660,000

pipeline

70,538

Wasson, OK

Ardmore

225,000

pipeline

76,330

Total

1,725,000

231,609

For the year ended December 31, 2005, Valero Energy accounted for 100% of the total segment revenues, as Valero Energy is the only customer of Valero L.P.’s crude oil pipeline segment.


	*Competition and Business Considerations*

Valero L.P.’s crude oil pipelines are physically integrated with and principally serve refineries owned by Valero Energy. Additionally, Valero L.P. has entered into various agreements with Valero Energy governing the usage of these pipelines. As a result, Valero L.P. believes that it will not face significant competition for transportation services provided to those refineries owned by Valero Energy. For a description of the various agreements between Valero Energy and Valero L.P., refer to “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy.”

Crude Oil Storage Tanks

Valero L.P.’s crude oil storage tanks operations consist primarily of storing and delivering crude oil to Valero Energy’s refineries in Benicia, Corpus Christi and Texas City.

At December 31, 2005, Valero L.P. owned 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. charges a fee for each barrel of crude oil or certain other feedstocks that Valero L.P. delivers to Valero Energy’s Benicia, Corpus Christi West and Texas City refineries.

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

Throughput

Year Ended

Valero Energy

Number

Mode of

December 31,

Location

Refinery

Capacity

of Tanks

Mode of Receipt

Delivery

2005

(Barrels)

(Barrels/Day)

Benicia, CA

Benicia

3,815,000

marine/pipeline

pipeline

155,628

Corpus Christi, TX

Corpus Christi

4,023,000

marine

pipeline

149,174

Texas City, TX

Texas City

3,087,000

marine

pipeline

212,607

Corpus Christi, TX (North Beach)(a)

Three Rivers

1,600,000

marine

pipeline

—

12,525,000

517,409


(a)	Valero L.P. does not report throughput for the Corpus Christi North Beach storage facility, as revenues for this facility are based on a lease agreement with Valero Energy.


	*Principal Customers*

For the year ended December 31, 2005, Valero Energy accounted for 100% of the total segment revenues, as Valero Energy is the only customer of Valero L.P.’s crude oil storage tank segment.

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	*Competition and Business Considerations*

Valero L.P.’s crude oil storage tanks are physically integrated with and principally serve refineries owned by Valero Energy. Additionally, Valero L.P. has entered into various agreements with Valero Energy governing the usage of these tanks. As a result, Valero L.P. believes that it will not face significant competition for its services provided to those refineries owned by Valero Energy. For a description of the various agreements between Valero Energy and Valero L.P., refer to “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy.”

Employees

Valero L.P. has no employees. Valero GP, LLC, the general partner of the general partner of Valero L.P., manages Valero L.P.’s operations with its employees. In addition, pursuant to the Services Agreement described under “Certain Relationships and Related Transactions — Valero L.P.’s Relationship with Valero Energy,” employees of subsidiaries of Valero Energy provide certain services to Valero GP, LLC. As of January 1, 2006, Valero GP, LLC had 1,291 employees. Valero GP, LLC believes that its relationship with its employees is satisfactory.

Rate Regulation

Several of Valero L.P.’s petroleum pipelines are interstate common carrier pipelines, which are subject to regulation by the FERC under the October 1, 1977 version of the Interstate Commerce Act (ICA) and the Energy Policy Act of 1992 (the EP Act). The ICA and its implementing regulations give the FERC authority to regulate the rates charged for service on the interstate common carrier pipelines and generally require the rates and practices of interstate oil pipelines to be just and reasonable and nondiscriminatory. The ICA also requires tariffs to be maintained on file with the FERC that set forth the rates it charges for providing transportation services on its interstate common carrier liquids pipelines as well as the rules and regulations governing these services. The EP Act deemed certain rates in effect prior to its passage to be just and reasonable and limited the circumstances under which a complaint can be made against such “grandfathered” rates. The EP Act and its implementing regulations also allow interstate common carrier oil pipelines to annually index their rates up to a prescribed ceiling level. In addition, the FERC retains cost-of-service ratemaking, market-based rates and settlement rates as alternatives to the indexing approach.

Valero L.P.’s interstate anhydrous ammonia pipeline is subject to regulation by the Surface Transportation Board (STB) under the current version of the ICA. The ICA and its implementing regulations give the STB authority to regulate the rates Valero L.P. charges for service on the ammonia pipeline and generally require that Valero L.P.’s rates and practices be just and reasonable and nondiscriminatory.

Additionally, the rates and practices for Valero L.P.’s intrastate common carrier pipelines are subject to regulation by state commissions in Colorado, Kansas, Louisiana, North Dakota, Oklahoma and Texas. Although the applicable state statutes and regulations vary, they generally require that intrastate pipelines publish tariffs setting forth all rates, rules and regulations applying to intrastate service, and generally require that pipeline rates and practices be reasonable and nondiscriminatory. Shippers may also challenge Valero L.P.’s intrastate tariff rates and practices on its pipelines.


	*Valero L.P.’s Pipelines Rates*

Neither the FERC nor the state commissions have investigated Valero L.P.’s rates or practices, and none of those rates are currently subject to challenge or complaint. Valero L.P. does not currently believe that it is likely that there will be a challenge to the tariffs on its petroleum products or crude oil pipelines by a current shipper that would materially affect its revenues or cash flows. In addition, Valero Energy is a significant shipper on many of Valero L.P.’s pipelines. Valero Energy has committed to refrain from challenging several of Valero

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L.P.’s petroleum products and crude oil tariffs until at least April 2008. Valero Energy has also agreed to be responsible for certain ICA liabilities with respect to activities or conduct occurring during periods prior to April 16, 2001. However, the FERC, the STB or a state regulatory commission could investigate Valero L.P.’s tariffs on their own motion or at the urging of a third party. Also, since 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.

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. 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. The principal environmental and safety risks associated with Valero L.P.’s operations relate to unauthorized emissions into the air, unauthorized releases into soil, surface water or groundwater, and personal injury and property damage. Compliance with these environmental and safety 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.

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 and procedures, 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 or more stringent 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 the use of dikes and similar structures to help prevent contamination of state waters or waters of the United States in the event of an overflow or release.


	*Air Emissions*

Valero L.P.’s operations are subject to the Federal Clean Air Act, as amended, and analogous or more stringent state and local statutes. The Clean Air Act Amendments of 1990, along with more restrictive interpretations of the Clean Air Act, 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) has been developing, over a period of many years, regulations to implement these requirements. Depending on the nature of those regulations, and upon requirements that may be imposed by state and local regulatory authorities; Valero L.P. may be required to incur certain capital expenditures over the next several years for air pollution control equipment in connection with maintaining or obtaining operating permits and approvals and addressing other air emission-related issues.

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Due to the broad scope of the issues involved and the complex nature of the regulations, full development and implementation of many Clean Air Act regulations have been delayed. Until such time as the new Clean Air Act requirements are implemented, Valero L.P. is unable to estimate the effect on 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.

In addition, EPA has recently revised its fuel content regulations under Section 211 of the Clean Air Act. These regulations tighten diesel fuel specifications and effectively eliminate the use of MTBE in gasoline. In response to these regulations, many refineries are expected to undergo maintenance turnarounds in the first half of 2006. Certain of Valero Energy’s refineries served by Valero L.P.’s assets are scheduled to undergo maintenance turnarounds to address these environmental regulations. As a result, Valero L.P. expects this period of high maintenance turnaround activity will negatively impact its throughputs and revenues for the first half of 2006. Additionally, Valero L.P. expects higher maintenance expense will negatively impact the results of its operations for the first half of 2006.


	*Solid Waste*

Valero L.P. generates non-hazardous solid wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act (RCRA) and analogous or more stringent state statutes. RCRA also governs the disposal of hazardous wastes. Valero L.P. is not currently required to comply with a substantial portion of RCRA 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 or more stringent 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 recovery from the responsible classes of persons for 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.”

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, RCRA 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. In addition, Valero L.P. may be exposed to joint and several liability under CERCLA for all or part of the costs required to clean up sites at which hazardous substances may have been disposed of or released into the environment.

Remediation of subsurface contamination is in process at many of Valero L.P.’s pipeline and terminal sites. Based on current investigative and remedial activities, Valero L.P. believes that the cost of these activities will not materially affect its financial condition or results of operations. Such costs, however, are often unpredictable and, therefore, there can be no assurances that the future costs will not become material.

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	*Pipeline Integrity and Safety*

Valero L.P.’s pipelines are subject to extensive federal and state laws and regulations governing pipeline integrity and safety. The federal 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 and analogous or more stringent state laws 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.

Title to Properties

Valero L.P.’s principal properties are described above in “Business of Valero L.P. — Business Segments” and that information is included herein by reference. 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 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 prospectus. 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. Please read “Business of Valero L.P. — Business Segments.”

Legal Proceedings and Other Contingencies


	*Valero L.P.*

Valero L.P. is named as a defendant in litigation relating to its normal business operations, including regulatory and environmental matters. Valero L.P. is insured against various business risks to the extent Valero L.P. believes it is prudent; however, there can be no assurance that the nature and amount of such insurance will be adequate, in every case, to indemnify Valero L.P. against liabilities arising from future legal proceedings as a result of its ordinary business activity.

With respect to the environmental proceedings listed below, if any one or more of them were decided against Valero L.P., Valero L.P. believes that it would not have a material effect on its consolidated financial position. However, it is not possible to predict the ultimate outcome of any of these proceedings or whether such ultimate outcome may have a material effect on Valero L.P.’s consolidated financial position.

Grace Energy Corporation Matter. In 1997, Grace Energy Corporation (Grace Energy) sued subsidiaries of Kaneb in Texas state court. The complaint sought recovery of the cost of remediation of fuel leaks in the 1970s from a pipeline that had once connected a former Grace Energy terminal with Otis Air Force Base (Otis AFB) in Massachusetts. Grace Energy alleges the Otis AFB pipeline and related environmental liabilities had been transferred in 1978 to an entity that was part of Kaneb’s acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace Energy in 1993. Kaneb contends that it did not acquire the Otis AFB pipeline and never assumed any responsibility for any associated environmental damage.

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In 2000, the court entered final judgment that: (i) Grace Energy could not recover its own remediation costs of $3.5 million, (ii) Kaneb owned the Otis AFB pipeline and its related environmental liabilities and (iii) Grace Energy was awarded $1.8 million in attorney costs. Both Kaneb and Grace Energy appealed the trial court’s final judgment to the Texas Court of Appeals in Dallas. In 2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay of actions against Grace Energy. Once that stay is lifted, Valero L.P. intends to resume vigorous prosecution of the appeal.

Otis AFB is a part of a Superfund Site pursuant to CERCLA. The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis AFB pipeline. Relying on the Texas state court’s final judgment assigning ownership of the Otis AFB pipeline to Kaneb, the U.S. Department of Justice advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for the remediation costs associated with the two spill areas. In 2002, the Department of Justice asserted that it had incurred over $49.0 million in costs and expected to incur additional costs of approximately $19.0 million for remediation of the two spill areas. The Department of Justice has not filed a lawsuit against Valero L.P. on this matter.

Potomac Electric Power Company Matter. On December 14, 2002, Potomac Electric Power Company sued subsidiaries of Kaneb in the U.S. District Court for the District of Maryland, seeking recovery of all its costs associated with an oil spill in 2000 resulting from a rupture in a fuel oil pipeline in Maryland owned by Potomac Electric and operated by a subsidiary of Kaneb. Potomac Electric alleged that it has incurred costs of approximately $80.0 million as a result of the spill. This matter was settled, and the case was dismissed on December 19, 2005. The effects of this settlement, net of insurance recoveries, were immaterial to the financial position and results of operations of Valero L.P.

Port of Vancouver Matter. Valero L.P. owns a refined products terminal on property owned by the Port of Vancouver, and Valero L.P. leases the land under the terminal from the Port of Vancouver. Under an Agreed Order entered into with the Washington Department of Ecology when Kaneb purchased the terminal in 1998, Kaneb agreed to investigate and remediate a groundwater plume contaminated by the terminal’s previous owner and operator. Kaneb has submitted a final remedial action plan to the Washington Department of Ecology and is waiting for it to approve that plan. The Port of Vancouver also owns property near the terminal site that has been contaminated by other parties, some of which are in bankruptcy. Estimated costs to remediate the terminal site depend on a number of factors, including the outcome of litigation involving the other properties owned by the Port of Vancouver that are near the terminal site. No lawsuits have been filed against Valero L.P. in this matter, and Valero L.P.’s liability for any portion of total future remediation costs is not reasonably estimable at this time.

Environmental and Safety Compliance Matters. While it is not possible to predict the outcome of the following environmental and safety compliance proceedings, if any one or more of them were decided adversely against Valero L.P., Valero L.P. believes that there would be no material effect on its consolidated financial position, liquidity or results of operations. Nevertheless, Valero L.P. reports these proceedings to comply with Securities and Exchange Commission regulations, which require it to disclose proceedings arising under federal, state or local provisions regulating the discharge of materials into the environment or protecting the environment if Valero L.P. reasonably believes that such proceedings will result in monetary sanctions of $100,000 or more.

In particular, the California Bay Area Air Quality Management District has proposed penalties totaling $381,000 for air violations at the Selby Terminal; the Illinois State General’s Office has proposed penalties totaling $133,000 related to a pipeline leak at the Chillicothe Terminal; and the Pipeline and Hazardous Materials Safety Agency has proposed penalties totaling $255,000 based on alleged violations of various pipeline safety requirements in the McKee System. Valero L.P. is currently in settlement negotiations with these government agencies to resolve these matters. The California Bay Area Air Quality Management District has also proposed penalties totaling $494,000 for alleged air violations at the Martinez Terminal. The Martinez Terminal was sold to Pacific Energy Group LLC, a subsidiary of Pacific Energy Partners, L.P., on September 30, 2005. As part of the asset purchase agreement, Pacific Energy Group LLC, a subsidiary of Pacific Energy Partners, L.P., assumed responsibility for the notices of violation at the Martinez Terminal.

Valero L.P. is also a party to additional claims and legal proceedings arising in the ordinary course of business. Valero L.P. believes it is unlikely that the final outcome of any of these claims or proceedings to which it is a party would have a material adverse effect on Valero L.P.’s financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on Valero L.P.’s results of operations, financial position or liquidity.

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MANAGEMENT

Valero GP Holdings, LLC

Our Board of Directors

Our current board of directors consists of one member, William E. Greehey. Our current board will appoint an independent director prior to the closing of this offering. The board also expects to appoint one independent director within 90 days of the close of this offering and a third independent director within one year of this offering. The members of the board of directors will serve staggered terms, as a result only a portion of the board of directors will be elected each year. Initially, the board intends to appoint two functioning committees: an audit committee and a conflicts committee. The additional independent directors to be appointed following this offering are expected to serve on one or more of the committees described below. Upon completion of this offering, subsidiaries of Valero Energy will own approximately 63% of our outstanding units and we will not be required to have a majority of independent directors, nor will we be required to have compensation or nominating committees.

Audit Committee. We currently contemplate that the audit committee will consist of three directors. All members of the audit committee will be independent under the independence standards established by the NYSE and SEC rules, and the committee expects to have an “audit committee financial expert,” as defined under SEC rules. The audit committee will recommend to the board the independent public accountants to audit our financial statements and establish the scope of, and oversee, the annual audit. The committee also will approve any other services provided by its auditor. The audit committee will provide assistance to the board in fulfilling its oversight responsibility to the unitholders, the investment community and others relating to the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence and the performance of our internal audit function. The audit committee will oversee our system of disclosure controls and procedures and system of internal controls regarding financial, accounting, legal compliance and ethics that management and the board have established. In doing so, it will be the responsibility of the audit committee to maintain free and open communication between the committee and our independent auditors, the internal accounting function and management of our company.

Conflicts Committee. We currently contemplate that the conflicts committee will consist of three independent directors. The conflicts committee will review specific matters that the board believes may involve conflicts of interest. The conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to our company. Our limited liability company agreement provides that members of the committee may not be officers or employees of our company or directors, officers or employees of any of our affiliates and must meet the independence standards for service on an audit committee of a board of directors as established by the NYSE and SEC rules. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to our company and approved by all of our unitholders.

While our executive officers and our Chairman of the Board serve in similar roles with Valero GP, LLC, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our board of directors.

Meetings. Our board will hold regular and special meetings at any time as may be necessary. Regular meetings may be held without notice on dates set by the board from time to time. Special meetings of the board may be called with reasonable notice to each member upon request of the chairman of the board or upon the written request of any three board members. A quorum for a regular or special meeting will exist when a majority of the members are participating in the meeting either in person or by conference telephone. Any action required or permitted to be taken at a board meeting may be taken without a meeting, without prior notice and without a vote if all of the members sign a written consent authorizing the action.

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Our Board of Directors and Executive Officers

The following table shows information for members of our board of directors and our executive officers. Members of our board of directors will serve staggered terms, as a result only a portion of the board of directors will be elected each year. As a result of their initial ownership of approximately 63% of our member interests, subsidiaries of Valero Energy will retain the ability to elect, remove and replace at any time any or all of our directors.


Name	Age		Position with Our Company

William E. Greehey		69	Chairman of the Board
Curtis V. Anastasio		49	President and Chief Executive Officer
Steven A. Blank		51	Senior Vice President, Chief Financial Officer and Treasurer
James R. Bluntzer		51	Senior Vice President-Operations
Thomas R. Shoaf		47	Vice President and Controller
Mary F. Morgan		53	Vice President-Marketing and Business Development

For biographical information, please read “— Valero L.P. — Directors and Executive Officers of Valero GP, LLC.”

Executive Compensation

Pursuant to our new Administration Agreement, we will pay Valero GP, LLC approximately $500,000 annually for administrative services, which includes payment for the time our executive officers (who are employees of Valero GP, LLC) who devote to the management of our company.

Employment Agreements

Our executive officers are also executive officers of Valero GP, LLC. These executive officers do not have employment agreements in their capacity as our officers.

Compensation of Directors

Our independent directors will receive the following compensation: a $1,000 fee for each in-person board meeting attended, a $500 fee for each telephonic board meeting attended, a $1,000 fee for each in-person committee meeting attended, a $500 fee for each telephonic committee meeting attended, a $30,000 annual retainer, a $10,000 annual retainer for serving as chairman of a committee of the board, a $30,000 annual retainer for serving as chairman of the board, and an annual grant of restricted common units under the Valero GP Holdings, LLC Long-Term Incentive Plan having an aggregate value of $20,000 at the time of grant, which vest over three years. A non-employee director serving as chairman of the board will not receive meeting fees for attending committee meetings. In addition, each independent member of our board will be reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors or committees. Each director will be fully indemnified by us for actions associated with being a member of our board to the extent permitted under Delaware law.

Long-Term Incentive Plan

General. We intend to adopt the Valero GP Holdings Long-Term Incentive Plan for employees, consultants and directors of us and our affiliates who perform services for us. The long-term incentive plan will consist of unit grants, restricted units, phantom units, performance units, unit options and unit appreciation rights. The long-term incentive plan will permit the grant of awards covering an aggregate of 2,000,000 units. The plan will be administered by the compensation committee of our board of directors.

Our board of directors, or its compensation committee, in its discretion may terminate, suspend or discontinue the long-term incentive plan at any time with respect to any award that has not yet been granted. Our

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board of directors, or its compensation committee, also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted subject to unitholder approval as required by the exchange upon which the units are listed at that time. However, no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the participant.

Unit Grants. The long-term incentive plan will permit the grant of units. A unit grant is a grant of units that vest immediately upon issuance.

Restricted Units and Phantom Units. A restricted unit is a unit that is subject to forfeiture prior to the vesting of the award. A phantom unit is a notional unit that entitles the grantee to receive a unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the value of a unit. The compensation committee may determine to make grants under the plan of restricted units and phantom units to employees and directors containing such terms as the compensation committee shall determine. The compensation committee will determine the period over which restricted units and phantom units granted to employees, consultants and directors will vest. The committee may base its determination upon the achievement of specified financial objectives. In addition, the restricted units and phantom units will vest upon a change of control of our company, as defined in the plan, unless provided otherwise by the compensation committee.

If a grantee’s employment or membership on the board of directors terminates for any reason, the grantee’s unvested restricted units and phantom units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. If a grantee’s employment or membership in the board of directors terminates as a result of retirement, death or disability, the grantee’s restricted units and phantom units shall immediately vest and become non-forfeitable as of such date. Units to be delivered in connection with the grant of restricted units or upon the vesting of phantom units may be units acquired by us on the open market, units already owned by us, units acquired by us from any other person or any combination of the foregoing. If we issue new units in connection with the grant of restricted units or upon vesting of the phantom units, the total number of units outstanding will increase. The compensation committee, in its discretion, may grant tandem distribution rights with respect to restricted units and tandem distribution equivalent rights with respect to phantom units.

Unit Options and Unit Appreciation Rights. The long-term incentive plan, will permit the grant of options covering units and the grant of unit appreciation rights. A unit appreciation right is an award that, upon exercise, entitles the participant to receive the excess of the fair market value of a unit on the exercise date over the exercise price established for the unit appreciation right. Such excess may be paid in units, cash, or a combination thereof, as determined by the compensation committee in its discretion. The compensation committee will be able to make grants of unit options and unit appreciation rights under the plan to employees and directors containing such terms as the committee shall determine. Unit options and unit appreciation rights may not have an exercise price that is less than the fair market value of the units on the date of grant. In general, unit options and unit appreciation rights granted will become exercisable over a period determined by the compensation committee. In addition, the unit options and unit appreciation rights will become exercisable upon a change in control of our company, as defined in the plan, unless provided otherwise by the committee. The compensation committee, in its discretion may grant tandem distribution equivalent rights with respect to unit options and unit appreciation rights.

Upon exercise of a unit option (or a unit appreciation right settled in units), we will acquire units on the open market or directly from any other person or use units already owned by us, or any combination of the foregoing. If we issue new units upon exercise of the unit options (or a unit appreciation right settled in units), the total number of units outstanding will increase, and we will receive the proceeds from an optionee upon exercise of a unit option. The availability of unit options and unit appreciation rights is intended to furnish additional compensation to employees and directors and to align their economic interests with those of unitholders.

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Valero L.P.

Directors and Executive Officers of Valero GP, LLC

Valero L.P. does not have directors or officers. The directors and officers of Valero GP, LLC, the general partner of Valero L.P.’s general partner, Riverwalk Logistics, L.P., perform all management functions for Valero L.P. We select the directors of Valero GP, LLC. Officers of Valero GP, LLC are appointed by its directors.

Set forth below is certain information concerning the directors and executive officers of Valero GP, LLC:


Name	Age		Position Held with Valero GP, LLC

William E. Greehey		69	Chairman of the Board
Curtis V. Anastasio		49	President, Chief Executive Officer and Director
Dan J. Hill		65	Director
Gregory C. King		45	Director
William R. Klesse		59	Director
Stan McLelland		60	Director
Rodman D. Patton		62	Director
Steven A. Blank		51	Senior Vice President, Chief Financial Officer and Treasurer
James R. Bluntzer		51	Senior Vice President-Operations
Mary F. Morgan		53	Vice President-Marketing and Business Development
Brad R. Ramsey		37	Vice President-Engineering
Rodney L. Reese		55	Vice President-Regional Operations
Thomas R. Shoaf		47	Vice President and Controller

Mr. Greehey became Chairman of the board of directors of Valero GP, LLC in January 2002. Mr. Greehey has served as Chairman of the board of directors of Valero Energy since 1979. Mr. Greehey was Chief Executive Officer of Valero Energy from 1979 through December 2005. He was also President of Valero Energy from 1998 until January 2003.

Mr. Anastasio became the President and a director of Valero GP, LLC in December 1999. He also became its Chief Executive Officer in June 2000. He served as Vice President, General Counsel, and Secretary of Ultramar Diamond Shamrock Corporation (UDS) from 1997 until December 1999.

Mr. Hill became a director of Valero GP, LLC in July 2004. From February 2001 through May 2004, he served as a consultant to El Paso Corporation. Prior to that, he served as President and Chief Executive Officer of Coastal Refining and Marketing Company. In 1978, Mr. Hill was named as Senior Vice President of The Coastal Corporation and President of Coastal States Crude Gathering. In 1971, he began managing Coastal’s NGL business. Previously, Mr. Hill worked for Amoco and Mobil.

Mr. King became a director of Valero GP, LLC in January 2002. He has served as President of Valero Energy since January 2003. He served as Executive Vice President and General Counsel of Valero Energy from September 2001, until January 2003. Mr. King served as Valero Energy’s Executive Vice President and Chief Operating Officer from January 2001 until September 2001. Mr. King was Senior Vice President and Chief Operating Officer of Valero Energy from 1999 to January 2001.

Mr. Klesse became a director of Valero GP, LLC in December 1999. He has been Chief Executive Officer of Valero Energy since January 2006. Prior to that he served as the Executive Vice President and Chief Operating Officer of Valero Energy from January 2003 until January 2006. He previously served as Executive Vice President-Refining and Commercial Operations of Valero Energy from January 2003 until January 2006. He had served as Executive Vice President, Operations of UDS from January 1999 through December 2001.

Mr. McLelland became a director of Valero GP, LLC in October 2005. Mr. McLelland was U.S. Ambassador to Jamaica from January 1997 until March 2001. Prior to being named U.S. Ambassador to Jamaica,

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Mr. McLelland was a senior executive with Valero Energy. He joined Valero Energy in 1981 as Senior Vice President and General Counsel. He served as Executive Vice President and General Counsel from 1990 until 1997.

Mr. Patton became a director of Valero GP, LLC in June 2001. He retired from Merrill Lynch & Co. in 1999 where he had served as Managing Director in the Energy Group since 1993. Prior to that, he served in investment banking and corporate finance positions with Credit Suisse First Boston (1981-1993) and Blyth Eastman Paine Webber (1971-1981). He is a director of Apache Corporation.

Mr. Blank became Senior Vice President and Chief Financial Officer of Valero GP, LLC in January 2002. From December 1999 until January 2002, he was Chief Accounting and Financial Officer and a director of Valero GP, LLC. He also served as UDS’s Vice President and Treasurer from December 1996 until January 2002, when he became Vice President-Finance of Valero Energy.

Mr. Bluntzer became Senior Vice President-Operations of Valero GP, LLC in October 2005. He served as Vice President-Operations of Valero GP, LLC from February 2004 until October 2005. He served as Vice President-Terminal Operations of Valero GP, LLC from May 2003 to February 2004. He served as Special Projects Director of Valero GP, LLC from January 2002 to May 2003 and as Vice President of Midstream Operations of Valero Energy from June 2001 to January 2002. He served as Refinery Logistics & Supply Chain Director of Valero Energy from July 2000 to June 2001.

Ms. Morgan became Vice President-Marketing and Business Development of Valero GP, LLC in July 2005. Ms. Morgan served as Vice President, Marketing and Business Development of Kaneb Pipe Line Company LLC from 2004 until July 2005. She served as Vice President, Marketing of Kinder Morgan Energy Partners, L.P. from 1998 until 2004.

Mr. Ramsey became Vice President-Engineering of Valero GP, LLC in April 2005. From July 2004 until April 2005, Mr. Ramsey was Project Management Director for Valero GP, LLC. From February 2003 to July 2004, he was Engineering and Maintenance Director of Valero Energy’s McKee refinery. From January 2001 to February 2003, Mr. Ramsey was Maintenance Director of Valero Energy’s Houston refinery. He was Turnaround Manager of Valero Energy’s Texas City refinery from July 1998 to January 2001.

Mr. Reese became Vice President- Regional Operations of Valero GP, LLC in October 2005. From April 2003 until October 2005, he served as Vice President, Engineering and Technical Services of Valero GP, LLC. Prior to that, he served as Vice President-Operations from December 1999 until April 2003.

Mr. Shoaf became Vice President and Controller of Valero GP, LLC in July 2005. Mr. Shoaf served as Vice President-Structured Finance of Valero Corporate Services Company, a subsidiary of Valero Energy, from 2001 until his appointment with Valero GP, LLC. From 2000 to 2001, Mr. Shoaf was Vice President-Finance of Valero Corporate Services Company.

Audit Committee

The audit committee reviews and reports to the board on various auditing and accounting matters, including the quality, objectivity and performance of Valero L.P.’s internal and external accountants and auditors, the adequacy of its financial controls and the reliability of financial information reported to the public. The audit committee is composed of Mr. Patton (Chairman), Mr. Hill and Mr. McLelland.

The board of directors has determined that each of the audit committee members meets the independence standards for audit committees set forth in the NYSE listing standards and the applicable regulations of the SEC. The board of directors has adopted a written charter for the audit committee. The board of directors has determined that a member of the audit committee, namely Mr. Patton, is an audit committee financial expert (as defined by the SEC) and that he is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

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	*Compensation Committee*

Valero GP, LLC has a compensation committee composed of the directors who the board has determined to be independent. For more information, see “Compensation Committee Interlocks and Insider Participation.” The members of the compensation committee are Mr. Hill (Chairman), Mr. McLelland and Mr. Patton.


	*Conflicts Committee*

Valero L.P.’s partnership agreement provides for a conflicts committee composed of the directors who the board has determined to be independent. The conflicts committee reviews and makes recommendations relating to potential conflicts of interest between Valero L.P., on one hand, and Valero Energy, on the other hand. The members of the conflicts committee are Mr. Hill (Chairman), Mr. McLelland and Mr. Patton.

Executive Compensation

The following table sets forth a summary of compensation paid for the last three years, if applicable, to Valero GP, LLC’s CEO and to its four other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 2005. In prior fiscal years, certain Valero GP, LLC executive officers were employed by Valero Energy. Valero L.P. paid for the cost of the services rendered by these officers under the terms of a services agreement between Valero L.P. and Valero Energy.


				Annual Compensation				Long-Term Compensation Awards

										Number of
										Securities
								Restricted		Underlying				All
								Unit		Options		LTIP		Other
Name and Principal Position (a)		Year		Salary		Bonus (b)		Awards (c)		Granted		Payouts (d)		Compensation (e)

Curtis V. Anastasio,
President and Chief Executive			2005	$	338,500	$	315,000	$	258,795		13,450	$	236,101	$	300,151
	Officer		2004		321,000		359,700		217,564		9,625		176,266		192,180
			2003		307,506		250,000		245,672		11,800		49,235		112,350
Steven A. Blank,
Senior Vice President and Chief			2005	$	287,000	$	220,500	$	139,174		7,225	$	236,101	$	143,525
	Financial Officer		2004		276,500		260,000		155,403		6,875		234,982		107,010
James R. Bluntzer,			2005	$	193,833	$	165,000	$	104,093		5,400		—	$	11,582
Senior Vice President-Operations			2004		177,961		126,700		55,945		2,475		—		6,305
			2003		171,558		107,000		24,943		2,675		—		—
Brad R. Ramsey,
Vice President-Engineering			2005	$	169,000	$	103,800	$	51,184		2,650	$	—	$	8,873
Rodney L. Reese,
Vice President-Regional			2005	$	182,123	$	105,000	$	44,858		2,450	$	—	$	10,927
	Operations		2004		172,071		110,000		54,250		2,400		—		10,324
			2003		163,835		95,000		24,036		2,575		—		11,506


(a)	The named executive officers hold or held the indicated offices in Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., Valero L.P.’s general partner. Valero L.P. does not have any officers or directors.


(b)	In 2005, 2004 and 2003, executive bonuses were paid 100% in cash, but recipients could elect to use 25% of their cash bonus award to purchase Valero L.P. common units at market price.

(c)

Cash distributions are paid on restricted common units at the same rate as on Valero L.P.’s unrestricted common units. Restricted common units granted in 2005, 2004 and October 2003 vest 1/5 annually over a five-year period, and restricted common units granted in January 2003 vest 1/3 annually over a three-year period. The aggregate number of unvested restricted common units held at December 31, 2005 and the market value of such common units on that date (calculated according to SEC regulations without regard to restrictions on such common units) were: Mr. Anastasio, 9,790 common units, $506,730; Mr. Blank, 5,609 common units, $290,322; Mr. Bluntzer, 2,932 common units, $151,760; Mr. Ramsey, 2,098 common units, $108,592; and Mr. Reese, 1,866 common units, $96,584.

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(d)

LTIP payouts are the number of performance share awards vested for the applicable year’s performance multiplied by the market price per share of Valero Energy common stock on the vesting date. These performance shares were granted under Valero Energy’s Executive Stock Incentive Plan. Total shareholder return, or TSR, during a specified “performance period” was established as the performance measure for determining what portion of an award may vest. TSR is measured by dividing the sum of (a) the net change in the price of a share of Valero Energy’s common stock between the beginning of the performance period and the end of the performance period, and (b) the total dividends paid on the common stock during the performance period, by (c) the price of a share of Valero Energy’s common stock at the beginning of the performance period. Each performance share award is subject to vesting in three equal increments, based upon Valero Energy’s TSR. At the end of each performance period, Valero Energy’s TSR is compared to the TSR for a target group of comparable companies. Valero Energy and the companies in the target group are then ranked by quartile. Participants then earn 0%, 50%, 100% or 150% of that portion of the initial grant amount that is vesting for such period, depending on whether Valero Energy’s TSR is in the last, 3rd, 2nd or 1st quartile of the target group; 200% will be earned if Valero Energy ranks highest in the group. Amounts not earned in the given performance period can be carried forward for one additional performance period and up to 100% of the carried-forward amount can still be earned, depending upon the quartile achieved for such subsequent period.

(e)

Amounts include contributions made to Valero Energy’s Thrift Plan and Excess Thrift Plan, and unused portions of amounts provided by Valero Energy under Valero Energy’s Flexible Benefits Plan. Messrs. Anastasio, Blank, Bluntzer, Ramsey and Reese were allocated $20,252, $17,185, $11,582, $8,873 and $10,927, respectively, as a result of contributions to the Thrift Plan (and, in the case of Messrs. Anastasio, Blank and Bluntzer, the Excess Thrift Plan) for 2005. Also included for Mr. Anastasio in 2005 was $7,247 received as reimbursement of certain membership dues. Amounts for 2005 also include vesting of restricted stock issued to Mr. Anastasio and Mr. Blank under Valero Energy’s long-term incentive plan, for which Mr. Anastasio was vested for $272,652 and Mr. Blank was vested for $126,340.

Option Grants and Related Information

The following table sets forth further information regarding the grants of Valero L.P. unit options to the named executive officers reflected in the Summary Compensation Table.


	*Option Grants in the Last Fiscal Year*


	Number of		Percent of
	Securities		Total Options				Market
	Underlying		Granted to				Price at				Grant Date
	Options		Employees in		Exercise Price		Grant Date		Expiration		Present Value
Name	Granted (#)		Fiscal Year		($/Security)(a)		($/Security)		Date		($)(b)

Curtis V. Anastasio		13,450		6.81	$	57.5100	$	57.5100		10/27/2012	$	77,607
Steven A. Blank		7,225		3.66		57.5100		57.5100		10/27/2012		41,688
James R. Bluntzer		5,400		2.74		57.5100		57.5100		10/27/2012		31,158
Brad R. Ramsey		2,650		1.34		57.5100		57.5100		10/27/2012		15,291
Rodney L. Reese		2,450		1.24		57.5100		57.5100		10/27/2012		14,137

(a)

All options reported vest in equal increments over a five-year period from the date of grant, unless otherwise noted. Under the terms of Valero GP, LLC’s 2000 Long Term Incentive Plan, a participant may satisfy the tax withholding obligations related to exercise by tendering cash payment, by authorizing Valero GP, LLC to withhold common units otherwise issuable to the participant or by delivering to Valero GP, LLC already owned and unencumbered common units, subject to certain conditions.

(b)

The Black-Scholes option pricing model was used to determine grant date present value. This model is designed to value publicly traded options. Options issued under Valero GP, LLC’s option plan are not freely traded, and the exercise of such options is subject to substantial restrictions. Moreover, the Black-Scholes model does not give effect to either risk of forfeiture or lack of transferability. The estimated values under

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the Black-Scholes model are based on assumptions as to variables such as interest rates, unit price volatility and future cash distribution yield. The estimated grant date present values presented in this table were calculated using an expected average option life of five years, risk-free rate of return of 4.43%, average volatility rate of 18.66% based on daily volatility rates from the initial public offering by Valero L.P. through December 31, 2005, and cash distribution yield of 5.95%, which is the expected annualized quarterly cash distribution rate in effect at the date of grant expressed as a percentage of the market value of the common units at the date of grant. The actual value of unit options could be zero; realization of any positive value depends upon the actual future performance of the common units, the continued employment of the option holder throughout the vesting period and the timing of the exercise of the option. Accordingly, the values set forth in this table may not be achieved.


	*Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values*

The following table sets forth information regarding Valero L.P. common units and shares of Valero Energy common stock underlying options exercisable at December 31, 2005, and options exercised during 2005, for the executive officers named in the Summary Compensation Table.


						Number of Securities
						Underlying Unexercised				Value of Unexercised
		Securities				Options at				In-the-Money Options at
		Acquired				December 31, 2005 (#)				December 31, 2005($)
		on Exercise		Value
Name		(#)		Realized ($)		Exercisable		Unexercisable		Exercisable		Unexercisable

Curtis V. Anastasio
	Valero L.P. common units		—	$	—		30,645		28,320	$	374,415	$	45,383	(a)
	Valero Energy’s common stock		34,000		1,136,822		146,600		—		6,357,385		—	(b)

Steven A. Blank
	Valero L.P. common units		—	$	—		11,521		17,945	$	118,964	$	33,460	(a)
	Valero Energy’s common stock		25,322		690,161		—		20,320		—		806,501	(b)

James R. Bluntzer
	Valero L.P. common units		—	$	—		6,065		8,985	$	67,789	$	10,288	(a)
	Valero Energy’s common stock		—		—		74,420		—		3,334,025		—	(b)

Brad R. Ramsey
	Valero L.P. common units		—	$	—		240		3,610	$	—	$	—	(a)
	Valero Energy’s common stock		—		—		24,680		2,220		1,070,332		92,385	(b)

Rodney L. Reese
	Valero L.P. common units		3,267	$	75,696		3,143		5,915	$	28,713	$	9,903	(a)
	Valero Energy’s common stock		—		—		17,120		—		784,989		—	(b)


(a)	Represents the dollar value obtained by multiplying the number of unexercised in-the-money options by the difference between the stated exercise price per unit of the options and the closing market price per unit of Valero L.P.’s common units on December 31, 2005.


(b)	Represents the dollar value obtained by multiplying the number of unexercised in-the-money options by the difference between the stated exercise price per share of the options and the closing market price per share of Valero Energy’s common stock on December 31, 2005.

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Retirement Benefits

The following table sets forth the estimated annual gross benefits payable under Valero Energy’s Pension Plan, Excess Pension Plan and Supplemental Executive Retirement Plan, or SERP, upon retirement at age 65, based upon the assumed compensation levels and years of service indicated and assuming an election to have payments continue for the life of the participant only.


	*Estimated Annual Pension Benefits at Age 65*


		Years of Service
Covered
Compensation		15		20		25		30		35

$	200,000	$	54,000	$	71,000	$	89,000	$	107,000	$	125,000
	300,000		83,000		110,000		138,000		166,000		193,000
	400,000		112,000		149,000		187,000		224,000		261,000
	500,000		142,000		188,000		236,000		283,000		330,000
	600,000		171,000		227,000		284,000		341,000		398,000
	700,000		200,000		266,000		333,000		400,000		466,000
	800,000		229,000		305,000		382,000		458,000		534,000
	900,000		259,000		344,000		431,000		517,000		603,000
	1,000,000		288,000		383,000		479,000		575,000		671,000
	1,100,000		317,000		422,000		528,000		634,000		739,000
	1,200,000		346,000		461,000		577,000		692,000		807,000
	1,300,000		375,000		500,000		626,000		751,000		876,000
	1,400,000		405,000		539,000		674,000		810,000		944,000
	1,500,000		434,000		578,000		723,000		868,000		1,012,000
	1,600,000		463,000		617,000		772,000		926,000		1,080,000
	1,700,000		492,000		656,000		821,000		985,000		1,149,000
	1,800,000		522,000		695,000		869,000		1,043,000		1,217,000
	1,900,000		551,000		734,000		918,000		1,102,000		1,285,000
	2,000,000		580,000		773,000		967,000		1,160,000		1,353,000

Valero Energy maintains a noncontributory defined benefit Pension Plan in which virtually all employees of Valero Energy, including those providing services for Valero L.P., are eligible to participate and under which contributions by individual participants are neither required nor permitted. Valero Energy also maintains a noncontributory, non-qualified Excess Pension Plan and a non-qualified SERP, which provide supplemental pension benefits to certain highly compensated employees. The Pension Plan (supplemented, as necessary, by the Excess Pension Plan) provides a monthly pension at normal retirement equal to 1.6% of the participant’s average monthly compensation (based upon the participant’s earnings during the three consecutive calendar years during the last 10 years of the participant’s credited service affording the highest such average) times the participant’s years of credited service. The SERP provides an additional benefit equal to 0.35% times the product of the participant’s years of credited service (maximum 35 years) multiplied by the excess of the participant’s average monthly compensation over the lesser of 1.25 times the monthly average (without indexing) of the social security wage bases for the 35-year period ending with the year the participant attains social security retirement age, or the monthly average of the social security wage base in effect for the year that the participant retires. For purposes of the SERP, the participant’s most highly compensated consecutive 36 months of service are considered. Compensation for purposes of the Pension Plan, Excess Pension Plan and SERP includes salary and bonus as reported in the Summary Compensation Table. Pension benefits are not subject to any deduction for social security or other offset amounts.

Credited years of service (for purposes of the Pension Plan) for the period ended December 31, 2005 for the executive officers named in the Summary Compensation Table are as follows: Mr. Anastasio- 18 years, Mr. Blank-26 years; Mr. Bluntzer- 30 years; Mr. Ramsey- 7 years; and Mr. Reese- 19 years. Mr. Anastasio and Mr. Blank have been eligible to participate in the SERP since 2002.

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Compensation of Directors

Directors who are not employees of Valero GP, LLC or its affiliates receive the following compensation: a $1,000 fee for each in-person board meeting attended, a $500 fee for each telephonic board meeting attended, a $1,000 fee for each in-person committee meeting attended, a $500 fee for each telephonic committee meeting attended, a $30,000 annual retainer, a $10,000 annual retainer for serving as chairman of a committee of the board, a $30,000 annual retainer for serving as chairman of the board, and an annual grant of restricted common units under the Valero GP, LLC 2000 Long-Term Incentive Plan having an aggregate value of $20,000 at the time of grant, which vest over three years. A non-employee director serving as chairman of the board will not receive meeting fees for attending committee meetings.

Compensation Committee Interlocks and Insider Participation

Mr. Hill (Chairman), Mr. McLelland and Mr. Patton compose the compensation committee of the board of directors of Valero GP, LLC. No executive officer of Valero GP, LLC has served as a member of the board of directors or on the compensation committee of any company whose executive officers include a member of Valero GP, LLC’s compensation committee.

The compensation committee administers the incentive plans of Valero GP, LLC and makes awards under them, in consultation with management, that create appropriate incentives for employees and management of Valero GP, LLC.

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SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

Valero GP Holdings, LLC

The following table sets forth certain information regarding the beneficial ownership of our units prior to and as of the closing of this offering by:


	•	each person who will beneficially own more than 5% of our units;

	•	each of our named executive officers;

	•	all of our directors and director nominees; and

	•	all of our directors, director nominees and executive officers as a group.

All information with respect to beneficial ownership has been furnished by the respective directors or officers, as the case may be.


	Units					Units
	Beneficially Owned					Beneficially Owned
	Prior to Offering					After Offering

Name of Beneficial Owner	Units		Percent			Units		Percent

Diamond Shamrock Refining and Marketing Company (a)		22,941,024		51.5	%		22,941,024		51.5	%
Sigmor Corporation (a)		13,129,474		29.5			5,069,234		11.4	(b)
The Shamrock Pipe Line Corporation (a)		6,028,369		13.5			—		0.00
Diamond Shamrock Refining Company, L.P. (a)		2,410,056		5.4			—		0.00
Valero Refining — New Orleans, L.L.C. (a)		445		*			—		0.00
Valero Refining Company — California (a)		445		*			—		0.00
Valero Refining — Texas, L.P. (a)		445		*			—		0.00
William E. Greehey		—		—			—		—
Curtis V. Anastasio		—		—			—		—
Steven A. Blank		—		—			—		—
James R. Bluntzer		—		—			—		—
Mary F. Morgan		—		—			—		—
Brad R. Ramsey		—		—			—		—
Rodney L. Reese		—		—			—		—
Thomas R. Shoaf		—		—			—		—
All current directors and executive officers as a group (8 persons)		—		—			—		—


*		Represents less than 1%.

(a)		Valero Energy directly or indirectly owns 100% of the interests in these entities. Therefore, Valero Energy indirectly beneficially owns 100% of the units before the offering and 62.9% of the units after the offering. Valero Energy intends to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions.

(b)		If the underwriters exercise their option to purchase additional units in full, Sigmor Corporation’s beneficial interest will be reduced to 5.8%.

Valero L.P.

The following table sets forth ownership of Valero L.P. common units and Valero Energy common stock by directors and executive officers of Valero GP, LLC as of December 31, 2005. Unless otherwise indicated in the

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notes to the table, each of the named persons and members of the group has sole voting and investment power with respect to the common units and common stock shown:


			Units							Shares of Valero
	Units		Under					Shares of Valero		Energy Stock
	Beneficially		Exercisable		Percentage of			Energy Stock		under		Percentage of
	Owned		Options		Outstanding			Beneficially		Exercisable		Outstanding
Name of Beneficial Owner (a)	(b)(c)		(d)		Units (b)			Owned (e)(f)		Options (g)		Shares (f)

William E. Greehey		66,422		—		*			5,891,266		8,402,376		2.32	%
Curtis V. Anastasio		28,706		30,645		*			57,254		146,600		*
Dan J. Hill		1,932		—		*			3,000		—		*
Gregory C. King		6,506		20,000		*			344,633		654,800		*
William R. Klesse		24,722		13,333		*			512,348		765,080		*
Stan McLelland		344		—		*			9,034		—		*
Rodman D. Patton		9,082		—		*			10,000		—		*
Steven A. Blank		18,638		11,521		*			5,090		20,320		*
James R. Bluntzer		3,885		6,065		*			40,386		74,420		*
Brad R. Ramsey		2,137		240		*			652		24,680		*
Rodney L. Reese		7,937		3,143		*			20,097		17,120		*
All directors and executive officers as a group (11 persons)		170,311		84,947		0.68	%		6,893,760		10,105,396		2.75	%


	*	Indicates that the percentage of beneficial ownership does not exceed 1% of the class.


(a)		The business address for all beneficial owners listed above is One Valero Way, San Antonio, Texas 78249.

(b)		As of December 31, 2005, 37,210,427 common units were issued and outstanding. No executive officer or director owns any class of equity securities of Valero L.P. other than common units. The calculation for Percentage of Outstanding common units includes common units listed under the captions “Units Beneficially Owned” and “Units under Exercisable Options.”

(c)		Includes restricted common units issued under Valero L.P.’s long-term incentive plans. Restricted common units granted under Valero GP, LLC’s long-term incentive plans may not be disposed of until vested. Does not include common units that could be acquired under options, which information is set forth in the next column.

(d)		Consisting of common units that may be acquired within 60 days of December 31, 2005 through the exercise of common unit options.

(e)		As of December 31, 2005, 617,422,290 shares of Valero Energy’s common stock were issued and outstanding. No executive officer or director owns any class of equity securities of Valero Energy other than common stock. The calculation for Percentage of Outstanding Shares includes shares listed under the captions “Shares of Valero Energy Stock Beneficially Owned” and “Shares of Valero Energy Stock under Exercisable Options.”

(f)		Includes shares allocated pursuant to the Valero Energy Corporation Thrift Plan through December 31, 2005, as well as shares of restricted stock granted under Valero Energy’s Executive Stock Incentive Plan and Valero Energy’s Restricted Stock Plan for Non-Employee Directors. Except as otherwise noted, each person named in the table, and each other executive officer, has sole power to vote or direct the vote and to dispose or direct the disposition of all such shares beneficially owned by him. Restricted stock granted under Valero Energy’s Executive Stock Incentive Plan and Valero Energy’s Restricted Stock Plan for Non-Employee Directors may not be disposed of until vested. Does not include shares that could be acquired under options, which information is set forth in the next column.

(g)		Consisting of shares of common stock that may be acquired within 60 days of December 31, 2005 through the exercise of stock options. Such shares may not be voted unless the stock options are exercised. Stock options that may become exercisable within such 60-day period only in the event of a change of control of

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Valero Energy are excluded. Except as set forth herein, none of the current executive officers or directors of Valero L.P. hold any rights to acquire Valero Energy common stock, except through exercise of stock options.

Except as otherwise indicated, the following table sets forth certain information as of February 28, 2006 with respect to each entity known to Valero L.P. to be the beneficial owner of more than 5% of its outstanding common units.

Percentage of

Common

Subordinated

Name and Address of Beneficial Owner

Units

Units(b)

Units

Valero Energy Corporation (a)

617,339

1.7

9,599,322

100

One Valero Way

San Antonio, Texas 78249


(a)		Valero Energy owns the common and subordinated units through its wholly owned subsidiaries, Valero GP, LLC and Riverwalk Holdings, LLC. Valero Energy shares voting and investment power with certain of its wholly owned subsidiaries with respect to the common and subordinated units.

(b)		Assumes 37,210,427 common units outstanding.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Our Relationship with Valero L.P. and its General Partner, Riverwalk Logistics, L.P.

We manage Valero L.P. through our ownership of Valero GP, LLC, and Riverwalk Holdings, LLC, which own Riverwalk Logistics, L.P., the general partner of Valero L.P. Valero L.P., through its subsidiaries, is engaged in the crude oil and refined product transportation, terminalling and storage business. Our only cash-generating assets are our ownership interests in Valero GP, LLC and Riverwalk Holdings, LLC, which own the following:


	•	the 2% general partner interest in Valero L.P., which we hold through our 100% ownership interest in Riverwalk Logistics, L.P.;

	•	100% of the incentive distribution rights issued by Valero L.P., which entitle us to receive increasing percentages of the cash distributed by Valero L.P., currently at the maximum percentage of 23%; and

	•	617,339 common units and 9,599,322 subordinated units of Valero L.P., representing a 21.4% limited partner interest in Valero L.P. We expect the subordinated units to convert on a one-for-one basis to common units during the second quarter of 2006.

Our officers are also officers of Valero GP, LLC. Our Chairman, William E. Greehey, is also the Chairman of Valero GP, LLC. We also expect to appoint three independent directors, as defined by the NYSE. We appoint the directors of Valero GP, LLC. The board of Valero GP, LLC is responsible for overseeing Valero GP, LLC’s role as the owner of the general partner of Valero L.P. and we, as the sole owner of Valero GP, LLC, must also approve matters that have or would reasonably be expected to have a material effect on our interest as the sole indirect owner of Valero GP, LLC. We also have exclusive authority over the business and affairs of Valero GP, LLC other than its role as the owner of the general partner of Valero L.P.

Indemnification of Directors and Officers

Under our limited liability company agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by Delaware law, from and against all losses, claims, damages or similar events any director or officer, or while serving as a director or officer, any person who is or was serving as a tax matters member or as a director, officer, tax matters member, employee, partner, manager, fiduciary or trustee of our partnership or any of our affiliates. Additionally, we will indemnify to the fullest extent permitted by law, from and against all losses, claims, damages or similar events any person who is or was our employee (other than an officer) or agent.

Any indemnification under our limited liability company agreement will only be out of our assets. We are authorized to purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our limited liability company agreement.

Related Party Transactions

Our wholly owned subsidiary, Valero GP, LLC performs operating and maintenance services with respect to Valero L.P. assets and receives reimbursement for such services from Valero L.P.

It is Valero Energy’s intent to further reduce its ownership in us, pending market conditions. Possible additional sales of our units owned by subsidiaries of Valero Energy resulting in an indirect ownership in us by Valero Energy of less than 51% may trigger a “change of control” under the indentures governing the $100 million 6.875% Senior Notes due 2012 and the $250 million 6.05% Senior Notes due 2013 issued by Valero Logistics Operations, L.P.

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	*Administration Agreement*

Effective with the closing of this offering, we will enter into an Administration Agreement with Valero GP, LLC. The Administration Agreement will provide, among other things, that:


	•	all of our employees will be employees of our wholly owned subsidiary Valero GP, LLC; and

	•	Valero GP, LLC will provide all executive management, accounting, legal, cash management, corporate finance and other administrative services to us.

The initial term of the Administration Agreement will commence with the closing of this offering and terminate on December 31, 2011, with automatic two year renewals unless terminated by either party on six months’ written notice. We may cancel or reduce the services provided under this agreement on 60 days’ written notice. This Agreement will terminate upon a change of control of either us or Valero GP, LLC.


	*Non-Compete Agreement*

We will enter into a Non-Compete Agreement with Valero L.P. upon the closing of this offering. This Non-Compete Agreement will not be effective until we are no longer subject to the Amended and Restated Omnibus Agreement described below. Under the Non-Compete Agreement, we will have a right of first refusal with respect to the potential acquisition of general partner and other equity interests in publicly traded partnerships under common ownership with the general partner interest. Valero L.P. will have a right of first refusal with respect to the potential acquisition of assets that relate to the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals) in the United States and internationally. With respect to any other business opportunities, neither we nor Valero L.P. are prohibited from engaging in any business, even if we and Valero L.P. would have a conflict of interest with respect to such other business opportunity.


	*Rights of Valero GP, LLC*

Riverwalk Holdings, LLC owns 614,572 common units and 9,599,322 subordinated units of Valero L.P. representing an aggregate 21.4% limited partner interest in Valero L.P. Riverwalk Logistics, L.P. owns a 2% general partner interest in Valero L.P. and also owns incentive distribution rights giving Riverwalk Logistics, L.P. higher percentages of Valero L.P.’s cash distributions as various target distribution levels are met. Valero GP, LLC, the general partner of Riverwalk Logistics, L.P., owns 2,767 common units of Valero L.P. representing a 0.02% limited partner interest in Valero L.P.

The subordinated units will convert to common units of Valero L.P. on a one-for-one basis during the second quarter of 2006, if Valero L.P. meets certain tests set forth in its partnership agreement. If the subordination period ends, the rights of the holders of subordinated units will no longer be subordinated to the rights of the holders of common units and the subordinated units will be converted into common units.

As the sole general partner of Valero L.P., Riverwalk Logistics, L.P. is responsible for the management of Valero L.P. Valero GP, LLC, the sole general partner of Riverwalk Logistics, L.P., is responsible for managing the affairs of Riverwalk Logistics, L.P., and through it, the affairs of Valero L.P. and its operating subsidiaries. We own all the membership interests in Valero GP, LLC.


	Valero L.P.’s Relationship with Valero Energy

Valero L.P.’s operations include assets that are strategically located within Valero Energy’s refining and marketing supply chain in Texas, Oklahoma, California, Colorado, New Jersey, New Mexico, Arizona and other

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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 a significant amount of 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. Subsequent to Valero L.P.’s acquisition of Kaneb, the percentage of Valero L.P.’s revenues attributable to Valero Energy has declined. However, revenues attributable to Valero Energy remain significant with such revenues representing approximately 34% of Valero L.P.’s total revenues for 2005.

Services Agreement

Valero L.P. does not have any employees. The personnel who manage and operate Valero L.P. are employees of Valero GP, LLC, a wholly owned subsidiary of Valero GP Holdings, LLC. The costs related to these employees, including salary, wages and benefits, are charged by Valero GP, LLC to Valero L.P. In addition, Valero L.P. receives certain administration services, consisting primarily of information technology and income tax and property tax services from Valero Energy. The above described services are pursuant to a Services Agreement between Valero Energy, Valero GP, LLC and Valero L.P.

Effective January 1, 2006, a new Services Agreement was entered into by Valero Energy, Valero GP, LLC and Valero L.P. This new Services Agreement supersedes the prior agreement which provided for similar services between Valero Energy and Valero L.P. The new Services Agreement reflects a new organization structure whereby Valero Energy is now providing substantially fewer services than previously provided. Valero GP, LLC has increased its administrative personnel, primarily in the areas of legal, engineering, treasury and accounting to be able to provide these services to Valero L.P. versus receiving them from Valero Energy. These changes were made to reduce Valero GP, LLC’s dependence on Valero Energy for such services.

The new Services Agreement provides for an annual fee to be paid by Valero GP, LLC to Valero Energy of approximately $1.9 million per year. This annual fee will increase to approximately $2.9 million and $3.4 million for fiscal years 2007 and 2008, respectively. The annual fee will remain at approximately $3.4 million through the term of the agreement. In addition, each annual fee will be subject to adjustments to account for Valero Energy’s annual salary increase. The amounts may also be adjusted for changed service levels subject to approval by Valero L.P.’s Conflicts Committee.

The new Services Agreement will terminate on December 31, 2010 with automatic two year renewal options unless terminated by either party on six months’ written notice. Valero L.P. may cancel or reduce the level of services that Valero Energy provides it on 60 days prior written notice. The Services Agreement will terminate upon the change of control of either us or Valero L.P.

The overall effect of the new organization structure and the new Services Agreement will be to increase Valero L.P.’s general and administrative expenses by approximately $1.1 million in 2006.


	*Office Rental Agreement*

Valero L.P. currently occupies office space within Valero Energy’s existing headquarters complex. Valero Energy is constructing a new office building into which Valero L.P. will relocate its employees upon completion.

Valero L.P. entered into an agreement with Valero Energy whereby it agreed to lease approximately 65,000 square feet of office space at an annual cost of approximately $1.6 million per year for the first five years. For years six through ten, the annual fee is subject to adjustment for changes in the Consumer Price Index. For each subsequent five year period under the initial term and during the ten-year renewal option, the annual rent shall be adjusted to reflect the actual market rent of comparable office spaces. Rental payments will commence upon the completion of a new office facility presently being constructed by Valero Energy. The completion of this facility is expected to be in the second half of 2007.

The Office Rental Agreement has an initial term of 25 years with a 10 year renewal option.

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	*Amended and Restated Omnibus Agreement*


	•	any business retained by UDS as of April 16, 2001, the closing of Valero L.P.’s initial public offering, or any business owned by Valero Energy at the date of its acquisition of UDS on December 31, 2001;

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

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

	•	any newly constructed pipeline, terminalling or storage assets that Valero L.P. has not offered to purchase at fair market value within one year of construction.

Also under the Amended and Restated Omnibus Agreement, Valero Energy has agreed to indemnify Valero L.P. for environmental liabilities related to the assets transferred to Valero L.P. in connection with Valero L.P.’s initial public offering, provided that such liabilities arose prior to and are discovered within 10 years after that date (excluding liabilities resulting from a change in law after April 16, 2001). It is Valero Energy’s intent to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions.


	*Pipelines and Terminals Usage Agreement — McKee, Three Rivers and Ardmore*

Under the terms of the Pipelines and Terminals Usage Agreement dated April 2001, Valero L.P. provides transportation services that support Valero Energy’s refining and marketing operations relating to the McKee, Three Rivers and Ardmore refineries. Pursuant to the agreement, Valero Energy has agreed through April 2008 to:


	•	transport in Valero L.P.’s crude oil pipelines at least 75% of the aggregate volumes of crude oil shipped to the McKee, Three Rivers and Ardmore refineries;

	•	transport in Valero L.P.’s refined product pipelines at least 75% of the aggregate volumes of refined products shipped from the McKee, Three Rivers and Ardmore refineries; and

	•	use Valero L.P.’s refined product terminals for terminalling services for at least 50% of the refined products shipped from the McKee, Three Rivers and Ardmore refineries.

If market conditions change with respect to the transportation of crude oil or refined products, or to the end markets in which Valero Energy sells refined products, in a material manner such that Valero Energy would suffer a material adverse effect if it were to continue to use Valero L.P.’s pipelines and terminals that service the McKee, Three Rivers and Ardmore refineries at the required levels. Valero Energy’s obligation to Valero L.P. will be suspended during the period of the change in market conditions to the extent required to avoid the material adverse effect.

In the event Valero Energy does not transport in Valero L.P.’s pipelines or use Valero L.P.’s terminals to handle the minimum volume requirements and if its obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. During the years ended December 31, 2004 and 2005, Valero Energy exceeded its obligations under the Pipelines and Terminals Usage Agreement. Additionally, Valero Energy has agreed not to challenge, or cause others to challenge, Valero L.P.’s interstate or intrastate tariffs for the transportation of crude oil and refined products until at least April 2008.

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	*Crude Oil Storage Tanks Agreements*

In connection with the crude oil storage tank contribution in March 2003, Valero L.P. and Valero Energy entered into the following agreements related to the operations of the crude oil storage tanks.


	•	Handling and Throughput Agreement, dated March 2003 — Valero Energy has agreed to pay Valero L.P. a fee, for an initial period of ten years, for all crude oil and certain other feedstocks delivered to each of the Corpus Christi West refinery, the Texas City refinery and the Benicia refinery and to use Valero L.P. for handling all deliveries to these refineries. The throughput fees are adjustable annually, generally based on 75% of the regional consumer price index applicable to the location of each refinery. The agreement may be extended by Valero Energy for up to an additional five years.

	•	Services and Secondment Agreements, dated March 2003 — Valero Energy has agreed to provide to Valero L.P. personnel who perform operating and routine maintenance services related to the crude oil storage tank operations. The annual reimbursement for services is an aggregate $3.5 million for the initial year and is subject to adjustment based on the actual expenses incurred and increases in the regional consumer price index. The initial term of the Services and Secondment Agreements is ten years with a Valero L.P. option to extend for an additional five years. In addition to the fees Valero L.P. has agreed to pay, Valero L.P. is responsible for operating expenses and specified capital expenditures related to the tank assets that are not addressed in the agreement. These operating expenses and capital expenditures include tank safety inspections, maintenance and repairs, certain environmental expenses, insurance premiums and ad valorem taxes.

	•	Lease and Access Agreements, dated March 2003 — Valero L.P. leases from Valero Energy the real property on which the crude oil storage tanks are located for an aggregate of $0.7 million per year. The initial term of each lease is 25 years, subject to automatic renewal for successive one-year periods thereafter. Valero L.P. may terminate any of these leases upon 180 days notice prior to the expiration of the current term if Valero L.P. ceases to operate the crude oil storage tanks or ceases business operations.


	*South Texas Pipelines and Terminals Agreements*

In connection with the South Texas Pipelines and Terminals contribution in March of 2003, Valero L.P. and Valero Energy entered into the following agreements related to the operations of the pipelines and terminals:


	•	Terminalling Agreement, dated March 2003, pursuant to which Valero Energy agreed, during the initial period of five years, to pay a terminalling fee for each barrel of refined product stored or handled by or on behalf of Valero Energy at the terminals, including an additive fee for gasoline additive blended at the terminals. At the Houston Hobby Airport terminal, Valero Energy agreed to pay a filtering fee for each barrel of jet fuel stored or handled at the terminal.

	•	Throughput Commitment Agreement, dated March 2003, pursuant to which Valero Energy agreed, for an initial period of seven years to:


	—	transport in the Houston and Valley pipeline systems an aggregate of 40% of the Corpus Christi refineries’ gasoline and distillate production but only if the combined throughput in these pipelines is less than 110,000 barrels per day;

	—	transport in the Pettus to San Antonio refined product pipeline 25% of the Three Rivers refinery gasoline and distillate production and in the Pettus to Corpus Christi refined product pipeline 90% of the Three Rivers refinery raffinate production;

	—	use the Houston asphalt terminal for an aggregate of 7% of the asphalt production of the Corpus Christi refineries;

	—	use the Edinburg refined product terminal for an aggregate of 7% of the gasoline and distillate production of the Corpus Christi refineries, but only if the throughput at this terminal is less than 20,000 barrels per day; and

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	—	use the San Antonio east terminal for 75% of the throughput in the Pettus to San Antonio refined product pipeline.

In the event Valero Energy does not transport in Valero L.P.’s pipelines or use Valero L.P.’s terminals to handle the minimum volume requirements and if its obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. In 2003, Valero Energy indicated to Valero L.P. that the segment of the Corpus Christi to Edinburg refined product pipeline that runs approximately 60 miles south from Corpus Christi to Seeligson Station required repair and replacement. Valero Energy agreed to indemnify Valero L.P. for any costs Valero L.P. incurs to repair and replace this segment in excess of $1.5 million, excluding costs to upgrade the size of the pipe, which is Valero L.P.’s responsibility. This repair and replacement project became operational in the fourth quarter of 2004.


	*Other Operating Agreements*

Other operating agreements between Valero L.P. and Valero Energy include:


	•	A hydrogen tolling agreement, which provides that Valero Energy will pay Valero L.P. minimum annual revenues of $1.4 million for transporting crude hydrogen from the BOC Group’s chemical facility in Clear Lake, Texas to Valero Energy’s Texas City refinery.

	•	A terminal storage and throughput agreement related to the Pittsburg asphalt terminal, which provides that Valero Energy will pay Valero L.P. a monthly lease fee of $0.2 million, a minimum annual throughput fee of $0.4 million and will reimburse Valero L.P. for utility costs.

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

	•	Valero L.P. and Valero Energy entered into a one-year shell barrel capacity lease agreement on January 1, 2004 for the 1.6 million barrels of capacity at the Corpus Christi North Beach storage facility, renewable annually. The use of this storage facility was previously included as part of the crude oil pipeline tariff for the Corpus Christi to Three Rivers crude oil pipeline.


	*Summary of Transactions with Valero Energy*

Valero L.P. has related party transactions with Valero Energy for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, certain employee costs, insurance costs, administrative costs, and rent expense. On the consolidated balance sheet of Valero L.P. and its subsidiaries included elsewhere in this prospectus, the balance of the account receivable from Valero Energy as of December 31, 2002 and through March 18, 2003 represented the net amount due for these related party transactions and the net cash collected under Valero Energy’s centralized cash management program on Valero L.P.’s behalf. Beginning March 19, 2003, the balance of the account receivable from Valero Energy represents amounts due for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, and the balance of the account payable to Valero Energy represents amounts due for employee costs, insurance costs, operating expenses, administrative costs and rent expense.

The following table summarizes Valero L.P.’s related party transactions with Valero Energy for the periods indicated (dollars in thousands):


	Years Ended December 31,

	2003		2004		2005

Revenues	$	178,605	$	217,608	$	234,485
Operating expenses		24,196		31,960		60,921
General and administrative expenses		6,110		10,539		19,356

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CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

General

Conflicts of interest may arise in the future as a result of the relationships among us, Valero L.P. and our respective affiliates. Our directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. All of our executive officers and directors also serve as executive officers or directors of Valero GP, LLC. For example, William E. Greehey is the Chairman of the Board of each of us, Valero GP, LLC and Valero Energy. As a result, these executive officers and directors have fiduciary duties to manage the business of Riverwalk Logistics, L.P. and Valero L.P. in a manner beneficial to Valero L.P. and its partners. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to Valero L.P., on the one hand, and us, on the other hand, are in conflict.

Similarly, Valero Energy, through its retained control of us after giving effect to this offering and consequent ability to elect, remove or replace our directors or officers, may face conflicts of interest if it is confronted with decisions that would tend to impact us, on the one hand, and itself, on the other. In resolving any such conflict, Valero Energy may favor its own interests and the interests of its affiliates over our interests and those of our other unitholders.

The resolution of these conflicts may not always be in our best interest or that of our unitholders.

Potential Future Conflicts

Whenever a conflict arises between us, on the one hand, and any affiliated entities including Valero L.P. and Valero Energy, on the other hand, our board of directors may resolve that conflict. Our limited liability company agreement authorizes our board of directors to establish a conflicts committee, consisting solely of independent directors, which will be responsible for reviewing transactions involving potential conflicts of interest. Our independent directors are not the same independent directors who serve on the conflicts committee of either Valero L.P. or Valero GP, LLC. Our board of directors may, but is not required to, seek the approval of such resolution from the conflicts committee of our board of directors. Our limited liability company agreement contains provisions that modify and limit our directors’ fiduciary duties to our unitholders. Our limited liability company agreement also restricts the remedies available to our unitholders for actions taken that, without those limitations, might constitute breaches of fiduciary duty.

Conflicts of interest could arise in the situations described below, among others:


	*We may compete with Valero L.P. and Valero Energy for the time and effort of our Chairman and officers who also serve Valero L.P. and Valero Energy.*

There could be material competition for the time and effort of the directors, officers and employees who provide services to us and Valero GP, LLC on the one hand, and Valero Energy and its affiliates, on the other hand. Our officers are not required to work full time on our affairs or the affairs of Valero GP, LLC and may devote significant time to the affairs of Valero Energy or its affiliates.


	*Valero Energy may purchase assets or receive services from Valero L.P., giving rise to conflicts of interest.*

Valero Energy’s interest as a purchaser of assets or recipient of services in transactions involving Valero L.P. could conflict with Valero L.P.’s interest as a seller of these assets or provider of these services. Valero L.P. would want to receive the highest possible price, and Valero Energy would want to pay the lowest possible price for these assets or services.


	*Owners of the units will have no right to enforce obligations of Valero L.P., Valero Energy or their affiliates under any agreements with us.*

Any agreements between us on the one hand, and Valero L.P. or Valero Energy and its affiliates, on the other hand, will not grant to the holders of our units any right to enforce the obligations of such other parties in our favor.

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	*Contracts between us, on the one hand, and Valero L.P., Valero Energy and their respective affiliates, on the other hand, may not be the result of an arm’s-length negotiation.*

Neither the limited liability company agreement nor any of the other contracts or arrangements between us, Valero Energy and its subsidiaries or Valero L.P. are or will be the result of arm’s-length negotiations.


	*Valero Energy and its affiliates may compete with Valero L.P.*

Upon completion of this offering, Valero Energy is expected to retain approximately 63% of our ownership interests. Under Valero L.P.’s Amended and Restated Omnibus Agreement, if Valero Energy reduces its ownership interest such that it owns less than 20% of us or Valero GP, LLC, Valero Energy and its affiliates will no longer be prohibited from engaging in the business of transporting crude oil or refined petroleum products (including petrochemicals) or operating crude oil storage or refined petroleum products terminalling assets in the United States. As a result, Valero Energy could directly compete with Valero L.P., which could cause conflicts of interest among these entities and adversely impact Valero L.P.’s results of operations and cash available for distribution and therefore, our cash available for distribution. It is Valero Energy’s intent to further reduce and ultimately sell all of its indirect ownership interest in us, pending market conditions.


	*Valero Energy may cause its subsidiaries to exercise their purchase rights at any time or price that may be undesirable to you.*

The subsidiaries of Valero Energy who are our current unitholders may exercise their purchase rights to acquire your units at any time in their sole discretion after the conditions for such exercise have been satisfied. In exercising the rights, Valero Energy and its subsidiaries do not have to consider whether the exercise is in your best interest. As a result, the subsidiaries of Valero Energy may purchase your units at a time or price that you find undesirable.


	*Fiduciary Duties*

Our limited liability company agreement provides that our business and affairs shall be managed under the direction of our board of directors, which shall have the power to appoint our officers. Our limited liability company agreement further provides that the authority and function of our board of directors and officers shall be identical to the authority and functions of a board of directors and officers of a corporation organized under the Delaware General Corporation Law, or DGCL. Finally, our limited liability company agreement provides that except as specifically provided therein, the fiduciary duties and obligations owed to our limited liability company and to our members shall be the same as the respective duties and obligations owed by officers and directors of a corporation organized under the DGCL to their corporation and stockholders, respectively. Our limited liability company agreement establishes a conflicts committee of our board of directors, consisting solely of independent directors, which will be authorized to review transactions involving potential conflicts of interest. If the conflicts committee approves such a transaction, or if a transaction is on terms generally available from third parties or an action is taken that is fair and reasonable to the company, you will not be able to assert that such approval constituted a breach of fiduciary duties owed to you by our directors and officers.

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DESCRIPTION OF OUR UNITS

Our units represent limited liability company membership interests that entitle the holders to participate in our cash distributions and to exercise the rights and privileges available to members under our limited liability company agreement. For a description of the relative rights and preferences of holders of units and to cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.” For a description of the rights and privileges of unitholders under our limited liability company agreement, including voting rights, please read “Description of Our Limited Liability Company Agreement.”

Transfer Agent and Registrar

Computershare will serve as registrar and transfer agent for the units. We pay all fees charged by the transfer agent for transfers of units, except the following that must be paid by unitholders:


	•	surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;

	•	special charges for services requested by a holder of a unit; and

	•	other similar fees or charges.

There will be no charge to unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, and its agents, and each of their stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.

The transfer agent may at any time resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and has accepted the appointment within 30 days after notice of the resignation or removal, we are authorized to act as the transfer agent and registrar until a successor is appointed.

Transfer of Units

By transfer of our units in accordance with our limited liability company agreement, each transferee of our units will be admitted as a unitholder with respect to the units transferred when such transfer and admission is reflected in our books and records. Additionally, each transferee of our units:


	•	becomes the record holder of the units;

	•	represents that the transferee has the capacity, power and authority to enter into and become bound by our limited liability company agreement;

	•	automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our limited liability company agreement;

	•	grants powers of attorney to our officers and any liquidator of our company as specified in the limited liability company agreement; and

	•	makes the consents and waivers contained in our limited liability company agreement.

An assignee will become a substituted member of our limited liability company for the transferred units automatically upon the recording of the transfer on our books and records. Management will cause any transfers to be recorded on our books and records no less frequently than quarterly.

We may, at our discretion, treat the nominee holder of a unit as the absolute owner. In that case, the beneficial holder’s rights are limited solely to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.

Units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted member of our limited liability company for the transferred units.

Until a unit has been transferred on our books, we and the transfer agent, notwithstanding any notice to the contrary, may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

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DESCRIPTION OF OUR LIMITED LIABILITY COMPANY AGREEMENT

The following is a summary of the material provisions of our limited liability company agreement. The form of our limited liability company agreement is included as Appendix A in this prospectus. We will provide prospective investors with a copy of the form of this agreement upon request at no charge.

We summarize the following provisions of our limited liability company agreement elsewhere in this prospectus:


	•	with regard to distributions of available cash, please read “Our Cash Distribution Policy and Restrictions on Distributions” and “How We Make Cash Distributions”;

	•	with regard to rights of holders of units, please read “Description of Our Units”;

	•	with regard to the election of members of our board of directors, please read “Management — Our Board of Directors”; and

	•	with regard to allocations of taxable income and other matters, please read “Material Tax Consequences.”

Organization and Duration

Our company was formed in June 2000 as UDS Logistics. It changed its name to Valero GP Holdings in January 2006 and will remain in existence until dissolved in accordance with our limited liability company agreement.

Purpose

Under our limited liability company agreement, we are permitted to engage in any business activity that lawfully may be conducted by a limited liability company organized under Delaware law and, in connection therewith, to exercise all of the rights and powers conferred upon us pursuant to the agreements relating to such business activity; provided, however, that our management shall not cause us to engage, directly or indirectly, in any business activity that our board of directors determines would cause us or Valero L.P. to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes.

Fiduciary Duties

Our limited liability company agreement provides that our business and affairs shall be managed under the direction of our board of directors, which shall have the power to appoint our officers. Our limited liability company agreement further provides that the authority and function of our board of directors and officers shall be identical to the authority and functions of a board of directors and officers of a corporation organized under the DGCL. Finally, our limited liability company agreement provides that, except as specifically provided therein, the fiduciary duties and obligations owed to our limited liability company and to our members shall be the same as the respective duties and obligations owed by officers and directors of a corporation organized under the DGCL to their corporation and stockholders, respectively. Our limited liability company agreement permits affiliates of our directors to invest or engage in other businesses or activities that compete with us. In addition, our limited liability company agreement establishes a conflicts committee of our board of directors, consisting solely of independent directors, which will be responsible for reviewing transactions involving potential conflicts of interest. If the conflicts committee approves such a transaction, you will not be able to assert that such approval constituted a breach of fiduciary duties owed to you by our directors and officers.

Agreement to be Bound by Limited Liability Company Agreement; Power of Attorney

By purchasing a unit in us, you will be admitted as a unitholder of our company and will be deemed to have agreed to be bound by the terms of our limited liability company agreement. Pursuant to this agreement, each unitholder and each person who acquires a unit from a unitholder grants to our board of directors (and, if appointed, a liquidator) a power of attorney to, among other things, execute and file documents required for our qualification, continuance or dissolution. The power of attorney also grants our board of directors the authority

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to make certain amendments to, and to make consents and waivers under and in accordance with, our limited liability company agreement.

Capital Contributions

Unitholders are not obligated to make additional capital contributions, except as described below under “— Limited Liability.”

Limited Liability

Unlawful Distributions. The Delaware Limited Liability Company Act, which we refer to in this prospectus as the Delaware LLC Act, provides that a unitholder who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware LLC Act shall be liable to the company for the amount of the distribution for three years. Under the Delaware LLC Act, a limited liability company may not make a distribution to a unitholder if, after the distribution, all liabilities of the company, other than liabilities to unitholders on account of their membership interests and liabilities for which the recourse of creditors is limited to specific property of the company, would exceed the fair value of the assets of the company. For the purpose of determining the fair value of the assets of a company, the Delaware LLC Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the company only to the extent that the fair value of that property exceeds the nonrecourse liability. Under the Delaware LLC Act, an assignee who becomes a substituted unitholder of a company is liable for the obligations of his assignor to make contributions to the company, except the assignee is not obligated for liabilities unknown to him at the time he became a unitholder and that could not be ascertained from the limited liability company agreement.

Failure to Comply with the Limited Liability Provisions of Jurisdictions in Which We Do Business. Our subsidiaries and Valero L.P. will initially conduct business in 25 states. We, our subsidiaries or Valero L.P. may decide to conduct business in other states, and maintenance of limited liability for us, as a member, or partner, as the case may be, of our subsidiaries and through our indirect ownership of Valero L.P.’s general partner, may require compliance with legal requirements in the jurisdictions in which the subsidiaries or Valero L.P. conduct business, including qualifying our subsidiaries to do business there. Limitations on the liability of unitholders for the obligations of a limited liability company have not been clearly established in many jurisdictions. We will operate in a manner that our board of directors considers reasonable and necessary or appropriate to preserve the limited liability of our unitholders.

Voting Rights

The following matters require the unitholder vote specified below:


Election of members of the board of directors		Following our initial public offering we will have two directors. Our limited liability company agreement provides that we will have a board of no more than members. Holders of our units, voting together as a single class, will elect our directors. Please read “— Election of Members of Our Board of Directors.”

Staggered board		We will have a staggered board of directors as a result of which only a portion of the members of the board of directors will be elected each year. Removal of directors will require a meeting of unitholders and cannot be done by written consent.

Issuance of additional units		No approval right.

Amendment of the limited liability company agreement		Certain amendments may be made by our board of directors without the approval of the unitholders. Other amendments generally require

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the approval of a unit majority. Please read “— Amendment of Our Limited Liability Company Agreement.”

Merger of our company or the sale of all or substantially all of our assets Unit majority. Please read “— Merger, Sale or Other Disposition of Assets.”

Dissolution of our company Unit majority. Please read “— Termination and Dissolution.”

Matters requiring the approval of a “unit majority” require the approval of a majority of the units.

Issuance of Additional Securities

Our limited liability company agreement authorizes us to issue an unlimited number of additional securities and rights to buy securities for the consideration of and on the terms and conditions determined by our board of directors without the approval of the unitholders.

It is possible that we will fund acquisitions through the issuance of additional units or other equity securities. Holders of any additional units we issue will be entitled to share equally with the then-existing holders of units in our distributions of available cash. In addition, the issuance of additional units or other equity securities may dilute the value of the interests of the then-existing holders of units in our net assets.

In accordance with Delaware law and the provisions of our limited liability company agreement, we may also issue additional securities that, as determined by our board of directors, may have special voting rights to which the units are not entitled.

The holders of units will not have preemptive rights to acquire additional units or other securities.

Election of Members of Our Board of Directors

The current member and the independent members of the board of directors will serve staggered terms, as a result of which only a portion of the board of directors will be elected each year.

Removal of Members of Our Board of Directors

Any director may be removed, with or without cause, by the holders of a majority of the units then entitled to vote at an election of directors. Removal of directors will require a meeting of unitholders and cannot be done by written consent.

Amendment of Our Limited Liability Company Agreement

General. Amendments to our limited liability company agreement may be proposed only by or with the consent of our board of directors. To adopt a proposed amendment, other than the amendments discussed below, our board of directors is required to seek written approval of the holders of the number of units required to approve the amendment or call a meeting of our unitholders to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a unit majority.

Prohibited Amendments. No amendment may be made that would:


	•	enlarge the obligations of any unitholder without its consent, unless approved by at least a majority of the type or class of member interests so affected;

	•	provide that we are not dissolved upon an election to dissolve our company by our board of directors that is approved by a unit majority;

	•	change the term of existence of our company; or

	•	give any person the right to dissolve our company other than our board of directors’ right to dissolve our company with the approval of a unit majority.

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The provision of our limited liability company agreement preventing the amendments having the effects described in any of the clauses above can be amended upon the approval of the holders of at least % of the outstanding units, voting together as a single class.

No Unitholder Approval. Our board of directors may generally make amendments to our limited liability company agreement without the approval of any unitholder or assignee to reflect:


	•	a change in our name, the location of our principal place of our business, our registered agent or our registered office;

	•	the admission, substitution, withdrawal or removal of members in accordance with our limited liability company agreement;

	•	the merger of our company or any of its subsidiaries into, or the conveyance of all of our assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity;

	•	a change that our board of directors determines to be necessary or appropriate for us to qualify or continue our qualification as a company in which our members have limited liability under the laws of any state or to ensure that neither we, our operating subsidiaries nor any of their subsidiaries will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;

	•	an amendment that is necessary, in the opinion of our counsel, to prevent us, members of our board, or our officers, agents or trustees from in any manner being subjected to the provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, or ERISA, whether or not substantially similar to plan asset regulations currently applied or proposed;

	•	an amendment that our board of directors determines to be necessary or appropriate for the authorization of additional securities or rights to acquire securities;

	•	any amendment expressly permitted in our limited liability company agreement to be made by our board of directors acting alone;

	•	an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our limited liability company agreement;

	•	any amendment that our board of directors determines to be necessary or appropriate for the formation by us of, or our investment in, any corporation, partnership or other entity, as otherwise permitted by our limited liability company agreement;

	•	a change in our fiscal year or taxable year and related changes;

	•	a merger, conversion or conveyance effected in accordance with the limited liability company agreement; and

	•	any other amendments substantially similar to any of the matters described in the clauses above.

In addition, our board of directors may make amendments to our limited liability company agreement without the approval of any unitholder or assignee if our board of directors determines that those amendments:


	•	do not adversely affect the unitholders (including any particular class of unitholders as compared to other classes of unitholders) in any material respect;

	•	are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;

	•	are necessary or appropriate to facilitate the trading of units or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the units are or will be listed for trading,

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compliance with any of which our board of directors deems to be in the best interests of us and our unitholders;

• are necessary or appropriate for any action taken by our board of directors relating to splits or combinations of units under the provisions of our limited liability company agreement; or

• are required to effect the intent expressed in this prospectus or the intent of the provisions of our limited liability company agreement or are otherwise contemplated by our limited liability company agreement.

Opinion of Counsel and Unitholder Approval. Our board of directors will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to our unitholders or result in our being treated as an entity for federal income tax purposes if one of the amendments described above under “— Amendment of Our Limited Liability Company Agreement” should occur. No other amendments to our limited liability company agreement will become effective without the approval of holders of at least 90% of the units unless we obtain an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any unitholder of our company.

Any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding units in relation to other classes of units will require the approval of at least a majority of the type or class of units so affected. Any amendment that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of unitholders whose aggregate outstanding units constitute not less than the voting requirement sought to be reduced.

Merger, Sale or Other Disposition of Assets

Our board of directors is generally prohibited, without the prior approval of the holders of a unit majority, from causing us to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all or substantially all of the assets of our subsidiaries, provided that our board of directors may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without that approval. Our board of directors may also sell all or substantially all of our assets under a foreclosure or other realization upon the encumbrances above without that approval.

If the conditions specified in the limited liability company agreement are satisfied, our board of directors may merge our company or any of its subsidiaries into, or convey all of our assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity. The unitholders are not entitled to dissenters’ rights of appraisal under the limited liability company agreement or applicable Delaware law in the event of a merger or consolidation, a sale of all or substantially all of our assets or any other transaction or event.

Termination and Dissolution

We will continue as a company until terminated under our limited liability company agreement. We will dissolve upon: (1) the election of our board of directors to dissolve us, if approved by the holders of a unit majority; (2) the sale, exchange or other disposition of all or substantially all of the assets and properties of our company and our subsidiaries; or (3) the entry of a decree of judicial dissolution of our company.

Liquidation and Distribution of Proceeds

Upon our dissolution, the liquidator authorized to wind up our affairs will, acting with all of the powers of our board of directors that the liquidator deems necessary or desirable in its judgment, liquidate our assets and apply the proceeds of the liquidation as provided in “Cash Distribution Policy of Valero L.P. — Distributions of Cash upon Liquidation.” The liquidator may defer liquidation or distribution of our assets for a reasonable period of time or distribute assets to unitholders in kind if it determines that a sale would be impractical or would cause undue loss to our unitholders.

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Anti-Takeover Provisions

Our limited liability company agreement contains specific provisions that are intended to discourage a person or group from attempting to take control of our company without the approval of our board of directors. Specifically, our limited liability company agreement provides that we will elect to have Section 203 of the DGCL apply to transactions in which an interested unitholder (as described below) seeks to enter into a merger or business combination with us. Under this provision, such a holder will not be permitted to enter into a merger or business combination with us unless:


	•	prior to such time, our board of directors approved either the business combination or the transaction that resulted in the unitholder’s becoming an interested unitholder;

	•	upon consummation of the transaction that resulted in the unitholder’s becoming an interested unitholder, the interested unitholder owned at least 85% of our outstanding units at the time the transaction commenced, excluding for purposes of determining the number of units outstanding those units owned:


	•	by persons who are directors and also officers; and

	•	by employee unit plans in which employee participants do not have the right to determine confidentially whether units held subject to the plan will be tendered in a tender or exchange offer; or

	•	at or subsequent to such time the business combination is approved by our board of directors and authorized at an annual or special meeting of our unitholders (and not by written consent), by the affirmative vote of at least a majority of our outstanding voting units that are not owned by the interested unitholder.

Section 203 defines “business combination” to include:


	•	any merger or consolidation involving the company and the interested unitholder;

	•	any sale, transfer, pledge or other disposition of 10% or more of the assets of the company involving the interested unitholder;

	•	subject to certain exceptions, any transaction that results in the issuance or transfer by the company of any units of the company to the interested unitholder;

	•	any transaction involving the company that has the effect of increasing the proportionate share of the units of any class or series of the company beneficially owned by the interested unitholder; or

	•	the receipt by the interested unitholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the company.

In general, by reference to Section 203, an “interested unitholder” is any entity or person who or which beneficially owns (or within three years did own) 15% or more of the outstanding voting units of the company and any entity or person affiliated with or controlling or controlled by such entity or person.

The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for units held by unitholders.

Limited Call Right

If at any time our affiliates own more than 80% of the then-issued and outstanding membership interests of any class, our affiliates will have the right, which such affiliate may assign in whole or in part to one or more affiliates or to us, to acquire all, but not less than all, of the remaining membership interests of the class as of a record date to be selected by our management, on at least 10 but not more than 60 days’ notice. The unitholders are not entitled to dissenters’ rights of appraisal under the limited liability company agreement or applicable

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Delaware law if this limited call right is exercised. The purchase price in the event of this purchase is the greater of:


	•	the highest cash price paid by our affiliates for any membership interests of the class purchased within the 90 days preceding the date on which our affiliates first mail notice of their election to purchase those membership interests; or

	•	the closing market price as of the date three days before the date the notice is mailed.

As a result of this limited call right, a holder of membership interests in our company may have his membership interests purchased at an undesirable time or price. Please read “Risk Factors — Risks Inherent in an Investment in Us.” The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his units in the market. Please read “Material Tax Consequences — Disposition of Units.”

Meetings; Voting

All notices of meetings of unitholders shall be sent or otherwise given in accordance with our limited liability company agreement not less than 10 nor more than 60 days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the unitholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board of directors intends to present for election. Any previously scheduled meeting of the unitholders may be postponed, and any special meeting of the unitholders may be cancelled, by resolution of the board of directors upon public notice given prior to the date previously scheduled for such meeting of unitholders.

Units that are owned by an assignee who is a record holder, but who has not yet been admitted as a unitholder, shall be voted at the written direction of the record holder by a proxy designated by our board of directors. Absent direction of this kind, the units will not be voted, except that units held by us on behalf of non-citizen assignees shall be voted in the same ratios as the votes of unitholders on other units are cast.

Any action required or permitted to be taken by our unitholders must be effected at a duly called annual or special meeting of unitholders and may not be effected by any consent in writing by such unitholders.

Meetings of the unitholders may be called only by a majority of our board of directors. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called represented in person or by proxy shall constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum shall be the greater percentage.

Each record holder of a unit has a vote according to his percentage interest in us, although additional units having special voting rights could be issued. Please read “— Issuance of Additional Securities.” Units held in nominee or street name accounts will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and its nominee provides otherwise.

Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of units under our limited liability company agreement will be delivered to the record holder by us or by the transfer agent.

Non-Citizen Assignees; Redemption

If we or any of our subsidiaries are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our board of directors, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any

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unitholder or assignee, we may redeem, upon 30 days’ advance notice, the units held by the unitholder or assignee at their current market price. To avoid any cancellation or forfeiture, our board of directors may require each unitholder or assignee to furnish information about his nationality, citizenship or related status. If a unitholder or assignee fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our board of directors determines after receipt of the information that the unitholder or assignee is not an eligible citizen, the unitholder or assignee may be treated as a non-citizen assignee. In addition to other limitations on the rights of an assignee who is not a substituted unitholder, a non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in kind upon our liquidation.

Indemnification

Under our limited liability company agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by law, any director or officer, or while serving as a director or officer, any person who is or was serving as a tax matters member or as a director, officer, tax matters member, employee, partner, manager, fiduciary or trustee of any or our affiliates from and against all losses, claims, damages or similar events. Additionally, we shall indemnify to the fullest extent permitted by law, any person who is or was an employee (other than an officer) or agent of our company from and against all losses, claims, damages or similar events.

Books and Reports

We are required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and financial reporting purposes, our fiscal year is the calendar year.

We will furnish or make available to record holders of units, within 120 days after the close of each fiscal year, an annual report containing audited financial statements and a report on those financial statements by our independent registered public accounting firm. Except for our fourth quarter, we will also furnish or make available summary financial information within 90 days after the close of each quarter.

We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of unitholders can be avoided. Our ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless of whether he supplies us with information.

Right to Inspect Our Books and Records

Our limited liability company agreement provides that a unitholder can, for a purpose reasonably related to his interest as a unitholder, upon reasonable demand and at his own expense, have furnished to him:


	•	a current list of the name and last known address of each unitholder;

	•	a copy of our tax returns;

	•	information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each unitholder and the date on which each became a unitholder;

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	•	copies of our limited liability company agreement, the certificate of formation of the company, any related amendments and powers of attorney under which they have been executed;

	•	information regarding the status of our business and financial condition; and

	•	any other information regarding our affairs as is just and reasonable.

Our board of directors may, and intends to, keep confidential from our unitholders information that it believes to be in the nature of trade secrets or other information, the disclosure of which our board of directors believes in good faith is not in our best interests, information that could damage our company or our business, or information that we are required by law or by agreements with a third party to keep confidential.

Registration Rights

Under our limited liability company agreement, we have agreed to register for resale under the Securities Act of 1933, as amended and applicable state securities laws any units proposed to be sold by the subsidiaries of Valero Energy or any of their affiliates if an exemption from the registration requirements is not otherwise available. We are obligated to pay all costs and expenses incidental to any such registration and offering on behalf of such subsidiaries or affiliates of Valero Energy, excluding underwriting discounts and commissions.

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MATERIAL PROVISIONS OF VALERO L.P.’s PARTNERSHIP AGREEMENT

The following is a summary of the material provisions of the Valero L.P. partnership agreement. Valero L.P.’s partnership agreement is included as an exhibit to the registration statement of which this prospectus constitutes a part.

Organization and Duration

Valero L.P. was organized in December 1999 and will continue until dissolved under the terms of its partnership agreement.

Purpose

Valero L.P.’s stated purposes under its partnership agreement are to serve as a partner of its operating partnership and to engage in any business activities that may be engaged in by its operating partnership or that are approved by the general partner, provided that the general partner must reasonably determine that such activity generates or enhances the operations of an activity that generates “qualifying income,” as this term is defined in Section 7704 of the Internal Revenue Code.

Valero L.P.’s general partner is authorized in general to perform all acts deemed necessary to carry out Valero L.P.’s purposes and to conduct Valero L.P.’s business.

Power of Attorney

Each limited partner, and each person who acquires a unit from a unitholder and executes and delivers a transfer application, grants to the general partner and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for the qualification, continuance or dissolution of Valero L.P. The power of attorney also grants the general partner and the liquidator the authority to amend the partnership agreement, and to make consents and waivers under the partnership agreement.

Capital Contributions

Valero L.P.’s unitholders are not obligated to make additional capital contributions, except as described below under “— Limited Liability.”

Limited Liability

Assuming that a limited partner does not participate in the control of Valero L.P.’s business within the meaning of the Delaware Revised Uniform Limited Partnership Act, which we refer to in this prospectus as the Delaware law, and that he otherwise acts in conformity with the provisions of Valero L.P.’s partnership agreement, his liability under the Delaware law will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to Valero L.P. for his common units plus his share of any undistributed profits and assets. If it were determined, however, that the right or exercise of the right by the Valero L.P. limited partners as a group


	•	to remove or replace the general partner;

	•	to approve some amendments to the partnership agreement; or

	•	to take other action under the partnership agreement;

constituted “participation in the control” of Valero L.P.’s business for the purposes of the Delaware law, then the limited partners could be held personally liable for Valero L.P.’s obligations under the laws of Delaware, to the same extent as the general partner. This liability would extend to persons who transact business with Valero L.P. who reasonably believe that the limited partner is a general partner. Neither Valero L.P.’s partnership agreement nor the Delaware law specifically provides for legal recourse against the general partner if a limited partner were to lose limited liability through any fault of the general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.

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Under the Delaware law, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware law provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware law provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware law shall be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware law, an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations of his assignor to make contributions to the partnership, except the assignee is not obligated for liabilities unknown to him at the time he became a limited partner and that could not be ascertained from the partnership agreement.

Valero L.P.’s operating subsidiaries conduct business or own assets in the United States, Canada, Mexico, the Netherland Antilles, the Netherlands and the United Kingdom. Maintenance of Valero L.P.’s limited liability as a limited partner or member, respectively, of its operating subsidiaries, may require compliance with legal requirements in the jurisdictions in which the operating subsidiary conducts business. Limitations on the liability of limited partners or members for the obligations of a limited partner or member have not been clearly established in many jurisdictions. If it were determined that Valero L.P. was, by virtue of Valero L.P.’s ownership interest in the operating subsidiaries or otherwise, conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace Valero L.P.’s general partner, to approve some amendments to the partnership agreement, or to take other action under the partnership agreement constituted “participation in the control” of Valero L.P.’s business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for Valero L.P.’s obligations under the law of that jurisdiction to the same extent as the general partner under the circumstances. Valero L.P. will operate in a manner that the general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.

Issuance of Additional Securities

Valero L.P.’s partnership agreement authorizes Valero L.P. to issue an unlimited number of additional limited partner interests and other equity securities for the consideration and on the terms and conditions established by the general partner in its sole discretion without the approval of any limited partners. During the subordination period, however, Valero L.P. may not issue equity securities ranking senior to the common units or in the aggregate of more than 4,462,161 additional common units or common units on a parity with the common units, in each case, without the approval of the holders of a majority of the outstanding common units (excluding those common units held by the general partner and its affiliates so long as the general partner and its affiliates own 10% or more of the outstanding common units) and subordinated units, voting as separate classes, except that Valero L.P. may issue an unlimited number of common units as follows:


	•	under employee benefit plans;

	•	upon conversion of the general partner interest and incentive distribution rights as a result of a withdrawal of the general partner;

	•	in the event of a combination or subdivision of common units; or

	•	to finance an acquisition or a capital improvement that would have resulted, on a pro forma basis, in an increase in adjusted operating surplus on a per unit basis for the preceding four-quarter period.

It is possible that Valero L.P. will fund acquisitions through the issuance of additional common units or other equity securities. Holders of any additional common units Valero L.P. issues will be entitled to share equally with the then-existing holders of common units in Valero L.P.’s distributions of available cash. In

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addition, the issuance of additional partnership interests may dilute the value of the interests of the then-existing holders of common units in Valero L.P.’s net assets.

After the subordination period, there will be no restriction under the partnership agreement on the ability of the general partner to issue common units or common units junior or senior to the common units.

In accordance with Delaware law and the provisions of the partnership agreement, Valero L.P. may also issue additional partnership securities that, in the sole discretion of the general partner, may have special voting rights to which the common units are not entitled.

Upon issuance of additional partnership securities, the general partner will be required to make additional capital contributions to the extent necessary to maintain its combined 2% general partner interest in Valero L.P. and Valero Logistics Operations, L.P. Moreover, the general partner will have the right, which it may from time to time assign in whole or in part to any of its affiliates, to purchase common units, subordinated units or other equity securities whenever, and on the same terms that Valero L.P. issues those securities to persons other than the general partner and its affiliates, to the extent necessary to maintain its percentage interest, including its interest represented by common units and subordinated units, that existed immediately prior to each issuance. The holders of common units will not have preemptive rights to acquire additional common units or other partnership interests.

Amendment of the Partnership Agreement


	*General*

Amendments to the partnership agreement may be proposed only by or with the consent of the general partner, which consent may be given or withheld in its sole discretion. In order to adopt a proposed amendment, other than the amendments discussed below, the general partner is required to seek written approval of the holders of the number of common units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by:


	•	during the subordination period, by a majority of the common units (excluding those common units held by the general partner and its affiliates so long as the general partner and its affiliates own 10% or more of the outstanding common units), and a majority of the subordinated units, voting as separate classes; and

	•	after the subordination period, by a majority of the common units.

We refer to the voting provision described above as a “unit majority.”


	*Prohibited Amendments*

No amendment may be made that would:


	•	enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected;

	•	enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by Valero L.P. to the general partner or any of its affiliates without the consent of the general partner, which may be given or withheld in its sole discretion;

	•	change the term of Valero L.P.;

	•	provide that Valero L.P. is not dissolved upon an election to dissolve Valero L.P. by the general partner that is approved by the holders of a majority of the outstanding common units and subordinated units, voting as separate classes; or

	•	give any person the right to dissolve Valero L.P. other than the general partner’s right to dissolve Valero L.P. with the approval of the holders of a majority of the outstanding common units and subordinated units, voting as separate classes.

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The provision of the partnership agreement preventing the amendments having the effects described in the five bullets above can be amended upon the approval of the holders of at least 90% of the outstanding common units voting together as a single class.


	*No Unitholder Approval*

The general partner may generally make amendments to the partnership agreement without the approval of any limited partner or assignee to reflect:


	•	a change in the name of Valero L.P., the location of the principal place of business of Valero L.P., the registered agent or the registered office of Valero L.P.;

	•	the admission, substitution, withdrawal or removal of partners in accordance with the partnership agreement;

	•	a change that, in the sole discretion of the general partner, is necessary or advisable to qualify or continue the qualification of Valero L.P. as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that neither Valero L.P. nor Valero Logistics Operations, L.P. will be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;

	•	an amendment that is necessary, in the opinion of counsel to Valero L.P., to prevent Valero L.P., the general partner, Valero GP, LLC, or any of the directors, officers, agents or trustees of Valero GP, LLC from in any manner being subjected to the provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset” regulations adopted under ERISA, whether or not substantially similar to plan asset regulations currently applied or proposed;

	•	subject to the limitations on the issuance of additional common units or other limited or general partner interests described above, an amendment that in the discretion of the general partner is necessary or advisable for the authorization of additional limited or general partner interests;

	•	any amendment expressly permitted in the partnership agreement to be made by the general partner acting alone;

	•	an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of the partnership agreement;

	•	any amendment that, in the discretion of the general partner, is necessary or advisable for the formation by Valero L.P. of, or its investment in, any corporation, partnership or other entity, as otherwise permitted by the partnership agreement;

	•	a change in the fiscal year or taxable year of Valero L.P. and related changes; and

	•	any other amendments substantially similar to any of the matters described above.

In addition, the general partner may make amendments to the partnership agreement without the approval of any limited partner or assignee if those amendments, in the discretion of the general partner:


	•	do not adversely affect the limited partners (or any particular class of limited partners) in any material respect;

	•	are necessary or advisable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;

	•	are necessary or advisable to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are or will be listed for trading, compliance with any of which the general partner deems to be in the best interests of Valero L.P. and the limited partners;

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	•	are necessary or advisable for any action taken by the general partner relating to splits or combinations of common units under the provisions of the partnership agreement; or

	•	are required to effect the intent expressed in this prospectus or the intent of the provisions of the partnership agreement or are otherwise contemplated by the partnership agreement.


	*Opinion of Counsel and Unitholder Approval*

The general partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners or result in Valero L.P. being treated as an entity for federal income tax purposes if one of the amendments described above under “— Amendment of the Partnership Agreement” should occur. No other amendments to the partnership agreement will become effective without the approval of holders of at least 90% of the common units unless Valero L.P. obtains an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any limited partner in Valero L.P. or cause Valero L.P. or its operating subsidiaries to be taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously taxed as such).

Any amendment that would have a material adverse effect on the rights or preferences of any type or class of outstanding common units in relation to other classes of common units will require the approval of at least a majority of the type or class of common units so affected. Any amendment that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of limited partners constituting not less than the voting requirement sought to be reduced.


	*Merger/ Consolidation*

A merger or consolidation of Valero L.P. requires the prior approval of Valero L.P.’s general partner. The general partner must also approve the merger agreement, which must include certain information as set forth in Valero L.P.’s partnership agreement. Once approved by the general partner, the merger agreement must be submitted to a vote of Valero L.P.’s limited partners, and the merger agreement will be approved upon receipt of the affirmative vote or consent of the holders of a unit majority (unless the affirmative vote of the holders of a greater percentage is required under the merger agreement or Delaware law).

Unit Majority. During the subordination period, a unit majority consists of at least a majority of the outstanding common units (excluding those common units held by the general partner or its affiliates if they own at least 10% of the common units), voting as a class, and at least a majority of the outstanding subordinated units, voting as a class. Upon the expiration of the subordination period, a unit majority will consist of at least a majority of the outstanding common units.


	*Disposal of Assets*

Except in connection with a dissolution and liquidation of the partnership or a duly approved merger, Valero L.P.’s general partner may not (a) sell, exchange or otherwise dispose of all or substantially all of Valero L.P.’s assets in a single transaction or a series of related transactions, or (b) approve on behalf of the partnership the sale, exchange or other disposition of all or substantially all of the assets of the operating partnership without the approval of the holders of a unit majority. However, the general partner may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the partnership or operating partnership without the approval of the unitholders. In addition, the general partner may sell any or all of the assets of the partnership or operating partnership in a forced sale pursuant to the foreclosure of, or other realization upon, any such encumbrance without the approval of the unitholders.

Termination and Dissolution

Valero L.P. will continue in existence as a limited partnership until terminated under its partnership agreement. Valero L.P. will dissolve upon:


	•	the election of the general partner to dissolve Valero L.P., if approved by the holders of common units representing a unit majority;

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	•	the sale, exchange or other disposition of all or substantially all of the assets and properties of Valero L.P.;

	•	the entry of a decree of judicial dissolution of Valero L.P.; or

	•	the withdrawal or removal of the general partner or any other event that results in its ceasing to be the general partner other than by reason of a transfer of its general partner interest in accordance with the partnership agreement or withdrawal or removal following approval and admission of a successor.

Upon a dissolution under the last clause above, the holders of common units representing a unit majority may also elect, within specific time limitations, to reconstitute Valero L.P. and continue its business on the same terms and conditions described in the partnership agreement by forming a new limited partnership on terms identical to those in the partnership agreement and having as general partner an entity approved by the holders of common units representing a unit majority, subject to receipt by Valero L.P. of an opinion of counsel to the effect that:


	•	the action would not result in the loss of limited liability of any limited partner; and

	•	neither Valero L.P., the reconstituted limited partnership, nor any operating subsidiary would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.

Liquidation and Distribution of Proceeds

Upon its dissolution, unless Valero L.P. is reconstituted and continued as a new limited partnership, the liquidator authorized to wind up Valero L.P.’s affairs will, acting with all of the powers of the general partner that the liquidator deems necessary or desirable in its judgment, liquidate Valero L.P.’s assets and apply the proceeds of the liquidation as provided in “Cash Distribution Policy of Valero L.P. — Distributions of Cash upon Liquidation.” The liquidator may defer liquidation or distribution of Valero L.P.’s assets for a reasonable period of time or distribute assets to partners in kind if it determines that a sale would be impractical or would cause undue loss to the partners.

Withdrawal or Removal of the General Partner

Except as described below, Valero L.P.’s general partner has agreed not to withdraw voluntarily as general partner of Valero L.P. or as the general partner of any operating subsidiary prior to March 31, 2011 without obtaining the approval of the holders of at least a majority of the outstanding common units, excluding common units held by the general partner and its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after March 31, 2011, Valero L.P.’s general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of the partnership agreement. Notwithstanding the information above, Valero L.P.’s general partner may withdraw without unitholder approval upon 90 days’ notice to the limited partners if at least 50% of the outstanding common units are held or controlled by one person and its affiliates other than the general partner and its affiliates. In addition, the partnership agreement permits the general partner in some instances to sell or otherwise transfer all of its general partner interest in Valero L.P. without the approval of the unitholders. Please read “— Transfer of General Partner Interests.”

Upon the withdrawal of the general partner under any circumstances, other than as a result of a transfer of all or a part of its general partner interest in Valero L.P., the holders of common units representing a unit majority may select a successor to that withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, Valero L.P. will be dissolved, wound up and liquidated, unless within 180 days after that withdrawal, the holders of a majority of the outstanding common units and subordinated units, voting as separate classes, agree in writing to continue the business of Valero L.P. and to appoint a successor general partner. Please read “— Termination and Dissolution.”

If the general partner withdraws under circumstances where such withdrawal does not violate the partnership agreement, and a successor general partner is elected under the terms of partnership agreement, the departing

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general partner will have the option to require the successor general partner to purchase its general partner interests and incentive distribution rights for cash. If the general partner withdraws under circumstances where such withdrawal does violate the partnership agreement, and a successor general partner is elected, the successor general partner will have the option to purchase the general partner interests and incentive distribution rights of the departing general partner. If such general partner interests and incentive distribution rights are not purchased by the successor general partner, they will be converted into common units.

The general partner may not be removed unless that removal is approved by the vote of the holders of not less than a majority of the outstanding common units, and Valero L.P. receives an opinion of counsel regarding limited liability and tax matters. Any removal of the general partner is also subject to the approval of a successor general partner by the vote of the holders of a majority of the outstanding common units and subordinated units, voting as separate classes.

If the general partner is removed under circumstances where cause does not exist, and a successor general partner is elected under the partnership agreement, the departing general partner will have the option to require the successor general partner to purchase its general partner interests and incentive distribution rights for cash. If the general partner is removed under circumstances where cause does exist, and a successor general partner is elected, the successor general partner will have the option to purchase the general partner interests and incentive distribution rights of the departing general partner. If the general partner interests and incentive distribution rights are not purchased by the successor general partner, they will be converted into common units.

“Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud, gross negligence, or willful or wanton misconduct in its capacity as the general partner.

In addition, if the general partner is removed under circumstances where cause does not exist, and units held by the general partner and its affiliates are not voted in favor of such removal, the subordination period will end and all subordinated units will convert into common units and all cumulative arrearages on the common units will be extinguished.

Withdrawal or removal of the general partner of Valero L.P. also constitutes withdrawal or removal of the general partner of Valero Logistics Operations, L.P.

In addition, Valero L.P. will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general partner for the benefit of Valero L.P.

Transfer of General Partner Interests

Prior to March 31, 2011, Valero L.P.’s general partner may not transfer all or any part of its general partner interest unless such transfer (a) has been approved by the prior written consent or vote of the holders of at least a majority of the outstanding common units (excluding any common units held by the general partner or its affiliates) or (b) is of all, but not less than all, of its general partner interest to (i) an affiliate of the general partner or (ii) another person in connection with the merger or consolidation of the general partner with or into such person or the transfer by the general partner of all or substantially all of its assets to such person.

On or after March 31, 2011, Valero L.P.’s general partner may transfer all or any part of its general partner interest in Valero L.P. without unitholder approval.

No transfer by Valero L.P.’s general partner of all or any part of its general partner interest is permitted unless (a) the transferee agrees to assume the rights and duties of the general partner and be bound by the partnership agreement and (b) the partnership receives an opinion of counsel regarding limited liability and tax matters.

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Change of Management Provisions

Valero L.P.’s partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove the general partner or otherwise change management, including the following:


	•	If the general partner is removed without cause, and the units held by the general partner and its affiliates are not voted in favor of that removal, the subordination period will end, all remaining subordinated units will automatically convert into common units and will share distributions with the existing common units pro rata, existing arrearages on the common units will be extinguished and the common units will no longer be entitled to arrearages if Valero L.P. fails to pay the minimum quarterly distribution in any quarter.

	•	Any units held by a person that owns 20% or more of any class of units then outstanding, other than the general partner and its affiliates, cannot be voted on any matter.

	•	The partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about the partnership’s operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Limited Call Right

If at any time Valero L.P.’s general partner and its affiliates own 80% or more of the issued and outstanding limited partner interests of any class, the general partner will have the right (which right it may assign and transfer to the partnership or any affiliate of the general partner) to purchase all, but not less than all, of the outstanding limited partner interests of that class that are held by non-affiliated persons. The record date for determining ownership of the limited partner interests to be purchased by the general partner will be selected by the general partner, and the general partner must mail notice of its election to purchase the interests to the holders of such interests at least 10 but not more than 60 days prior to the purchase date. The purchase price in the event of a purchase under these provisions would be the greater of (a) the current market price (as defined in the partnership agreement) of the limited partner interests of that class as of the date three days prior to the date the general partner mails notice of its election to purchase the interests and (b) the highest price paid by the general partner or any of its affiliates for any limited partner interest of that class purchased within the 90 days preceding the date the general partner mails notice of its election to purchase the interests.

Meetings; Voting

Special meetings of Valero L.P.’s limited partners may be called by the general partner or by limited partners owning 20% or more of the outstanding limited partner interests of the class or classes for which a meeting is proposed. The general partner must send notice of any meeting to the limited partners, and a meeting may not be held less than 10 days nor more than 60 days after the mailing of the notice. For the purpose of determining the limited partners entitled to notice of, and to vote at, a meeting of the limited partners (or to give written approvals without a meeting as described below), the general partner will set a record date, which may not be less than 10 nor more than 60 days before the date of the meeting (or the date by which the limited partners are requested to submit written approvals). Only record holders of limited partner interests on such record date are entitled to notice of, and to vote at, a meeting of the limited partners (or to vote on any action to be taken without a meeting).

If authorized by the general partner, any action that may be taken at a meeting of limited partners may be taken without a meeting by obtaining approval in writing of the necessary percentage of the limited partners that would be required to authorize or take the action at a meeting of the limited partners.

Each record holder of a limited partner interest has a vote according to his percentage interest in the partnership. Limited partner interests held for a person’s account by another person (such as a broker, dealer, or bank), in whose name such limited partner interests are registered, will be voted by such other person in favor of, and at the direction of, the beneficial owner unless the arrangement between such persons provides otherwise. Representation in person or by proxy of a majority of the outstanding limited partner interests of the class or classes for which a meeting has been called will constitute a quorum at such meeting (unless a particular action

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by the limited partners requires approval by a greater percentage of limited partner interests, in which case the quorum shall be such greater percentage). At any meeting at which a quorum is present, the act of the limited partners holding a majority of the outstanding limited partner interests entitled to vote at the meeting will be deemed to be the act of all the limited partners, unless a greater or different percentage is required under the partnership agreement, in which case the act of the limited partners holding such greater or different percentage of the outstanding limited partner interests will be required.

Valero L.P. unitholders have no right to elect Valero L.P.’s general partner on an annual or other continuing basis. Valero L.P.’s partnership agreement explicitly authorizes the general partner to issue limited partner interests having special or superior voting rights without the consent of the limited partners.

Transfer of Units and Status as a Limited Partner or Assignee

No transfer of Valero L.P. limited partner interests will be recognized by the partnership unless certificate(s) representing those limited partnership interests are surrendered and such certificates are accompanied by a duly executed transfer application. Each transferee of Valero L.P. limited partner interests must execute a transfer application whereby the transferee, among other things, requests admission as a substituted limited partner, makes certain representations, executes and agrees to comply with and be bound by the partnership agreement, and gives the consents and approvals and makes the waivers contained in the partnership agreement. Transferees may hold common units in nominee accounts.

Once a transferee has executed and delivered a transfer application in accordance with the partnership agreement, the transferee becomes an assignee. An assignee becomes a limited partner upon the consent of the general partner and the recordation of the name of the assignee on Valero L.P.’s books and records. Such consent may be withheld in the sole discretion of the general partner. An assignee, pending its admission as a substituted limited partner, is entitled to an interest in Valero L.P. equivalent to that of a limited partner with respect to the right to share in allocations and distributions, including liquidating distributions. Valero L.P.’s general partner will vote and exercise, at the written direction of the assignee, other powers attributable to limited partner interests owned by an assignee who has not become a substituted limited partner.

Transferees who do not execute and deliver transfer applications will be treated neither as assignees nor as record holders of limited partner interests and will not receive distributions, federal income tax allocations or reports furnished to record holders of limited partner interests. The only right such transferees will have is the right to admission as a substituted limited partner upon execution of a transfer application, subject to the approval of the general partner. A nominee or broker who has executed a transfer application with respect to limited partner interests held in street name or nominee accounts will receive distributions and reports pertaining to such limited partner interests.

Non-Citizen Assignees; Redemption

If Valero L.P. is or becomes subject to federal, state or local laws or regulations that, in the reasonable determination of the general partner, create a substantial risk of cancellation or forfeiture of any property that Valero L.P. has an interest in because of the nationality, citizenship or other related status of any limited partner or assignee, Valero L.P. may redeem the common units held by the limited partner or assignee at their current market price. In order to avoid any cancellation or forfeiture, the general partner may require each limited partner or assignee to furnish information about his nationality, citizenship or related status. If a limited partner or assignee fails to furnish information about this nationality, citizenship or other related status within 30 days after a request for the information or the general partner determines after receipt of the information that the limited partner or assignee is not an eligible citizen, the limited partner or assignee may be treated as a non-citizen assignee. In addition to other limitations on the rights of an assignee who is not a substituted limited partner, a non-citizen assignee does not have the right to direct the voting of his common units and may not receive distributions in kind upon Valero L.P.’s liquidation.

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Indemnification

Under the partnership agreement, in most circumstances, Valero L.P. will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:


	•	the general partner;

	•	any departing general partner;

	•	any person who is or was an affiliate of the general partner or any departing general partner;

	•	any person who is or was a partner, officer, director, employee, agent, or trustee of the general partner, Valero GP, LLC, or departing general partner or any affiliate of the general partner, Valero GP, LLC, or departing general partner; or

	•	any person who is or was serving at the request of the general partner or departing general partner or any affiliate of the general partner or departing general partner as an officer, director, employee, member, partner, agent, or trustee of another person.

Any indemnification under these provisions will only be out of Valero L.P.’s assets. Unless it otherwise agrees in its sole discretion, the general partner shall not be personally liable for any of Valero L.P.’s indemnification obligations, nor have any obligation to contribute or loan funds or assets to Valero L.P. to enable Valero L.P. to effectuate indemnification. Valero L.P. is authorized to purchase insurance against liabilities asserted against and expenses incurred by persons for its activities, regardless of whether Valero L.P. would have the power to indemnify the person against liabilities under the partnership agreement.

Books and Reports

The general partner is required to keep appropriate books of Valero L.P.’s business at Valero L.P.’s principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and financial reporting purposes, Valero L.P.’s fiscal year is the calendar year.

Valero L.P. will furnish or make available to record holders of common units, within 120 days after the close of each fiscal year, an annual report containing audited financial statements and a report on those financial statements by its registered public accounting firm. Except for its fourth quarter, Valero L.P. will also furnish or make available summary financial information within 90 days after the close of each quarter.

Valero L.P. will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Valero L.P.’s ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying it with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless of whether he supplies Valero L.P. with information.

Right to Inspect Valero L.P.’s Books and Records

The partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon reasonable demand and at his own expense, have furnished to him:


	•	a current list of the name and last known address of each partner;

	•	a copy of Valero L.P.’s tax returns;

	•	information as to the amount of cash, and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each partner and the date on which each became a partner;

	•	copies of the partnership agreement, the certificate of limited partnership of the partnership, related amendments and powers of attorney under which they have been executed;

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	•	information regarding the status of Valero L.P.’s business and financial condition; and

	•	any other information regarding Valero L.P.’s affairs as is just and reasonable.

The general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of which the general partner believes in good faith is not in Valero L.P.’s best interests or which Valero L.P. is required by law or by agreements with third parties to keep confidential.

Registration Rights

Under the partnership agreement, Valero L.P. has agreed to register for resale under the Securities Act of 1933, as amended, and applicable state securities laws any common units, subordinated units or other partnership securities proposed to be sold by the general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. These registration rights continue for two years following any withdrawal or removal of Riverwalk Logistics, L.P. as the general partner of Valero L.P. Valero L.P. is obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions.

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CASH DISTRIBUTION POLICY OF VALERO L.P.

Distributions of Available Cash


	*General*

Within 45 days after the end of each quarter, Valero L.P. will distribute all of its available cash to its partners of record on the applicable record date.


	*Definition of Available Cash*

Available cash is defined in Valero L.P.’s partnership agreement and generally means, with respect to any fiscal quarter, the sum of all cash and cash equivalents on hand at the end of such quarter, plus any working capital borrowings made subsequent to the end of such quarter, less the amount of any cash reserves that Valero L.P.’s general partner deems necessary or appropriate to:


	•	provide for the proper conduct of Valero L.P.’s business, including reserves for future capital expenditures and anticipated credit needs;

	•	comply with applicable law or any debt instrument or other agreement or obligation; or

	•	provide funds for distributions with respect to any one or more of the next four fiscal quarters.


	*Intent to Distribute the Minimum Quarterly Distribution*

Valero L.P.’s policy is, to the extent it has sufficient available cash from operating surplus, as defined below, to distribute to each common unit and subordinated unit at least the minimum quarterly distribution of $0.60 per quarter or $2.40 per year. However, there is no guarantee that Valero L.P. will pay the minimum quarterly distribution on the common units in any quarter and Valero L.P. may be prohibited from making any distributions to unitholders if it would cause an event of default under the terms of Valero L.P.’s indebtedness.

Operating Surplus and Capital Surplus


	*General*

Cash distributions are characterized as distributions from either operating surplus or capital surplus. Valero L.P. distributes available cash from operating surplus differently than available cash from capital surplus.


	*Definition of Operating Surplus*

Operating surplus is defined in Valero L.P.’s partnership agreement and generally means, with respect to any period ending prior to the dissolution of Valero L.P.:


	•	$10 million plus all cash and cash equivalents on hand as of the close of business on April 16, 2001, the closing date of its initial public offering of its common units;

	•	plus all cash receipts since April 16, 2001, other than from interim capital transactions such as borrowings that are not working capital borrowings, sales of equity and debt securities and sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirements or replacements of assets;

	•	plus all cash receipts resulting from working capital borrowings after the end of such period but on or before the date of determination of the operating surplus for such period;

	•	less all operating expenditures since April 16, 2001; and

	•	less the amount of cash reserves that Valero L.P.’s general partner deems necessary or advisable to provide funds for future operating expenditures.

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	*Definition of Capital Surplus*

Capital surplus of Valero L.P. will generally be generated only by:


	•	borrowings other than working capital borrowings;

	•	sales of debt and equity securities; and

	•	sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or as part of normal retirements or replacements of assets.


	*Characterization of Cash Distributions*

To avoid the difficulty of trying to determine whether the available cash that Valero L.P. distributes is from operating surplus or from capital surplus, all available cash that Valero L.P. distributes on any date from any source is treated as a distribution of cash from operating surplus until the sum of all available cash theretofore distributed equals the operating surplus calculated as of the end of the fiscal quarter with respect to which such distribution is being made. Any remaining amounts of available cash distributed on such date will be treated as cash from capital surplus and will be distributed accordingly.

If at any time (i) a hypothetical holder of a common unit acquired on April 16, 2001 has received distributions of available cash from capital surplus in an aggregate amount equal to the $24.50 initial public offering price of the common units, and (ii) each common unit then outstanding has received an amount equal to any cumulative arrearage existing with respect to the common units, then the distinction between operating surplus and capital surplus will cease, and all subsequent distributions of available cash will be treated as distributions of cash from operating surplus and will be distributed accordingly. To date there have been no distributions from capital surplus, and Valero L.P. does not anticipate that there will be significant distributions from capital surplus in the future.

Subordination Period


	*General*

Valero L.P. is currently in its “subordination period,” which generally will not end prior to March 31, 2006. During the subordination period, the common units have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.60 per quarter, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Affiliates of Valero Energy currently hold all of the 9,599,322 outstanding subordinated units.


	*Definition of Subordination Period*

The subordination period is defined in Valero L.P.’s partnership agreement and will end on the first to occur of the following:


	•	the first day of any fiscal quarter beginning after March 31, 2006 with respect to which (a)(i) distributions of available cash from operating surplus on each of the outstanding common and subordinated units for each of the three previous, consecutive, non-overlapping four-quarter periods equaled or exceeded the sum of the minimum quarterly distribution on all outstanding common and subordinated units during such periods and (ii) the adjusted operating surplus generated during each of the three previous, consecutive, non-overlapping four-quarter periods equaled or exceeded the sum of the minimum quarterly distribution on all outstanding common and subordinated units on a fully diluted basis plus the

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related distribution to the general partner, and (b) there are no cumulative arrearages on the common units; and

• the date on which the general partner is removed as general partner of the partnership other than for cause and units held by the general partner and its affiliates are not voted in favor of such removal. Upon such removal, existing arrearages on the common units will be extinguished and the common units will no longer be entitled to arrearages if Valero L.P. fails to pay the minimum quarterly distribution in any quarter.

We expect the subordination period to end and the subordinated units to convert to common units on a one-for-one basis, during the second quarter of 2006.


	*Definition of Adjusted Operating Surplus*

Adjusted operating surplus for any period generally means operating surplus generated during that period:


	•	less any net increase in working capital borrowings during that period;

	•	less any net reduction in cash reserves for operating expenditures during that period not relating to an operating expenditure made during that period;

	•	plus any net decrease in working capital borrowings during that period; and

	•	plus any net increase in cash reserves for operating expenditures during that period required by any debt agreement for the repayment of principal, interest or premium.

Generally speaking, adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in Valero L.P.’s working capital borrowings and net drawdowns of reserves of cash generated in prior periods.


	*Effect of Expiration of the Subordination Period*

Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove Valero L.P.’s general partner other than for cause and common units held by the general partner and its affiliates are not voted in favor of that removal, the subordination period will end, any then-existing arrearages on the common units will terminate, and each subordinated unit will immediately convert into one common unit.

Distributions of Available Cash from Operating Surplus


	*During Subordination Period*

Currently, Valero L.P. makes distributions of available cash from operating surplus for any quarter during the subordination period as follows:


	•	First, 98% to the common unitholders, pro rata, and 2% to the general partner, until Valero L.P. has distributed for each outstanding common unit an amount equal to the minimum quarterly distribution of $0.60 for that quarter;

	•	Second, 98% to the common unitholders, pro rata, and 2% to the general partner, until Valero L.P. has distributed for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

	•	Third, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until Valero L.P. has distributed for each outstanding subordinated unit an amount equal to the minimum quarterly distribution of $0.60 for that quarter;

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	•	Fourth, 90% to all unitholders, pro rata, 8% to the holders of the incentive distribution rights, and 2% to the general partner, until Valero L.P. has distributed with respect to each unit then outstanding an amount equal to the excess of the first target distribution ($0.66 per unit) over the minimum quarterly distribution; and

	•	Thereafter, 75% to all unitholders, pro rata, 23% to the holders of the incentive distribution rights, and 2% to the general partner.

If the minimum quarterly distribution and the first target distribution have been reduced to zero under the terms of the partnership agreement, then any distribution of available cash from operating surplus will be made solely in accordance with the final bullet point above.


	*After Subordination Period*

For any quarter after the subordination period, Valero L.P. will make distributions of available cash from operating surplus as follows:


	•	First, 98% to the unitholders, pro rata, and 2% to the general partner, until Valero L.P. has distributed for each outstanding unit an amount equal to the minimum quarterly distribution of $0.60 for that quarter;

	•	Second, 90% to all unitholders, pro rata, 8% to the holders of the incentive distribution rights, and 2% to the general partner, until Valero L.P. has distributed with respect to each unit then outstanding an amount equal to the excess of the first target distribution ($0.66 per unit) over the minimum quarterly distribution; and

	•	Thereafter, 75% to all unitholders, pro rata, 23% to the holders of the incentive distribution rights, and 2% to the general partner.

The minimum quarterly distribution and the first target distribution are subject to adjustment as described below in “— Adjustment of the Minimum Quarterly Distribution and Target Distribution Levels.”

Distributions of Available Cash from Capital Surplus


	*How Distributions from Capital Surplus are Made*

Valero L.P. makes distributions of available cash from capital surplus in the following manner:


	•	First, 98% to all unitholders, pro rata, and 2% to the general partner, until a hypothetical holder of a common unit acquired on April 16, 2001 has received an aggregate amount equal to the $24.50 initial public offering price of the common units;

	•	Second, 98% to the common unitholders, pro rata, and 2% to the general partner, until there has been distributed with respect to each common unit then outstanding an amount equal to any cumulative arrearage existing with respect to the common units; and

	•	Thereafter, all distributions of available cash from capital surplus will be distributed as if they were from operating surplus.


	*Effect of a Distribution from Capital Surplus*

Valero L.P.’s partnership agreement treats a distribution of cash from capital surplus on a common unit as the repayment of the initial public offering price of such common unit, which is a return of capital. The initial public offering price less any distributions of cash from capital surplus per common unit is referred to as “unrecovered initial unit price” or “unrecovered capital.” Each time a distribution of cash from capital surplus is made on a common unit, the minimum quarterly distribution and the first target distribution for all units will be reduced in the same proportion as the corresponding reduction in the unrecovered capital. Because

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distributions of cash from capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier for Valero L.P.’s general partner to receive incentive distributions. However, any distribution by Valero L.P. of capital surplus before the unrecovered capital is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

If at any time, Valero L.P. makes a distribution of cash from capital surplus in an amount equal to the then current unrecovered capital, the minimum quarterly distribution and the first target distribution will be reduced to zero. As a result, all future distributions will be made from operating surplus, with 75% being paid to all unitholders, pro rata, 23% to the general partner as the holder of incentive distribution rights, pro rata, and 2% to the general partner.

Incentive Distribution Rights

Incentive distribution rights are non-voting limited partner interests that were issued to Valero L.P.’s general partner in connection with the transfer of its general partnership interest in the operating partnership to Valero L.P. Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution has been achieved. The general partner as the holder of incentive distribution rights is paid in the manner described in “— Distributions of Available Cash from Operating Surplus” above.

Prior to March 31, 2011, the general partner may not transfer (other than to affiliates, in a merger or the sale of all assets) the incentive distribution rights without the approval of the majority of the common units (excluding the general partner’s common units).

Adjustment of the Minimum Quarterly Distribution and Target Distribution Levels

Valero L.P.’s minimum quarterly distribution is $0.60 per unit, subject to adjustment. Valero L.P.’s first target distribution is $0.66 per unit, subject to adjustment. Valero L.P. has no other target distribution levels.

In addition to reductions of the minimum quarterly distribution and first target distribution level made upon a distribution of available cash from capital surplus, as described above, if Valero L.P. distributes units to its unitholders, combines its units into fewer units or subdivides its units into a greater number of units, Valero L.P. will proportionately adjust:


	•	the minimum quarterly distribution;

	•	the first target distribution level;

	•	any common unit arrearage;

	•	any cumulative common unit arrearage; and

	•	the unrecovered capital.

For example, in the event of a two-for-one split of the common units (assuming no prior adjustments), the minimum quarterly distribution, the first target distribution level, any common unit arrearage, any cumulative common unit arrearage and the unrecovered capital of the common units would each be reduced to 50% of its initial level.

In addition, if legislation is enacted or if existing law is modified or interpreted in a manner that causes Valero L.P. and/or the operating partnership to become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, then Valero L.P. will reduce the then-applicable minimum quarterly distribution and the first target distribution level by multiplying the same by one minus the sum of (a) the highest marginal federal corporate (or other) income tax rate that could apply plus (b) any increase in the effective overall state and local income tax rates. For example, if Valero L.P. became subject to a maximum effective federal, state and local income tax rate of 35%, then the minimum quarterly distribution and the first target distribution level would each be reduced to 65% of their previous levels.

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Distributions of Cash upon Liquidation

If Valero L.P. dissolves in accordance with its partnership agreement, it will sell or otherwise dispose of its assets in a process called a liquidation, and the partner’s capital account balances will be adjusted to reflect any resulting gain or loss. Valero L.P. will first apply the proceeds of liquidation to the payment of its creditors (including partners) in the order of priority provided in the partnership agreement and by law and, thereafter, it will distribute any remaining proceeds to its partners in accordance with, and to the extent of, the positive balances in their respective capital accounts, as adjusted. The manner of adjustment of capital accounts is set forth in Valero L.P.’s partnership agreement.


	*Manner of Adjustments for Gain*

Upon its liquidation, Valero L.P. will allocate any net gain (or unrealized gain attributable to assets distributed in kind to the partners) in the following manner:


	•	first, to each partner having a negative balance in its capital account, in the proportion that such negative balance bears to the total negative balances of all partners, until each partner has been allocated net gain equal to its negative balance;

	•	second, 98% to the common unitholders, pro rata, and 2% to the general partner, until the capital account for each common unit then outstanding is equal to the sum of:


	•	the unrecovered capital with respect to such common unit;

	•	the amount of any unpaid minimum quarterly distribution for the quarter during which the liquidation occurs; and

	•	the amount of any cumulative arrearage existing with respect to the common units;


	•	third, if prior to the expiration of the subordination period, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until the capital account for each subordinated unit then outstanding is equal to the sum of:


	•	the unrecovered capital with respect to such subordinated unit; and

	•	the amount of any unpaid minimum quarterly distribution for the quarter during which the liquidation occurs;


	•	fourth, 90% to all unitholders, pro rata, 8% to the holders of the incentive distribution rights, pro rata, and 2% to the general partner, until the capital account for each common unit then outstanding is equal to the sum of:


	•	the unrecovered capital with respect to each common unit;

	•	the amount of any unpaid minimum quarterly distribution for the quarter during which the liquidation occurs;

	•	the amount of any cumulative arrearage existing with respect to the common units; and

	•	the excess of (a) the first target distribution less the minimum quarterly distribution for each quarter of the partnership’s existence, over (b) the cumulative per unit amount of any distributions of available cash from operating surplus that were distributed 90% to all unitholders, pro rata, 8% to the holders of incentive distribution rights, pro rata, and 2% to the general partner; and


	•	thereafter, 75% to all unitholders, pro rata, 23% to the holders of incentive distribution rights, pro rata, and 2% to the general partner.

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	*Manner of Adjustments for Losses*

Upon its liquidation, Valero L.P. will allocate any loss in the following manner:


	•	first, if prior to the conversion of the last subordinated unit, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until the capital account for each subordinated unit has been reduced to zero;

	•	second, 98% to the common unitholders, pro rata, and 2% to the general partner, until the capital account for each common unit has been reduced to zero; and

	•	thereafter, 100% to the general partner.


	*Adjustments to Capital Accounts*

In addition, interim adjustments to capital accounts will be made at the time Valero L.P. issues additional partnership interests or makes distributions of property. Such adjustments will be based on the fair market value of the partnership interests or the property distributed and any gain or loss resulting therefrom will be allocated to the partners in the same manner as gain or loss is allocated upon liquidation. In the event that positive interim adjustments are made to the capital accounts, any subsequent negative adjustments to the capital accounts resulting from the issuance of additional partnership interests in Valero L.P., distributions of property by Valero L.P., or upon Valero L.P.’s liquidation, will be allocated in a manner which results, to the extent possible, in the capital account balances of the general partner equaling the amount that would have been the general partner’s capital account balances if no prior positive adjustments to the capital accounts had been made.

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UNITS ELIGIBLE FOR FUTURE SALE

After the sale of the units offered by this prospectus, subsidiaries of Valero Energy will hold an aggregate of 28 million of our units, representing approximately 63% of our outstanding units. The sale of these units could have an adverse impact on the price of the units or on any trading market that may develop.

The units sold in this offering will generally be freely transferable without restriction or further registration under the Securities Act, except that any units held by an “affiliate” of ours may not be resold publicly except in compliance with the registration requirements of the Securities Act or under an exemption under Rule 144 or otherwise. Rule 144 permits securities acquired by an affiliate of the issuer to be sold into the market in an amount that does not exceed, during any three-month period, the greater of:


	•	1% of the total number of the securities outstanding; or

	•	the average weekly reported trading volume of the units for the four calendar weeks prior to the sale.

Sales under Rule 144 are also subject to specific manner of sale provisions, holding period requirements, notice requirements, and the availability of current public information about us. A person who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned his units for at least two years, would be entitled to sell units under Rule 144 without regard to the current public information requirements, volume limitations, manner of sale provisions, and notice requirements of Rule 144.

Our limited liability company agreement provides that we may issue an unlimited number of limited liability company interests of any type without a vote of the unitholders. Our limited liability company agreement does not restrict our ability to issue equity securities ranking junior to the units at any time. Any issuance of additional units or other equity securities would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect the cash distributions to and market price of, units then outstanding. Please read “Description of our Limited Liability Company Agreement — Issuance of Additional Securities.”

Under the limited liability company agreement, subsidiaries of Valero Energy have the right to cause us to register under the Securities Act and applicable state securities laws the offer and sale of any units that they hold. Subject to the terms and conditions of the limited liability company agreement, these registration rights allow such subsidiaries of Valero Energy or their assignees holding any units to require registration of any of these units and to include any of these units in a registration by us of other units, including units offered by us or by any unitholder. These subsidiaries of Valero Energy will continue to have these registration rights for . In connection with any registration of this kind, we will indemnify each unitholder participating in the registration and its officers, directors, and controlling persons from and against any liabilities under the Securities Act or any applicable state securities laws arising from the registration statement or prospectus. We will bear all costs and expenses incidental to any registration, excluding any underwriting discounts and commissions. Except as described below, such subsidiaries of Valero Energy may sell their units in private transactions at any time, subject to compliance with applicable laws.

We and our principal unitholders have agreed not to sell any units for a period of 180 days from the date of this prospectus. Please read “Underwriting” for a description of these lock-up provisions.

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MATERIAL TAX CONSEQUENCES

This section is a discussion of the material tax considerations that may be relevant to prospective unitholders who are individual citizens or residents of the United States and, unless otherwise noted in the following discussion, is the opinion of Andrews Kurth LLP, tax counsel to us, insofar as it relates to matters of United States federal income tax law and legal conclusions with respect to those matters. This section is based upon current provisions of the Internal Revenue Code, existing and proposed regulations and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “us” or “we” are references to Valero GP Holdings.

The following discussion does not comment on all federal income tax matters affecting us or the unitholders. Moreover, the discussion focuses on unitholders who are individual citizens or residents of the United States and has only limited application to corporations, estates, trusts, nonresident aliens or other unitholders subject to specialized tax treatment, such as tax-exempt institutions, foreign persons, individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds. Accordingly, we urge each prospective unitholder to consult, and depend on, his own tax advisor in analyzing the federal, state, local and foreign tax consequences particular to him of the ownership or disposition of units.

No ruling has been or will be requested from the IRS regarding any matter affecting us or prospective unitholders. Instead, we will rely on opinions of Andrews Kurth LLP. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made here may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for our units and the prices at which our units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders. Furthermore, the tax treatment of us, or of an investment in us, may be significantly modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.

All statements as to matters of law and legal conclusions, but not as to factual matters, contained in this section, unless otherwise noted, are the opinion of Andrews Kurth LLP and are based on the accuracy of the representations made by us.

For the reasons described below, Andrews Kurth LLP has not rendered an opinion with respect to the following specific federal income tax issues:


	(1)	the treatment of a unitholder whose units are loaned to a short seller to cover a short sale of units (please read “— Tax Consequences of Unit Ownership — Treatment of Short Sales”);

	(2)	whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read “— Disposition of Units — Allocations Between Transferors and Transferees”); and

	(3)	whether our method for depreciating Section 743 adjustments is sustainable in certain cases (please read “— Tax Consequences of Unit Ownership — Section 754 Election”).

Partnership Status

Except as discussed in the following paragraph, a limited liability company that has more than one member and that has not elected to be treated as a corporation is treated as a partnership for federal income tax purposes and, therefore, is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, even if no cash distributions are made to him. Distributions by a partnership to a partner are generally not taxable unless the amount of cash distributed to him is in excess of the partner’s adjusted basis in his partnership interest.

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Section 7704 of the Internal Revenue Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,” exists with respect to publicly traded partnerships of which 90% or more of the gross income for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation and marketing of any mineral or natural resource, including our allocable share of such income from Valero L.P. Other types of qualifying income include interest other than from a financial business, dividends, gains from the sale of real property and gains from the sale or other disposition of assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than % of our current income is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by us and the general partner and a review of the applicable legal authorities, Andrews Kurth LLP is of the opinion that at least 90% of our current gross income constitutes qualifying income.

No ruling has been or will be sought from the IRS and the IRS has made no determination as to our status for federal income tax purposes or whether our operations generate “qualifying income” under Section 7704 of the Internal Revenue Code. Moreover, no ruling has been or will be sought from the IRS and the IRS has made no determination as to Valero L.P.’s status for federal income tax purposes or whether its operations generate “qualifying income” under Section 7704 of the Internal Revenue Code. Instead, we will rely on the opinion of Andrews Kurth LLP that, based upon the Internal Revenue Code, its regulations, published revenue rulings and court decisions and the representations described below, we will be treated as a partnership for federal income tax purposes.

In rendering its opinion, Andrews Kurth LLP has relied on factual representations made by us and the general partner of Valero L.P. The representations made by us and the general partner of Valero L.P. upon which Andrews Kurth LLP has relied are:


	•	Neither we, nor Valero L.P., have elected nor will elect to be treated as a corporation; and

	•	For each taxable year, more than 90% of our gross income will be income that Andrews Kurth LLP has opined or will opine is “qualifying income” within the meaning of Section 7704(d) of the Internal Revenue Code.

If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery, we will be treated as if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in us. This contribution and liquidation should be tax-free to unitholders and us so long as we, at that time, do not have liabilities in excess of the tax basis of our assets. Thereafter, we would be treated as a corporation for federal income tax purposes.

If we were taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to the unitholders, and our net income would be taxed to us at corporate rates. Moreover, if Valero L.P. were taxable as a corporation in any given year, our share of Valero L.P.’s items of income, gain, loss and deduction would not be passed through to us, and Valero L.P. would pay tax on its income at corporate rates. In addition, any distribution made to a unitholder would be treated as either taxable dividend income, to the extent of our current or accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholder’s tax basis in his units, or taxable capital gain, after the unitholder’s tax basis in his units is reduced to zero. Accordingly, taxation of either us or Valero L.P. as a corporation would result in a material reduction in a unitholder’s cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.

The discussion below is based on Andrews Kurth LLP’s opinion that we and Valero L.P. will be classified as a partnership for federal income tax purposes.

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Limited Partner Status

Unitholders who have become members of Valero GP Holdings will be treated as partners of Valero GP Holdings for federal income tax purposes. Also, assignees who have executed and delivered transfer applications, and are awaiting admission as members, and unitholders whose units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their units will be treated as partners of Valero GP Holdings for federal income tax purposes.

Because there is no direct authority addressing assignees of units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, Andrews Kurth LLP’s opinion does not extend to these persons. Furthermore, a purchaser or other transferee of units who does not execute and deliver a transfer application may not receive some federal income tax information or reports furnished to record holders of units unless the units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those units.

A beneficial owner of units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read “— Tax Consequences of Unit Ownership — Treatment of Short Sales.”

Income, gains, deductions or losses would not appear to be reportable by a unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore be fully taxable as ordinary income. These holders are urged to consult their own tax advisors with respect to their status as partners in us for federal income tax purposes.

Tax Consequences of Unit Ownership

Flow-through of Taxable Income. We will not pay any federal income tax. Instead, each unitholder will be required to report on his income tax return his share of our income, gains, losses and deductions without regard to whether corresponding cash distributions are received by him. Consequently, we may allocate income to a unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his allocable share of our income, gains, losses and deductions for our taxable year ending with or within his taxable year. Our taxable year ends on December 31.

Treatment of Distributions. Distributions by us to a unitholder generally will not be taxable to the unitholder for federal income tax purposes to the extent of his tax basis in his units immediately before the distribution. Our cash distributions in excess of a unitholder’s tax basis generally will be considered to be gain from the sale or exchange of the units, taxable in accordance with the rules described under “— Disposition of Units” below. To the extent our distributions cause a unitholder’s “at risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted in previous years. Please read “— Limitations on Deductibility of Losses.”

Any reduction in a unitholder’s share of our liabilities for which no unitholder bears the economic risk of loss, known as “nonrecourse liabilities,” will be treated as a distribution of cash to that unitholder. A decrease in a unitholder’s percentage interest in us because of our issuance of additional units will decrease his share of our nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. A non-pro rata distribution of money or property may result in ordinary income to a unitholder, regardless of his tax basis in his units, if the distribution reduces the unitholder’s share of our “unrealized receivables,” including depreciation recapture, and/or substantially appreciated “inventory items,” both as defined in the Internal Revenue Code, and collectively, “Section 751 Assets.” To that extent, he will be treated as having been distributed his proportionate share of the Section 751 Assets and having exchanged those assets with us in return for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will generally result in the unitholder’s realization of ordinary income. That income will equal the excess of (1) the non-pro rata portion of that distribution over (2) the unitholder’s tax basis for the share of Section 751 Assets deemed relinquished in the exchange.

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Ratio of Taxable Income to Distributions. We estimate that a purchaser of units in this offering who owns those units from the date of closing of this offering through the record date for distributions for the period ending December 31, 2008, will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be % or less of the cash distributed with respect to that period. We anticipate that after the taxable year ending December 31, 2008, the ratio of allocable taxable income to cash distributions to the unitholders will increase. We expect that our ratio of taxable income to cash distributions will be higher than the ratio applicable to holders of common units in Valero L.P. because our ownership of incentive distribution rights will cause more taxable income to be allocated to us from Valero L.P. Moreover, if Valero L.P. is successful in increasing distributable cash flow over time, our income allocations from incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will further increase. These estimates are based upon the assumption that the distribution rate from Valero L.P. will approximate the amount required to make the minimum quarterly distribution on all units and other assumptions with respect to capital expenditures, cash flow and anticipated cash distributions. These estimates and assumptions are subject to, among other things, numerous business, economic, regulatory, competitive and political uncertainties beyond our control. Further, the estimates are based on current tax law and tax reporting positions that we will adopt and with which the IRS could disagree. Accordingly, we cannot assure you that these estimates will prove to be correct. The actual ratio of taxable income to distributions could be higher or lower and any differences could be material and could materially affect the value of the units. For example, the ratio of allocable taxable income to cash distributions to a purchaser of common units in this offering will be greater than the estimate with respect to the period described above if:


	•	Valero L.P.’s gross income from operations exceeds the amount required to make the minimum quarterly distribution on all Valero L.P.’s units, yet Valero L.P. only distributes the minimum quarterly distribution on all its units, or

	•	Valero L.P. makes a future offering of common units and uses the proceeds of the offering in a manner that does not produce substantial additional deductions during the period described above, such as to repay indebtedness outstanding at the time of this offering or to acquire property that is not eligible for depreciation or amortization for federal income tax purposes or that is depreciable or amortizable at a rate significantly slower than the rate applicable to Valero L.P.’s assets at the time of this offering.

Basis of Units. A unitholder’s initial tax basis for his units will be the amount he paid for the units plus his share of our nonrecourse liabilities. That basis will be increased by his share of our income and by any increases in his share of our nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions from us, by the unitholder’s share of our losses, by any decreases in his share of our nonrecourse liabilities and by his share of our expenditures that are not deductible in computing taxable income and are not required to be capitalized. A unitholder’s share of our nonrecourse liabilities will generally be based on his share of our profits. Please read “— Disposition of Units — Recognition of Gain or Loss.”

Limitations on Deductibility of Losses. The deduction by a unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual unitholder or a corporate unitholder, if more than 50% of the value of the corporate unitholder’s stock is owned directly or indirectly by five or fewer individuals or some tax-exempt organizations, to the amount for which the unitholder is considered to be “at risk” with respect to our activities, if that amount is less than his tax basis. A unitholder must recapture losses deducted in previous years to the extent that distributions cause his at risk amount to be less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result of these limitations will carry forward and will be allowable to the extent that his tax basis or at risk amount, whichever is the limiting factor, is subsequently increased. Upon the taxable disposition of a unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at risk limitation but may not be offset by losses suspended by the basis limitation. Any excess loss above that gain previously suspended by the at risk or basis limitations is no longer utilizable.

In general, a unitholder will be at risk to the extent of the tax basis of his units, excluding any portion of that basis attributable to his share of our nonrecourse liabilities, reduced by any amount of money he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in us, is related to the unitholder

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or can look only to the units for repayment. A unitholder’s at risk amount will increase or decrease as the tax basis of the unitholder’s units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of our nonrecourse liabilities.

The passive loss limitations generally provide that individuals, estates, trusts and some closely-held corporations and personal service corporations can deduct losses from passive activities, which are generally corporate or partnership activities in which the taxpayer does not materially participate, only to the extent of the taxpayer’s income from those passive activities. As a general rule, the passive loss limitations are applied separately with respect to each publicly traded partnership. However, the application of the passive loss limitations to tiered publicly traded partnerships is uncertain. We will take the position that any passive losses we generate that are reasonably allocable to our investment in Valero L.P. will only be available to offset our passive income generated in the future that is reasonably allocable to our investment in Valero L.P. and will not be available to offset income from other passive activities or investments, including other investments in private businesses or investments we may make in other publicly traded partnerships. Moreover, because the passive loss limitations are applied separately with respect to each publicly traded partnership, any passive losses we generate will not be available to offset your income from other passive activities or investments, including your investments in other publicly traded partnerships, such as Valero L.P., or salary or active business income. Further, your share of our net income may be offset by any suspended passive losses from your investment in us, but may not be offset by your current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships. Passive losses that are not deductible because they exceed your share of income we generate may be deducted in full when you dispose of your entire investment in us in a fully taxable transaction with an unrelated party.

The IRS could take the position that for purposes of applying the passive loss limitation rules to tiered publicly traded partnerships, such as Valero L.P. and us, the related entities are treated as one publicly traded partnership. In that case, any passive losses we generate would be available to offset income from your investments in Valero L.P. However, passive losses that are not deductible because they exceed a unitholder’s share of income we generate would not be deductible in full until a unitholder disposes of his entire investment in both us and Valero L.P. in a fully taxable transaction with an unrelated party.

The passive activity loss rules are applied after other applicable limitations on deductions, including the at risk rules and the basis limitation.

Limitations on Interest Deductions. The deductibility of a non-corporate taxpayer’s “investment interest expense” is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:


	•	interest on indebtedness properly allocable to property held for investment;

	•	our interest expense attributed to portfolio income; and

	•	the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.

The computation of a unitholder’s investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit.

Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment. The IRS has indicated that net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders. In addition, the unitholder’s share of our portfolio income will be treated as investment income.

Entity Level Collections. If we are required or elect under applicable law to pay any federal, state, local or foreign income tax on behalf of any unitholder or any former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of cash to the partner on whose behalf the payment was made. If the payment is made on behalf of a person whose identity cannot be determined, we are

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authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend the partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under the partnership agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of an individual partner in which event the partner would be required to file a claim in order to obtain a credit or refund.

Allocation of Income, Gain, Loss and Deduction. In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among the unitholders in accordance with their percentage interests in us. If we have a net loss for the entire year, that loss will be allocated to our unitholders in accordance with their percentage interests in us to the extent of their positive capital accounts.

Specified items of our income, gain, loss and deduction will be allocated to account for the difference between the tax basis and fair market value of our assets at the time of this offering, referred to in this discussion as “Contributed Property.” The effect of these allocations to a unitholder purchasing units in this offering will be essentially the same as if the tax basis of our assets were equal to their fair market value at the time of this offering. In addition, items of recapture income will be allocated to the extent possible to the partner who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by some unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and manner to eliminate the negative balance as quickly as possible.

An allocation of items of our income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference between a partner’s “book” capital account, credited with the fair market value of Contributed Property, and “tax” capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “book-tax disparity,” will generally be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a partner’s share of an item will be determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances, including:


	•	his relative contributions to us;

	•	the interests of all the unitholders in profits and losses;

	•	the interest of all the unitholders in cash flow; and

	•	the rights of all the unitholders to distributions of capital upon liquidation.

Andrews Kurth LLP is of the opinion that, with the exception of the issues described in “— Tax Consequences of Unit Ownership — Section 754 Election” and “— Disposition of Units — Allocations Between Transferors and Transferees,” allocations under our limited liability company agreement will be given effect for federal income tax purposes in determining a unitholder’s share of an item of income, gain, loss or deduction.

Treatment of Short Sales. A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be a partner for those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period:


	•	any of our income, gain, loss or deduction with respect to those units would not be reportable by the unitholder;

	•	any cash distributions received by the unitholder as to those units would be fully taxable; and

	•	all of these distributions would appear to be ordinary income.

Andrews Kurth LLP has not rendered an opinion regarding the treatment of a unitholder where units are loaned to a short seller to cover a short sale of units. Therefore, unitholders desiring to assure their status as

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partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units. The IRS has announced that it is actively studying issues relating to the tax treatment of short sales of partnership interests. Please read “— Disposition of Units — Recognition of Gain or Loss.”

Alternative Minimum Tax. Each unitholder will be required to take into account his distributive share of any items of our income, gain, loss or deduction for purposes of the alternative minimum tax. The current minimum tax rate for noncorporate taxpayers is 26% on the first $175,000 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. Prospective unitholders are urged to consult with their tax advisors as to the impact of an investment in units on their liability for the alternative minimum tax.

Tax Rates. In general, the highest effective United States federal income tax rate for individuals is currently 35% and the maximum United States federal income tax rate for net capital gains of an individual is currently 15% if the asset disposed of was held for more than 12 months at the time of disposition.

Section 754 Election. We will make the election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS. The election will generally permit us to adjust a unit purchaser’s tax basis in our assets (“inside basis”) under Section 743(b) of the Internal Revenue Code to reflect his purchase price. This election does not apply to a person who purchases units directly from us. The Section 743(b) adjustment belongs to the purchaser and not to other unitholders. For purposes of this discussion, a unitholder’s inside basis in our assets will be considered to have two components: (1) his share of our tax basis in our assets (“common basis”) and (2) his Section 743(b) adjustment to that basis.

Treasury regulations under Section 743 of the Internal Revenue Code require, if the remedial allocation method is adopted (which we will adopt), a portion of the Section 743(b) adjustment attributable to recovery property to be depreciated over the remaining cost recovery period for the Section 704(c) built-in gain. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code, rather than cost recovery deductions under Section 168, is generally required to be depreciated using either the straight-line method or the 150% declining balance method. We are authorized to take a position to preserve the uniformity of units even if that position is not consistent with these Treasury Regulations. Please read “— Uniformity of Units.”

Although Andrews Kurth LLP is unable to opine as to the validity of this approach because there is no clear authority on this issue, we intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized book-tax disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of the property, or treat that portion as non-amortizable to the extent attributable to property the common basis of which is not amortizable. This method is consistent with the regulations under Section 743 of the Internal Revenue Code but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. To the extent this Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized book-tax disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read “— Uniformity of Units.”

A Section 754 election is advantageous if the transferee’s tax basis in his units is higher than the units’ share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation and depletion deductions and his share of any gain or loss on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferee’s tax basis in his units is lower than those units’ share of the aggregate tax basis of our assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either

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favorably or unfavorably by the election. A basis adjustment is required regardless of whether a Section 754 election is made in the case of a transfer of an interest in us if we have a substantial built-in loss immediately after the transfer or if we distribute property and have a substantial basis reduction. Generally, a built-in loss or a basis reduction is substantial if it exceeds $250,000.

The calculations involved in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by us to our tangible assets or the tangible assets owned by Valero L.P. to goodwill instead. Goodwill, as an intangible asset, is generally amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations we make will not be successfully challenged by the IRS and that the deductions resulting from them will not be reduced or disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754 election. If permission is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not been revoked.

Tax Treatment of Operations

Accounting Method and Taxable Year. We will use the year ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each unitholder will be required to include in income his share of our income, gain, loss and deduction for our taxable year ending within or with his taxable year. In addition, a unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of his units following the close of our taxable year but before the close of his taxable year must include his share of our income, gain, loss and deduction in income for his taxable year, with the result that he will be required to include in income for his taxable year his share of more than one year of our income, gain, loss and deduction. Please read “— Disposition of Units — Allocations Between Transferors and Transferees.”

Tax Basis, Depreciation and Amortization. The tax basis of our assets and Valero L.P.’s assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The tax basis of assets owned at the time of this offering will be greater to the extent such assets have been recently acquired. The federal income tax burden associated with the difference between the fair market value of our assets and Valero L.P.’s assets and their tax basis immediately prior to (i) this offering will be borne by existing unitholders, and (ii) any other offering will be borne by unitholders as of that time. Please read “— Tax Consequences of Unit Ownership — Allocation of Income, Gain, Loss and Deduction.”

To the extent allowable, we may elect to use the depreciation and cost recovery methods that will result in the largest deductions being taken in the early years after assets are placed in service. Property we subsequently acquire or construct may be depreciated using accelerated methods permitted by the Internal Revenue Code.

If we or Valero L.P. dispose of depreciable property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own or Valero L.P. owns will likely be required to recapture some or all of those deductions as ordinary income upon a sale of his interest in us. Please read “— Tax Consequences of Unit Ownership — Allocation of Income, Gain, Loss and Deduction” and “— Disposition of Units — Recognition of Gain or Loss.”

The costs incurred in selling our units (called “syndication expenses”) must be capitalized and cannot be deducted currently, ratably or upon our termination. There are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as syndication expenses, which may not be amortized by us. The underwriting discounts and commissions we incur will be treated as syndication expenses.

Valuation and Tax Basis of Our Properties. The federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values, and the tax bases, of our assets and Valero L.P.’s assets. Although we may from time to time consult with professional appraisers

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regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.

Disposition of Units

Recognition of Gain or Loss. Gain or loss will be recognized on a sale of units equal to the difference between the amount realized and the unitholder’s tax basis for the units sold. A unitholder’s amount realized will be measured by the sum of the cash or the fair market value of other property received by him plus his share of our nonrecourse liabilities. Because the amount realized includes a unitholder’s share of our nonrecourse liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.

Prior distributions from us in excess of cumulative net taxable income for a unit that decreased a unitholder’s tax basis in that unit will, in effect, become taxable income if the unit is sold at a price greater than the unitholder’s tax basis in that unit, even if the price received is less than his original cost.

Except as noted below, gain or loss recognized by a unitholder, other than a “dealer” in units, on the sale or exchange of a unit held for more than one year will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held more than 12 months will generally be taxed at a maximum rate of 15%. However, a portion of this gain or loss will be separately computed and taxed as ordinary income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to depreciation recapture or other “unrealized receivables” or to “inventory items” we own or Valero L.P. owns. The term “unrealized receivables” includes potential recapture items, including depreciation recapture. Ordinary income attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized upon the sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and a capital loss upon a sale of units. Net capital losses may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gains in the case of corporations.

The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an “equitable apportionment” method. Treasury Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify units transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling, a unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but, according to the regulations, may designate specific units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of units transferred must consistently use that identification method for all subsequent sales or exchanges of units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged to consult his tax advisor as to the possible consequences of this ruling and application of the regulations.

Specific provisions of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:


	•	a short sale;

	•	an offsetting notional principal contract; or

	•	a futures or forward contract with respect to the partnership interest or substantially identical property.

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Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.

Allocations Between Transferors and Transferees. In general, our taxable income and losses will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month, which we refer to in this prospectus as the “Allocation Date.” However, gain or loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.

Although simplifying conventions are contemplated by the Code and most publicly traded partnerships use similar simplifying conventions, the use of this method may not be permitted under existing Treasury Regulations. Accordingly, Andrews Kurth LLP is unable to opine on the validity of this method of allocating income and deductions between unitholders. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the unitholder’s interest, our taxable income or losses might be reallocated among the unitholders. We are authorized to revise our method of allocation between unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury Regulations.

A unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter but will not be entitled to receive that cash distribution.

Notification Requirements. A unitholder who sells any of his units, other than through a broker, generally is required to notify us in writing of that sale within 30 days after the sale (or, if earlier, January 15 of the year following the sale). A purchaser of units who purchases units is required to notify us in writing of that purchase within 30 days after the purchase, unless a broker or nominee will satisfy such requirement. We are required to notify the IRS of any such transfers of units and to furnish specified information to the transferor and transferee. Failure to notify us of a transfer of units may lead to the imposition of penalties.

Constructive Termination. We will be considered to have been terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Valero Energy currently intends to sell its interests in us, pending market conditions, such that 50% of more of the total interests in our capital and profits may be sold within a twelve-month period after the completion of this offering. A constructive termination results in the closing of our taxable year for all unitholders. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may result in more than 12 months of our taxable income or loss being includable in his taxable income for the year of termination. We would be required to make new tax elections after a termination, including a new election under Section 754 of the Internal Revenue Code, and a termination would result in a deferral of our depreciation and cost recovery deductions. A termination could also result in penalties if we were unable to determine that the termination had occurred, and might either accelerate the application of, or subject us to, any tax legislation enacted before the termination.

Moreover, a termination of our partnership would result in a deemed sale or exchange of our interest in Valero L.P.’s capital and profits. This deemed sale or exchange of our interests in Valero L.P.’s capital and profits may also cause the termination of Valero L.P.’s partnership if this deemed sale, together with all other sales of interests in Valero L.P., results in a sale or exchange of 50% or more of Valero L.P.’s capital and profits interests within a 12-month period. A termination of Valero L.P. would result in the closing of Valero L.P.’s taxable year for all unitholders, including us, and would result in a deferral of depreciation and cost recovery deductions allowable in computing Valero L.P.’s taxable income.

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Uniformity of Units

Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on the value of the units. Please read “— Tax Consequences of Unit Ownership — Section 754 Election.”

We intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized book-tax disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of that property, or treat that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent with the regulations under Section 743 of the Internal Revenue Code. This method is consistent with the Treasury Regulations applicable to property depreciable under the accelerated or modified accelerated cost recovery systems, which we expect to apply to substantially all, if not all, of our depreciable property. We also intend to use this method with respect to property that we own, if any, depreciable under Section 167 of the Internal Revenue Code. We do not expect Section 167 to apply to a material portion, if any, of our assets. Please read “— Tax Consequences of Unit Ownership — Section 754 Election.” To the extent that the Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized book-tax disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may adopt a depreciation and amortization position under which all purchasers acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to a common basis or Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our property. If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable to some unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions are otherwise allowable. This position will not be adopted if we determine that the loss of depreciation and amortization deductions will have a material adverse effect on the unitholders. If we choose not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax characteristics of any units that would not have a material adverse effect on the unitholders. The IRS may challenge any method of depreciating the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might be affected, and the gain from the sale of units might be increased without the benefit of additional deductions. Please read “— Disposition of Units — Recognition of Gain or Loss.”

Tax-Exempt Organizations and Other Investors

Ownership of units by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations and other foreign persons raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them.

Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of our income allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to them.

Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the United States because of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships, we will withhold at the highest applicable effective tax rate from cash distributions made quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8BEN or applicable substitute form in order to

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obtain credit for these withholding taxes. A change in applicable law may require us to change these procedures.

In addition, because a foreign corporation that owns units will be treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain, as adjusted for changes in the foreign corporation’s “U.S. net equity,” which are effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.

Under a ruling of the IRS, a foreign unitholder who sells or otherwise disposes of a unit will be subject to federal income tax on gain realized on the sale or disposition of that unit to the extent that this gain is effectively connected with a United States trade or business of the foreign unitholder. Apart from the ruling, a foreign unitholder will not be taxed or subject to withholding upon the sale or disposition of a unit if he has owned less than 5% in value of the units during the five-year period ending on the date of the disposition and if the units are regularly traded on an established securities market at the time of the sale or disposition.

Administrative Matters

Information Returns and Audit Procedures. We intend to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes his share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been mentioned earlier, to determine his share of income, gain, loss and deduction. We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations of the IRS. Neither we nor Andrews Kurth LLP can assure prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the units.

The IRS may audit our federal income tax information returns. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior year’s tax liability, and possibly may result in an audit of his return. Any audit of a unitholder’s return could result in adjustments not related to our returns as well as those related to our returns.

Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings with the partners. The Internal Revenue Code requires that one partner be designated as the “Tax Matters Partner” for these purposes. The limited liability company agreement names Diamond Shamrock Refining and Marketing Company as our Tax Matters Partner.

The Tax Matters Partner will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate.

A unitholder must file a statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties.

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Nominee Reporting. Persons who hold an interest in us as a nominee for another person are required to furnish to us:


	•	the name, address and taxpayer identification number of the beneficial owner and the nominee;

	•	whether the beneficial owner is:

(1) a person that is not a United States person;

(2) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or

(3) a tax-exempt entity;


	•	the amount and description of units held, acquired or transferred for the beneficial owner; and

	•	specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.

Brokers and financial institutions are required to furnish additional information, including whether they are United States persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.

Accuracy-related Penalties. An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.

A substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:

(1) for which there is, or was, “substantial authority,” or

(2) as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return.

If any item of income, gain, loss or deduction included in the distributive shares of unitholders for a given year might result in that kind of an “understatement” of income relating to such a transaction for which no “substantial authority” exists, we will disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make adequate disclosure on their returns and to take other actions as may be appropriate to permit unitholders to avoid liability for penalties. More stringent rules would apply to an understatement of tax resulting from an ownership of units if we were classified as a “tax shelter.” We believe we will not be classified as a tax shelter.

A substantial valuation misstatement exists if the value of any property, or the adjusted basis of any property, claimed on a tax return is 200% or more of the amount determined to be the correct amount of the valuation or adjusted basis. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a return is 400% or more than the correct valuation, the penalty imposed increases to 40%.

Reportable Transactions. If we were to engage in a “reportable transaction,” we (and possibly you and others) would be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or that it produces certain kinds of losses in excess of $2 million. Our participation in a reportable transaction could increase the likelihood that our federal

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income tax information return (and possibly your tax return) would be audited by the IRS. Please read “— Information Returns and Audit Procedures” above.

Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you may be subject to the following provisions of the American Jobs Creation Act of 2004:


	•	accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at “— Accuracy-related Penalties,”

	•	for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability, and

	•	in the case of a listed transaction, an extended statute of limitations.

We do not expect to engage in any reportable transactions.

State, Local, Foreign and Other Tax Considerations

In addition to federal income taxes, you likely will be subject to other taxes, such as state, local and foreign income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the various jurisdictions in which we or Valero L.P. may do business or own property or in which you are a resident. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on his investment in us. Although you may not be required to file a return and pay taxes in some jurisdictions because your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many other jurisdictions in which we or Valero L.P. may do business or own property and may be subject to penalties for failure to comply with those requirements. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to offset income in subsequent taxable years. Some jurisdictions may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the jurisdiction. Withholding, the amount of which may be greater or less than a particular unitholder’s income tax liability to the jurisdiction, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld will be treated as if distributed to unitholders for purposes of determining the amounts distributed by us. Please read “— Tax Consequences of Unit Ownership — Entity Level Collections.” Based on current law and our estimate of our future operations, we anticipate that any amounts required to be withheld will not be material.

It is the responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions, of his investment in us. Accordingly, each prospective unitholder is urged to consult, and depend upon, his tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each unitholder to file all state, local and foreign tax returns, as well as U.S. federal tax returns, that may be required of him. Andrews Kurth LLP has not rendered an opinion on the state, local or foreign tax consequences of an investment in us.

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INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS

An investment in our units by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA, and restrictions imposed by Section 4975 of the Internal Revenue Code. For these purposes, the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be given to:


	•	whether the investment is prudent under Section 404(a)(l)(B) of ERISA;

	•	whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(l)(C) of ERISA; and

	•	whether the investment will result in recognition of unrelated business taxable income (please read “Material Tax Consequences — Tax-Exempt Organizations and Other Investors”) by the plan and, if so, the potential after-tax investment return.

In addition, the person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in our units is authorized by the appropriate governing instrument and is a proper investment for the plan.

Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit employee benefit plans, and IRAs that are not considered part of an employee benefit plan, from engaging in specified transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Internal Revenue Code with respect to the plan. Therefore, a fiduciary of an employee benefit plan or an IRA accountholder that is considering an investment in our units should consider whether the entity’s purchase or ownership of such units would or could result in the occurrence of such a prohibited transaction.

In addition to considering whether the purchase of units is or could result in a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in our units, be deemed to own an undivided interest in our assets, with the result that our operations would be subject to the regulatory restrictions of ERISA, including fiduciary standard and its prohibited transaction rules, as well as the prohibited transaction rules of the Internal Revenue Code.

The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s assets would not be considered to be “plan assets” if, among other things:


	•	the equity interests acquired by employee benefit plans are publicly offered securities; i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal securities laws;

	•	the entity is an “operating company;” i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority owned subsidiary or subsidiaries; or

	•	there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest is held by the employee benefit plans referred to above, IRAs and other employee benefit plans not subject to ERISA, including governmental plans.

Our assets should not be considered “plan assets” under these regulations because it is expected that the investment will satisfy the requirements in the first bullet point above.

Plan fiduciaries contemplating a purchase of units should consult with their own counsel regarding the consequences under ERISA and the Internal Revenue Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.

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SELLING UNITHOLDERS

Immediately prior to the closing of this offering, we will issue to the selling unitholders an aggregate of units representing an aggregate 48.5% membership interest in us. The following table sets forth information concerning the ownership of units by the selling unitholders immediately after this offering assuming:


	•	the underwriters’ option to purchase additional units is not exercised; and

	•	the underwriters exercise their option to purchase additional units in full, with the number of units to be sold by each selling unitholder.

If the underwriters exercise their option to purchase additional units, Sigmor Corporation will sell additional units as set forth below.


					Units Offered By Selling
					Unitholders				Units Owned Immediately After This Offering

							Assuming						Assuming
	Units Owned				Assuming		Underwriters’		Assuming				Underwriters’
	Prior to Offering				Underwriters’		Option is		Underwriters’				Option is
					Option is Not		Exercised		Option is Not				Exercised
Name of Selling Unitholder	Units		Percent		Exercised		in Full		Exercised		Percent		in Full		Percent

Sigmor Corporation		13,129,474		29.5%		8,060,240		10,535,240		5,069,234		11.4%		2,594,234		5.8%
The Shamrock Pipe Line Corporation		6,028,369		13.5		6,028,369		6,028,369		—		0.0		—		0.0
Diamond Shamrock Refining Company, L.P.		2,410,056		5.4		2,410,056		2,410,056		—		0.0		—		0.0
Valero Refining — New Orleans, L.L.C		445		*		445		445		—		0.0		—		0.0
Valero Refining Company — California		445		*		445		445		—		0.0		—		0.0
Valero Refining — Texas, L.P.		445		*		445		445		—		0.0		—		0.0


*	Represents less than 1%.

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UNDERWRITING

Lehman Brothers Inc. is acting as representative of the underwriters. Under the terms of an Underwriting Agreement, which will be filed as an exhibit to the registration statement, each of the underwriters named below has severally agreed to purchase from the selling unitholders the respective number of units shown opposite its name below:


		Number of
Underwriters		Units

Lehman Brothers Inc.			—

	Total		16,500,000

The underwriting agreement provides that the underwriters’ obligation to purchase the units depends on the satisfaction of the conditions contained in the underwriting agreement including:


	•	the obligation to purchase all of the units offered hereby if any of the units are purchased;

	•	the representations and warranties made by us and the selling unitholders to the underwriters are true;

	•	there has been no material change in our financial condition or in the financial markets; and

	•	we deliver customary closing documents to the underwriters.

Commissions and Expenses

The following table summarizes the underwriting discounts and commissions the selling unitholders will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional units. The underwriting fee is the difference between the initial public offering price and the amount the underwriters pay to the selling unitholders for the units.


		No Exercise	Full Exercise

Per unit		$	$

	Total	$	$

The representative of the underwriters has advised us that the underwriters propose to offer the units directly to the public at the public offering price on the cover of this prospectus and to selected dealers, which may include the underwriters, at such offering price less a selling concession not in excess of $ per unit. After the offering, the representative may change the offering price and other selling terms.

We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $2.0 million. Valero Energy will pay the expenses of the offering.

Option to Purchase Additional Units

The selling unitholders have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase, from time to time, in whole or in part, up to an aggregate of 2,475,000 additional units at the public offering price less underwriting discounts and commissions. This option may be exercised if the underwriters sell more than 16,500,000 units in connection with this offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional units based on the underwriter’s percentage underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting section.

Directed Unit Program

At our request, Lehman Brothers Inc. has established a Directed Unit Program under which they have reserved up to units offered hereby at the public offering price for officers, directors, employees and certain other persons associated with us. The number of units available for sale to the general public will be reduced to the extent such persons purchase units reserved under the Directed Unit Program. The units reserved for sale

183

under the Directed Unit Program will be subject to a 90 day lock-up agreement (or 180 days if sold to our executive officers and directors). Any reserved units not so purchased will be offered by the underwriters to the general public on the same basis as the other units offered hereby.

Lock-Up Agreements

We, certain of our affiliates, our executive officers and directors, and the selling unitholders have agreed that, without the prior written consent of Lehman Brothers Inc., we and they will not directly or indirectly, offer, pledge, announce the intention to sell, sell, contract to sell, sell an option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of any units or any securities which may be converted into or exchanged for any units, enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the units, make any demand for or exercise any right or file or cause to be filed a registration statement with respect to the registration of any units or securities convertible or exchangeable into units or any of our other securities or publicly disclose the intention to do any of the foregoing for a period of 180 days from the date of this prospectus.

The 180-day restricted period described in the preceding paragraph will be extended if:


	•	during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or

	•	prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

Lehman Brothers Inc., in its sole discretion, may release the units subject to lock-up agreements in whole or in part at any time with or without notice. When determining whether or not to release units from lock-up agreements, Lehman Brothers Inc. will consider, among other factors, the unitholder’s reasons for requesting the release, the number of units and other securities for which the release is being requested and market conditions at the time.

Offering Price Determination

Prior to this offering, there has been no public market for our units. The initial public offering price will be negotiated between the representative, us and the selling unitholders. In determining the initial public offering price of our units, the representative will consider:


	•	the history and prospects for the industry in which we compete,

	•	our financial information,

	•	the ability of our management and our business potential and earnings prospects,

	•	the prevailing securities markets at the time of this offering, and

	•	the recent market prices of, and the demand for, publicly traded common units of generally comparable entities.

Indemnification

We and the selling unitholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities incurred in connection with the Directed Unit Program referred to above, and to contribute to payments that the underwriters may be required to make for these liabilities.

184

Stabilization, Short Positions and Penalty Bids

The underwriters may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the units, in accordance with Regulation M under the Exchange Act:


	•	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

	•	A short position involves a sale by the underwriters of units in excess of the number of units the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of units involved in the sales made by the underwriters in excess of the number of units they are obligated to purchase is not greater than the number of units that they may purchase by exercising their option to purchase additional units. In a naked short position, the number of units involved is greater than the number of units in their option to purchase additional units. The underwriters may close out any short position by either exercising their option to purchase additional units and/or purchasing units in the open market. In determining the source of units to close out the short position, the underwriters will consider, among other things, the price of units available for purchase in the open market as compared to the price at which they may purchase units through their option to purchase additional units. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the units in the open market after pricing that could adversely affect investors who purchase in the offering.

	•	Syndicate covering transactions involve purchases of the units in the open market after the distribution has been completed in order to cover syndicate short positions.

	•	Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our units or preventing or retarding a decline in the market price of the units. As a result, the price of the units may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters or the selling unitholders make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the units. In addition, neither we nor any of the underwriters make representation that the representative will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Electronic Distribution

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of units for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representative on the same basis as other allocations.

Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.

185

New York Stock Exchange

We will apply for listing of the units on the New York Stock Exchange under the symbol “VEH.”

In connection with the listing of our units on the New York Stock Exchange, the underwriters have advised us that they will undertake to sell round lots of 100 units or more to a minimum of 2,000 beneficial owners.

Discretionary Sales

The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of units offered by them.

Stamp Taxes

If you purchase units offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

Relationships

The underwriters and their affiliates may in the future perform investment banking and advisory services for us and our affiliates from time to time for which they may receive customary fees and expenses. The underwriters may also, from time to time, engage in transactions with or perform services for us and our affiliates in the ordinary course of their business. In addition, certain of the underwriters and their affiliates have performed, and may in the future perform, investment banking, commercial banking and advisory services for Valero Energy and/or Valero L.P. for which they have received or will receive customary fees and expenses.

NASD Conduct Rules

Because the National Association of Securities Dealers, Inc. (NASD) views the units offered hereby as interests in a direct participation program, the offering is being made in compliance with Rule 2810 of the NASD’s Conduct Rules. Investor suitability with respect to the units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange.

VALIDITY OF THE UNITS

The validity of the units will be passed upon for us by Andrews Kurth LLP, Houston, Texas. Certain legal matters in connection with the units will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.

EXPERTS

The combined financial statements of Valero GP Holdings, LLC as of and for the years ended December 31, 2005 and 2004, the consolidated financial statements of Valero L.P. as of and for the years ended December 31, 2005 and 2004, and the consolidated financial statements of Kaneb Services LLC as of and for the years ended December 31, 2004 and 2003 have been included herein in reliance upon the reports of KPMG LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audit report covering the December 31, 2003 consolidated financial statements of Kaneb Services LLC refers to a change in the method of accounting for asset retirement obligations.

The combined financial statements of Valero GP Holdings, LLC for the year ended December 31, 2003, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

186

The consolidated financial statements of Valero L.P. for the year ended December 31, 2003, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

FORWARD-LOOKING STATEMENTS

This prospectus contains various forward-looking statements and information that are based on our beliefs as well as assumptions made by and information currently available to us. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. In particular, a significant amount of information included under “Our Cash Distribution Policy and Restrictions on Distributions” is comprised of forward-looking statements. When used in this prospectus or in the documents we have incorporated herein or therein by reference, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations, are intended to identify forward-looking statements. Although we believe that such expectations reflected in such forward-looking statements are reasonable, we can give no assurances that such expectations will prove to be correct. Such statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on our results of operations and financial condition are:


	•	Our ability to pay distributions to our unitholders;

	•	Our expected receipt of distributions from Valero L.P.;

	•	Any reduction in the quantities of crude oil and refined products transported in Valero L.P.’s pipelines or handled at Valero L.P.’s terminals and storage tanks;

	•	Any significant decrease in the demand for refined products in the markets served by Valero L.P.’s pipelines and terminals;

	•	Any material decline in production by any of Valero Energy’s McKee, Three Rivers, Corpus Christi East, Corpus Christi West, Texas City, Paulsboro, Benicia and Ardmore refineries or Tesoro’s Mandan, North Dakota refinery;

	•	Any downward pressure on market prices caused by new competing refined product pipelines that could cause Valero Energy to decrease the volumes transported in Valero L.P.’s pipelines;

	•	Any challenges to Valero L.P.’s tariffs or changes in state or federal ratemaking methodology;

	•	Any changes in laws and regulations to which we or Valero L.P. are subject, including federal, state and local tax laws, safety, environmental and employment laws;

	•	Overall economic conditions;

	•	Any material decrease in the supply of or material increase in the price of crude oil available for transport through Valero L.P.’s pipelines and storage in Valero L.P.’s storage tanks;

	•	Inability to expand Valero L.P.’s business and acquire new assets as well as to attract third-party shippers;

	•	Conflicts of interest with Valero L.P., Valero GP, LLC or Valero Energy;

	•	The loss of Valero Energy as a customer or a significant reduction in its current level of throughput and storage with Valero L.P.;

	•	Any inability to borrow additional funds;

	•	Any substantial costs related to environmental risks, including increased costs of compliance;

	•	Any change in the credit rating assigned to our or Valero Energy or its subsidiaries’ indebtedness;

187


	•	Any reductions in space allocated to Valero L.P. in interconnecting third-party pipelines;

	•	Any material increase in the price of natural gas;

	•	Inability to successfully complete the announced mergers with Kaneb or integrate Kaneb’s operations;

	•	Terrorist attacks, threat of war or terrorist attacks or political or other disruptions that limit crude oil production; and

	•	Accidents or unscheduled shutdowns affecting Valero L.P.’s pipelines, terminals, machinery, or equipment, or those of Valero Energy.

You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please review the risk factors described under “Risk Factors” in this prospectus.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 regarding the units. This prospectus does not contain all of the information found in the registration statement. For further information regarding us and the units offered by this prospectus, you should review the full registration statement, including its exhibits and schedules, filed under the Securities Act. The registration statement of which this prospectus constitutes a part, including its exhibits and schedules, may be inspected and copied at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of the materials may also be obtained from the SEC at prescribed rates by writing to the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website on the Internet at http://www.sec.gov. Our registration statement, of which this prospectus constitutes a part, can be downloaded at no cost from the SEC’s website.

We intend to furnish our unitholders annual reports containing our audited financial statements and furnish or make available quarterly reports containing our unaudited interim financial information for the first three fiscal quarters of each of our fiscal years.

188

INDEX TO FINANCIAL STATEMENTS


			Page

VALERO GP HOLDINGS, LLC
	Unaudited Pro Forma Combined Financial Statements:
		Introduction		F-2
		Unaudited Pro Forma Combined Balance Sheet as of December 31, 2005		F-3
		Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 2005		F-4
		Notes to Unaudited Pro Forma Combined Financial Statements		F-5
	Combined Financial Statements for 2005, 2004 and 2003:
		Reports of Independent Registered Public Accounting Firms		F-7
		Combined Balance Sheets as of December 31, 2005 and 2004		F-9
		Combined Statements of Income for the Years Ended December 31, 2005, 2004 and 2003		F-10
		Combined Statements of Members’ Equity for the Years Ended December 31, 2005, 2004 and 2003		F-11
		Combined Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		F-12
		Notes to Combined Financial Statements		F-13
VALERO L.P.
	Unaudited Pro Forma Combined Financial Statement:
		Introduction		F-24
		Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 2005		F-25
		Notes to Unaudited Pro Forma Combined Financial Statement		F-26
	Consolidated Financial Statements for 2005, 2004 and 2003:
		Reports of Independent Registered Public Accounting Firms		F-28
		Consolidated Balance Sheets as of December 31, 2005 and 2004		F-30
		Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003		F-31
		Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		F-32
		Consolidated Statements of Partners’ Equity for the Years Ended December 31, 2005, 2004 and 2003		F-33
		Notes to Consolidated Financial Statements		F-34
KANEB SERVICES LLC
	Consolidated Financial Statements for the Six Months Ended June 30, 2005 and 2004:
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004		F-70
		Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		F-71
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		F-72
		Condensed Notes to Consolidated Financial Statements		F-73
	Consolidated Financial Statements for 2004 and 2003:
		Report of Independent Registered Public Accounting Firm		F-81
		Consolidated Statements of Income for the Years Ended December 31, 2004 and 2003		F-82
		Consolidated Balance Sheet as of December 31, 2004 and 2003		F-83
		Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003		F-84
		Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004 and 2003		F-85
		Notes to Consolidated Financial Statements		F-86

F-1

VALERO GP HOLDINGS, LLC

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Introduction

The unaudited pro forma combined statement of income for the year ended December 31, 2005 reflects the pro forma effect of two separate transactions. First, Valero GP Holdings’ equity in income of Valero L.P. is adjusted to reflect the effect of the acquisition of Kaneb, including the effect of the sale of certain of the acquired assets in accordance with an agreement with the Federal Trade Commission to divest such assets, as if those transactions occurred on January 1, 2005. Second, the pro forma combined statement of income reflects the effect of this offering as if it had occurred on January 1, 2005, including (a) the elimination of interest expense on Valero GP Holdings’ notes payable to affiliates resulting from a capital contribution by Valero Energy subsidiaries to Valero GP Holdings of notes issued by Valero GP Holdings and held by Valero Energy subsidiaries and (b) the incurrence of an incremental $2.3 million of general and administrative expenses that Valero GP Holdings is expected to incur as a publicly traded limited liability company, including costs under a new Administration Agreement with Valero GP, LLC, pursuant to which Valero GP, LLC will provide certain administrative services to Valero GP Holdings for a fee. The unaudited pro forma combined balance sheet reflects the effect of the capital contribution discussed above as well as a capital contribution by Valero Energy subsidiaries to fund certain employee benefit plan liabilities of Valero GP Holdings as if those transactions occurred on December 31, 2005.

The unaudited pro forma combined financial information should be read in conjunction with the audited financial statements of Valero GP Holdings and Valero L.P. and the audited and unaudited financial statements of Kaneb Services LLC included in this prospectus. The unaudited pro forma combined financial information is not necessarily indicative of the financial results that would have occurred if the acquisition of Kaneb and this offering had been consummated on the dates indicated, nor are they necessarily indicative of the financial results in the future. The pro forma adjustments, as described in the Notes to Unaudited Pro Forma Combined Financial Statements, are based upon available information and certain assumptions that the management of Valero GP Holdings believes are reasonable.

F-2

VALERO GP HOLDINGS, LLC

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

As of December 31, 2005


			Valero GP
			Holdings		Offering			Pro Forma
			Historical		Adjustments			as Adjusted

			(Thousands of dollars)
ASSETS
Current assets:
	Cash		$	121	$	3,886	(b)	$	4,007
	Receivable from Valero L.P.			1,151		—			1,151

		Total current assets		1,272		3,886			5,158

Long-term receivable from Valero L.P.				—		5,507	(b)		5,507
Investment in Valero L.P.				408,744		—			408,744
Deferred tax asset				298		—			298

		Total assets	$	410,314	$	9,393		$	419,707


LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
	Accounts payable		$	2	$	—		$	2
	Income taxes payable			11		—			11
	Accrued liabilities			2,560		—			2,560

		Total current liabilities		2,573		—			2,573

Notes payable to affiliates				265,961		(7,100	)(a)		—
						(258,861	)(c)
Other long-term liabilities				—		7,100	(a)		7,100
Members’ equity				141,780		9,393	(b)		410,034
						258,861	(c)

		Total liabilities and members’ equity	$	410,314	$	9,393		$	419,707

See Notes to Unaudited Pro Forma Combined Financial Statements.

F-3

VALERO GP HOLDINGS, LLC

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

For the Year Ended December 31, 2005


			Valero GP			Kaneb			Pro Forma
			Holdings			Pro Forma			Combined			Offering			Pro Forma
			Historical			Adjustments			for Kaneb			Adjustments			as Adjusted

			(Thousands of dollars)
Equity in earnings of Valero L.P.			$	37,646		$	(11,695	)(d)	$	25,951		$	—		$	25,951

Costs and expenses:
	General and administrative expenses			28			—			28			2,322	(e)		2,350

		Total costs and expenses		28			—			28			2,322			2,350

Operating income				37,618			(11,695	)		25,923			(2,322	)		23,601
Other income, net				456			—			456			—			456
Interest income — affiliated				111			—			111			(111	)(f)		—
Interest expense — affiliated				(17,778	)		—			(17,778	)		17,778	(f)		—

Income before income tax expense				20,407			(11,695	)		8,712			15,345			24,057
Income tax expense				114			—			114			(61	)(g)		53

Net income			$	20,293		$	(11,695	)	$	8,598		$	15,406		$	24,004

Earnings per unit — basic and assuming dilution															$	0.54

Weighted-average units outstanding (in thousands)(h)																44,510

See Notes to Unaudited Pro Forma Combined Financial Statements.

F-4

VALERO GP HOLDINGS, LLC

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS


	(a)	To reclass $7.1 million of other postretirement employee benefit (OPEB) liabilities for Valero GP Holdings’ employees from notes payable to affiliates to other long-term liabilities. See Note (b) for planned funding of these and other employee benefit plan liabilities.


	(b)	To reflect a planned $9.4 million capital contribution from Valero Energy to Valero GP Holdings to fund certain employee benefit plan liabilities of Valero GP Holdings in accordance with agreements between Valero Energy and Valero GP Holdings that will become effective upon the effective date of this offering. The capital contribution will be funded with $3.9 million of cash and a $5.5 million receivable from Valero L.P. held by Valero Energy.


	(c)	To reflect a planned $258.9 million capital contribution from Valero Energy subsidiaries to Valero GP Holdings of notes issued by Valero GP Holdings and held by Valero Energy subsidiaries.


	(d)	To reflect the adjustment to Valero GP Holdings’ general partner and limited unitholder interests in Valero L.P.’s income from continuing operations, resulting from (i) the pro forma effects of the acquisition of Kaneb on net income, (ii) the issuance of additional common units in connection with the acquisition of Kaneb, and (iii) an assumed quarterly per unit distribution by Valero L.P. of $0.855 per unit, which is the amount of Valero L.P.’s distribution for the quarter ended December 31, 2005.


	The following table reflects the calculation of Valero GP Holdings’ pro forma adjustment to equity in earnings of Valero L.P. for the year ended December 31, 2005 (in thousands):


Valero L.P.’s pro forma combined income from continuing operations	$	83,084
Less: General partner’s incentive distribution		(12,196	)

Amount to be allocated to 2% general partner interest and limited partners	$	70,888

Valero GP Holdings’ 23.4% interest in Valero L.P.	$	16,639
General partner’s incentive distribution		12,196
Less: Amortization of step-up in basis related to Valero Energy’s acquisition of UDS (1)		(2,884	)

Valero GP Holdings’ pro forma equity in earnings of Valero L.P.		25,951
Less: Valero GP Holdings’ historical equity in earnings of Valero L.P.		(37,646	)

Pro forma adjustment to equity in earnings of Valero L.P.	$	(11,695	)


	(1)	Represents the amortization of the excess of the fair value over historical carrying amounts of Valero L.P.’s assets and liabilities at the date of Valero Energy’s acquisition of Ultramar Diamond Shamrock Corporation (UDS), related to Valero Energy’s interest in Valero L.P. at that date.


	(e)	To reflect an adjustment to general and administrative expenses for the year ended December 31, 2005 as follows (in thousands):


Administration agreement with Valero GP, LLC (1)	$	500
Public company costs (2)		1,850
Less: Historical general and administrative expenses		(28	)

Adjustment to general and administrative expenses	$	2,322


	(1)	Represents the fee to be charged by Valero GP, LLC to Valero GP Holdings under the Administration Agreement for executive management, accounting, legal, cash management, corporate finance and other administrative services.

F-5

VALERO GP HOLDINGS, LLC

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS — (Continued)


	(2)	Represents third party general and administrative expenses that Valero GP Holdings expects to incur as a result of being a publicly traded limited liability company, such as costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, director compensation and insurance costs, including director and officer liability insurance.


	(f)	To reflect the elimination of affiliated interest income and expense resulting from the planned contribution by Valero Energy subsidiaries to Valero GP Holdings of notes issued by Valero GP Holdings and held by Valero Energy subsidiaries.


	(g)	To reflect the tax effect of the pro forma pre-tax income adjustments related to the offering for the year ended December 31, 2005. Although the pro forma pre-tax income adjustments increase income, income tax expense is reduced as the incremental general and administrative expenses affect an entity subject to certain state income tax while the interest expense reduction primarily affects an entity not subject to state income tax. Amounts in the following table are in thousands:


Pro forma income tax expense	$	53
Less: Historical income tax expense		114

Adjustment to income tax expense	$	(61	)


	(h)	To reflect the weighted-average units outstanding for the year ended December 31, 2005, assuming the current ownership interest held by Valero Energy subsidiaries in Valero GP Holdings was exchanged for 44,510,258 units of Valero GP Holdings on January 1, 2005.

F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Members

of Valero GP Holdings, LLC:

We have audited the accompanying combined balance sheets of Valero GP Holdings, LLC (the Company) as of December 31, 2005 and 2004, and the related combined statements of income, members’ equity and cash flows for the years then ended. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Valero GP Holdings, LLC as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.


	/s/ KPMG LLP

San Antonio, Texas

March 24, 2006

F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Members

of Valero GP Holdings, LLC:

We have audited the accompanying combined statements of income, members’ equity and cash flows of Valero GP Holdings, LLC (the Company) for the year ended December 31, 2003. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of Valero GP Holdings, LLC for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.


	/s/ ERNST & YOUNG LLP

San Antonio, Texas

February 3, 2006

F-8

VALERO GP HOLDINGS, LLC

COMBINED BALANCE SHEETS


			December 31,

			2005		2004

			(Thousands of dollars)
ASSETS
Current assets:
	Cash		$	121	$	120
	Receivable from Valero L.P.			1,151		—

		Total current assets		1,272		120
Investment in Valero L.P.				408,744		388,682
Deferred tax asset				298		189

		Total assets	$	410,314	$	388,991


LIABILITIES AND MEMBERS ’ EQUITY
Current liabilities:
	Accounts payable		$	2	$	—
	Income taxes payable			11		—
	Accrued liabilities			2,560		4,419

		Total current liabilities		2,573		4,419
Notes payable to affiliates				265,961		270,597
Members’ equity				141,780		113,975

		Total liabilities and members’ equity	$	410,314	$	388,991

See Notes to Combined Financial Statements.

F-9

VALERO GP HOLDINGS, LLC

COMBINED STATEMENTS OF INCOME


			Year Ended December 31,

			2005			2004			2003

			(Thousands of dollars)
Operating revenues			$	—		$	—		$	24,868
Equity in earnings of Valero L.P.				37,646			35,314			27,418

		Total revenues		37,646			35,314			52,286

Costs and expenses:
	Operating expenses			—			—			9,484
	General and administrative expenses			28			91			1,562
	Depreciation expense			—			—			2,975

		Total costs and expenses		28			91			14,021

Operating income				37,618			35,223			38,265
Equity in earnings of Skelly-Belvieu Pipeline Company				—			—			633
Other income, net				456			375			72
Interest income — affiliated				111			26			—
Interest expense:
	Affiliated			(17,778	)		(17,110	)		(18,691	)
	Nonaffiliated, net of capitalized interest			—			—			(1,592	)
Minority interest in net income of Valero L.P.				—			—			(2,400	)

Income before income tax expense				20,407			18,514			16,287
Income tax expense				114			67			33

Net income			$	20,293		$	18,447		$	16,254

See Notes to Combined Financial Statements.

F-10

VALERO GP HOLDINGS, LLC

COMBINED STATEMENTS OF MEMBERS’ EQUITY


	Year Ended December 31,

	2005			2004			2003

	(Thousands of dollars)
Balance as of beginning of year	$	113,975		$	105,960		$	244,771
Net income		20,293			18,447			16,254
Contributions from Valero Energy		29,411			—			1,513
Distributions to Valero Energy		(21,899	)		(10,432	)		(156,578	)

Balance as of end of year	$	141,780		$	113,975		$	105,960

See Notes to Combined Financial Statements.

F-11

VALERO GP HOLDINGS, LLC

COMBINED STATEMENTS OF CASH FLOWS


				Year Ended December 31,

				2005			2004			2003

				(Thousands of dollars)
Cash flows from operating activities:
Net income				$	20,293		$	18,447		$	16,254
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation expense			—			—			2,975
		Equity in earnings of Valero L.P.			(37,646	)		(35,314	)		(27,418	)
		Distributions of equity income from Valero L.P.			37,646			37,208			25,524
		Equity in earnings of Skelly-Belvieu Pipeline Company			—			—			(633	)
		Distributions of equity income from Skelly-Belvieu Pipeline Company			—			—			633
		Gain on sale of Valero L.P. units in connection with employee benefit plans			(456	)		(375	)		(33	)
		Minority interest in net income of Valero L.P.			—			—			2,400
		Deferred income tax expense (benefit)			67			(7	)		(158	)
		Changes in current assets and liabilities			(2,997	)		2,224			601
		Other, net			(176	)		—			2,888

			Net cash provided by operating activities		16,731			22,183			23,033

Cash flows from investing activities:
	Capital expenditures				—			—			(1,883	)
	Acquisitions				—			—			(14,807	)
	Distributions in excess of equity income from Valero L.P.				7,099			756			—
	Distributions in excess of equity income from Skelly-Belvieu Pipeline Company				—			—			18
	Investment in Valero L.P.				(29,747	)		(597	)		(1,474	)
	Proceeds from the sale of Valero L.P. units in connection with employee benefit plans				3,042			1,362			1,086

			Net cash provided by (used in) investing activities		(19,606	)		1,521			(17,060	)

Cash flows from financing activities:
	Increase (decrease) in notes payable to affiliates				(4,636	)		(13,200	)		7,388
	Proceeds from senior note offering, net of issuance costs				—			—			247,819
	Long-term debt repayments				—			—			(174	)
	Proceeds from issuance of common units by Valero L.P., net of issuance costs				—			—			200,342
	Contributions from Valero Energy				29,411			—			1,513
	Distributions to Valero Energy				(21,899	)		(10,432	)		(156,578	)
	Cash distributions to minority interest in Valero L.P.				—			—			(3,631	)

			Net cash provided by (used in) financing activities		2,876			(23,632	)		296,679

Valero L.P.’s cash balance as of the date (March 18, 2003) that Valero GP Holdings ceased consolidation of Valero L.P. (Note 2)					—			—			(336,139	)

Net increase (decrease) in cash and temporary cash investments					1			72			(33,487	)
Cash and temporary cash investments at beginning of year					120			48			33,535

Cash and temporary cash investments at end of year				$	121		$	120		$	48

See Notes to Combined Financial Statements.

F-12

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS


1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


	*Organization*

Valero GP Holdings, LLC (Valero GP Holdings), a Delaware limited liability company, was formed in June 2000 as UDS Logistics, LLC (UDS Logistics). Valero Energy Corporation (Valero Energy) acquired UDS Logistics in connection with its December 31, 2001 acquisition of Ultramar Diamond Shamrock Corporation (UDS). The UDS Logistics name was changed to Valero GP Holdings in January 2006. Valero GP Holdings is an indirect wholly owned subsidiary of Valero Energy. Valero Energy is a publicly held independent refining and marketing company (NYSE: VLO).

As of December 31, 2005, Valero GP Holdings owned:


	•	a 99.9% limited partner interest in Riverwalk Logistics, L.P. (Riverwalk), the 2% general partner of Valero L.P., and

	•	9,599,322 subordinated units and 614,572 common units of Valero L.P.

In addition, another indirect wholly owned subsidiary of Valero Energy, Valero GP, LLC, owned 8,200 common units of Valero L.P. Valero GP, LLC also held the general partner interest in Riverwalk, and Riverwalk, as general partner of Valero L.P., owned certain incentive distribution rights of Valero L.P. As of December 31, 2005, the combined interest of Valero GP Holdings and Valero GP, LLC in Valero L.P. was 23.4%. Public unitholders held the remaining 76.6% interest as of that date through their ownership of 36,587,655 common units of Valero L.P.

Valero L.P. (NYSE: VLI) is a Delaware limited partnership that owns and operates crude oil and refined product pipeline, storage and terminalling assets that serve Valero Energy’s McKee, Three Rivers, Texas City, Corpus Christi East and Corpus Christi West Refineries in Texas, Benicia Refinery in California, Paulsboro Refinery in New Jersey and Ardmore Refinery in Oklahoma.

In accordance with its limited liability company agreement, the members of Valero GP Holdings are not liable for its debts, obligations or liabilities and are not required to make any additional capital contributions to Valero GP Holdings. The limited liability company agreement of Valero GP, LLC also does not require its member to make any additional capital contributions to Valero GP, LLC.


	*Basis of Presentation and Principles of Combination*

Valero Energy’s acquisition of UDS on December 31, 2001 was accounted for using the purchase method of accounting. Accordingly, an allocation of the purchase price, approximately $517.3 million, was assigned to the group of entities that now comprise Valero GP Holdings. In connection with the allocation of the purchase price to Valero GP Holdings, approximately $258.6 million of debt (notes payable to affiliates) was recorded in these financial statements as of December 31, 2001.

These financial statements combine the financial statements of Valero GP Holdings and the financial statements of Valero GP, LLC. (As used in this report, the term Valero GP Holdings may refer to Valero GP Holdings, Valero GP, LLC or Riverwalk individually or Valero GP Holdings combined with Valero GP, LLC and Riverwalk.) The consolidated financial statements of Valero GP Holdings include the financial statements of Riverwalk. The consolidated financial statements of Valero GP Holdings also include the consolidated financial statements of Valero L.P. until March 18, 2003, at which time Valero GP Holdings began accounting for its investment in Valero L.P. under the equity method. (See Note 2 for a discussion of the transactions resulting in that reporting change in 2003 for Valero GP Holdings’ investment in Valero L.P.) Intercompany balances and transactions between companies in the combined group have been eliminated. Investments in 50% or less owned entities are accounted for using the equity method.

F-13

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)


	*Initial Public Offering*

An initial public offering (IPO) of units of Valero GP Holdings is planned for 2006. Prior to the IPO, the following transactions are expected to occur:


	•	Valero GP Holdings will contribute its subordinated units and common units of Valero L.P. to a newly formed subsidiary of Valero GP Holdings, Riverwalk Holdings, LLC;

	•	Valero GP Holdings will amend its limited liability company agreement to provide for governance and certain anti-takeover provisions;

	•	Valero Energy will fund certain employee benefit plan liabilities of Valero GP Holdings through a capital contribution to Valero GP Holdings;

	•	Valero Energy subsidiaries will contribute to Valero GP Holdings notes issued by Valero GP Holdings and held by Valero Energy subsidiaries; and

	•	Valero GP Holdings will issue 44,510,258 units to Valero Energy subsidiaries in exchange for their current ownership interests in Valero GP Holdings.

These planned transactions are not reflected in these combined financial statements.


	*Use of Estimates*

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.


	*Equity Investments*

As discussed in Note 2, commencing in March 2003, Valero GP Holdings began accounting for its investment in Valero L.P. on the equity method. Valero GP Holdings evaluates its investment in Valero L.P. for impairment when there is evidence that it may not be able to recover the carrying amount of its investment or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of its investment that is other than a temporary decline is recognized currently in earnings, and is based on the difference between the estimated current fair value of the investment and its carrying amount. Valero GP Holdings believes that the carrying amount of its investment in Valero L.P. as of December 31, 2005 is recoverable.

Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu Pipeline Company) owns a liquefied petroleum gas pipeline that begins in Skellytown, Texas and extends to Mont Belvieu, Texas near Houston. Skelly-Belvieu Pipeline Company is owned 50% by Valero L.P. and 50% by ConocoPhillips. Prior to March 18, 2003 (the date Valero GP Holdings ceased consolidation of Valero L.P., as discussed in Note 2), Valero GP Holdings accounted for this investment under the equity method of accounting.


	*EITF Issue No. 04-5*

In June 2005, the Financial Accounting Standards Board ratified its consensus on Emerging Issues Task Force (EITF) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (EITF No. 04-5), which requires the general partner in a limited partnership to determine whether the limited partnership is controlled by, and therefore should be consolidated by, the general partner. The guidance in EITF No. 04-5 was effective after June 29, 2005 for general partners of all new partnerships formed and for existing

F-14

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, the guidance in EITF No. 04-5 was effective no later than January 1, 2006. Valero GP Holdings adopted EITF No. 04-5 effective January 1, 2006, the adoption of which had no impact on Valero GP Holdings’ financial position or results of operations.


	*Revenue Recognition*

Through March 18, 2003 (the date that Valero GP Holdings ceased consolidation of Valero L.P. as discussed above), operating revenues were derived from interstate and intrastate pipeline transportation of refined products and crude oil, terminalling, blending and filtering of refined products and the movement of crude oil and other refinery feedstocks through crude oil storage tanks. Transportation revenues (based on pipeline tariff rates) were recognized as refined product or crude oil was delivered through the pipelines. The costs of the crude oil storage facilities associated with the crude oil pipelines were considered in establishing the tariffs charged for transporting crude oil from the storage facilities to the refineries. Terminalling revenues (based on a terminalling fee) were recognized as refined products moved through the terminal and as additives were blended with refined products.


	*Segment Disclosures*

For the period through March 18, 2003, during which Valero GP Holdings consolidated Valero L.P., Valero L.P. operated in only one segment, the petroleum pipeline segment of the oil and gas industry. Subsequent to that date, substantially all of Valero GP Holdings’ earnings are derived from its equity investment in Valero L.P.


	*Income Taxes*

Valero GP Holdings is a limited liability company which is treated as a partnership for federal income tax purposes. Therefore, Valero GP Holdings is not a taxable entity and generally incurs no federal income tax liability. The taxable income or loss of Valero GP Holdings is includable in the federal and state income tax returns of its individual members. Valero GP Holdings does, however, incur state income taxes under the franchise tax laws of certain states, which is reflected as income tax expense in the combined statements of income.

Income tax expense includes state income taxes currently payable and deferred state income taxes resulting from temporary differences between financial statement and tax bases of assets and liabilities when such differences exist.


	*Financial Instruments*

Valero GP Holdings’ financial instruments include cash, receivables and payables. The estimated fair values of these financial instruments approximate their carrying amounts as reflected in the combined balance sheets.


	*Stock-Based Compensation*

As discussed in Note 9, employees of Valero GP Holdings provide services to operate Valero L.P.’s assets. Valero GP Holdings has adopted various long-term incentive plans as described in Note 9, which provide employees and directors of Valero GP Holdings and certain corporate officers of Valero Energy with the right to receive common units of Valero L.P. under specified conditions. Commencing on March 18, 2003, the date that Valero GP Holdings ceased consolidating Valero L.P. and began accounting for its investment in Valero L.P. on the equity method (see Note 2), unit options and unvested restricted units are accounted for at fair value. Under these plans, the fair value of unit options granted is recorded in expense over the nominal vesting period, with appropriate adjustments to recognize the effect of fair value adjustments on expense previously recognized for the portion of the applicable vesting period that has lapsed at the date of the fair value adjustment. Fair value

F-15

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

adjustments related to unit options are recognized in expense until the unit options are exercised. Restricted unit awards are recorded in expense over the nominal vesting period based on the fair value of the restricted unit, with appropriate adjustments to recognize the effect of fair value adjustments on expense previously recognized for the portion of the applicable vesting period that has lapsed at the date of the fair value adjustment. Fair value adjustments related to restricted unit awards cease upon vesting. Amounts expensed are offset in accrued expenses until the date of exercise or vesting.

For periods prior to March 18, 2003, Valero GP Holdings accounted for unit options and restricted units granted under its long-term incentive plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by Statement No. 123, “Accounting for Stock-Based Compensation.” Because Valero GP Holdings accounted for such grants using the intrinsic value method, compensation cost was not recognized in the combined statements of income from January 1, 2003 through March 17, 2003 for unit option grants as all options granted had an exercise price equal to the market value of the underlying common units of Valero L.P. on the date of grant. However, as discussed in Note 9, if compensation cost had been recognized for the unit option grants, such costs would have been reimbursed by either Valero L.P. or Valero Energy affiliates outside of Valero GP Holdings. As a result, no pro forma effect of recognizing compensation cost for the unit options under Statement No. 123 is presented since any such expense would not have affected the statement of income of Valero GP Holdings.

Under Valero GP Holdings’ employee stock compensation plans, certain awards provide that employees vest in the award when they retire or will continue to vest in the award after retirement over the nominal vesting period established in the award. Through 2005, Valero GP Holdings accounted for such awards by recognizing compensation cost over the nominal vesting period. By analogy to the transition rules of Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share-Based Payment,” and the Securities and Exchange Commission’s (SEC) amended Rule 4-01(a) of Regulation S-X, Valero GP Holdings has changed its method of recognizing compensation cost to the non-substantive vesting period approach for any awards that are granted beginning January 1, 2006. Under the non-substantive vesting period approach, compensation cost is recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the date retirement eligibility is achieved if that date is expected to occur during the nominal vesting period. The estimated increase in accrued liabilities related to the non-substantive vesting period approach would be approximately $600,000 at December 31, 2005. However, as discussed in Note 9, such additional expense would have been reimbursed by either Valero L.P. or Valero Energy affiliates outside of Valero GP Holdings.


2.	INVESTMENT IN AND TRANSACTIONS WITH VALERO L.P. AND VALERO ENERGY

As of December 31, 2004, Valero GP Holdings owned 45.7% of Valero L.P. Prior to March 18, 2003 and the transactions discussed below, Valero GP Holdings owned 73.6% of Valero L.P. and therefore consolidated the financial statements of Valero L.P. through that date.

Effective March 18, 2003, immediately prior to Valero GP Holdings ceasing consolidation of Valero L.P., Valero L.P. issued 5,750,000 common units to the public for aggregate proceeds of $211.3 million and completed a private placement of $250 million of debt. The net proceeds, after issuance costs, of $200.3 million and $247.8 million, respectively, combined with borrowings under Valero L.P.’s credit facility and a contribution of $4.3 million by Valero GP Holdings to maintain its 2% general partner interest in Valero L.P., were used to fund a redemption of common units from Valero GP Holdings, discussed further below, and the acquisition of certain storage tanks and a pipeline system from Valero Energy.

Subsequent to Valero L.P.’s equity and debt offerings, Valero L.P. redeemed 3.8 million of its common units from Valero GP Holdings for $134.1 million. In conjunction with this redemption, Valero GP Holdings received $2.9 million from Valero L.P. representing the redemption of a proportionate amount of Valero GP Holdings’ general partner interest. This redemption, combined with the common unit issuance discussed above, reduced Valero GP Holdings’ ownership of Valero L.P. to 49.5% as of March 18, 2003. At the same time, Valero L.P.

F-16

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

amended its partnership agreement to reduce the minimum vote required to remove the general partner from 66 ² / 3 % to 58% of Valero L.P.’s outstanding common and subordinated units, excluding the units held by Valero GP Holdings (see discussion below for subsequent revisions to this minimum vote which were effective on March 11, 2004). As a result of the issuance and redemption of Valero L.P. common units and the partnership agreement changes, effective March 18, 2003, Valero GP Holdings ceased consolidation of Valero L.P. and began using the equity method to account for its investment in Valero L.P.

On April 16, 2003, an additional 581,000 common units of Valero L.P. were issued as a result of the exercise by the underwriters of a portion of their overallotment option related to the March 18, 2003 common unit issuance, reducing Valero GP Holdings’ ownership interest from 49.5% to 48.2%. In conjunction with this issuance, Valero GP Holdings contributed $0.5 million to Valero L.P. to maintain its 2% general partner interest.

In August 2003, Valero L.P. consummated a public offering of common units, selling 1,236,250 common units to the public. In conjunction with this offering, Valero GP Holdings contributed $1.0 million to Valero L.P. to maintain its 2% general partner interest. Net proceeds from this common unit offering further reduced Valero GP Holdings’ ownership interest in Valero L.P. to slightly below 46%.

Effective March 11, 2004, Valero L.P. amended its partnership agreement as follows:


	•	capped the general partner’s distribution, including incentive distributions, at 25% for all distributions in excess of $0.66 per unit per quarter and

	•	reduced the minimum vote required to remove the general partner from 58% to a simple majority of Valero L.P.’s outstanding common and subordinated units, excluding the units held by Valero GP Holdings.

On July 1, 2005, Valero L.P. completed its acquisition of Kaneb Pipe Line Partners, L.P. (KPP) and Kaneb Services LLC (together, the Kaneb Acquisition) in a transaction that included the issuance of Valero L.P. common units in exchange for KPP’s units. Valero GP Holdings contributed approximately $29 million to Valero L.P. to maintain Valero GP Holdings’ 2% general partner interest in Valero L.P., and Valero GP Holdings’ total ownership interest in Valero L.P., including its 2% general partner interest, was reduced to 23.4%. Valero GP Holdings’ ownership interest in Valero L.P. remained at 23.4% as of December 31, 2005, which was composed of its 2% general partner interest and a 21.4% limited partner interest represented by 622,772 common units and 9,599,322 subordinated units of Valero L.P.

As indicated above, Valero L.P. has from time to time issued common units to the public, which have diluted Valero GP Holdings’ ownership percentage in Valero L.P. Such issuances have resulted in increases in Valero GP Holdings’ proportionate share of Valero L.P.’s capital because, in each case, the issuance price per unit exceeded Valero GP Holdings’ carrying amount per unit at the time of issuance. SEC Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock by a Subsidiary” (SAB 51), provides guidance on accounting for the effect of issuances of a subsidiary’s stock on the parent’s investment in that subsidiary. SAB 51 allows registrants to elect an accounting policy of recording such increases or decreases in a parent’s investment (SAB 51 credits or charges, respectively) either in income or directly in equity.

As of December 31, 2004, Valero GP Holdings had approximately $7 million in accumulated pre-tax SAB 51 credits related to its investment in Valero L.P. On July 1, 2005, the issuance of common units by Valero L.P. in connection with the Kaneb Acquisition generated an additional pre-tax SAB 51 credit of approximately $151 million for Valero GP Holdings. Valero GP Holdings has not recognized any SAB 51 credits in its combined financial statements through December 31, 2005 and is not permitted to do so until its subordinated units convert to common units, which is expected to occur in the second quarter of 2006. Valero GP Holdings expects to adopt its accounting policy and recognize all of its cumulative SAB 51 credits at that time.

F-17

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)


	*Summary Financial Information*

Condensed financial information reported by Valero L.P. is summarized below:


			December 31,

			2005		2004

			(in thousands)
Current assets			$	295,411	$	39,979
Property and equipment, net				2,160,213		784,999
Other long-term assets				911,368		32,529

	Total assets		$	3,366,992	$	857,507

Current liabilities			$	205,588	$	33,609
Long-term debt				1,169,659		384,171
Other long-term liabilities				90,966		1,416

	Total liabilities			1,466,213		419,196
Partners’ equity				1,900,779		438,311

		Total liabilities and partners’ equity	$	3,366,992	$	857,507


	Year Ended December 31,

	2005		2004		2003

	(in thousands)
Revenues	$	659,557	$	220,792	$	181,450
Operating income		153,694		98,024		83,037
Net income		111,073		78,418		69,593


	*Related Party Transactions*

Pursuant to a services agreement, Valero GP, LLC, a subsidiary of Valero GP Holdings provides personnel to Valero L.P. to perform operating and maintenance services with respect to certain Valero L.P. assets, and to provide certain administrative services, for which Valero GP Holdings receives reimbursement from Valero L.P. Effective January 1, 2006, the services agreement was amended and now provides for more services by Valero GP Holdings due to the transfer to Valero GP Holdings of a substantial number of employees of Valero Energy subsidiaries who had previously provided services to Valero GP Holdings under the prior services agreement. For purposes of these financial statements, no corporate costs have been allocated to Valero GP Holdings by Valero Energy as management has determined that no such corporate costs were incurred specifically on behalf of Valero GP Holdings.

As of December 31, 2005, Valero GP Holdings had a receivable from Valero L.P. of $1,151,000 representing amounts due for employee costs. The following table summarizes the results of transactions with Valero L.P.:


	Year Ended December 31,

	2005		2004		2003

	(in thousands)
Expenses charged by Valero GP Holdings to Valero L.P.	$	66,421	$	36,869	$	22,736

F-18

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)


	*Other*

As of December 31, 2005 and 2004, Valero GP Holdings’ investment in Valero L.P. (representing the 2% general partner interest, all of Valero L.P.’s subordinated units and 622,772 (2005) and 664,119 (2004) of Valero L.P.’s common units) reconciles to Valero L.P.’s total partners’ equity as follows:


	December 31,

	2005			2004

	(in thousands)
Valero L.P. total partners’ equity	$	1,900,779		$	438,311
Valero GP Holdings’ ownership interest in Valero L.P.		23.4	%		45.7	%

Valero GP Holdings’ share of Valero L.P.’s partners’ equity		444,782			200,308
Unrecognized SAB 51 gains		(158,170	)		(7,094	)
Step-up in basis related to Valero L.P.’s assets and liabilities, including equity method goodwill		122,132			195,468

Investment in Valero L.P.	$	408,744		$	388,682

As reflected above, as of December 31, 2005 and 2004, Valero GP Holdings’ investment in Valero L.P. included 622,772 and 664,119 publicly traded common units, respectively, which had an aggregate market value of $32.2 million and $39.5 million, respectively. A quoted market price is not available for either Valero GP Holdings’ 2% general partner interest in Valero L.P. or the subordinated units held by Valero GP Holdings. The subordinated units are expected to convert to common units on a one-for-one basis in the second quarter of 2006.


3.	DISTRIBUTIONS FROM VALERO L.P.

Valero L.P.’s partnership agreement, as amended, determines the amount and priority of cash distributions that Valero L.P.’s common unitholders, subordinated unitholders and general partner may receive. During the subordination period, if there is sufficient available cash, the holders of Valero L.P.’s common units are entitled to receive each quarter a minimum 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. In addition, the general partner is entitled to incentive distributions, as defined below, if the amount Valero L.P. distributes with respect to any quarter exceeds $0.60 per unit. Effective March 11, 2004, 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 will continue to receive a 2% distribution with respect to its general partner interest.

F-19

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

The following table reflects the allocation of the total cash distributions paid by Valero L.P. among the general and limited partners. The amounts presented reflect the distributions applicable to the period in which the distributions are earned:


		Year Ended December 31,

		2005		2004		2003

		(in thousands, except per unit data)
General partner interest		$	2,589	$	1,595	$	1,404
General partner incentive distribution			8,711		4,449		2,620

	Total general partner distribution		11,300		6,044		4,024
Valero GP Holdings’ limited partner distribution			34,421		32,805		30,319

	Total distributions to Valero GP Holdings		45,721		38,849		34,343
Public unitholders’ distributions			83,757		40,928		35,860

	Total cash distributions	$	129,478	$	79,777	$	70,203

Cash distributions per unit applicable to limited partners		$	3.365	$	3.20	$	2.95

During 2005, Valero L.P. paid quarterly cash distributions as follows:


			Amount
Distribution Related To:	Payment Date		Per Unit

4th quarter 2004		February 14, 2005	$	0.800
1st quarter 2005		May 13, 2005		0.800
2nd quarter 2005		August 12, 2005		0.855
3rd quarter 2005		November 14, 2005		0.855

Cash distributions related to the fourth quarter of 2005 of $0.855 per unit were paid by Valero L.P. on February 14, 2006.


4.	ACQUISITIONS BY VALERO L.P. PRIOR TO MARCH 18, 2003


	*Telfer Asphalt Terminal*

On January 7, 2003, Valero L.P. completed its acquisition of Telfer Oil Company’s (Telfer) Pittsburg, California asphalt terminal for $15.1 million. The asphalt terminal includes two storage tanks with a combined storage capacity of 350,000 barrels, six 5,000-barrel polymer modified asphalt tanks, a truck rack, rail facilities and various other tanks and equipment. A portion of the purchase price represented payment to the principal owner of Telfer for a non-compete agreement and for the lease of certain facilities adjacent to the terminal operations.


5.	NOTES PAYABLE TO AFFILIATES

Valero GP Holdings’ notes payable to affiliates reflects the allocation to Valero GP Holdings of a portion of the debt incurred by Valero Energy to fund its merger with UDS in December 2001, as well as the effect of cash inflows and outflows of Valero GP Holdings resulting from its normal operations. The notes payable to affiliates have a maturity date of January 1, 2008. As of December 31, 2005, $151.1 million of the borrowing capacity under the notes was available for borrowing. Valero Energy uses a centralized cash management system under which cash receipts of Valero GP Holdings are remitted to Valero Energy and cash disbursements of Valero GP Holdings are funded by Valero Energy. Interest expense is incurred by Valero GP Holdings on its notes payable to affiliates at rates that are adjusted monthly to amounts that represent Valero Energy’s overall cost of borrowing. Valero GP Holdings’ borrowing rate was 6.91% and 6.33% as of December 31, 2005 and 2004,

F-20

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

respectively. Valero Energy has represented to Valero GP Holdings that, on or prior to the effective date of the IPO discussed in Note 1, Valero Energy will contribute to Valero GP Holdings notes issued by Valero GP Holdings and held by Valero Energy subsidiaries.


6.	DISTRIBUTIONS TO VALERO ENERGY

Valero GP Holdings makes distributions to Valero Energy affiliates in accordance with its limited liability company agreement, under which cash receipts less cash expenditures are distributed on a quarterly or more frequent basis to Valero GP Holdings’ members. Distributions for the year ended December 31, 2003 of $156.6 million include the distribution from Valero L.P. of approximately $132.7 million, received prior to the ceasing of consolidation, representing (i) proceeds of $137 million for the redemption of 3.8 million common units and a proportionate amount of the general partner interest held by Valero GP Holdings, reduced by (ii) a $4.3 million investment by Valero GP Holdings to maintain its 2% general partner interest as a result of the issuance of 5.75 million common units by Valero L.P. as discussed in Note 2.


7.	STATEMENTS OF CASH FLOWS

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and liabilities as follows:


		Year Ended December 31,

		2005			2004		2003

		(in thousands)
Decrease (increase) in current assets:
	Receivables, net	$	—		$	—	$	(249	)
	Receivable from Valero L.P.		(1,151	)		985		2,937
	Prepaid expenses and other		—			—		(1,194	)
Increase (decrease) in current liabilities:
	Accounts payable		2			—		823
	Income taxes payable		11			—		—
	Accrued liabilities		(1,859	)		1,239		(362	)
	Taxes other than income taxes		—			—		(1,354	)

Changes in current assets and liabilities		$	(2,997	)	$	2,224	$	601

Cash flows related to interest and income taxes were as follows:


	Year Ended December 31,

	2005		2004		2003

	(in thousands)
Interest paid	$	17,778	$	17,110	$	20,283
Income taxes paid		47		74		191


8.	INCOME TAXES

Components of income tax expense (benefit) were as follows:


		Year Ended
		December 31,

		2005		2004			2003

		(in thousands)
Current		$	47	$	74		$	191
Deferred			67		(7	)		(158	)

	Income tax expense	$	114	$	67		$	33

F-21

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

The tax effects of significant temporary differences representing deferred income tax assets relate principally to differences between the timing of expense recognition and the deductibility for tax purposes of compensation and employee benefit costs.


9.	EMPLOYEE BENEFIT PLANS

Valero L.P., which has no employees, relies on employees of Valero Energy and its affiliates, including Valero GP Holdings, to provide certain services to operate Valero L.P.’s assets. Effective January 1, 2003, most of the employees providing operational services to Valero L.P. became employees of Valero GP Holdings. The employees of Valero GP Holdings are included in the various employee benefit plans of Valero Energy. These plans include qualified, non-contributory defined benefit retirement plans, defined contribution 401(k) plans, employee and retiree medical, dental and life insurance plans, bonus plans, long-term incentive plans (i.e., unit options and restricted common units) and other such benefits. In addition, prior to the ceasing of consolidation of Valero L.P. on March 18, 2003, certain unit options and restricted common units of Valero L.P. were granted by Valero GP Holdings to certain corporate officers of Valero Energy.

All costs incurred by Valero GP Holdings related to these employee benefit plans, excluding compensation expense related to the long-term incentive plans, are reimbursed by Valero L.P. at cost. Long-term incentive plan compensation expense pertaining to employees of Valero GP Holdings is reimbursed by Valero L.P., while such compensation expense pertaining to corporate officers of Valero Energy is borne by Valero Energy affiliates outside of Valero GP Holdings. Any liability of Valero GP Holdings related to the various employee benefit plans discussed above, other than the bonus plans and the long-term incentive plans, are reflected in “notes payable to affiliates” in the consolidated balance sheet of Valero GP Holdings. The liability for the bonus plans is recorded by Valero L.P., and the obligation under the long-term incentive plans is reflected in “accrued liabilities” in the consolidated balance sheet of Valero GP Holdings.

Valero GP Holdings has adopted the following plans:


	•	the 2000 Long-Term Incentive Plan (the LTIP) under which Valero GP Holdings may award up to 250,000 common units of Valero L.P. to certain key employees of Valero Energy’s affiliates providing services to Valero L.P. and to directors and officers of Valero GP Holdings. Awards under the LTIP can include unit options, restricted common units, distribution equivalent rights (DERs) and contractual rights to receive common units of Valero L.P.

	•	the 2002 Unit Option Plan (the UOP) under which Valero GP Holdings may award up to 200,000 unit options of Valero L.P. to officers and directors of Valero GP Holdings or its affiliates.

	•	the 2003 Employee Unit Incentive Plan (the UIP) under which Valero GP Holdings may award up to 500,000 common units of Valero L.P. to employees of Valero GP Holdings or its affiliates, excluding officers and directors of Valero GP Holdings and its affiliates. Awards under the UIP can include unit options, unit appreciation rights, restricted units, performance awards, unit compensation and other unit-based awards.

F-22

VALERO GP HOLDINGS, LLC

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

The number of awards granted under the above-noted plans during the years ended December 31, 2005, 2004 and 2003 were as follows:


		2005				2004				2003

		Granted		Vesting		Granted		Vesting		Granted		Vesting

LTIP:
	Contractual rights		—		—		—		—		30,000		1/3 per year
	Unit options		25,075		1/5 per year		—		—		28,625		1/5 per year
	Restricted units		14,920		1/5 per year		9,425		1/5 per year		2,280		1/5 per year
	Restricted units		1,340		1/3 per year		579		1/3 per year		—		—
UOP			14,925		1/5 per year		23,775		1/5 per year		32,000		1/5 per year
UIP:
	Unit options		128,300		1/5 per year		49,575		1/5 per year		—		—
	Restricted units		31,800		1/5 per year		2,680		1/5 per year		1,440		1/5 per year

As of December 31, 2005 and 2004, Valero GP Holdings had accrued $2,293,000 and $4,419,000, respectively, for the outstanding awards. See Note 1, “Stock-Based Compensation,” for a discussion of the manner in which Valero GP Holdings accounts for the above awards. As of December 31, 2005, Valero L.P. common units that remained available to be awarded totaled 38,772 under the LTIP, 250 under the UOP and 287,730 under the UIP. Awards under these plans are currently granted solely to individuals whose services are entirely devoted to Valero L.P., and the costs related to such awards are borne by Valero L.P.

F-23

VALERO L.P. AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT

Introduction

The following unaudited pro forma combined statement of income gives effect to the acquisition by Valero L.P. of Kaneb Services LLC (“KSL”) and Kaneb Pipe Line Partners, L.P. (“KPP”) (collectively referred to as “Kaneb”) on July 1, 2005. Valero L.P. acquired all of the equity securities of KSL in a fixed cash merger for $43.31 per share. Immediately subsequent to the KSL merger, unitholders of KPP exchanged their units for Valero L.P. common units receiving 1.0231 common units of Valero L.P. for each KPP unit tendered in the exchange.

As a condition to complete the acquisition of Kaneb, Valero L.P. and the United States Federal Trade Commission agreed that Valero L.P. would divest certain Kaneb assets within six months of the close of the acquisition. The assets to be divested included Kaneb terminals located in Richmond, CA; Martinez, CA; Paulsboro, NJ; two terminals in Philadelphia, PA; and Kaneb’s West Pipeline System. These assets are collectively referred to as the “Held Separate Businesses.” On September 30, 2005, Valero L.P. sold the Held Separate Businesses to Pacific Energy Partners, L.P. for approximately $455 million. On July 1, 2005 Valero L.P. sold the stock of Martin Oil LLC (“MOC”), a wholly owned subsidiary of KSL and acquired as part of the acquisition of Kaneb, to a subsidiary of Valero Energy Corporation (“Valero Energy”) for approximately $27 million. Additionally, on March 30, 2006 Valero L.P. sold its subsidiaries located in Australia and New Zealand (the Australia and New Zealand Subsidiaries) for approximately $65 million plus working capital adjustments. These subsidiaries had also been acquired as part of the acquisition of Kaneb.

The unaudited pro forma combined statement of income for the year ended December 31, 2005 assumes that the Kaneb acquisition occurred on January 1, 2005, and it excludes the results of operations of the Held Separate Businesses, MOC and the Australia and New Zealand Subsidiaries. The Valero L.P. historical statement of income information presented in the unaudited pro forma combined statement of income includes the results of operations of KPP and KSL from the date of acquisition, July 1, 2005, through December 31, 2005. Therefore, the adjusted KSL historical statement of income information, which reflects the consolidation of KPP and KSL with all intercompany transactions being eliminated, is only for the six months ended June 30, 2005. The first set of pro forma adjustments in the unaudited pro forma combined statement of income reflects the effect of the KSL merger. The second set of pro forma adjustments reflects the effect of the KPP merger that occurred immediately upon the closing of the KSL merger. The estimates of fair value of the assets acquired and liabilities assumed are based on preliminary assumptions, pending the completion of an independent appraisal, with any excess of purchase price over the net fair value of assets acquired and liabilities assumed assigned to goodwill.

An unaudited pro forma combined balance sheet as of December 31, 2005 is not presented because the transactions discussed above are reflected in Valero L.P.’s historical balance sheet as of December 31, 2005, other than the sale of the Australia and New Zealand subsidiaries, the effect of which is immaterial.

The unaudited pro forma combined statement of income should be read in conjunction with the historical consolidated financial statements of Valero L.P. and Kaneb Services LLC included elsewhere in this prospectus. The unaudited pro forma combined statement of income is not necessarily indicative of the financial results that would have occurred if the Kaneb acquisition had been consummated on the date indicated, nor is it necessarily indicative of the results of operations in the future. The pro forma adjustments, as described in the notes to unaudited pro forma combined financial statements, are based upon available information and certain assumptions that Valero L.P.’s management believes are reasonable.

The unaudited pro forma combined statement of income does not give effect to any anticipated cost savings or other financial benefits expected to result from the Kaneb acquisition.

F-24

VALERO L.P. AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2005


						Kaneb Services
						LLC Historical
						As Adjusted			KSL			Valero L.P.			KPP			Valero L.P.
						(Six Months			Merger			Pro Forma			Merger			Pro Forma
			Valero L.P.			Ended June 30,			Pro Forma			after KSL			Pro Forma			Combined
			Historical			2005)(a)			Adjustment			Merger			Adjustments			with Kaneb

			(Thousands of dollars, except unit and per unit data)
Revenues			$	659,557		$	348,902		$	—		$	1,008,459		$	(2,797	)(d)	$	1,005,662

Costs and expenses:
	Cost of sales			229,806			171,551			—			401,357			—			401,357
	Operating expenses			184,609			87,641			—			272,250			—			272,250
	General and administrative expenses			26,553			38,975			—			65,528			—			65,528
	Depreciation and amortization			64,895			24,649			—			89,544			4,636	(e)		94,180
	Provision for loss contingencies			—			42,000			—			42,000			—			42,000

		Total costs and expenses		505,863			364,816			—			870,679			4,636			875,315

Operating income (loss)				153,694			(15,914	)		—			137,780			(7,433	)		130,347
	Equity earnings in joint ventures			2,319			—			—			2,319			2,797	(d)		5,116
	Interest and other expense, net			(43,625	)		(22,397	)		946	(b)		(65,076	)		3,955	(f)		(61,121	)

Income (loss) before interest of outside non-controlling partners and income tax expense				112,388			(38,311	)		946			75,023			(681	)		74,342
	Interest of outside non-controlling partners			—			2,158			—			2,158			(2,158	)(g)		—
	Income tax benefit (expense)			(4,713	)		13,455			—			8,742			—	(h)		8,742

Income (loss) from continuing operations			$	107,675		$	(22,698	)	$	946		$	85,923		$	(2,839	)	$	83,084

Allocation of income from continuing operations:
	Income (loss) from continuing operations		$	107,675		$	(22,698	)	$	946		$	85,923		$	(2,839	)	$	83,084
	General partner’s interest in income from continuing operations			(10,758	)		—			—			(10,758	)		(3,053	)(i)		(13,811	)

	Limited partners’ interest in income (loss) from continuing operations		$	96,917		$	(22,698	)	$	946		$	75,165		$	(5,892	)	$	69,273

Income from continuing operations per unit applicable to limited partners			$	2.76														$	1.48

Weighted average number of limited partnership units outstanding				35,023,250									35,023,250			11,786,696	(c)		46,809,946

See Notes to Unaudited Pro Forma Combined Financial Statement.

F-25

VALERO L.P. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT

Kaneb Services LLC’s Historical Statement of Operations:


	(a)	KSL’s historical statement of operations for the six months ended June 30, 2005 has been adjusted on a pro forma basis to reflect the elimination of the revenues and expenses of the Held Separate Businesses, MOC and the Australia and New Zealand Subsidiaries, as follows (in thousands):


									Kaneb Services
			Kaneb Services			Pro Forma			LLC Historical,
			LLC Historical			Adjustments			As Adjusted

Revenue			$	626,221		$	(277,319	)	$	348,902

Costs and expenses:
	Cost of products sold			405,165			(233,614	)		171,551
	Operating expenses			104,731			(17,090	)		87,641
	General and administrative expenses			40,897			(1,922	)		38,975
	Depreciation and amortization			29,501			(4,852	)		24,649
	Provision for loss contingencies			42,000			—			42,000

		Total costs and expenses		622,294			(257,478	)		364,816

Operating income (loss)				3,927			(19,841	)		(15,914	)
	Interest and other expense, net			(23,671	)		1,274			(22,397	)

Loss before interest of outside non-controlling partners and income tax expense				(19,744	)		(18,567	)		(38,311	)
	Interest of outside non-controlling partners			2,158			—			2,158
	Income tax benefit			12,778			677			13,455

Loss from continuing operations			$	(4,808	)	$	(17,890	)	$	(22,698	)

Kaneb Services LLC Merger Pro Forma Adjustment:


	(b)	To reflect a net reduction in interest expense of $946,000 calculated on a net reduction in borrowings of $22 million ($525 million of new term debt, less $455 million due to proceeds from the sale of the Held Separate Businesses, less $27 million due to proceeds from the sale of MOC and less $65 million due to proceeds from the sale of the Australia and New Zealand Subsidiaries), offset by the amortization of deferred debt issuance costs of $81,000. A 1/8% change in the interest rate associated with these borrowings would have a $13,750 effect on interest expense.

Kaneb Pipe Line Partners, L.P. Pro Forma Adjustments:


	(c)	To reflect the purchase of KPP’s remaining 82% limited partner interest through an exchange of Valero L.P. common units.


KPP’s limited partner units outstanding as of June 30, 2005	28,327,590
Less: KSL’s ownership of KPP’s limited partner units acquired by Valero L.P. in the KSL merger L.P. in the KSL merger	5,095,500

Number of KPP limited partner units exchanged for Valero L.P. common units	23,232,090
Multiplied by the exchange ratio	1.0231	(1)

Number of Valero L.P. common units issued in the exchange	23,768,751

F-26

VALERO L.P. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT — (Continued)


		The following calculates the weighted average effect of the common unit issuance for the year ended December 31, 2005:


Number of Valero L.P. common units issued in the exchange			23,768,751
Multiplied by the ratio of total days during the six-month period prior to the acquisition date to total days during the year			181/365

Weighted average effect of common unit issuance			11,786,696


	(1)	Under the terms of the merger agreement with KPP, each unit of KPP was exchanged for 1.0231 Valero L.P. common units.


	(d)	To reclassify certain revenues as equity income from joint ventures of $2,797,000 for the six months ended June 30, 2005 in order to conform the financial statement presentation to that of Valero L.P.


	(e)	To record depreciation and amortization expense on the excess purchase price allocated to property and equipment and intangible assets (exclusive of the Held Separate Businesses and MOC). The pro forma adjustment to depreciation expense is $1,736,000 based on an estimated life of 25 years and no salvage value. The pro forma adjustment to amortization expense is $2,900,000 based on an estimated life of 10 years.


	(f)	To reflect interest expense reductions attributable to amortization of the $55 million excess of fair value over carrying value of Kaneb’s debt at June 30, 2005 (i.e., the “fair value premium”) of $3,955,000 for the six months ended June 30, 2005. For pro forma presentation purposes, the fair value premium associated with each Kaneb debt instrument assumed has been amortized from January 1, 2005 or the date of issuance of the debt, whichever is later, over the remaining term of the instrument using the effective interest method. If market rates underlying the fair value of each debt instrument were to increase 1/8%, the pro forma increase in interest expense would be $266,000 for the six months ended June 30, 2005.


	(g)	To eliminate the deduction from income representing the interest of outside non-controlling partners in KPP of $2,158,000 for the six months ended June 30, 2005. As a result of the Kaneb mergers, Valero L.P. owns 100% of KSL’s and KPP’s ownership interests.

	(h)	The pro forma adjustments to the statement of income have not been tax-effected as the effect on income tax is not material.


	(i)	To reflect the adjustment to the general partner’s interest in income from continuing operations that has been calculated assuming quarterly distributions per limited partner unit of $0.855, which was declared and approved by Valero L.P.’s board of directors on January 27, 2006. The general partner’s incentive distribution rights have been calculated as defined by Valero L.P.’s partnership agreement. The income from continuing operations applicable to the general partner is reflected in the KPP merger pro forma adjustments to reflect the effect of both mergers. The following reflects the general partner’s total interest in the pro forma combined income from continuing operations for the year ended December 31, 2005 (in thousands):


General partner’s 2% ownership interest in income from continuing operations	$	1,615
General partner’s incentive distribution		12,196

Total general partner interest in income from continuing operations	$	13,811

F-27

Report of Independent Registered Public Accounting Firm

The Board of Directors of Valero GP, LLC

and Unitholders of Valero L.P.:

We have audited the accompanying consolidated balance sheets of Valero L.P. and subsidiaries (a Delaware limited partnership) (the Partnership) as of December 31, 2005 and 2004, and the related consolidated statements of income, cash flows and partners’ equity for the years then ended. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valero L.P. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, the effectiveness of Valero L.P. and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.


	/s/ KPMG LLP

San Antonio, Texas

March 13, 2006

F-28

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Valero GP, LLC

and Unitholders of Valero L.P.

We have audited the consolidated statements of income, cash flows and partners’ equity of Valero L.P. and subsidiaries (a Delaware limited partnership, “the Partnership”) for the year ended December 31, 2003. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Valero L.P. and subsidiaries for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.


	/s/ ERNST & YOUNG LLP

San Antonio, Texas

March 11, 2004

F-29

VALERO L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


			December 31,

			2005			2004

			(Thousands of dollars,
			except unit data)
ASSETS
Current assets:
	Cash and cash equivalents		$	36,054		$	16,147
	Receivable from Valero Energy			21,873			19,195
	Accounts receivable, net of allowance for doubtful accounts of $1,976 and $0 as of December 31, 2005 and 2004, respectively			110,066			3,395
	Inventories			17,473			—
	Other current assets			30,138			1,242
	Assets of businesses held for sale			79,807			—

		Total current assets		295,411			39,979

Property and equipment, at cost				2,417,529			981,360
Accumulated depreciation and amortization				(257,316	)		(196,361	)

	Property and equipment, net			2,160,213			784,999
Intangible assets, net				59,159			4,695
Goodwill				767,587			4,715
Investment in joint ventures				73,986			15,674
Deferred charges and other assets, net				10,636			7,445

		Total assets	$	3,366,992		$	857,507


LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	1,046		$	990
	Payable to Valero Energy			12,800			4,166
	Accounts payable			104,320			10,909
	Accrued interest payable			16,391			7,693
	Accrued liabilities			46,917			5,146
	Taxes other than income taxes			9,013			4,705
	Income taxes payable			4,001			—
	Liabilities of businesses held for sale			11,100			—

		Total current liabilities		205,588			33,609

Long-term debt, less current portion				1,169,659			384,171
Deferred income taxes				13,576			—
Other long-term liabilities				77,390			1,416
Commitments and contingencies (Note 12)
Partners’ equity:
	Common units (37,210,427 outstanding as of December 31, 2005 and 13,442,072 as of December 31, 2004)			1,749,007			310,537
	Subordinated units (9,599,322 outstanding as of December 31, 2005 and 2004)			114,127			117,968
	General partner’s equity			38,913			9,836
	Accumulated other comprehensive loss			(1,268	)		(30	)

		Total partners’ equity		1,900,779			438,311

		Total liabilities and partners’ equity	$	3,366,992		$	857,507

See Notes to Consolidated Financial Statements.

F-30

VALERO L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


			Year Ended December 31,

			2005			2004			2003

			(Thousands of dollars, except unit and
			per unit data)
Revenues:
	Services		$	407,194		$	220,792		$	181,450
	Product			252,363			—			—

		Total revenues		659,557			220,792			181,450

Costs and expenses:
	Cost of sales			229,806			—			—
	Operating expenses			184,609			78,298			64,609
	General and administrative expenses			26,553			11,321			7,537
	Depreciation and amortization			64,895			33,149			26,267

		Total costs and expenses		505,863			122,768			98,413

Operating income				153,694			98,024			83,037
	Equity earnings in joint ventures			2,319			1,344			2,416
	Interest and other expense, net			(43,625	)		(20,950	)		(15,860	)

Income from continuing operations before income tax expense				112,388			78,418			69,593
	Income tax expense			4,713			—			—

Income from continuing operations				107,675			78,418			69,593
Income from discontinued operations, net of income tax				3,398			—			—

Net income				111,073			78,418			69,593
Less general partner’s interest and incentive distributions				(10,758	)		(5,927	)		(3,959	)

Limited partners’ interest in net income			$	100,315		$	72,491		$	65,634

Net income per unit applicable to limited partners:
	Continuing operations		$	2.76		$	3.15		$	3.02
	Discontinued operations			0.10			—			—

	Net income		$	2.86		$	3.15		$	3.02

Weighted average number of basic and diluted units outstanding				35,023,250			23,041,394			21,706,164

See Notes to Consolidated Financial Statements.

F-31

VALERO L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


			Year Ended December 31,

			2005			2004			2003

			(Thousands of dollars)
Cash Flows from Operating Activities:
Net income			$	111,073		$	78,418		$	69,593
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			66,667			33,149			26,267
	Provision for deferred income taxes			4,283			—			—
	Equity earnings in joint ventures			(2,499	)		(1,344	)		(2,416	)
	Distributions of equity earnings in joint ventures			2,499			1,344			2,416
	Changes in operating assets and liabilities:
		Increase in receivable from Valero Energy		(2,678	)		(3,414	)		(7,299	)
		(Increase) decrease in accounts receivable		(39,397	)		1,938			(3,831	)
		Increase in inventories		(6,042	)		—			—
		Increase in other current assets		(11,475	)		(260	)		(1,098	)
		Increase (decrease) in payable to Valero Energy		8,634			(5,683	)		9,849
		(Decrease) increase in accrued interest payable		(259	)		47			4,441
		Increase in accounts payable and other accrued liabilities		54,604			3,339			4,091
		(Decrease) increase in taxes other than income taxes		(3,323	)		264			644
	Other, net			4,343			705			3,451

		Net cash provided by operating activities		186,430			108,503			106,108

Cash Flows from Investing Activities:
Reliability capital expenditures				(23,707	)		(9,701	)		(10,353	)
Expansion capital expenditures				(44,379	)		(19,702	)		(21,208	)
Kaneb acquisition, net of cash acquired				(500,973	)		(1,098	)		—
Other acquisitions				—			(28,085	)		(411,176	)
Investment in other noncurrent assets				(3,319	)		—			—
Proceeds from sale of Held Separate Businesses, net				454,109			—			—
Proceeds from dispositions of other assets				26,836			46			—
Distributions in excess of equity earnings in joint ventures				2,433			29			387

		Net cash used in investing activities		(89,000	)		(58,511	)		(442,350	)

Cash Flows from Financing Activities:
Proceeds from 6.05% senior note offering, net of discount and issuance costs				—			—			247,297
Proceeds from other long-term debt borrowings				746,472			43,000			25,000
Repayment of long-term debt				(735,064	)		(15,468	)		(25,298	)
Distributions to unitholders and general partner				(127,789	)		(78,240	)		(65,916	)
Redemption of common units held by UDS Logistics, LLC				—			—			(134,065	)
General partner contributions, net of redemption				29,197			—			2,930
Proceeds from sale of common units to the public, net of issuance costs				—			—			269,026
Increase (decrease) in cash book overdrafts				10,006			1,118			(520	)

		Net cash provided by (used in) financing activities		(77,178	)		(49,590	)		318,454

Effect of foreign exchange rate changes on cash				(345	)		—			—
Net increase (decrease) in cash and cash equivalents				19,907			402			(17,788	)
Cash and cash equivalents as of the beginning of year				16,147			15,745			33,533

Cash and cash equivalents as of the end of year			$	36,054		$	16,147		$	15,745

Supplemental cash flow information:
Cash paid for interest			$	53,162		$	24,120		$	15,701

Cash paid for income taxes			$	1,663		$	—		$	—

See Notes to Consolidated Financial Statements.

F-32

VALERO L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003


												Accumulated
			Limited Partners									Other			Total
									General			Comprehensive			Partners’
			Common			Subordinated			Partner			Loss			Equity

			(Thousands of dollars)
Balance as of January 1, 2003			$	170,655		$	117,042		$	6,198		$	—		$	293,895
	Net income			36,832			28,802			3,959			—			69,593
	Cash distributions to partners			(34,559	)		(27,839	)		(3,518	)		—			(65,916	)
	Sales of 7,567,250 common units to the public in March, April and August 2003 and related general partner interest contributions			269,026			—			5,787			—			274,813
	Redemption of 3,809,750 common units held by UDS Logistics, LLC and related general partner interest redemption			(134,065	)		—			(2,857	)		—			(136,922	)
	Other			2,700			—			—			—			2,700

Balance as of December 31, 2003				310,589			118,005			9,569			—			438,163
	Net income			42,290			30,201			5,927			—			78,418
	Other comprehensive loss — foreign currency translation			—			—			—			(30	)		(30	)

		Total comprehensive income		42,290			30,201			5,927			(30	)		78,388

	Cash distributions to partners			(42,342	)		(30,238	)		(5,660	)		—			(78,240	)

Balance as of December 31, 2004				310,537			117,968			9,836			(30	)		438,311
	Net income			72,383			27,932			10,758			—			111,073
	Other comprehensive loss — foreign currency translation			—			—			—			(1,238	)		(1,238	)

		Total comprehensive income		72,383			27,932			10,758			(1,238	)		109,835

	Cash distributions to partners			(85,138	)		(31,773	)		(10,878	)		—			(127,789	)
	Exchange of 23,768,355 common units for all common units of KPP in July 2005 and related general partner interest contributions			1,451,225			—			29,197			—			1,480,422

Balance as of December 31, 2005			$	1,749,007		$	114,127		$	38,913		$	(1,268	)	$	1,900,779

See Notes to Consolidated Financial Statements.

F-33

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003


1.	ORGANIZATION AND OPERATIONS


	*Organization*

Valero L.P. is a Delaware limited partnership formed in 1999 that completed its initial public offering of common units in April 16, 2001.

As used in this report, references to “we,” “us,” “our” or “the Partnership” collectively refer, depending on the context, to Valero L.P. or a wholly owned subsidiary of Valero L.P.

Riverwalk Logistics, L.P., a wholly owned subsidiary of Valero Energy Corporation (Valero Energy), is the 2% general partner of the Partnership. Valero Energy, through various affiliates, is also a limited partner in us, resulting in a combined partnership ownership of 23.4%. The remaining 76.6% limited partnership interests are held by public unitholders.

On July 1, 2005, we completed our acquisition (Kaneb Acquisition) of Kaneb Services LLC (KSL) and Kaneb Pipe Line Partners, L.P. (KPP, and, together with KSL, Kaneb). We acquired all of KSL’s outstanding equity securities for approximately $509 million in cash, which was primarily funded by borrowings under a $525 million term credit agreement. Additionally, we issued approximately 23.8 million of our common units valued at approximately $1.45 billion in exchange for all of the outstanding common units of KPP.


	*Operations*

Our operations are managed by Valero GP, LLC. Valero GP, LLC is the general partner of Riverwalk Logistics, L.P. Valero GP, LLC is an indirect wholly owned subsidiary of Valero Energy.

We conduct our operations through our subsidiaries, primarily Valero Logistics Operations, L.P. (Valero Logistics) and, as a result of the Kaneb Acquisition, Kaneb Pipe Line Operating Partnership, L.P. (KPOP). We have four business segments: refined product terminals, refined product pipelines, crude oil pipelines and crude oil storage tanks. As of December 31, 2005, our assets included:


	•	76 refined product terminal facilities providing approximately 59.7 million barrels of storage capacity;

	•	8,389 miles of refined product pipelines, including 2,000 miles of anhydrous ammonia pipelines, with 21 associated terminals providing storage capacity of 4.7 million barrels;

	•	797 miles of crude oil pipelines with 11 associated storage tanks providing storage capacity of 1.7 million barrels; and

	•	60 crude oil storage tanks providing storage capacity of 12.5 million barrels.

We have terminal facilities in the United States, Canada, Mexico, the Netherlands Antilles, the Netherlands, Australia, New Zealand and the United Kingdom. Our largest customer is Valero Energy, which accounted for 34% of our consolidated revenues for the year ended December 31, 2005 (See Note 14. Related Party Transactions).

Valero Energy, an independent refining and marketing company, owns and operates 18 refineries with a combined total throughput capacity as of December 31, 2005 of approximately 3.3 million barrels per day. Valero Energy’s refining operations rely on various logistics assets (pipelines, terminals, marine dock facilities, bulk storage facilities, refinery delivery racks and rail car loading equipment) that support its refining and retail operations, including the logistics assets we own and operated.

F-34

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


	*Consolidation*

The accompanying consolidated financial statements represent the consolidated operations of the Partnership and our subsidiaries in which we have a controlling interest. Inter-partnership balances and transactions have been eliminated in consolidation. The operations of certain crude oil, refined product pipelines and refined product terminals in which we own an undivided interest, are proportionately consolidated in the accompanying consolidated financial statements. Investments in 50% or less owned entities are accounted for using the equity method of accounting.


	*Use of Estimates*

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews their estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.


	*Cash and Cash Equivalents*

Cash equivalents are all highly liquid investments with an original maturity of three months or less when acquired.


	*Accounts Receivable, net*

Accounts receivable represent valid claims against non-affiliated customers for products sold or services rendered. We extend credit terms to certain customers after review of various credit indicators, including the customer’s credit rating. Outstanding customer receivable balances are regularly reviewed for possible non-payment indicators and allowances for doubtful accounts are recorded based upon management’s estimate of collectibility at the time of their review.


	*Inventories*

Inventories consist of petroleum products purchased for resale and are valued at the lower of cost or market. Cost is determined using the weighted-average cost method.


	*Property and Equipment*

Additions to property and equipment, including reliability and expansion capital expenditures and capitalized interest, are recorded at cost.

Reliability capital expenditures represent capital expenditures to replace partially or fully depreciated assets to maintain the existing operating capacity of existing assets and extend their useful lives. Expansion capital expenditures represent capital expenditures to expand or upgrade the operating capacity, increase efficiency or increase the earnings potential of existing assets, whether through construction or acquisition. Repair and maintenance costs associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred.

Depreciation of property and equipment is recorded on a straight-line basis over the estimated useful lives of the related assets. Gains or losses on sales or other dispositions of property are recorded in income and are reported in “interest and other expense, net” in the consolidated statements of income. When property and equipment is retired or otherwise disposed of, the difference between the carrying value and the net proceeds is recognized as gain or loss in the consolidated statement of income in the year retired.

F-35

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Goodwill and Intangible Assets*

Goodwill represents the excess of cost of an acquired entity over the fair value of net assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets). Goodwill acquired in a business combination is not amortized. Intangible assets with finite useful lives are amortized on a straight-line basis over 5 to 47 years. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. We use October 1 of each year as our annual valuation date for the impairment test. Based on the results of the impairment tests performed as of October 1, 2005, 2004 and 2003, no impairment had occurred.


	*Investment in Joint Ventures*

Skelly-Belvieu Pipeline Company, LLC. Formed in 1993, the Skelly-Belvieu Pipeline Company, LLC (Skelly-Belvieu) owns a liquefied petroleum gas pipeline that begins in Skellytown, Texas and extends to Mont Belvieu, Texas near Houston. Skelly-Belvieu is owned 50% by the Partnership and 50% by ConocoPhillips. We account for this investment under the equity method of accounting.

ST Linden Terminals, LLC. Formed in 1998, the 44-acre facility provides us with deep-water terminalling capabilities at New York Harbor and primarily stores petroleum products, including gasoline, jet fuel and fuel oils. ST Linden Terminals, LLC (Linden) is owned 50% by the Partnership and 50% by Northville Industries Corp. We account for this investment under the equity method of accounting.


	*Deferred Charges and Other Assets*

“Deferred charges and other assets, net” primarily include the following:


	•	deferred financing costs amortized over the life of the related debt obligation using the effective interest method; and

	•	deferred costs incurred in connection with acquiring a customer contract, which will be amortized over the life of the contract.


	*Impairment of Long-Lived Assets*

Long-lived assets, including property and equipment and investment in joint ventures, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation of recoverability is performed using undiscounted estimated net cash flows generated by the related asset. If an asset is deemed to be impaired, the amount of impairment is determined as the amount by which the net carrying value exceeds discounted estimated net cash flows. We believe that the carrying amounts of our long-lived assets as of December 31, 2005 are recoverable.


	*Taxes Other than Income Taxes*

Taxes other than income taxes include primarily liabilities for ad valorem taxes, franchise taxes, and value added taxes.


	*Income Taxes*

We are a limited partnership and are not subject to federal or state income taxes. Accordingly, the taxable income or loss of the Partnership, which may vary substantially from income or loss reported for financial reporting purposes, is generally includable in the federal and state income tax returns of the individual partners. For transfers of publicly held units subsequent to the initial public offering, we have made an election permitted by Section 754 of the Internal Revenue Code to adjust the common unit purchaser’s tax basis in our underlying

F-36

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets to reflect the purchase price of the units. This results in an allocation of taxable income and expenses to the purchaser of the common units, including depreciation deductions and gains and losses on sales of assets, based upon the new unitholder’s purchase price for the common units.

Due to the Kaneb Acquisition, we conduct certain of our operations through separate taxable wholly owned corporate subsidiaries. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred taxes are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.


	*Asset Retirement Obligations*

Effective January 1, 2003, we adopted FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” which establishes financial accounting and reporting standards for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We record a liability for asset retirement obligations in the period the obligation is incurred if we can make a reasonable estimate of the fair value of the obligation. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the fair value.

We have asset retirement obligations with respect to certain of our assets due to various legal obligations to clean and/or dispose of those assets at the time they are retired. However, these assets can be used for extended and indeterminate period of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain our assets and continue making improvements to those assets based on technological advances. As a result, we believe that our assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any asset, we estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.

We also have legal obligations in the form of leases and right of way agreements, which require us to remove certain of our assets upon termination of the agreement. However, these lease or right of way agreements generally contain automatic renewal provisions that extend our rights indefinitely or we have other legal means available to extend our rights. As a result, we have not recorded a liability for asset retirement obligations as the timing of settlement cannot be reasonably determined.


	*Environmental Remediation Costs*

Environmental remediation costs are expensed and an associated accrual established when site restoration and environmental remediation and cleanup obligations are either known or considered probable and can be reasonably estimated. Accrued liabilities are based on estimates of probable undiscounted future costs over a 20-year time period using currently available technology and applying current regulations, as well as our own internal environmental policies. The environmental liabilities have not been reduced by possible recoveries from third parties. Environmental costs include initial site surveys, costs for remediation and restoration and ongoing monitoring costs, as well as fines, damages and other costs, when estimable. Adjustments to initial estimates are recorded, from time to time, to reflect changing circumstances and estimates based upon additional information developed in subsequent periods.


	*Product Imbalances*

Product imbalances occur when customers deliver more or less refined product volumes into our pipelines than they are entitled to receive. We value assets and liabilities related to product imbalances at current market

F-37

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prices. Product imbalance liabilities are included in accrued liabilities on the consolidated balance sheet. Included in other current assets is $20.0 million of product imbalance assets as of December 31, 2005. Prior to the Kaneb Acquisition, we did not have product imbalances.


	*Revenue Recognition*

Revenues for the refined product terminals segment include fees for tank storage agreements, whereby a customer agrees to pay for a certain amount of storage in a tank over a period of time (storage lease revenues), and throughput agreements, whereby a customer pays a fee per barrel for volumes moving through our terminals (throughput revenues). Certain of our terminals also provide blending, handling and filtering services. Revenues for the refined product terminals segment also include the sale of bunker fuel, the fuel used by marine vessels, at Point Tupper and St. Eustatius for which we earn revenues based upon a price per metric ton applied to the number of metric tons delivered to our customer. Our facilities at Point Tupper, Nova Scotia and St. Eustatius, Netherland Antilles charge fees to provide ancillary services such as pilotage, tug assistance, line handling, launch service, emergency response services and other ship services.

Throughput revenues (based on a terminalling fee) are recognized as refined products are delivered out of our terminal. Storage revenues are recognized when services are provided to the customer. Product revenues are recognized when product is sold and title and risk pass to the customer. Revenues for ancillary services are recognized as those services are provided.

Revenues for the refined product and crude oil pipelines segments are derived from interstate and intrastate pipeline transportation of refined product and crude oil. The revenues for the East Pipeline, North Pipeline and Ammonia Pipeline are based upon volumes and the distance the product is shipped and the related tariffs. Transportation revenues (based on pipeline tariffs) are recognized as refined products or crude oil is delivered out of the pipelines.

Crude oil storage tank revenues are recognized as crude oil and certain other refinery feedstocks are received by the related refinery.


	*Income Allocation*

Our net income for each quarterly reporting period is first allocated to the general partner in an amount equal to the general partner’s incentive distribution declared for the respective reporting period. The remaining net income is allocated among the limited and general partners in accordance with their respective 98% and 2% interests.


	*Net Income per Unit Applicable to Limited Partners*

We have identified the general partner and the subordinated units as participating securities and use the two-class method when calculating the net income per unit applicable to limited partners, which is based on the weighted-average number of common and subordinated units outstanding during the period. Net income per unit applicable to limited partners is computed by dividing net income applicable to limited partners, after deducting the general partner’s 2% interest and incentive distributions, by the weighted-average number of limited partnership units outstanding. Basic and diluted net income per unit applicable to limited partners is the same because we have no potentially dilutive securities outstanding. The general partner’s incentive distribution allocation for the years ended December 31, 2005, 2004 and 2003 was $8.7 million, $4.4 million and $2.6 million, respectively. The amount of net income per unit allocated to common units was equal to the amount allocated to the subordinated units for the years presented.

F-38

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Comprehensive Income*

Comprehensive income consists of net income and other gains and losses affecting partners’ equity that, under United States generally accepted accounting principles, are excluded from net income, such as foreign currency translation adjustments.


	*Risk Management Activities*

Beginning in 2003, we entered into interest rate swap agreements for the purpose of hedging the interest rate risk associated with a portion of our fixed-rate senior notes. We account for the interest rate swaps as fair value hedges and recognize the fair value of each interest rate swap in the consolidated balance sheet as either an asset or liability. Changes in the fair value of the interest rate swaps, along with the offsetting gain or loss on the debt that is being hedged, are recognized currently in the consolidated statement of income as an adjustment to interest expense.


	*New Accounting Pronouncements*

FASB Statement 153. In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets,” which addresses the measurement of exchanges of nonmonetary assets. Statement No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets, which was previously provided by APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. Statement No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Statement No 153 was effective for nonmonetary asset exchanges occurring in the fiscal periods beginning after June 15, 2005. The adoption of Statement No. 153 did not affect our financial position or results of operations.

FASB Interpretation No. 47. In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Since the obligation to perform the asset retirement activity is unconditional, FIN 47 provides that a liability for the fair value of a conditional asset retirement obligation should be recognized if that fair value can be reasonably estimated, even though uncertainty exists about the timing and/or method of settlement. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of a conditional asset retirement obligation under FASB Statement No. 143. FIN 47 became effective for us for the year ended December 31, 2005, and did not affect our financial position or results of operations.


	*Reclassifications*

Certain previously reported amounts in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the 2005 presentation.


3.	ACQUISITIONS

COMPLETED DURING 2005


	*Kaneb Acquisition*

On July 1, 2005, we completed the Kaneb Acquisition. We acquired all of KSL’s outstanding equity securities for approximately $509 million in cash, which was primarily funded by borrowings under our

F-39

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$525 million term credit agreement. Additionally, we issued approximately 23.8 million of our common units valued at approximately $1.45 billion in exchange for all of the outstanding common units of KPP.

The Kaneb Acquisition expands our geographic presence and creates one of the largest terminal and pipeline operations in the United States. The Kaneb Acquisition also provides us with a more diversified customer base, which minimizes our dependence on one customer.

The financial statements include the results of operations of the Kaneb Acquisition commencing on July 1, 2005.


	*Purchase Price Allocation*

The Kaneb Acquisition was accounted for using the purchase method. The purchase price has been preliminarily allocated based on the estimated fair values of the individual assets acquired and liabilities assumed at the date of acquisition pending completion of an independent appraisal and other evaluations.

The purchase price and the preliminary purchase price allocation as of December 31, 2005 were as follows (in thousands):


Cash paid for the outstanding equity securities of KSL		$	509,307
Value of Valero L.P.’s common units issued in exchange for KPP units			1,451,249
Transaction costs			10,532
Fair value of long-term debt assumed			779,707
Fair value of other liabilities assumed			181,618

	Total	$	2,932,413

Current assets		$	602,910
Property and equipment			1,443,289
Goodwill			762,872
Intangible assets			58,000
Other noncurrent assets			65,342

	Total	$	2,932,413


	*Unaudited Pro Forma Information*

The unaudited pro forma financial information below includes the historical financial information of Kaneb and the Partnership for the periods indicated. This financial information assumes the following:


	•	we completed the Kaneb Acquisition on January 1, 2004;

	•	we borrowed $525.0 million to purchase all of the outstanding equity securities of KSL;

	•	we issued approximately 23.8 million common units in exchange for all of the outstanding common units of KPP;

	•	we received a contribution from our general partner of $29.2 million to maintain its 2% interest; and

	•	the results of operations of the Held Separate Businesses, Martin Oil LLC, (a marketing subsidiary of KSL) and the Australian and New Zealand subsidiaries are reported as discontinued operations.

F-40

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The unaudited pro forma information presented below is not necessarily indicative of the results of future operations:


		Year Ended December 31,

		2005		2004

		(Thousands of dollars,
		except per unit data)
Revenues		$	1,005,662	$	787,475
Operating income			130,347		179,936
Income from continuing operations		$	83,084	$	132,374
Income from discontinued operations			9,853		13,985

Net income		$	92,937	$	146,359

Net income per unit applicable to limited partners:
	Continuing operations	$	1.48	$	2.52
	Discontinued operations		0.21		0.29

	Net income	$	1.69	$	2.81

COMPLETED DURING 2004


	*Royal Trading Asphalt Terminals*

On February 20, 2004, we acquired two asphalt terminals, one in Catoosa, Oklahoma near Tulsa and one in Rosario, New Mexico near Santa Fe, from Royal Trading Company (Royal Trading) for $28.1 million. These terminals have an aggregate storage capacity of 500,000 barrels in 32 tanks and six loading stations. The purchase price was allocated to the individual tangible and identifiable intangible assets acquired based on their fair values as determined by an independent appraisal. In conjunction with the Royal Trading acquisition, we entered into an agreement with Valero Energy (See Note 14. Related Party Transactions).

The results of operations for these two terminals are included in the consolidated statements of income commencing on February 20, 2004. The pro forma financial information for the years ended December 31, 2004 and 2003 that give effect to the acquisition of Royal Trading as of January 1, 2004 and 2003 have not been disclosed, as the effect is not significant.

COMPLETED DURING 2003


	*Telfer Asphalt Terminal*

On January 7, 2003, we completed our acquisition of Telfer Oil Company’s (Telfer) Pittsburg, California asphalt terminal for $15.3 million. The asphalt terminal includes two storage tanks with a combined storage capacity of 350,000 barrels, six 5,000-barrel polymer modified asphalt tanks, a truck rack, rail facilities and various other tanks and equipment. In conjunction with the Telfer acquisition, we entered into a six-year Terminal Storage and Throughput Agreement with Valero Energy. A portion of the purchase price represented payment to the principal owner of Telfer for a non-compete agreement and for the lease of certain facilities adjacent to the terminal operations.


	*South Texas Pipelines and Terminals*

On March 18, 2003, Valero Energy contributed the South Texas pipeline system to us for $150.1 million, including transaction costs. The South Texas pipeline system was comprised of the Houston pipeline system, the Valley pipeline system and the San Antonio pipeline system (together referred to as the South Texas Pipelines

F-41

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and Terminals). In conjunction with the South Texas Pipelines and Terminals acquisition, we entered into several agreements with Valero Energy (See Note 14. Related Party Transactions).

The following unaudited pro forma financial information assumes that the South Texas Pipelines and Terminals acquisition was funded with $111.0 million of net proceeds from the issuance of the 6.05% senior notes, $25.0 million of borrowings under the revolving credit facility, $6.7 million of net proceeds from the issuance of 185,422 common units and the related general partner capital contribution and $7.4 million of available cash.

The unaudited pro forma financial information for the years ended December 31, 2003 assumes that the South Texas Pipelines and Terminals acquisition occurred on January 1, 2003.


	Year Ended December 31, 2003

	(Thousands of dollars,
	except per unit data)
Revenues	$	187,294
Operating income		85,028
Net income		69,930
Net income per unit applicable to limited partners	$	3.03


	*Crude Oil Storage Tanks*

On March 18, 2003, Valero Energy contributed 58 crude oil storage tanks and related assets (the Crude Oil Storage Tanks) to us for $200.2 million, including transaction costs. The Crude Oil Storage Tanks consisted of certain tank shells, foundations, tank valves, tank gauges, pressure equipment, temperature equipment, corrosion protection, leak detection, tank lighting and related equipment located at Valero Energy’s Corpus Christi refinery, Texas City refinery and Benicia refinery.

Historically, the Crude Oil Storage Tanks were operated as part of Valero Energy’s refining operations and, as a result, no separate fee was charged related to these assets and, accordingly, no revenues were recorded by Valero Energy. The Crude Oil Storage Tanks were not accounted for separately by Valero Energy and were not operated as an autonomous business unit. As a result, the purchase of the Crude Oil Storage Tanks represented an asset acquisition and, therefore, no pro forma impact of this transaction has been included above. In conjunction with the Crude Oil Storage Tanks acquisition, we entered into several agreements with Valero Energy (See Note 14. Related Party Transactions).


	*Shell Pipeline Interest*

On May 1, 2003, we acquired Shell Pipeline Company, LP’s (Shell) 28% undivided interest in the Amarillo to Abernathy refined product pipeline and Shell’s 46% undivided interest in the Abernathy to Lubbock refined product pipeline for $1.6 million. After this acquisition, we own a 67% undivided interest and ConocoPhillips owns the remaining 33% undivided interest in the Amarillo to Abernathy refined product pipeline and we own a 46% undivided interest and ConocoPhillips owns the remaining 54% undivided interest in the Abernathy to Lubbock refined product pipeline.


	*Southlake Refined Product Pipeline*

Effective August 1, 2003, we acquired the Southlake refined product pipeline from Valero Energy for $29.9 million. The pipeline, which has a capacity of 27,300 barrels per day, is a 375-mile pipeline connecting Valero Energy’s McKee refinery to our Southlake refined product terminal near Dallas, Texas.

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VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Paulsboro Refined Product Terminal*

On September 3, 2003, we acquired the Paulsboro refined product terminal from ExxonMobil Oil Corporation for $14.1 million. The Paulsboro refined product terminal is located in Paulsboro, New Jersey, next to Valero Energy’s Paulsboro refinery. The terminal has a storage capacity of 90,800 barrels.


	*Purchase Price Allocations for 2003 Acquisitions*

The purchase prices for the Telfer, South Texas Pipelines and Terminals, Crude Oil Storage Tanks, Shell, Southlake and Paulsboro acquisitions were allocated based on the fair values of the individual assets acquired at the date of acquisition.

The following summarizes the purchase price allocation of the assets acquired in 2003:


		Property
		and		Intangible
		Equipment		Assets		Total

		(Thousands of dollars)
Telfer (Pittsburg) Asphalt Terminal		$	15,047	$	250	$	15,297
South Texas Pipelines and Terminals			149,575		540		150,115
Crude Oil Storage Tanks			200,198		—		200,198
Shell Pipeline Interest			1,600		—		1,600
Southlake Refined Product Pipeline			29,911		—		29,911
Paulsboro Refined Product Terminal			14,055		—		14,055

	Total Purchase Price Allocations	$	410,386	$	790	$	411,176


4.	DISPOSITIONS AND ASSETS AND LIABILITIES OF BUSINESSES HELD FOR SALE


	*Sale of Held Separate Businesses*

In conjunction with the Kaneb Acquisition, we agreed with the United States Federal Trade Commission to divest certain assets. These assets consisted of two California terminals handling refined products, blendstocks, and crude oil, three East Coast refined product terminals, and a 550-mile refined products pipeline with four truck terminals and storage in the U.S. Rocky Mountains (collectively, the Held Separate Businesses).

On September 30, 2005, we sold the Held Separate Businesses to Pacific Energy Partners, L.P. for approximately $455.0 million. Results of operations related to the Held Separate Businesses are classified as income from discontinued operations in the consolidated statement of income for the year ended December 31, 2005. Revenues and pre-tax income related to the Held Separate Businesses were $14.2 million and $3.2 million, respectively, for the year ended December 31, 2005. Income tax expense was not included in discontinued operations related to the Held Separate Businesses as they were owned by entities that were not subject to income tax. Additionally, interest expense of approximately $4.9 million was allocated to the Held Separate Businesses as certain of our debt agreements required us to use the proceeds from the sale of the Held Separate Businesses to repay outstanding debt.


	*Sale of Martin Oil LLC*

In a separate transaction that occurred simultaneously with the closing of the Kaneb Acquisition, we sold all of our interest in Kaneb’s commodity trading business, Martin Oil LLC, to Valero Energy for approximately $26.8 million.

F-43

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Assets and Liabilities of Businesses Held for Sale*

On December 13, 2005, we entered into a definitive agreement to sell our subsidiaries located in Australia and New Zealand (the Australia and New Zealand Subsidiaries) for approximately $65.0 million plus working capital adjustments. These assets combined have a total capacity of approximately 1.1 million barrels.

As a result, the assets and liabilities of the Australia and New Zealand Subsidiaries have been classified as assets and liabilities of businesses held for sale in the accompanying consolidated balance sheet. The amounts are reflected within current assets and liabilities as the sale closed in the first quarter of 2006. The results of operations for the Australia and New Zealand Subsidiaries for 2005 have been included in income from discontinued operations. Revenues and pre-tax income related to the Australia and New Zealand Subsidiaries, included in income from discontinued operations, were $10.1 million and $0.2 million, respectively, for the year ended December 31, 2005. Income tax expense associated with the Australia and New Zealand Subsidiaries totaled $0.1 million for the year ended December 31, 2005. Additionally, the income from discontinued operations includes interest expense of approximately $1.5 million allocated to the Australia and New Zealand Subsidiaries based upon the expected proceeds and the interest rate applicable to our debt.

Assets and liabilities of businesses held for sale consisted of the following:


	December 31, 2005

	(Thousand of dollars)
Current assets	$	8,047
Property and equipment, net		68,726
Other assets		3,034

Assets of businesses held for sale		79,807

Current liabilities		3,606
Deferred income taxes		3,604
Other liabilities		3,890

Liabilities of businesses held for sale	$	11,100


5.	ALLOWANCE FOR DOUBTFUL ACCOUNTS

The changes in the allowance for doubtful accounts consisted of the following:


		Year Ended
		December 31, 2005

		(Thousands of dollars)
Balance as of December 31, 2004		$	—
	Fair value of amounts acquired in the Kaneb Acquisition		2,265
	Accounts charged against the allowance, net of recoveries		(289	)

Balance as of December 31, 2005		$	1,976

F-44

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	PROPERTY AND EQUIPMENT

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


		Estimated		December 31,
		Useful
		Lives		2005			2004

		(Years)
				(Thousands of dollars)
Land			—	$	92,741		$	8,526
Land and leasehold improvements			15 — 35		63,465			3,942
Buildings			25 — 40		26,282			10,464
Pipeline and equipment			20 — 35		2,096,415			876,905
Rights of way			20 — 35		96,554			68,446
Construction in progress			—		42,072			13,077

	Total				2,417,529			981,360
Less accumulated depreciation and amortization					(257,316	)		(196,361	)

	Property and equipment, net			$	2,160,213		$	784,999

Capitalized interest costs included in property and equipment were $1.0 million, $0.2 million and $0.1 million for the years ended December 31, 2005, 2004 and 2003, respectively.

In the fourth quarter of 2005, a portion of the Three Rivers to Pettus to Corpus Christi refined product pipeline was permanently idled. As a result, we recorded an impairment charge of $2.1 million, included in “interest and other expense, net” in the accompanying consolidated statement of income.


7.	INTANGIBLE ASSETS

Intangible assets consisted of the following:


			December 31, 2005					December 31, 2004

					Accumulated					Accumulated
			Cost		Amortization			Cost		Amortization

			(Thousands of dollars)
Intangible assets subject to amortization:
	Customer relationships		$	58,000	$	(2,900	)	$	—	$	—
	Non-compete agreements			1,765		(701	)		1,765		(348	)
	Consulting agreements			1,150		(422	)		1,150		(192	)
	Other			2,359		(92	)		2,359		(39	)

		Total	$	63,274	$	(4,115	)	$	5,274	$	(579	)

All of our intangible assets are subject to amortization. Amortization expense for intangible assets was $3.5 million, $0.6 million and $0.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. The estimated aggregate amortization expense is approximately $6.4 million per year for the years ending December 31, 2006 through 2008 and $5.9 million for the years ending December 31, 2009 and 2010.

F-45

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	INVESTMENT IN JOINT VENTURES

The following presents summarized combined unaudited financial information related to our joint ventures as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003:


		December 31,

		2005		2004

		(Thousands of dollars)
Balance Sheet Information:
Current assets		$	9,138	$	2,928
Property, plant and equipment, net			71,066		45,235

	Total assets	$	80,204	$	48,163

Current liabilities		$	3,686	$	378
Other long-term liabilities			1,076		—
Members’ equity			75,442		47,785

	Total liabilities and members’ equity	$	80,204	$	48,163


	Year Ended December 31,

	2005(a)		2004		2003

	(Thousands of dollars)
Statement of Income Information:
Revenues	$	27,525	$	9,355	$	11,613
Net income		10,715		1,916		4,062
Our share of net income(b)		2,499		1,344		2,416
Our share of distributions		4,932		1,373		2,803


(a)	Revenues and net income reflect the amounts for the year ended December 31, 2005. Our share of net income and distributions related to investments in the joint ventures acquired as part of the Kaneb Acquisition reflect amounts for the six months ended December 31, 2005.


(b)	For 2005, our share of net income shown in the table includes $0.2 million of income that is included in income from discontinued operations in the consolidated statement of income.


	*Skelly-Belvieu Pipeline Company*

Upon the formation of Skelly-Belvieu, we contributed certain equipment to Skelly-Belvieu in exchange for 50% of its members’ equity. Our investment in Skelly-Belvieu was recorded at the carrying amount of the contributed equipment. However, the financial statements of Skelly-Belvieu reflect these assets at fair value at the date of formation. As a result, our 50% share of Skelly-Belvieu’s members’ equity exceeds the carrying value of our investment. This excess, which totaled $7.8 million as of December 31, 2005 and $8.2 million as of December 31, 2004, is being accreted into income over the average life of the assets held by Skelly-Belvieu, or 33 years.


	*ST Linden Terminals, LLC*

As part of the Kaneb Acquisition, we acquired an investment in Linden. As part of the preliminary allocation of the purchase price of Kaneb, we increased the carrying amount of our investment in Linden to its fair value. As a result, the carrying value of our investment in Linden exceeds our 50% share of its members’ equity. This excess totaled $37.6 million as of December 31, 2005, of which $8.0 million is being amortized into expense

F-46

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over the average life of the assets held by Linden, or 25 years. The balance not being amortized has been preliminarily allocated to goodwill of Linden.


9.	ACCRUED LIABILITIES

Accrued liabilities consisted of the following:


		December 31,

		2005		2004

		(Thousands of
		dollars)
Employee wage and benefit costs		$	9,819	$	3,941
Unearned income			9,525		48
Environmental costs			2,404		265
Product shortages			17,547		—
Other			7,622		892

	Accrued liabilities	$	46,917	$	5,146


10.	LONG-TERM DEBT

Long-term debt consisted of the following:


		December 31,

		2005			2004

		(Thousands of dollars)
6.05% senior notes due 2013, net of unamortized discount of $507 in 2005 and $577 in 2004 and a fair value adjustment of $2,197 in 2005 and $441 in 2004		$	247,296		$	248,982
6.875% senior notes due 2012, net of unamortized discount of $205 in 2005 and $237 in 2004 and a fair value adjustment of $1,805 in 2005 and $776 in 2004			97,990			98,987
7.75% senior notes due 2012, including a fair value adjustment of $37,893 in 2005			287,893			—
5.875% senior notes due 2013, including a fair value adjustment of $13,714 in 2005			263,714			—
$525 million term credit agreement			225,000			—
$400 million revolving credit agreement			4,000			—
$175 million revolving credit facility			—			28,000
UK term loan			36,131			—
Port Authority of Corpus Christi note payable			8,681			9,192

	Total debt		1,170,705			385,161
Less current portion			(1,046	)		(990	)

	Long-term debt, less current portion	$	1,169,659		$	384,171

F-47

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The long-term debt repayments are due as follows (in thousands):


2006		$	1,046
2007			611
2008			660
2009			713
2010			265,901
Thereafter			854,881

	Total repayments		1,123,812
Net fair value adjustment and unamortized discount			46,893

	Total debt	$	1,170,705

Interest payments totaled $53.2 million, $24.1 million and $15.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.


	*6.05% Senior Notes*

On March 18, 2003, Valero Logistics completed the sale of $250 million of 6.05% senior notes, issued in a private placement to institutional investors, for net proceeds of $247.3 million. Interest on the 6.05% senior notes is payable semi-annually in arrears on March 15 and September 15 of each year beginning September 15, 2003. Although the 6.05% senior notes were not initially registered under the Securities Act of 1933 or any other securities laws, we exchanged the outstanding $250.0 million 6.05% senior notes that were not registered for $250.0 million of 6.05% senior notes that have been registered under the Securities Act of 1933 in July 2003.


	*6.875% Senior Notes*

On July 15, 2002, we completed the sale of $100.0 million of 6.875% senior notes for net proceeds of $98.2 million. The net proceeds were used to repay the $91.0 million then outstanding under the revolving credit facility. Interest on the 6.875% senior notes is payable semi-annually in arrears on January 15 and July 15 of each year.

The 6.05% and the 6.875% senior notes do not have sinking fund requirements. These notes rank equally with existing senior unsecured indebtedness of Valero Logistics, including indebtedness under the revolving credit agreement and term loan agreement. Both series of senior notes contain restrictions on Valero Logistics’ ability to incur secured indebtedness unless the same security is also provided for the benefit of holders of the senior notes. In addition, the senior notes limit Valero Logistics’ ability to incur indebtedness secured by certain liens and to engage in certain sale-leaseback transactions.

At the option of Valero Logistics, the 6.05% and the 6.875% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date. The Valero Logistics senior notes also include a change-in -control provision, which requires (1) that Valero Energy or an investment grade entity own, directly or indirectly, 51% of our general partner interests and (2) that we (or an investment grade entity) own, directly or indirectly, all of the general partner and limited partner interests in Valero Logistics. Otherwise, Valero Logistics must offer to purchase the senior notes at a price equal to 100% of their outstanding principal balance plus accrued interest through the date of purchase.

F-48

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*7.75% and 5.875% Senior Notes*

As a result of the Kaneb Acquisition, we assumed the outstanding senior notes issued by KPOP, having an aggregate face value of $500.0 million, and an aggregate fair value of $555.0 million. The difference between the fair value and the face value of the senior notes is being amortized as a reduction of interest expense over the remaining lives of the senior notes using the effective interest method.

The senior notes were issued in two series, the first of which bears interest at 7.75% annually (due semi-annually on February 15 and August 15) and matures February 15, 2012. The second series bears interest at 5.875% annually (due on June 1 and December 1) and matures June 1, 2013.

The 7.75% and 5.875% senior notes do not contain sinking fund requirements. These notes contain restrictions on our ability to incur indebtedness secured by liens, to engage in certain sale-leaseback transactions, to engage in certain transactions with affiliates, as defined, and to utilize proceeds from the disposition of certain assets. At the option of KPOP, the 7.75% and 5.875% senior notes may be redeemed in whole or in part at any time at a redemption price, which includes a make-whole premium, plus accrued and unpaid interest to the redemption date.

The senior notes issued by Valero Logistics are fully and unconditionally guaranteed by Valero L.P. In connection with the Kaneb Acquisition, effective July 1, 2005, Valero L.P. fully and unconditionally guaranteed the outstanding senior notes issued by KPOP. Additionally, effective July 1, 2005, both Valero Logistics and KPOP fully and unconditionally guaranteed the outstanding senior notes of the other.


	*$525 Million Term Loan Agreement*

On July 1, 2005, we borrowed $525.0 million under our new $525 million term loan agreement dated July 1, 2005 (the $525 Term Loan Agreement), the majority of which was used to fund the Kaneb Acquisition. The $525 Million Term Loan Agreement matures on July 1, 2010 and bears interest based on either an alternative base rate or LIBOR, which was 5.2% as of December 31, 2005. The weighted-average interest rate related to outstanding borrowings under the $525 Million Term Loan Agreement for the year ended December 31, 2005 was 4.5%. With a portion of the proceeds received from the sale of the Held Separate Businesses, we repaid $300.0 million of the outstanding balance. As of December 31, 2005, our outstanding balance under the $525 Million Term Loan Agreement was $225.0 million. No additional funds may be borrowed under the $525 Million Term Loan Agreement.


	*$400 Million Revolving Credit Agreement*

On July 1, 2005, we borrowed $180.0 million under our $400 million revolving credit agreement (the $400 Million Revolving Credit Agreement), dated effective December 20, 2004 as amended on June 30, 2005, which expires on July 1, 2010 and bears interest based on either an alternative base rate or LIBOR, which was 5.2% as of December 31, 2005. Utilizing the $180.0 million borrowing, other proceeds and cash on hand, on July 1, 2005, we repaid approximately $191.5 million of the outstanding indebtedness of Kaneb and repaid $38.0 million of indebtedness outstanding on our prior $175 million revolving credit facility.

During the year ended December 31, 2005, we repaid the $209.5 million outstanding under the $400 Million Revolving Credit Agreement, including $160.0 million which was repaid using a portion of the proceeds from the sale of the Held Separate Businesses on September 30, 2005. As of December 31, 2005, we had $395.1 million available for borrowing under the $400 Million Revolving Credit Agreement. The weighted-average interest rate related to outstanding borrowings under the $400 Million Revolving Credit Agreement for the year ended December 31, 2005 was 4.3%.

F-49

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*$175 Million Revolving Credit Facility*

We terminated our $175 million revolving credit facility on July 1, 2005 by repaying the $38.0 million outstanding amount using proceeds from our new $400 Million Revolving Credit Agreement. At Valero Logistics’ option, borrowings under the revolving credit facility bore interest based on either an alternative base rate or LIBOR.


	*UK Term Loan*

As a result of the Kaneb Acquisition, on July 1, 2005, we amended and restated a term loan agreement of Kaneb’s UK subsidiary dated January 29, 1999 (the UK Term Loan), and assumed the outstanding obligation of 21,000,000 Pounds Sterling ($36.1 million as of December 31, 2005). The UK Term Loan bears interest at 6.65% annually and matures June 30, 2010.

The $525 Million Term Loan Agreement, the $400 Million Revolving Credit Agreement and the UK Term Loan all require that we maintain certain financial ratios and include other restrictive covenants, including a prohibition on distributions if any defaults, as defined in the agreements, exists or would result from the distribution. These agreements include a change in control provision, which requires that Valero Energy continue to own, directly or indirectly, a majority of Valero L.P.’s general partner interest and that Valero Energy and/or Valero L.P. own 100% of the borrower or 100% of the outstanding limited partner interest in borrower. Management believes that we are in compliance with all of these ratios and covenants as of December 31, 2005.

Valero Logistics and KPOP own and operate pipelines, terminals and storage tanks and are issuers of the publicly traded senior notes. Valero L.P. has no operations and has fully and unconditionally guaranteed the senior notes issued by KPOP and Valero Logistics and any obligations under Valero Logistics’ $400 Million Revolving Credit Agreement and $525 Million Term Loan Agreement and the Kaneb UK Term Loan.


	*Port Authority of Corpus Christi Note Payable*


	*Interest Rate Swaps*

During 2003, we entered into interest rate swap agreements to manage our exposure to changes in interest rates. The interest rate swap agreements have an aggregate notional amount of $167.5 million, of which $60.0 million is tied to the maturity of the 6.875% senior notes and $107.5 million is tied to the maturity of the 6.05% senior notes. Under the terms of the interest rate swap agreements, we will receive a fixed rate (6.875% and 6.05% for the $60.0 million and $107.5 million of interest rate swap agreements, respectively) and will pay a variable rate based on LIBOR plus a percentage that varies with each agreement.

As of December 31, 2005 and 2004, the weighted average effective interest rate for the interest rate swaps was 6.6% and 4.7%, respectively. As of December 31, 2005 and 2004, the aggregate estimated fair value of the interest rate swaps included in other long-term liabilities in the consolidated balance sheet was $4.0 million and $1.2 million, respectively.

F-50

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	HEALTH, SAFETY AND ENVIRONMENTAL MATTERS

Our 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. Our operations are also subject to extensive federal and state health and safety laws and regulations, including those relating to pipeline safety. The principal environmental and safety risks associated with our operations relate to unauthorized emissions into the air, unauthorized releases into soil, surface water or groundwater, and personal injury and property damage. Compliance with these environmental and safety laws, regulations and permits increases our capital expenditures and our 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.

We have 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 our pipelines, our 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 and procedures, 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.

Valero Energy has agreed to indemnify us for a period of ten years from the date of acquisition for pre-acquisition environmental liabilities related to assets transferred or otherwise acquired by the Partnership from Valero Energy or UDS. Excluded from this indemnification are liabilities that result from a change in environmental law after the date of acquisition.

Additionally, ExxonMobil has agreed to indemnify us for pre-acquisition environmental liabilities in connection with off site disposal activities performed prior to September 4, 2003 related to the Paulsboro refined product terminal acquisition (See Note 3. Acquisitions).

As an operator or owner of the assets, we could be held liable for pre-acquisition environmental liabilities should Valero Energy or ExxonMobil be unable to fulfill their obligations. However, we believe that such a situation is unlikely.

Environmental and safety exposures and liabilities are difficult to assess and estimate due to unknown factors such as the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental and safety laws and regulations may change in the future. Although environmental and safety costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.

F-51

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The balance of and changes in the accruals for environmental matters were as follows (in thousands):


		December 31,

		2005			2004

Balance as of beginning of year		$	343		$	125
	Fair value of amounts acquired in the Kaneb Acquisition		22,234			—
	Additions to accrual		1,157			271
	Amounts related to Held Separate Businesses		(3,137	)		—
	Payments		(3,097	)		(53	)
	Foreign currency translation		9			—

Balance as of end of year		$	17,509		$	343

Accruals for environmental matters are included in the consolidated balance sheet as follows (in thousands):


		December 31,

		2005		2004

Accrued liabilities		$	2,404	$	265
Liabilities of businesses held for sale			3,051		—
Other long-term liabilities			12,054		78

	Accruals for environmental matters	$	17,509	$	343


12.	COMMITMENTS AND CONTINGENCIES


	*Contingencies*

We have contingent liabilities resulting from various litigation, claims and commitments, the most significant of which are discussed below. We record accruals for loss contingencies when losses are considered probable and can be reasonably estimated. Legal fees associated with defending our self in legal matters are expensed as incurred. As of December 31, 2005, we have recorded accruals for contingent losses totaling $59.1 million. The actual payment of any amounts accrued and the timing of such payments ultimately made is uncertain. We believe that should we be unable to successfully defend ourselves in any of these matters, the ultimate payment of any or all of the amounts reserved would not have a material adverse effect on our financial position or liquidity. However, if any actual losses ultimately exceed the amounts accrued, there could be a material adverse effect on our results of operations.

Grace Energy Corporation Matter. In 1997, Grace Energy Corporation (Grace Energy) sued subsidiaries of Kaneb in Texas state court. The complaint sought recovery of the cost of remediation of fuel leaks in the 1970s from a pipeline that had once connected a former Grace Energy terminal with Otis Air Force Base in Massachusetts (Otis AFB). Grace Energy alleges the Otis AFB pipeline and related environmental liabilities had been transferred in 1978 to an entity that was part of Kaneb’s acquisition of Support Terminal Services, Inc. and its subsidiaries from Grace Energy in 1993. Kaneb contends that it did not acquire the Otis Air Force pipeline and never assumed any responsibility for any associated environmental damage.

In 2000, the court entered final judgment that: (i) Grace Energy could not recover its own remediation costs of $3.5 million, (ii) Kaneb owned the Otis AFB pipeline and its related environmental liabilities and (iii) Grace Energy was awarded $1.8 million in attorney costs. Both Kaneb and Grace Energy appealed the trial court’s final judgment to the Texas Court of Appeals in Dallas. In 2001, Grace Energy filed a petition in bankruptcy, which created an automatic stay of actions against Grace Energy. Once that stay is lifted, we intend to resume vigorous prosecution of the appeal.

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The Otis Air Force Base is a part of a Superfund Site pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). The site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis Air Force pipeline. Relying on the Texas state court’s final judgment assigning ownership of the Otis Air Force pipeline to Kaneb, the U.S. Department of Justice advised Kaneb in 2001 that it intends to seek reimbursement from Kaneb for the remediation costs associated with the two spill areas. In 2002, the Department of Justice asserted that it had incurred over $49.0 million in costs and expected to incur additional costs of approximately $19.0 million for remediation of the two spill areas. The Department of Justice has not filed a lawsuit against us on this matter.

Potomac Electric Power Company Matter. On December 14, 2002, Potomac Electric Power Company sued subsidiaries of Kaneb in the U.S. District Court for the District of Maryland, seeking recovery of all its costs associated with an oil spill in 2000 resulting from a rupture in a fuel oil pipeline in Maryland owned by Potomac Electric and operated by a subsidiary of Kaneb. Potomac Electric alleged that it has incurred costs of approximately $80.0 million as a result of the spill. This matter was settled, and the case was dismissed and entered on December 19, 2005. The effect of this settlement, net of insurance recoveries, were immaterial to our financial position and our results of operations.

Port of Vancouver Matter. We own a refined products terminal on property owned by the Port of Vancouver, and we lease the land under the terminal from the Port of Vancouver. Under an Agreed Order entered into with the Washington Department of Ecology when Kaneb purchased the terminal in 1998, Kaneb agreed to investigate and remediate a groundwater plume contaminated by the terminal’s previous owner and operator. Kaneb has submitted a final remedial action plan to the Washington Department of Ecology and is waiting for it to approve that plan. The Port of Vancouver also owns property near the terminal site that has been contaminated by other parties, some of which are in bankruptcy. Estimated costs to remediate the terminal site depend on a number of factors, including the outcome of litigation involving the other properties owned by the Port of Vancouver that are near the terminal site. No lawsuits have been filed against us in this matter, and our liability for any portion of total future remediation costs is not reasonably estimable at this time.

Xanser Tax Indemnification. In 2001, Xanser, Inc (Xanser) distributed its interest in its pipeline, terminalling and product marketing business to its shareholders, which resulted in the formation of KSL. Pursuant to that distribution, KSL agreed to indemnify Xanser for certain potential tax liabilities, if any that resulted from the distribution.

St. Eustatius Tax Agreement. On June 1, 1989, the governments of the Netherlands Antilles and St. Eustatius approved a Free Zone and Profit Tax Agreement retroactive to January 1, 1989, which expired on December 31, 2000. This agreement required a subsidiary of Kaneb, which we acquired on July 1, 2005, to pay the greater of 2% of taxable income, as defined therein, or 500,000 Netherlands Antilles guilders (approximately $0.3 million) per year. The agreement further provided that any amounts paid in order to meet the minimum annual payment were available to offset future tax liabilities under the agreement to the extent that the minimum annual payment is greater than 2% of taxable income.

On February 22, 2006, we entered into a revised agreement (the 2005 Tax and Maritime Agreement) with the governments of St. Eustatius and the Netherlands Antilles. The 2005 Tax and Maritime Agreement is effective beginning January 1, 2005 and expires on December 31, 2014. Under the terms of the 2005 Tax and Maritime Agreement, we agreed to make a one-time payment of five million Netherlands Antilles gilders (approximately $2.8 million) in full and final settlement of all of our liabilities, taxes, fees, levies, charges, or otherwise (including settlement of audits) due or potentially due to St. Eustatius. We further agreed to pay an annual minimum profit tax to St. Eustatius of one million Netherlands Antilles gilders (approximately $0.6 million), beginning as of January 1, 2005. We agreed to pay the minimum annual profit tax in twelve equal monthly installments. To the extent the minimum annual profit tax exceeds 2% of taxable profit (as defined), we can carryforward that excess to offset future tax liabilities. If the minimum annual profit tax is less than 2% of taxable profit (as defined), we agreed to pay that difference.

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We are also a party to additional claims and legal proceedings arising in the ordinary course of business. We believe it is unlikely that the final outcome of any of these claims or proceedings to which we are a party would have a material adverse effect on our financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial position or liquidity.


	*Commitments*

Future minimum rental payments applicable to all noncancellable operating leases as of December 31, 2005 are as follows (in thousands):


2006		$	9,544
2007			6,424
2008			5,274
2009			4,434
2010			4,217
Thereafter			81,028

	Future minimum lease payments	$	110,921

Rental expense for all operating leases totaled $8.9 million, $1.2 million and $0.9 million for the years ended December 31, 2005, 2004 and 2003, respectively.

At December 31, 2005 we had a commitment to purchase a minimum amount of inventory for resale to our customers. We estimated the value of this commitment to be approximately $214.8 million.


13.	RISK MANAGEMENT ACTIVITIES


	*Interest Rate Risk*

The estimated fair value of our fixed-rate debt as of December 31, 2005 and 2004 was $954.0 million and $389.9 million, respectively, as compared to the carrying amount of $941.7 million and $357.2 million, respectively. These fair values were estimated using discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.

We are exposed to market risk for changes in interest rates related to our long-term debt obligations. We use interest rate swap agreements to manage a portion of the exposure to changing interest rates by converting certain fixed-rate debt to variable-rate debt. Interest rates on borrowings under the revolving credit facility float with market rates and thus the carrying amount approximates fair value.


	*Concentration of Credit Risk*

For the year ended December 31, 2005, we derived approximately 34% of our revenues from Valero Energy and its subsidiaries, our largest customer. No other single customer accounted for more than 10% of our consolidated operating revenues. Valero Energy transports crude oil to six of its refineries using Valero L.P.’s various crude oil pipelines and storage facilities and the crude oil storage tanks, and transports refined products from seven of its refineries to its company-owned retail operations or wholesale customers using Valero L.P.’s various refined product pipelines and terminals. Valero Energy and its subsidiaries are investment grade customers; therefore, we do not believe that the trade receivable from Valero Energy represents a significant credit risk. However, the concentration of business with Valero Energy, which is a large refining and retail marketing company, has the potential to impact Valero L.P., both positively and negatively, to changes in the refining and marketing industry.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


14.	RELATED PARTY TRANSACTIONS

We have related party transactions with Valero Energy for pipeline tariff, terminalling fee and crude oil storage tank fee revenues, certain employee costs, insurance costs, administrative costs, and lease expense. Under the terms of a services agreement with Valero Energy (Services Agreement), we reimburse Valero Energy for payroll costs of employees working on our behalf. Additionally, Valero Energy charges us an administrative service fee. The receivable from Valero Energy as of December 31, 2005 and 2004 represents amounts due for pipeline tariff, terminalling fee and crude oil storage tank fee revenues and the payable to Valero Energy represents amounts due for employee costs, insurance costs, operating expenses, administrative costs and lease expense.

The following table summarizes information pertaining to transactions with Valero Energy:


	Year Ended December 31,

	2005(a)		2004		2003

	(Thousands of dollars)
Revenues	$	234,485	$	217,608	$	178,605
Operating expenses		60,921		31,960		24,196
General and administrative expenses		19,356		10,539		6,110


(a)	The amounts reflected in the table include revenues and operating expenses of $1,867 and $1,850, respectively, which are included in income from discontinued operations in the consolidated statement of income.

In addition to owning a combined 23.4% general and limited partner interest in us as of December 31, 2005, we have entered into a number of operating agreements with Valero Energy, which govern the required services provided to and received from Valero Energy. Most of the operating agreements include adjustment provisions, which allow us to increase the handling, storage and throughput fees we charge to Valero Energy based on a consumer price index. In addition, the pipeline tariffs charged by us are reviewed annually and adjusted based on an inflation index and may also be adjusted to take into consideration additional costs incurred to provide the transportation services. The following is a summary of the significant terms of the individual agreements.


	*Services Agreement*

We do not have any employees. Under the Services Agreement, the costs related to employees of Valero Energy who perform services directly on our behalf (direct services), including salary, wages and employee benefits are charged by Valero Energy to us. Effective July 1, 2005, the Services Agreement (the 2005 Services Agreement) was amended to account for our significant growth following the closing of the Kaneb Acquisition. The 2005 Services Agreement provided that the annual service fee would be $13.8 million for the first year from July 1, 2005 to June 30, 2006. In addition, we agreed to perform certain services for Valero Energy, including control room services, terminal operations oversight, mapping support and integrity management program planning in exchange for an annual fee.

Effective January 1, 2006, pursuant to the new services agreement (2006 Services Agreement), Valero GP LLC began directly performing many of the services previously provided by Valero Energy under the 2005 Services Agreement primarily consisting of legal, corporate development and health, safety and environmental functions. As a result, the employees performing these services became employees of Valero GP LLC and their costs are now directly charged to us. Accordingly, the annual fee charged to us for administrative services was reduced to approximately $1.9 million per year. This annual fee will increase to approximately $2.9 million and $3.4 million in years 2007 and 2008, respectively. The annual fee will remain at approximately $3.4 million through the term of the agreement. In addition, each annual fee will be subject to adjustments to account for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valero Energy’s annual salary increase. Subject to approval by our Conflicts Committee, the amounts may also be adjusted for changed service levels.

The term of the 2006 Services Agreement will expire on December 31, 2010 with automatic two-year renewal options unless terminated by either party at least six months prior to the renewal period. We may cancel or reduce the level of services that Valero Energy provides us with 60 days prior written notice. The 2006 Services Agreement will terminate upon the change of control of either us or Valero L.P.

A portion of our general and administrative costs is passed on to third parties, which jointly own certain pipelines and terminals with us. The net amount of general and administrative costs allocated to partners of jointly owned pipelines totaled $0.6 million, $0.7 million and $0.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.


	*Amended and Restated Omnibus Agreement*

The Amended and Restated Omnibus Agreement governs potential competition between Valero Energy and the Partnership. Under the Amended and Restated Omnibus Agreement, Valero Energy has agreed, and will cause its controlled affiliates to agree, for so long as Valero Energy owns 20% or more of Valero L.P. or Valero L.P.’s general partner, not to engage in the business of transporting crude oil and other feedstocks or refined products, including petrochemicals, or operating crude oil storage facilities or refined product terminalling assets in the United States. This restriction does not apply to:


	•	any business retained by Ultramar Diamond Shamrock Corporation (UDS) as of April 16, 2001, the closing of Valero L.P.’s initial public offering, or any business owned by Valero Energy at the date of its acquisition of UDS on December 31, 2001;

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

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

	•	any newly constructed pipeline, terminalling or storage assets that we have not offered to purchase at fair market value within one year of construction.

Also under the Amended and Restated Omnibus Agreement, Valero Energy has agreed to indemnify us for environmental liabilities related to the assets transferred to us in connection with our initial public offering, provided that such liabilities arose prior to and are discovered within ten years after that date (excluding liabilities resulting from a change in law after April 16, 2001).


	*Pipelines and Terminals Usage Agreement — McKee, Three Rivers and Ardmore*

Under the terms of the Pipeline and Terminals Usage Agreement dated April 16, 2001, we provide transportation services that support Valero Energy’s refining and marketing operations relating to the McKee, Three Rivers and Ardmore refineries. Pursuant to the agreement, Valero Energy has agreed through April 2008:


	•	to transport in our crude oil pipelines at least 75% of the aggregate volumes of crude oil shipped to the McKee, Three Rivers and Ardmore refineries;

	•	to transport in our refined product pipelines at least 75% of the aggregate volumes of refined products shipped from the McKee, Three Rivers and Ardmore refineries; and

	•	to use our refined product terminals for terminalling services for at least 50% of all refined products shipped from the McKee, Three Rivers and Ardmore refineries.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

If market conditions change with respect to the transportation of crude oil or refined products, or to the end markets in which Valero Energy sells refined products, in a material manner such that Valero Energy would suffer a material adverse effect if it were to continue to use our pipelines and terminals that service the McKee, Three Rivers and Ardmore refineries at the required levels, Valero Energy’s obligation to us will be suspended during the period of the change in market conditions to the extent required to avoid the material adverse effect.

In the event Valero Energy does not transport in our pipelines or use our terminals to handle the minimum volume requirements and if its obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. For the year ended December 31, 2005, Valero Energy exceeded its obligations under the Pipelines and Terminals Usage Agreement. Additionally, Valero Energy has agreed not to challenge, or cause others to challenge, our interstate or intrastate tariffs for the transportation of crude oil and refined products until at least April 2008.


	*Crude Oil Storage Tank Agreements*

In conjunction with the acquisition of the Crude Oil Storage Tanks in March 2003, we entered into the following agreements with Valero Energy:


	•	*Handling and Throughput Agreement,* dated March 2003, pursuant to which Valero Energy agreed to pay us a fee for 100% of crude oil and certain other feedstocks delivered to each of the Corpus Christi West refinery, the Texas City refinery and the Benicia refinery and to use our logistic assets for handling all deliveries to these refineries. The throughput fees are adjustable annually, generally based on 75% of the regional consumer price index applicable to the location of each refinery. The initial term of the handling and throughput agreement is ten years, which may be extended by Valero Energy for up to an additional five years.

	•	*Services and Secondment Agreements,* dated March 2003, pursuant to which Valero Energy agreed to provide personnel to us who perform operating and routine maintenance services related to the crude oil storage tank operations. The annual reimbursement for those services is an aggregate $3.5 million. The initial term of the services and secondment agreements is ten years which we have the option to extend for an additional five years. In addition to the fees we have agreed to pay Valero Energy under the services and secondment agreements, we are responsible for operating expenses and specified capital expenditures related to the tank assets that are not addressed in the services and secondment agreements. These operating expenses and capital expenditures include tank safety inspections, maintenance and repairs, certain environmental expenses, insurance premiums and ad valorem taxes.

	•	*Lease and Access Agreements,* dated March 2003, pursuant to which Valero Energy leases to us the land on which the crude oil storage tanks are located for an aggregate amount of $0.7 million per year. The initial term of each lease is 25 years, subject to automatic renewal for successive one-year periods thereafter. We may terminate any of these leases upon 30 days notice after the initial term or at the end of a renewal period. In addition, we may terminate any of these leases upon 180 days notice prior to the expiration of the current term if we cease to operate the crude oil storage tanks or cease business operations.


	*South Texas Pipelines and Terminals Agreements*

In conjunction with the acquisition of the South Texas Pipelines and Terminals in March 2003, we entered into the following agreements with Valero Energy:


	•	*Terminalling Agreement,* dated March 2003, pursuant to which Valero Energy agreed, during the initial period of five years, to pay a terminalling fee for each barrel of refined product stored or handled by or on behalf of Valero Energy at the terminals, including an additive fee for gasoline additive blended at the

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		terminals. At the Houston Hobby Airport terminal, Valero Energy agreed to pay a filtering fee for each barrel of jet fuel stored or handled at the terminal.

	•	*Throughput Commitment Agreement,* dated March 2003, pursuant to which Valero Energy agreed, for an initial period of seven years:


	•	to transport in the Houston and Valley pipeline systems an aggregate of 40% of the Corpus Christi refineries’ gasoline and distillate production but only if the combined throughput in these pipelines is less than 110,000 barrels per day;

	•	to transport in the Pettus to San Antonio refined product pipeline 25% of the Three Rivers refinery gasoline and distillate production and in the Pettus to Corpus Christi refined product pipeline 90% of the Three Rivers refinery raffinate production;

	•	to use the Houston asphalt terminal for an aggregate of 7% of the asphalt production of the Corpus Christi refineries;

	•	to use the Edinburg refined product terminal for an aggregate of 7% of the gasoline and distillate production of the Corpus Christi refineries, but only if the throughput at this terminal is less than 20,000 barrels per day; and

	•	to use the San Antonio East terminal for 75% of the throughput in the Pettus to San Antonio refined product pipeline.

In the event Valero Energy does not transport in our pipelines or use our terminals to handle the minimum volume requirements and if its obligation has not been suspended under the terms of the agreement, Valero Energy will be required to make a cash payment determined by multiplying the shortfall in volume by the applicable weighted average pipeline tariff or terminal fee. Valero Energy’s obligation to transport 90% of the Three Rivers refinery raffinate production in the Pettus to Corpus Christi refined product pipeline was suspended in the fourth quarter of 2005 due to the temporary idling of the pipeline in the fourth quarter of 2005.


	*Hydrogen Tolling Agreement*

A hydrogen tolling agreement, which provides that Valero Energy will pay us minimum annual revenues of $1.4 million for transporting crude hydrogen from the BOC Group’s chemical facility in Clear Lake, Texas to Valero Energy’s Texas City refinery.


	*Pittsburg Asphalt Terminal Throughput Agreement*

A terminal storage and throughput agreement related to the Pittsburg asphalt terminal, which provides that Valero Energy will pay us a monthly lease fee of $0.2 million, a minimum annual throughput fee of $0.4 million and will reimburse us for utility costs.


	*Royal Trading Throughput Agreement*

In conjunction with the Royal Trading acquisition, we entered into a five-year terminal storage and throughput agreement with Valero Energy. The agreement provides a base throughput and blending fee schedule with volume incentive discounts once certain thresholds are met. In addition, Valero Energy has agreed to utilize the acquired terminals for a minimum of 18.5% of the combined McKee and Ardmore refineries’ asphalt production.


	*Corpus Christi North Beach Storage Facility Lease*

We entered into a one-year shell barrel capacity lease agreement with Valero Energy on January 1, 2004 for the 1.6 million barrels of capacity at our Corpus Christi North Beach storage facility. This lease automatically

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renews for additional one-year terms unless either party terminates it with a 90-day written notice. The use of this storage facility was previously included as part of the crude oil pipeline tariff for our Corpus Christi to Three Rivers crude oil pipeline.


	*Office Rental Agreement*

In January of 2006, we entered into an Office Rental Agreement (the Rental Agreement) with Valero Energy whereby we agreed to lease approximately 65,000 square feet of office space at an annual cost of approximately $1.6 million per year for the first five years. For years six through ten, the annual fee is subject to adjustment for changes in the Consumer Price Index. For each subsequent five year period under the initial term and during the ten-year renewal option, the annual rent shall be adjusted to reflect the actual market rent of comparable office spaces. Rental payments will commence upon the completion of a new office facility presently being constructed by Valero Energy. The completion of this facility is expected to be in the second half of 2007. The Rental Agreement has an initial term of 25 years with a ten year renewal option.


	*Other Agreements*

We have other minor storage and throughput contracts with Valero Energy resulting from the Kaneb Acquisition.


15.	EMPLOYEE BENEFIT PLANS

We have no employees. We rely on employees of Valero Energy and its affiliates to provide the necessary services to conduct our operations. Those employees are included in the various employee benefit plans of Valero Energy and its affiliates. These plans include qualified, non-contributory defined benefit retirement plans, defined contribution 401(k) plans, employee and retiree medical, dental and life insurance plans, bonus plans, long-term incentive plans (i.e. unit options and restricted common units) and other such benefits.

Our share of allocated Valero Energy employee benefit plan expenses, excluding the compensation expense related to the contractual rights to receive common units, restricted units and unit options, was $20.4 million, $11.2 million and $4.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. These employee benefit plan expenses are included in costs and expenses with the related payroll costs.


	*Long-Term Incentive Plans*

Valero GP, LLC adopted the 2000 Long-Term Incentive Plan (the LTIP) under which Valero GP, LLC may award up to 250,000 common units to certain key employees of Valero Energy’s affiliates providing services to us and to directors and officers of Valero GP, LLC. Awards under the LTIP can include unit options, restricted units, performance awards, distribution equivalent rights (DERs) and contractual rights to receive common units. As of December 31, 2005, a total of 38,772 common units remained available to be awarded under the LTIP.

In June 2003, Valero GP, LLC adopted the 2003 Employee Unit Incentive Plan (the UIP) under which Valero GP, LLC may award up to 500,000 common units to employees of Valero GP, LLC or its affiliates, excluding officers and directors of Valero GP, LLC and its affiliates. Awards under the UIP can include unit options, restricted units and distribution equivalent rights (DERs). As of December 31, 2005, a total of 287,730 common units remained available to be awarded under the UIP.

In addition, Valero GP, LLC adopted the 2002 Unit Option Plan (the UOP) under which Valero GP, LLC may award up to 200,000 unit options to officers and directors of Valero GP, LLC or its affiliates, of which substantially all of the unit options have been awarded as of December 31, 2005.

Our share of compensation expense related to the contractual rights to receive common units, restricted units and unit options issued under the LTIP, the UIP and the UOP was $1.5 million, $0.7 million and $0.9 million,

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respectively, for the years ended December 31, 2005, 2004 and 2003 and such amounts have been included in general and administrative expenses in the consolidated statements of income for those years.


16.	PARTNERS’ EQUITY, ALLOCATIONS OF NET INCOME AND CASH DISTRIBUTIONS


	*Partners’ Equity*

We issued 23,768,355 of our common units valued at approximately $1.45 billion in exchange for all of the outstanding common units of KPP. In order to maintain a 2% general partner interest, Riverwalk Logistics, L.P. contributed $29.2 million to us. As of December 31, 2005, Valero Energy and its affiliates owned 23.4% of our outstanding partners’ equity, including the 2% general partner interest.

As of December 31, 2005, our outstanding partners’ equity as of December 31, 2005 includes 37,210,427 common units (622,772 of which are held by affiliates of Valero Energy), 9,599,322 subordinated units held by UDS Logistics, LLC and a 2% general partner interest held by Riverwalk Logistics, L.P. UDS Logistics, LLC is a wholly owned subsidiary of Valero Energy and the limited partner of Riverwalk Logistics, L.P.


	*March 2003 Common Unit Offering*

On March 18, 2003, we consummated a public offering of common units, selling 5,750,000 common units to the public at $36.75 per unit, before underwriters’ discount of $1.56 per unit. Net proceeds were $202.3 million, or $35.19 per unit, before offering expenses of $2.0 million. In order to maintain a 2% general partner interest, Riverwalk Logistics, L.P. contributed $4.3 million to us. The net proceeds of the common unit offering and the general partner contribution were primarily used to fund the acquisition of the Crude Oil Storage Tanks (See Note 3. Acquisitions).

On April 16, 2003, we closed on the exercise of a portion of the underwriters’ over-allotment option, by selling 581,000 common units at $35.19 per unit. Net proceeds from this sale were $20.4 million and Riverwalk Logistics, L.P. contributed $0.5 million to maintain its 2% general partner interest. The common unit proceeds and general partner contribution were used to pay down the then outstanding balance on the revolving credit facility.


	*Redemption of Common Units and Amendment to Partnership Agreement*

On March 18, 2003, subsequent to the common unit offering and private placement of 6.05% senior notes discussed above, we redeemed from UDS Logistics, LLC 3,809,750 common units at a total cost of $134.1 million, or $35.19 per unit. In order to maintain a 2% general partner interest, we redeemed a portion of Riverwalk Logistics, L.P.’s general partner interest at a total cost of $2.9 million. In addition to the redemption transaction, we amended our partnership agreement to reduce the vote required to remove the general partner from 66 ² / 3 % to 58% of our outstanding units and to exclude from participating in such a vote the common and subordinated units held by affiliates of the general partner.


	*August 2003 Common Unit Offering*

On August 11, 2003, we consummated a public offering of common units, selling 1,236,250 common units, which included 161,250 common units related to the underwriter’s over-allotment option, to the public at $41.15 per unit, before underwriter’s discount of $1.85 per unit. Net proceeds were $48.6 million, or $39.30 per unit, before offering expenses of $0.3 million. In order to maintain its 2% general partner interest, Riverwalk Logistics, L.P. contributed $1.0 million to the Partnership. The net proceeds of the common unit offering and the general partner contribution were primarily used to fund the acquisitions of the Southlake refined product pipeline and the Paulsboro refined product terminal (See Note 3. Acquisitions).

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There is no established public market for the trading of the subordinated units. In addition, all of the subordinated units may convert to common units on a one-for-one basis if we meet the tests set forth in the partnership agreement as discussed below. 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 will be converted into common units.

Effective March 11, 2004, our partnership agreement was amended to reduce the percentage of the vote required to remove our general partner from 58% to a simple majority (excluding any vote by the general partner and its affiliates).


	*Allocations of Net Income*

Our partnership agreement, as amended, sets forth the calculation to be used to determine the amount and priority of cash distributions that the common unitholders, subordinated unitholders and general partner will receive. The partnership agreement also contains provisions for the allocation of net income and loss to the unitholders and the general partner. For purposes of maintaining partner capital accounts, the partnership agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interests. Normal allocations according to percentage interests are done after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions allocated 100% to the general partner.


	*Cash Distributions*

We make quarterly distributions of 100% of our available cash, generally defined as cash receipts less cash disbursements and cash reserves established by the general partner, in its sole discretion. These quarterly distributions are declared and paid within 45 days subsequent to each quarter-end. During the subordination period, the holders of our 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 our 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) we have 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) our adjusted operating surplus, as defined in the partnership agreement, during such periods equals or exceeds the amount that would have been sufficient to enable us 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.

During the subordination period, our 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 is entitled to incentive distributions if the amount we distribute 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		75	%		25	%

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VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective March 11, 2004, our partnership agreement was amended to lower the general partner’s incentive distribution rights with respect to distributions of available cash from 48% to 23% of the amount of any quarterly distribution that exceeds $0.90 per unit. The general partner will continue to receive a 2% distribution with respect to its general partner interest.

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


		Years Ended December 31,

		2005		2004		2003

		(Thousands of dollars,
		except per unit data)
General partner interest		$	2,589	$	1,595	$	1,404
General partner incentive distribution			8,711		4,449		2,620

	Total general partner distribution		11,300		6,044		4,024
Limited partners’ distribution			118,178		73,733		66,179

	Total cash distributions	$	129,478	$	79,777	$	70,203

Cash distributions per unit applicable to limited partners		$	3.365	$	3.200	$	2.950

On January 27, 2006, we declared a quarterly distribution of $0.855 per unit, which was paid on February 14, 2006 to unitholders of record on February 7, 2006. This distribution related to the fourth quarter of 2005 totaled $44.0 million, of which $3.9 million represented the general partner’s share of such distribution. The general partner’s distribution included a $3.0 million incentive distribution.


17.	INCOME TAXES

Components of income tax expense related to certain of our operations conducted through separate taxable wholly owned corporate subsidiaries were as follows:


			Year Ended
			December 31, 2005

			(Thousands of dollars)
Current:
	U.S.		$	—
	Foreign			430

		Total current		430

Deferred:
	U.S.			892
	Foreign			3,391

		Total deferred		4,283

		Total income tax expense	$	4,713

F-62

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows:


		December 31, 2005

		(Thousands of dollars)
Deferred tax assets:
Net operating losses		$	17,827
Environmental and legal reserves			14,509
Other			418
Valuation allowance			(6,106	)

	Deferred tax assets		26,648

Property and equipment			(40,224	)

Net deferred tax liability		$	(13,576	)

The U.S. corporate operations have net operating loss carryforwards for tax purposes totaling approximately $50.9 million, which are subject to various limitations on use and expire in years 2008 through 2025.

As of December 31, 2005, we have recorded a valuation allowance, substantially all of which was recorded in conjunction with the allocation of the purchase price of the Kaneb Acquisition, due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of certain federal net operating loss carryforwards, before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable.

The realization of net deferred income tax assets recorded as of December 31, 2005 is dependent upon our ability to generate future taxable income in the United States. We believe it is more likely than not that the deferred income tax assets, net of the valuation allowance, as of December 31, 2005 will be realized, based on expected future taxable income and potential tax planning strategies.

SFAS No. 109, “Accounting for Income Taxes,” requires disclosure of the aggregate difference in the basis of our net assets for financial and tax reporting purposes. Our management does not believe that, in our circumstances, the aggregate difference would be meaningful information.


18.	SEGMENT INFORMATION

Our operating segments consist of refined product pipelines, crude oil pipelines, refined product terminals and crude oil storage tanks. The operations acquired as a result of the Kaneb Acquisition principally involve transporting refined petroleum products and fertilizer as a common carrier, the storage of petroleum products, specialty chemicals, and other liquids, and delivery and sale of bunker fuel at St. Eustatius, Netherland Antilles and Point Tupper, Nova Scotia. The results of Kaneb’s transportation operations are included in our refined product pipelines segment. The results of Kaneb’s storage and bunker sales operations are included in our refined product terminals segment.

These reportable segments are strategic business units that offer different services and performance is evaluated based on operating income, before general and administrative expenses. General and administrative expenses are not allocated to the operating segments since those expenses relate primarily to the overall management at the entity level. Our principal services include providing pipeline transportation services, terminalling services and crude oil storage handling services.

F-63

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Results of operations for the reportable segments were as follows:


			Year Ended December 31,

			2005		2004		2003

			(Thousands of dollars)
Revenues:
	Refined product terminals		$	411,332	$	39,984	$	31,269
	Refined product pipelines			149,853		86,418		72,276
	Crude oil pipelines			51,429		52,462		50,741
	Crude oil storage tanks			46,943		41,928		27,164

		Total revenues	$	659,557	$	220,792	$	181,450

Depreciation and amortization:
	Refined product terminals		$	25,008	$	6,471	$	3,508
	Refined product pipelines			27,778		14,715		12,380
	Crude oil pipelines			4,612		4,499		5,379
	Crude oil storage tanks			7,497		7,464		5,000

		Total depreciation and amortization	$	64,895	$	33,149	$	26,267

Operating income:
	Refined product terminals		$	61,911	$	15,148	$	12,314
	Refined product pipelines			57,404		34,371		30,982
	Crude oil pipelines			30,439		32,495		30,166
	Crude oil storage tanks			30,493		27,331		17,112

		Total segment operating income		180,247		109,345		90,574
	General and administrative expenses			26,553		11,321		7,537

		Total operating income	$	153,694	$	98,024	$	83,037

Revenues by geographic area for the years ended December 31, 2005, 2004 and 2003 are shown in the table below. The geographic area is based on the location of our customer.


		Year Ended December 31,

		2005		2004		2003

		(Thousands of dollars)
United States		$	347,765	$	220,792	$	181,450
Netherlands Antilles			255,893		—		—
Canada			35,639		—		—
Other countries			20,260		—		—

	Consolidated revenues	$	659,557	$	220,792	$	181,450

For the years ended December 31, 2005, 2004, and 2003, Valero Energy accounted for 34%, 99%, and 98% of our consolidated revenues, respectively. No other single customer accounted for more than 10% of our consolidated revenues.

F-64

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenues from Valero Energy by operating segment were as follows:


			Year Ended December 31,

			2005		2004		2003

			(Thousands of dollars)
Revenues:
	Refined product terminals		$	46,382	$	39,306	$	30,790
	Refined product pipelines			89,731		83,912		69,910
	Crude oil pipelines			51,429		52,462		50,741
	Crude oil storage tanks			46,943		41,928		27,164

		Total revenues	$	234,485	$	217,608	$	178,605

Long-lived assets include property, plant and equipment, intangible assets subject to amortization and certain long-lived assets included in “deferred charges and other assets, net.” Geographic information by country for long-lived assets consisted of the following:


		December 31,

		2005		2004

		(Thousands of dollars)
United States		$	1,904,154	$	800,491
Netherlands Antilles			210,756		—
Canada			83,916		—
Other countries			105,168		12,322

	Consolidated long-lived assets	$	2,303,994	$	812,813

Total assets by reportable segment were as follows:


		December 31,

		2005		2004

		(Thousands of dollars)
Refined product terminals(a)		$	1,701,782	$	145,966
Refined product pipelines			1,286,571		347,008
Crude oil pipelines			123,698		127,668
Crude oil storage tanks			204,580		209,919

	Total segment assets		3,316,631		830,561
Other partnership assets (including current assets and other noncurrent assets)			50,361		26,946

	Total consolidated assets	$	3,366,992	$	857,507


(a)	Total assets of the refined product terminals segment include the assets of the Australia and New Zealand Subsidiaries. We sold these subsidiaries for approximately $65.0 million, plus working capital adjustments.

F-65

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the carrying amount of goodwill were as follows:


		Refined Product		Refined Product		Crude Oil
		Terminals		Pipelines		Pipelines		Total

		(Thousands of dollars)
Balance as of December 31, 2004		$	—	$	519	$	4,196	$	4,715
	Kaneb Acquisition		569,745		193,127		—		762,872

Balance as of December 31, 2005		$	569,745	$	193,646	$	4,196	$	767,587

Capital expenditures, including acquisitions, by reportable segment were as follows:


		Year Ended December 31,

		2005		2004		2003

		(Thousands of dollars)
Refined product terminals		$	761,099	$	41,148	$	62,927
Refined product pipelines			748,392		12,009		176,956
Crude oil pipelines			561		3,275		2,656
Crude oil storage tanks			1,860		1,056		200,198
Other partnership assets			2,781		—		—

	Total capital expenditures	$	1,514,693	$	57,488	$	442,737


19.	CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Valero L.P. has no operations and its assets consist mainly of its investments in Valero Logistics, KSL and KPP. KPP is the majority owner of KPOP. Valero Logistics and KPOP own and operate pipelines, terminals and storage tanks and are issuers of publicly traded senior notes. The senior notes issued by Valero Logistics were and continue to be fully and unconditionally guaranteed by Valero L.P. In connection with the Kaneb Acquisition, effective July 1, 2005, Valero L.P. fully and unconditionally guaranteed the outstanding senior notes issued by KPOP. Additionally, effective July 1, 2005, both Valero Logistics and KPOP fully and unconditionally guaranteed the outstanding senior notes of the other.

As a result, the following condensed consolidating financial statements are being presented for the current year as an alternative to providing separate financial statements for Valero Logistics and KPOP. Condensed consolidating financial statements for the comparable periods of 2004 and 2003 are not presented as we did not own Kaneb.

Condensed Consolidating Balance Sheet

December 31, 2005


					Kaneb
					Pipe Line
			Valero Logistics		Operating		Non-
			Operations,		Partnership		Guarantor					Valero L.P.
	Valero L.P.		L.P.		L.P.		Subsidiaries(a)		Eliminations			Consolidated

	(Thousands of dollars)
Assets
Current assets	$	44	$	196,481	$	622,669	$	240,741	$	(764,524	)	$	295,411
Property and equipment, net		—		783,945		694,374		681,894		—			2,160,213
Goodwill		—		4,715		193,127		569,745		—			767,587
Investment in wholly owned subsidiaries		2,403,969		16,920		603,474		1,273,313		(4,297,676	)		—

F-66

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


						Kaneb
						Pipe Line
				Valero Logistics		Operating		Non-
				Operations,		Partnership		Guarantor					Valero L.P.
		Valero L.P.		L.P.		L.P.		Subsidiaries(a)		Eliminations			Consolidated

		(Thousands of dollars)
Equity investments			—		15,087		—		58,899		—			73,986
Other noncurrent assets, net			228		8,677		771		60,119		—			69,795

	Total assets	$	2,404,241	$	1,025,825	$	2,114,415	$	2,884,711	$	(5,062,200	)	$	3,366,992


Liabilities and Partners’ Equity
Current liabilities
Current liabilities		$	502,194	$	50,252	$	40,341	$	377,325	$	(764,524	)	$	205,588
Long-term debt, less current portion			—		581,921		551,607		36,131		—			1,169,659
Deferred income taxes			—		—		—		13,576		—			13,576
Other long-term liabilities			—		4,821		2,124		70,445		—			77,390
Total partners’ equity			1,902,047		388,831		1,520,343		2,387,234		(4,297,676	)		1,900,779

	Total liabilities and partners’ equity	$	2,404,241	$	1,025,825	$	2,114,415	$	2,884,711	$	(5,062,200	)	$	3,366,992


(a)	Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2005


							Kaneb
				Valero			Pipe Line
				Logistics			Operating			Non-
	Valero			Operations,			Partnership			Guarantor						Valero L.P.
	L.P.			L.P.			L.P.			Subsidiaries(a)			Eliminations			Consolidated

	(Thousands of dollars)
Revenues	$	—		$	234,444		$	57,400		$	368,495		$	(782	)	$	659,557
Costs and expenses		2,752			133,297			44,152			326,444			(782	)		505,863

Operating income		(2,752	)		101,147			13,248			42,051			—			153,694
Equity earnings in subsidiaries		113,825			(192	)		38,462			40,392			(192,487	)		—
Equity earnings in joint venture		—			376			—			1,943			—			2,319
Interest and other expense, net		—			(27,870	)		(13,488	)		(2,267	)		—			(43,625	)

Income from continuing operations before income tax expense		111,073			73,461			38,222			82,119			(192,487	)		112,388
Income tax expense		—			—			—			4,713			—			4,713

Income from continuing operations		111,073			73,461			38,222			77,406			(192,487	)		107,675
Income from discontinued operations		—			—			2,163			1,235			—			3,398

Net income	$	111,073		$	73,461		$	40,385		$	78,641		$	(192,487	)	$	111,073


(a)	Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.

F-67

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 2005


										Kaneb
							Valero			Pipe Line
							Logistics			Operating			Non-
				Valero			Operations,			Partnership			Guarantor						Valero L.P.
				L.P.			L.P.			L.P.			Subsidiaries(a)			Eliminations			Consolidated

				(Thousands of dollars)
Cash flows from operating activities:
	Net income			$	111,073		$	73,461		$	40,385		$	78,641		$	(192,487	)	$	111,073
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization		—			34,828			12,073			19,766			—			66,667
			Equity income, net of distributions		13,964			192			(38,462	)		(40,392	)		64,698			—
			Changes in operating assets and liabilities and other		4,274			12,523			3,645			(11,752	)		—			8,690

Net cash provided by operating activities					129,311			121,004			17,641			46,263			(127,789	)		186,430

Cash flows from investing activities					(522,456	)		(50,945	)		82,824			397,614			3,963			(89,000	)

Cash flows from financing activities					393,145			(84,510	)		(100,351	)		(409,288	)		123,826			(77,178	)

Effect of foreign exchange rate changes on cash					—			—			—			(345	)		—			(345	)
Net increase in cash and cash equivalents					—			(14,451	)		114			34,244			—			19,907
Cash and cash equivalents at the beginning of the period					10			16,041			—			96			—			16,147

Cash and cash equivalents at the end of the period				$	10		$	1,590		$	114		$	34,340		$	—		$	36,054


(a)	Non-guarantor subsidiaries are wholly owned by Valero L.P., Valero Logistics or KPOP.

F-68

VALERO L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


20.	QUARTERLY FINANCIAL DATA (UNAUDITED)


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter(b)		Quarter		Total

	(Thousands of dollars, except per unit data)
2005(a):
Revenues	$	56,635	$	58,306	$	258,385	$	286,231	$	659,557
Operating income		24,715		24,309		56,007		48,663		153,694
Net income		19,264		18,852		45,167		27,790		111,073
Net income per unit applicable to limited partners		0.77		0.74		0.88		0.52		2.86
Cash distributions per unit applicable to limited partners	$	0.800	$	0.855	$	0.855	$	0.855	$	3.365
2004:
Revenues	$	52,324	$	55,707	$	58,075	$	54,686	$	220,792
Operating income		24,543		24,600		24,448		24,433		98,024
Net income		19,970		19,706		19,387		19,355		78,418
Net income per unit applicable to limited partners		0.80		0.79		0.78		0.78		3.15
Cash distributions per unit applicable to limited partners	$	0.800	$	0.800	$	0.800	$	0.800	$	3.200


(a)		The significant increase in revenues, operating income and net income beginning in the third quarter of 2005 is due primarily to the Kaneb Acquisition as discussed in Note 3. Acquisitions.

(b)		On December 13, 2005, we entered into a definitive agreement to sell the Australia and New Zealand Subsidiaries. As such, revenues and operating income differ from the reported amounts disclosed in the Form 10-Q for the period ended September 30, 2005 as the results of operations for the Australia and New Zealand Subsidiaries have been reclassified as income from discontinued operations. Revenue and operating income reported in the Form 10-Q were $263.5 million and $56.7 million, respectively, for the three months ended September 30, 2005.

F-69

KANEB SERVICES LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2005			2004			2005			2004

			(In thousands — except per share amounts)
			(Unaudited)
Revenues:
	Services		$	102,183		$	94,058		$	201,405		$	184,756
	Products			233,012			160,144			424,816			302,625

		Total revenues		335,195			254,202			626,221			487,381

Costs and expenses:
	Cost of products sold			222,168			153,364			405,165			289,795
	Operating costs			58,109			43,371			104,731			86,795
	Depreciation and amortization			14,663			13,738			29,501			27,645
	General and administrative			29,499			7,195			40,897			13,697
	Provision for loss contingencies			42,000			—			42,000			—

		Total costs and expenses		366,439			217,668			622,294			417,932

Operating income (loss)				(31,244	)		36,534			3,927			69,449
Interest and other income				107			61			313			93
Interest expense				(12,636	)		(10,720	)		(23,984	)		(21,349	)

Income (loss) before income taxes and interest of outside non-controlling partners in KPP’s net (income) loss				(43,773	)		25,875			(19,744	)		48,193
Income tax benefit (expense)				14,304			(606	)		12,778			(1,769	)
Interest of outside non-controlling partners in KPP’s net (income) loss				18,012			(17,874	)		2,158			(33,034	)

Net income (loss)			$	(11,457	)	$	7,395		$	(4,808	)	$	13,390

Earnings (loss) per share:
		Basic	$	(.97	)	$	.63		$	(.41	)	$	1.15

		Diluted	$	(.97	)	$	.62		$	(.41	)	$	1.12

See Condensed Notes to Consolidated Financial Statements

F-70

KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


			June 30,		December 31,
			2005		2004

			(In thousands)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	17,291	$	38,415
	Accounts receivable			88,090		85,976
	Inventories			26,318		25,448
	Prepaid expenses and other			20,559		12,614

		Total current assets		152,258		162,453

Property and equipment				1,468,873		1,451,176
Less accumulated depreciation				329,352		302,564

	Net property and equipment			1,139,521		1,148,612

Investment in affiliates				26,828		25,939
Excess of cost over fair value of net assets of acquired business and other assets				18,313		19,884

		Total assets	$	1,336,920	$	1,356,888


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	195,984	$	—
	Accounts payable			45,145		54,280
	Accrued expenses			40,156		46,993
	Accrued interest payable			8,928		9,374
	Accrued distributions payable to shareholders			—		5,801
	Accrued distributions payable to outside non-controlling partners in KPP			—		19,863

		Total current liabilities		290,213		136,311

Long-term debt, less current portion				528,723		688,985
Other liabilities and deferred taxes				76,086		53,520
Commitments and contingencies (see note 6)
Interest of outside non-controlling partners in KPP				373,333		397,717
Shareholders’ equity				68,565		80,355

		Total liability and shareholders equity	$	1,336,920	$	1,356,888

See Condensed Notes to Consolidated Financial Statements

F-71

KANEB SERVICES LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


				Six Months Ended
				June 30,

				2005			2004

				(In thousands)
				(Unaudited)
Operating activities:
	Net income (loss)			$	(4,808	)	$	13,390
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization (loss)			29,501			27,645
		Provision for loss contingencies			42,000			—
		Equity in earnings of affiliates, net of distributions			(889	)		(497	)
		Interest of outside non-controlling partners in KPP’s net income (loss)			(2,158	)		33,034
		Deferred income taxes			(14,449	)		(230	)
		Other			1,334			(792	)
		Changes in working capital components			(28,713	)		(7,617	)

			Net cash provided by operating activities		21,818			64,933

Investing activities:
	Capital expenditures, primarily KPP				(22,030	)		(17,340	)
	Acquisitions by KPP				(10,034	)		(12,478	)
	Other				784			(722	)

		Net cash used in investing activities			(31,280	)		(30,540	)

Financing activities:
	Issuance of debt				39,690			17,923
	Payments on debt				—			(2,000	)
	Distributions to shareholders				(11,724	)		(11,134	)
	Distributions to outside non-controlling partners in KPP				(39,727	)		(39,014	)
	Other				99			87

		Net cash used in financing activities			(11,662	)		(34,138	)

Increase (decrease) in cash and cash equivalents					(21,124	)		255
Cash and cash equivalents at beginning of period					38,415			43,457

Cash and cash equivalents at end of period				$	17,291		$	43,712

Supplemental cash flow information — cash paid for interest				$	22,705		$	20,899

See Condensed Notes to Consolidated Financial Statements

F-72

KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements reflect the results of operations of Kaneb Services LLC (the “Company”), its wholly owned subsidiaries and Kaneb Pipe Line Partners, L.P. (“KPP”). The Company controls the operations of KPP through its 2% general partner interest and 18% limited partner interest in KPP as of June 30, 2005. All significant intercompany transactions and balances have been eliminated.

The unaudited condensed consolidated financial statements of the Company for the three and six month periods ended June 30, 2005 and 2004, have been prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies followed by the Company are disclosed in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all of the adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position of the Company and its consolidated subsidiaries at June 30, 2005, and the consolidated results of their operations and cash flows for the periods ended June 30, 2005 and 2004. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.


2.	VALERO L.P. MERGER

On July 1, 2005, Valero L.P. acquired all of the outstanding shares of the Company as well as all of the outstanding units of KPP. Consequently, the Company and KPP became wholly owned subsidiaries of Valero L.P.

In connection with the acquisition by Valero L.P., the Company incurred certain costs directly related to the acquisition. For the six months ended June 30, 2005, approximately $23.0 million was included in general and administrative expenses related principally to settling certain outstanding stock awards and settling other employee compensation obligations, and legal fees associated with the acquisition. In addition, on June 30, 2005 the Company and KPP paid approximately $4.4 million in contractual change of control payments. Because these payments were contingent upon the closing of the Valero L.P. merger, these payments were included in prepaid expenses and other at June 30, 2005. To fund a portion of these expenses, the Company and KPP borrowed approximately $39.7 million in the second quarter of 2005.

On July 1, 2005, Valero L.P. sold all of the outstanding equity interests of Martin Oil LLC, an indirect wholly owned subsidiary of KSL, to Valero Marketing and Supply Company, a wholly owned subsidiary of Valero Energy Corporation, for approximately $27 million.

On July 1, 2005, Valero L.P. entered into a definitive agreement to sell certain of KPP’s assets to Pacific Energy Partners L.P. for approximately $455 million. These asset sales were required by the U.S. Federal Trade Commission as a condition to closing the merger.


3.	COMPREHENSIVE INCOME

Comprehensive income (loss) for the three and six months ended June 30, 2005 and 2004, is as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2005			2004			2005			2004

	(In thousands)
Net income (loss)	$	(11,457	)	$	7,395		$	(4,808	)	$	13,390
Foreign currency translation adjustment		(443	)		(402	)		(596	)		(451	)
Gain on interest rate hedging transaction		12			8			18			17

Comprehensive income (loss)	$	(11,888	)	$	7,001		$	(5,386	)	$	12,956

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accumulated other comprehensive income aggregated $2.6 million at June 30, 2005 and $3.2 million at December 31, 2004, respectively.


4.	CASH DISTRIBUTIONS

Prior to the acquisition by Valero L.P., the Company made quarterly distributions of 100% of its available cash, as defined in the limited liability company agreement, to common shareholders of record on the applicable record date, within 45 days after the end of each quarter. Available cash consisted generally of all the cash receipts of the Company, less all cash disbursements and reserves. Excess cash flow of the Company’s wholly owned marketing operations was used to reduce working capital borrowings. Due to the acquisition by Valero L.P., neither the Company nor KPP declared any distributions subsequent to June 30, 2005. Accordingly, the June 30, 2005 consolidated balance sheet of the Company does not reflect any amounts for accrued distributions payable. A cash distribution of $0.495 per share with respect to the fourth quarter of 2004 was paid on February 14, 2005. A cash distribution of $0.495 per share with respect to the first quarter of 2005 was paid on May 13, 2005.


5.	EARNINGS LOSS PER SHARE

Earnings (loss) per share for the three and six months ended June 30, 2005 and 2004, is calculated using the Company’s basic and diluted weighted average shares outstanding for the period. For the three months ended June 30, 2005 and 2004, basic weighted average shares outstanding were 11,871,000 and 11,693,000, respectively, and diluted weighted average shares outstanding were 11,871,000 and 11,911,000, respectively. For the six months ended June 30, 2005 and 2004, basic weighted average shares outstanding were 11,871,000 and 11,680,000, respectively, and diluted weighted average shares outstanding were 11,871,000 and 11,907,000, respectively.


6.	CONTINGENCIES


	*GENERAL*


	*LITIGATION AND ENVIRONMENTAL*

KPP has contingent liabilities resulting from various litigation, claims and commitments, some of which are incident to the ordinary course of business. Other contingencies, which are considered more significant by KPP, are discussed below. Subsequent to the acquisition of the Company by Valero L.P., new management of the Company determined based on a comprehensive review of the matters disclosed below that an additional $42 million accrual for potential loss contingencies was required, which was recorded in the quarter ended June 30, 2005. Accordingly, KPP has recorded estimated reserves totaling approximately $44 million related to certain of the matters discussed below. These reserves have been recorded in compliance with generally accepted accounting principles, however, management believes that there are defenses in each of these matters and it intends to vigorously defend each matter. As a result, the actual payment of any amounts reserved and the timing of such payments ultimately made is uncertain. Management also believes that should KPP be unable to successfully defend itself in these matters, the ultimate payment of any or all of the amounts reserved would not have a material adverse effect on KPP’s financial position. However, given the inherent uncertainty in estimating

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

reserves for such matters, KPP can give no assurance that the amounts recorded will not require adjustment in the future, and such adjustments could be significant and could have a material adverse effect on KPP’s financial position and results of operations.

Grace Matter

Certain subsidiaries of KPP were sued in a Texas state court in 1997 by Grace Energy Corporation (“Grace”), the entity from which KPP acquired ST Services in 1993. The lawsuit involves environmental response and remediation costs allegedly resulting from fuel leaks in the early 1970’s from a pipeline. The pipeline, which connected a former Grace terminal with Otis Air Force Base in Massachusetts (the “Otis pipeline” or the “pipeline”), ceased operations in 1973 and was abandoned before 1978, when the connecting terminal was sold to an unrelated entity. Grace alleged that subsidiaries of KPP acquired the abandoned pipeline as part of the acquisition of ST Services in 1993 and assumed responsibility for environmental damages allegedly caused by the fuel leaks. Grace sought a ruling from the Texas court that these subsidiaries are responsible for all liabilities, including all present and future remediation expenses, associated with these leaks and that Grace has no obligation to indemnify these subsidiaries for these expenses. In the lawsuit, Grace also sought indemnification for expenses of approximately $3.5 million that it had incurred since 1996 for response and remediation required by the State of Massachusetts and for additional expenses that it expects to incur in the future. The consistent position of KPP’s subsidiaries has been that they did not acquire the abandoned pipeline as part of the 1993 ST Services transaction, and therefore did not assume any responsibility for the environmental damage nor any liability to Grace for the pipeline.

At the end of the trial, the jury returned a verdict including findings that (1) Grace had breached a provision of the 1993 acquisition agreement by failing to disclose matters related to the pipeline, and (2) the pipeline was abandoned before 1978 — 15 years before KPP’s subsidiaries acquired ST Services. On August 30, 2000, the Judge entered final judgment in the case that Grace take nothing from the subsidiaries on its claims seeking recovery of remediation costs. Although KPP’s subsidiaries have not incurred any expenses in connection with the remediation, the court also ruled, in effect, that the subsidiaries would not be entitled to indemnification from Grace if any such expenses were incurred in the future. Moreover, the Judge let stand a prior summary judgment ruling that the pipeline was an asset acquired by KPP’s subsidiaries as part of the 1993 ST Services transaction and that any liabilities associated with the pipeline would have become liabilities of the subsidiaries. Based on that ruling, the Massachusetts Department of Environmental Protection and Samson Hydrocarbons Company (successor to Grace Petroleum Company) wrote letters to ST Services alleging its responsibility for the remediation, and ST Services responded denying any liability in connection with this matter. The Judge also awarded attorney fees to Grace of approximately $1.8 million. Both KPP’s subsidiaries and Grace have appealed the trial court’s final judgment to the Texas Court of Appeals in Dallas. In particular, the subsidiaries have filed an appeal of the judgment finding that the Otis pipeline and any liabilities associated with the pipeline were transferred to them as well as the award of attorney fees to Grace.

On April 2, 2001, Grace filed a petition in bankruptcy, which created an automatic stay of actions against Grace. This automatic stay covers the appeal of the Dallas litigation, and the Texas Court of Appeals has issued an order staying all proceedings of the appeal because of the bankruptcy. Once that stay is lifted, KPP’s subsidiaries that are party to the lawsuit intend to resume vigorous prosecution of the appeal.

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KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

KPP’s subsidiaries voluntarily responded to an invitation from the Government to provide information indicating that they do not own the pipeline. In connection with a court-ordered mediation between Grace and KPP’s subsidiaries, the Government advised the parties in April 1999 that it has identified two spill areas that it believes to be related to the pipeline that is the subject of the Grace suit. The Government at that time advised the parties that it believed it had incurred costs of approximately $34 million, and expected in the future to incur costs of approximately $55 million, for remediation of one of the spill areas. This amount was not intended to be a final accounting of costs or to include all categories of costs. The Government also advised the parties that it could not at that time allocate its costs attributable to the second spill area.

By letter dated July 26, 2001, the United States Department of Justice (“DOJ”) advised ST Services that the Government intends to seek reimbursement from ST Services under the Massachusetts Oil and Hazardous Material Release Prevention and Response Act and the Declaratory Judgment Act for the Government’s response costs at the two spill areas discussed above. The DOJ relied in part on the Texas state court judgment, which in the DOJ’s view, held that ST Services was the current owner of the pipeline and the successor-in -interest of the prior owner and operator. The Government advised ST Services that it believed it had incurred costs exceeding $40 million, and expected to incur future costs exceeding an additional $22 million, for remediation of the two spill areas. KPP believes that its subsidiaries have substantial defenses. ST Services responded to the DOJ on September 6, 2001, contesting the Government’s positions and declining to reimburse any response costs. In 2002, the DOJ asserted that, inclusive of both spill areas, it had incurred over $49 million in costs and expected to incur additional costs of approximately $19 million. The DOJ has not filed a lawsuit against ST Services seeking cost recovery for its environmental investigation and response costs. Representatives of ST Services have met with representatives of the Government on several occasions since September 6, 2001 to discuss the Government’s claims and to exchange information related to such claims. Additional exchanges of information may occur in the future and additional meetings may be held to discuss possible resolution of the Government’s claims without litigation. KPP does not believe this matter will have a material adverse effect on its financial condition, although there can be no assurances as to the ultimate outcome.

PEPCO Matter

On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric Power Company (“PEPCO”) ruptured. Some work performed with regard to the pipeline was conducted by a partnership of which ST Services is general partner. PEPCO alleges that it has incurred costs of approximately $80 million as a result of the spill. PEPCO probably will continue to incur some cleanup related costs for the foreseeable future, primarily in connection with EPA requirements for monitoring the condition of some of the impacted areas. Since May 2000, ST Services has provisionally contributed a minority share of the cleanup expense, which has been funded by ST Services’ insurance carriers. ST Services and PEPCO have not, however, reached a final agreement regarding ST Services’ proportionate responsibility for this cleanup effort, if any, and cannot predict the amount, if any, that ultimately may be determined to be ST Services’ share of the remediation expense, but ST Services believes that such amount will be covered by insurance and therefore will not materially adversely affect KPP’s financial condition.

As a result of the rupture, purported class actions were filed against PEPCO and ST Services in federal and state court in Maryland by property and business owners alleging damages in unspecified amounts under various theories, including under the Oil Pollution Act (“OPA”) and Maryland common law. The federal court consolidated all of the federal cases in a case styled as In re Swanson Creek Oil Spill Litigation. A settlement of the consolidated class action, and a companion state-court class action, was reached and approved by the federal judge. The settlement involved creation and funding by PEPCO and ST Services of a $2,250,000 class settlement fund, from which all participating claimants would be paid according to a court-approved formula, as well as a court-approved payment to plaintiffs’ attorneys. The settlement has been consummated and the fund, to which PEPCO and ST Services contributed equal amounts, has been distributed. Participating claimants’ claims have been settled and dismissed with prejudice. A number of class members elected not to participate in the

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KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

settlement, i.e., to “opt out,” thereby preserving their claims against PEPCO and ST Services. All non-participant claims have been settled for immaterial amounts with ST Services’ portion of such settlements provided by its insurance carrier.

PEPCO and ST Services agreed with the federal government and the State of Maryland to pay costs of assessing natural resource damages arising from the Swanson Creek oil spill under OPA and of selecting restoration projects. This process was completed in mid-2002. ST Services’ insurer has paid ST Services’ agreed 50 percent share of these assessment costs. In late November 2002, PEPCO and ST Services entered into a Consent Decree resolving the federal and state trustees’ claims for natural resource damages. The decree required payments by ST Services and PEPCO of a total of approximately $3 million to fund the restoration projects and for remaining damage assessment costs. The federal court entered the Consent Decree as a final judgment on December 31, 2002. PEPCO and ST Services have each paid their 50% share and thus fully performed their payment obligations under the Consent Decree. ST Services’ insurance carrier funded ST Services’ payment.

The U.S. Department of Transportation (“DOT”) has issued a Notice of Proposed Violation to PEPCO and ST Services alleging violations over several years of pipeline safety regulations and proposing a civil penalty of $647,000 jointly against the two companies. ST Services and PEPCO have contested the DOT allegations and the proposed penalty. A hearing was held before the Office of Pipeline Safety at the DOT in late 2001. In June of 2004, the DOT issued a final order reducing the penalty to $256,250 jointly against ST Services and PEPCO and $74,000 against ST Services.

By letter dated January 4, 2002, the Attorney General’s Office for the State of Maryland advised ST Services that it intended to seek penalties from ST Services in connection with the April 7, 2000 spill. The State of Maryland subsequently asserted that it would seek penalties against ST Services and PEPCO totaling up to $12 million. A settlement of this claim was reached in mid-2002 under which ST Services’ insurer will pay a total of slightly more than $1 million in installments over a five year period. PEPCO has also reached a settlement of these claims with the State of Maryland. Accordingly, KPP believes that this matter will not have a material adverse effect on its financial condition.

On December 13, 2002, ST Services sued PEPCO in the Superior Court, District of Columbia, seeking, among other things, a declaratory judgment as to ST Services’ legal obligations, if any, to reimburse PEPCO for costs of the oil spill. On December 16, 2002, PEPCO sued ST Services in the United States District Court for the District of Maryland, seeking recovery of all its costs for remediation of and response to the oil spill. Pursuant to an agreement between ST Services and PEPCO, ST Services’ suit was dismissed, subject to refiling. ST Services has moved to dismiss PEPCO’s suit. ST Services is vigorously defending against PEPCO’s claims and is pursuing its own counterclaims for return of monies ST Services has advanced to PEPCO for settlements and cleanup costs. KPP believes that any costs or damages resulting from these lawsuits will be covered by insurance and therefore will not materially adversely affect KPP’s financial condition. The amounts claimed by PEPCO, if recovered, would trigger an excess insurance policy which has a $600,000 retention, but KPP does not believe that such retention, if incurred, would materially adversely affect KPP’s financial condition.

Paulsboro GATX Matter

F-77

KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

company of GATX, Kinder Morgan, and ST Services for costs in the amount of $400,000 that it claims are related to releases at the site subsequent to its sale of the terminal to GATX. It is also alleging that any remaining remediation requirements are the responsibility of GATX Corporation, Kinder Morgan, or ST Services. Kinder Morgan has alleged that it was relieved of any remediation obligations pursuant to the sale agreement between its predecessor, GATX, and ST Services. The terminal was sold to Pacific Energy Corporation who assumed the liability for the pending mediation of this matter.

Surface Transportation Board Matter

A subsidiary of KPP purchased the approximately 2,000-mile ammonia pipeline system from Koch Pipeline Company, L.P. and Koch Fertilizer Storage and Terminal Company in 2002. The rates of the ammonia pipeline are subject to regulation by the Surface Transportation Board (the “STB”). The STB had issued an order in May 2000, prescribing maximum allowable rates KPP’s predecessor could charge for transportation to certain destination points on the pipeline system. In 2003, KPP instituted a 7% general increase to pipeline rates. On August 1, 2003, CF Industries, Inc. (“CFI”) filed a complaint with the STB challenging these rate increases. On August 11, 2004, STB ordered KPP to pay reparations to CFI and to return CFI’s rates to the levels permitted under the rate prescription. KPP has complied with the order. The STB, however, indicated in the order that it would lift the rate prescription in the event KPP could show “materially changed circumstances.” KPP has submitted evidence of “materially changed circumstances,” which specifically includes its capital investment in the pipeline. CFI has argued that KPP’s acquisition costs should not be considered by the STB as a measure of KPP’s investment base.

Also, on June 16, 2003, Dyno Nobel Inc. (“Dyno”) filed a complaint with the STB challenging the 2003 rate increase on the basis that (i) the rate increase constitutes a violation of a contract rate, (ii) rates are discriminatory and (iii) the rates exceed permitted levels. Dyno also intervened in the CFI proceeding described above. Unlike CFI, Dyno’s rates are not subject to a rate prescription. On May 11, 2005, the STB held a hearing on KPP’s request to vacate the existing rate prescription and Dyno’s contract claims, and post-hearing briefing was completed on June 10, 2005. The case is currently pending before the STB and a ruling is expected later this year. As of June 30, 2005, Dyno would be entitled to approximately $3.1 million in rate refunds, should it be successful. KPP believes, however, that Dyno’s claims are of limited merit.

Port of Vancouver

ST Services (“STS”) currently owns a refined products terminal on property owned by the Port of Vancouver (“Port”) and leases the land under the terminal from the Port. Under an Agreed Order entered into with the Washington Department of Ecology (“WDE”) when STS purchased the terminal in 1998, STS agreed to investigate and remediate a groundwater plume contaminated by the terminal’s previous owner and operator. STS has submitted a final remedial action plan to WDE, and is waiting for WDE to approve that plan. The Port also owns property near the STS terminal site that has been contaminated by other parties, some of which are in bankruptcy. Estimated costs to remediate the STS terminal site depend on a number of factors, including the outcome of litigation involving the other properties owned by the Port that are near the STS terminal site. STS’s liability for remediation of the STS site is not the subject of any pending litigation. Until formal claims asserting such liability are made, liability is difficult to assess. Accordingly, STS’s liability for any portion of total future remediation costs is not reasonably estimable at this time.

KPP has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management of KPP believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a material adverse effect on the financial position, results of operations or liquidity of KPP.

F-78

KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.	BUSINESS SEGMENT DATA

The Company conducts business through three reportable business segments: the Pipeline Operations Segment of KPP, which consists primarily of the transportation of refined petroleum products and fertilizer in the Midwestern states as a common carrier; the Terminalling Operations Segment of KPP, which provides storage for petroleum products, specialty chemicals and other liquids; and the Company’s Product Marketing Services Segment, which provides wholesale motor fuel marketing services throughout the Midwest and Rocky Mountain regions, delivers bunker fuels to ships in the Caribbean and Nova Scotia, Canada, and sells bulk petroleum products to various commercial interests. General corporate includes accounting, tax, finance, legal, investor relations and other corporate expenses not related to the segments. General corporate assets include cash, receivables from affiliates of the Company and other assets not related to the segments.

The Company measures segment profit as operating income. Total assets are those assets controlled by each reportable segment. Business segment data is as follows:


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands)
Business segment revenues:
	Pipeline operations	$	32,706		$	30,610		$	62,798		$	58,513
	Terminalling operations		69,477			63,448			138,607			126,243
	Product marketing operations		233,012			160,144			424,816			302,625

		$	335,195		$	254,202		$	626,221		$	487,381

Business segment profit:
	Pipeline operations	$	7,232		$	12,024		$	18,969		$	23,234
	Terminalling operations		(36,260	)		20,876			(17,533	)		39,360
	Product marketing operations		5,803			4,156			11,370			7,910
	General corporate		(8,019	)		(522	)		(8,879	)		(1,055	)

	Operating income		(31,244	)		36,534			3,927			69,449
	Interest and other income		107			61			313			93
	Interest expense		(12,636	)		(10,720	)		(23,984	)		(21,349	)

	Income (loss) before income taxes and interest of outside non-controlling partners in KPP’s net income (loss)	$	(43,773	)	$	25,875		$	(19,744	)	$	48,193


		June 30,		December 31,
		2005		2004

		(In thousands)
Total assets:
	Pipeline operations	$	346,580	$	351,195
	Terminalling operations		886,805		917,966
	Product marketing operations		100,092		83,404
	General corporate		3,443		4,323

		$	1,336,920	$	1,356,888

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KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The business segment profit of the terminalling operations segment includes the $42 million provision for loss contingencies (see note 6) and a $4 million loss due to an impairment of a terminal in the U.K.


8.	ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

In March of 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which requires companies to recognize a liability for the fair value of a legal obligation to perform asset-retirement activities, even though the timing and/or method of settlement are conditional on a future event, if the amount can be reasonably estimated. FIN 47 must be adopted by the Company by the end of fiscal 2005. The impact of adoption of FIN 47 on the Company’s consolidated financial statements is still being evaluated.

F-80

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Kaneb Services LLC

We have audited the accompanying consolidated balance sheets of Kaneb Services LLC and its subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States)(the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As described in Note 2, the Company adopted Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” in 2003.

We have also audited, in accordance with the standards of the PCAOB, the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Controls — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.


	/s/ KPMG LLP

Dallas, Texas

March 11, 2005

F-81

KANEB SERVICES LLC

CONSOLIDATED STATEMENTS OF INCOME


			Year Ended December 31,

			2004			2003

Revenues:
	Services		$	379,155,000		$	354,591,000
	Products			676,093,000			511,200,000

		Total revenues		1,055,248,000			865,791,000

Costs and expenses:
	Cost of products sold			647,733,000			486,310,000
	Operating costs			177,829,000			169,380,000
	Depreciation and amortization			56,676,000			53,195,000
	General and administrative			36,231,000			28,402,000

		Total costs and expenses		918,469,000			737,287,000

Operating income				136,779,000			128,504,000
Interest and other income				336,000			365,000
Interest expense				(43,579,000	)		(39,576,000	)

Income before gain on issuance of units by KPP, income taxes, interest of outside non-controlling partners in KPP’s net income and cumulative effect of change in accounting principle				93,536,000			89,293,000
Gain on issuance of units by KPP				—			10,898,000
Income tax expense				(3,251,000	)		(4,887,000	)
Interest of outside non-controlling partners in KPP’s net income				(65,933,000	)		(61,908,000	)

Income before cumulative effect of change in accounting principle				24,352,000			33,396,000
Cumulative effect of change in accounting principle — adoption of new accounting standard for asset retirement obligations				—			(313,000	)

Net income			$	24,352,000		$	33,083,000

Earnings per share:
	Basic:
		Before cumulative effect of change in accounting principle	$	2.07		$	2.89
		Cumulative effect of change in accounting principle		—			(.03	)

			$	2.07		$	2.86

	Diluted:
		Before cumulative effect of change in accounting principle	$	2.03		$	2.84
		Cumulative effect of change in accounting principle		—			(.03	)

			$	2.03		$	2.81

See notes to consolidated financial statements

F-82

KANEB SERVICES LLC

CONSOLIDATED BALANCE SHEETS


				December 31,

				2004		2003

ASSETS
Current assets:
	Cash and cash equivalents			$	38,415,000	$	43,457,000
	Accounts receivable (net of allowance for doubtful accounts of $2,255,000 in 2004 and $3,777,000 in 2003)				85,976,000		60,684,000
	Inventories				25,448,000		18,637,000
	Prepaid expenses and other				12,614,000		9,650,000

		Total current assets			162,453,000		132,428,000

Property and equipment					1,451,176,000		1,360,523,000
Less accumulated depreciation					302,564,000		247,503,000

		Net property and equipment			1,148,612,000		1,113,020,000

Investment in affiliates					25,939,000		25,456,000
Excess of cost over fair value of net assets of acquired businesses and other assets					19,884,000		20,663,000

		Total Assets		$	1,356,888,000	$	1,291,567,000


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	54,280,000	$	36,916,000
	Accrued expenses				38,142,000		39,307,000
	Accrued interest payable				9,374,000		9,303,000
	Accrued distributions payable to shareholders				5,801,000		5,567,000
	Accrued distributions payable to outside non-controlling partners in KPP’s net income				19,863,000		19,507,000
	Deferred terminalling fees				8,851,000		7,061,000

		Total current liabilities			136,311,000		117,661,000

Long-term debt					688,985,000		636,308,000
Other liabilities and deferred taxes					53,520,000		52,242,000
Interest of outside non-controlling partners in KPP					397,717,000		407,635,000
Commitments and contingencies
Shareholders’ equity:
	Shareholders’ investment				77,136,000		75,291,000
	Accumulated other comprehensive income				3,219,000		2,430,000

		Total shareholders’ equity			80,355,000		77,721,000

			Total liabilities and shareholders equity	$	1,356,888,000	$	1,291,567,000

See notes to consolidated financial statements

F-83

KANEB SERVICES LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS


					Year Ended December 31,

					2004			2003

Operating activities:
	Net income				$	24,352,000		$	33,083,000
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				56,676,000			53,195,000
		Equity in earnings of affiliates, net of distributions				(483,000	)		148,000
		Interest of outside non-controlling partners in KPP’s net income				65,933,000			61,908,000
		Gain on issuance of units by KPP				—			(10,898,000	)
		Deferred income taxes				(671,000	)		1,683,000
		Cumulative effect of change in accounting principle				—			313,000
		Other				(1,191,000	)		1,468,000
		Changes in working capital components:
			Accounts receivable			(25,292,000	)		1,151,000
			Inventories, prepaid expenses and other			(9,775,000	)		(4,766,000	)
			Accounts payable and accrued expenses			17,135,000			7,639,000

				Net cash provided by operating activities		126,684,000			144,924,000

Investing activities:
	Acquisitions, net of cash acquired					(41,853,000	)		(1,644,000	)
	Capital expenditures					(42,214,000	)		(44,747,000	)
	Other, net					2,684,000			(1,388,000	)

				Net cash used in investing activities		(81,383,000	)		(47,779,000	)

Financing activities:
	Issuance of debt					52,001,000			291,377,000
	Payments of debt					(2,500,000	)		(388,051,000	)
	Distributions to shareholders					(22,860,000	)		(20,473,000	)
	Distributions to outside non-controlling partners in KPP					(78,732,000	)		(73,004,000	)
	Net proceeds from issuance of units by KPP					—			109,056,000
	Issuance of common shares upon exercise of stock options					111,000			164,000

				Net cash provided by (used in) financing activities		(51,980,000	)		(80,931,000	)

Effect of exchange rate changes on cash						1,637,000			2,766,000

Increase (decrease) in cash and cash equivalents						(5,042,000	)		18,980,000
Cash and cash equivalents at beginning of period						43,457,000			24,477,000

Cash and cash equivalents at end of period					$	38,415,000		$	43,457,000

Supplemental cash flow information — cash paid for interest					$	42,122,000		$	35,712,000

See notes to consolidated financial statements

F-84

KANEB SERVICES LLC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


					Accumulated
					Other
		Shareholders’			Comprehensive						Comprehensive
		Investment			Income			Total			Income

Balance at January 1, 2003			63,350,000			304,000			63,654,000
	Net income for the year		33,083,000			—			33,083,000		$	33,083,000
	Distributions declared		(21,306,000	)		—			(21,306,000	)		—
	Issuance of common shares and other		164,000			—			164,000			—
	Foreign currency translation adjustment		—			2,457,000			2,457,000			2,457,000
	Interest rate hedging transaction		—			(331,000	)		(331,000	)		(331,000	)

	Comprehensive income for the year										$	35,209,000

Balance at December 31, 2003			75,291,000			2,430,000			77,721,000
	Net income for the year		24,352,000			—			24,352,000		$	24,352,000
	Distributions declared		(23,094,000	)		—			(23,094,000	)		—
	Issuance of common shares and other		587,000			—			587,000			—
	Foreign currency translation adjustment		—			753,000			753,000			753,000
	Interest rate hedging transaction		—			36,000			36,000			36,000

	Comprehensive income for the year										$	25,141,000

Balance at December 31, 2004		$	77,136,000		$	3,219,000		$	80,355,000

See notes to consolidated financial statements

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	COMPANY ORGANIZATION


	*General*

On November 27, 2000, the Board of Directors of Kaneb Services, Inc. authorized the distribution of its pipeline, terminalling and product marketing businesses (the “Distribution”) to its stockholders in the form of a new limited liability company, Kaneb Services LLC (the “Company”). On June 29, 2001, the Distribution was completed, with each stockholder of Kaneb Services, Inc. receiving one common share of the Company for each three shares of Kaneb Services, Inc.’s common stock held on June 20, 2001, the record date for the Distribution, resulting in the distribution of 10.85 million shares of the Company. On August 7, 2001, the stockholders of Kaneb Services, Inc. approved an amendment to its certificate of incorporation to change its name to Xanser Corporation (“Xanser”).

In September 1989, Kaneb Pipe Line Company LLC (“KPL”), now a wholly owned subsidiary of the Company, formed Kaneb Pipe Line Partners, L.P. (“KPP”) to own and operate its refined petroleum products pipeline business. KPL manages and controls the operations of KPP through its general partner interests and a 18% (at December 31, 2004) limited partnership interest. KPP operates through Kaneb Pipe Line Operating Partnership, L.P. (“KPOP”), a limited partnership in which KPP holds a 99% interest as limited partner. KPL owns a 1% interest as general partner of KPP and a 1% interest as general partner of KPOP.

KPL owns a petroleum product marketing business which provides wholesale motor fuel marketing services in the Great Lakes and Rocky Mountain regions of the United States. KPP’s product sales business delivers bunker fuels to ships in the Caribbean and Nova Scotia, Canada, and sells bulk petroleum products to various commercial customers at those locations. In the bunkering business, KPP competes with ports offering bunker fuels along the route of the vessel. Vessel owners or charterers are charged berthing and other fees for associated services such as pilotage, tug assistance, line handling, launch service and emergency response services.


	*Valero L.P. Merger Agreement*

On October 31, 2004, Valero L.P. agreed to acquire by merger (the “KSL Merger”) all of the outstanding common shares of the Company for cash. Under the terms of that agreement, Valero L.P. is offering to purchase all of the outstanding shares of the Company at $43.31 per share.

In a separate definitive agreement, on October 31, 2004, Valero L.P. and KPP agreed to merge (the “KPP Merger”). Under the terms of that agreement, each holder of units of limited partnership interests in KPP will receive a number of Valero L.P. common units based on an exchange ratio that fluctuates within a fixed range to provide $61.50 in value of Valero L.P. units for each unit of KPP. The actual exchange ratio will be determined at the time of the closing of the proposed merger and is subject to a fixed value collar of plus or minus five percent of Valero L.P.’s per unit price of $57.25 as of October 7, 2004. Should Valero L.P.’s per unit price fall below $54.39 per unit, the exchange ratio will remain fixed at 1.1307 Valero L.P. units for each unit of KPP. Likewise, should Valero L.P.’s per unit price exceed $60.11 per unit, the exchange ratio will remain fixed at 1.0231 Valero L.P. units for each unit of KPP.

The completion of the KSL Merger is subject to the customary regulatory approvals including those under the Hart-Scott-Rodino Antitrust Improvements Act. The completion of the KSL Merger is also subject to completion of the KPP Merger. All required shareholder and unitholder approvals have been obtained. Upon completion of the mergers, the general partner of the combined partnership will be owned by affiliates of Valero Energy Corporation and the Company and KPP will become wholly owned subsidiaries of Valero L.P.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are followed by the Company in the preparation of the consolidated financial statements.

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	*Cash and Cash Equivalents*

The Company’s policy is to invest cash in highly liquid investments with original maturities of three months or less. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents.


	*Inventories*

Inventories consist primarily of petroleum products purchased for resale in the product marketing business and are valued at the lower of cost or market. Cost is determined by using the weighted-average cost method.


	*Property and Equipment*

Property and equipment are carried at historical cost. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets, as discussed in Note 5. The rates used for pipeline and certain storage facilities, which are subject to regulation, are the same as those which have been promulgated by the Federal Energy Regulatory Commission. Upon disposal of assets depreciated on an individual basis, the gains and losses are included in current operating income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost, less salvage, is charged against accumulated depreciation.

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements of the Company. Under SFAS No. 144, the carrying value of the Company’s property and equipment is periodically evaluated using undiscounted future cash flows as the basis for determining if impairment exists. To the extent impairment is indicated to exist, an impairment loss will be recognized by the Company based on fair value.


	*Revenue and Income Recognition*

The pipeline business provides pipeline transportation of refined petroleum products, liquified petroleum gases, and anhydrous ammonia fertilizer. Pipeline revenues are recognized as services are provided. KPP’s terminalling services business provides terminalling and other ancillary services. Storage fees are generally billed one month in advance and are reported as deferred income. Terminalling revenues are recognized in the month services are provided. Revenues for the product marketing business are recognized when product is sold and title and risk pass to the customer.


	*Sales of Securities by Subsidiaries*

The Company recognizes gains and losses in the consolidated statements of income resulting from subsidiary sales of additional equity interest, including KPP limited partnership units, to unrelated parties.


	*Foreign Currency Translation*

The Company translates the balance sheet of KPP’s foreign subsidiaries using year-end exchange rates and translates income statement amounts using the average exchange rates in effect during the year. The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive income (loss) in Shareholder’s Equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of income. The local

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

currency is considered to be the functional currency, except in the Netherland Antilles and Canada, where the U.S. dollar is the functional currency.


	*Excess of Cost Over Fair Value of Net Assets of Acquired Businesses*

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminates the amortization of goodwill (excess of cost over fair value of net assets of acquired businesses) and other intangible assets with indefinite lives. Under SFAS No. 142, intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. At December 31, 2004, the Company had no intangible assets subject to amortization under SFAS No. 142. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If an impairment is indicated, then the fair value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its fair value. Based on valuations and analysis performed by the Company at initial adoption date and at each annual evaluation date, including December 31, 2004, the Company determined that the implied fair value of its goodwill exceeded carrying value and, therefore, no impairment charge was necessary.


	*Environmental Matters*

KPP environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded by KPP when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or KPP’s commitment to a formal plan of action.


	*Asset Retirement Obligations*

Effective January 1, 2003, the Company adopted SFAS No. 143 “Accounting for Asset Retirement Obligations”, which establishes requirements for the removal-type costs associated with asset retirements. At the initial adoption date of SFAS No. 143, the Company recorded an asset retirement obligation of approximately $5.5 million and recognized a cumulative effect of change in accounting principle of $0.3 million, after interest of outside non-controlling partners in KPP’s net income, for its legal obligations to dismantle, dispose of, and restore certain leased KPP pipeline and terminalling facilities, including petroleum and chemical storage tanks, terminalling facilities and barges. The Company did not record a retirement obligation for certain of KPP’s pipeline and terminalling assets because sufficient information is presently not available to estimate a range of potential settlement dates for the obligation. In these cases, the obligation will be initially recognized in the period in which sufficient information exists to estimate the obligation. At December 31, 2004, the Company had no assets which were legally restricted for purposes of settling asset retirement obligations. The effect of SFAS No. 143, assuming adoption on January 1, 2002, was not material to the results of operations of the Company for the years ended December 31, 2004 and 2003. In 2004 and 2003, accretion expense of $0.2 million and $0.4 million, respectively, was included in operating costs.


	*Comprehensive Income*

The Company follows the provisions of SFAS No. 130, “Reporting Comprehensive Income”, for the reporting and display of comprehensive income and its components in a full set of general purpose financial

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

statements. SFAS No. 130 requires additional disclosure and does not affect the Company’s financial position or results of operations.


	*Income Taxes*

Limited liability company operations are not subject to federal or state income taxes. However, certain KPP terminalling operations are conducted through separate taxable wholly owned corporate subsidiaries. The income before tax expense for these subsidiaries was $18.4 million and $18.9 million for the years ended December 31, 2004 and 2003, respectively. The income tax expense for KPP’s taxable subsidiaries for the years ended December 31, 2004, and 2003 was $3.3 million and $5.2 million, respectively. KPP has recorded a net deferred tax liability of $21.5 million and $20.6 million at December 2004 and 2003, respectively, which is associated with these subsidiaries.

On June 1, 1989, the governments of the Netherlands Antilles and St. Eustatius approved a Free Zone and Profit Tax Agreement retroactive to January 1, 1989, which expired on December 31, 2000. This agreement required a subsidiary of KPP, to pay a 2% rate on taxable income, as defined therein, or a minimum payment of 500,000 Netherlands Antilles guilders ($0.3 million) per year. The agreement further provided that any amounts paid in order to meet the minimum annual payment were available to offset future tax liabilities under the agreement to the extent that the minimum annual payment is greater than 2% of taxable income. The subsidiary is currently engaged in discussions with representatives appointed by the Island Territory of St. Eustatius regarding the renewal or modification of the agreement, but the ultimate outcome cannot be predicted at this time. The subsidiary has accrued amounts assuming a new agreement becomes effective, and continues to make payments, as required, under the previous agreement.


	*Cash Distributions*

The Company makes quarterly distributions of 100% of available cash, as defined in the limited liability agreement, to the common shareholders of record on the applicable record date, within 45 days after the end of each quarter. Available cash consists generally of all the cash receipts of the Company, less all cash disbursements and reserves. Excess cash flow of the Company’s wholly owned product marketing operations is being used to reduce working capital borrowings. Distributions of $1.96, $1.825 per share were declared and paid to shareholders with respect to the years ended December 31, 2004 and 2003, respectively.


	*Earnings Per Share*

Earnings per share has been calculated using basic and diluted weighted average shares outstanding for each of the periods presented. For the years ended December 31, 2004 and 2003, basic weighted average shares outstanding were 11,746,000 and 11,554,000 and diluted weighted average shares outstanding were 11,981,000 and 11,792,000, respectively.


	*Derivative Instruments*

The Company follows the provisions of SFAS No. 133, “Accounting For Derivative Instruments and Hedging Activities”, which establishes the accounting and reporting standards for such activities. Under SFAS No. 133, companies must recognize all derivative instruments on their balance sheet at fair value. Changes in the value of derivative instruments, which are considered hedges, are offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. SFAS No. 133 requires that unrealized gains and losses on derivatives not qualifying for hedge accounting be recognized currently in earnings.

On May 19, 2003, KPP issued $250 million of 5.875% senior unsecured notes due June 1, 2013 (see Note 6). In connection with the offering, on May 8, 2003, KPP entered into a treasury lock contract for the

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

purpose of locking in the US Treasury interest rate component on $100 million of the debt. The treasury lock contract, which qualified as a cash flow hedging instrument under SFAS No. 133, was settled on May 19, 2003 with a cash payment by KPP of $1.8 million. The settlement cost of the contract, net of interest of outside non-controlling partners in KPP’s accumulated other comprehensive income, has been recorded as a component of accumulated other comprehensive income and is being amortized, as interest expense, over the life of the debt. For the year ended December 31, 2004 and 2003, $0.2 million and $0.1 million, respectively, of amortization is included in interest expense.


	*Stock Option Plans*

In December of 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R), which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise, or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees”, and generally requires that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating the provisions of SFAS No. 123R to determine which fair-value-based model and transitional provision to follow upon adoption. The alternatives for transition include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption. The modified retrospective method requires recording compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS No. 123R will be effective for the Company beginning in the third quarter of 2005. The impact of adoption on the Company’s consolidated financial statements is still being evaluated.

In accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company currently applies the provisions of APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123. The Company also applies the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-based Compensation — Transition and Disclosure” as if the fair-value-based method had been applied in measuring compensation expense. The Black-Scholes option pricing model has been used to estimate the fair value of stock options issued and the assumptions in the calculations under such model include stock price variance or volatility ranging from 3.40% to 4.39%, based on weekly average variances of KPP’s units prior to the Distribution and the Company’s common shares after the Distribution for the ten year period preceding issuance, a risk-free rate of return ranging from 3.75% to 4.78%, based on the 30-year U.S. treasury bill rate for the ten-year expected life of the options, and an annual dividend yield ranging from 6.89% to 8.36%.

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following illustrates the effect on net income and basic and diluted earnings per share if the fair value based method had been applied:


		Year Ended December 31,

		2004			2003

Reported net income		$	24,352,000		$	33,083,000
Share-based employee compensation expense determined under the fair value based method			(178,000	)		(85,000	)

Pro forma net income		$	24,174,000		$	32,998,000

Earning per share:
	Basic — as reported	$	2.07		$	2.86

	Basic — pro forma	$	2.06		$	2.86

	Diluted — as reported	$	2.03		$	2.81

	Diluted — pro forma	$	2.02		$	2.80


	*Estimates*

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


	*Recent Accounting Pronouncements*

Effective January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that all restructurings initiated after December 31, 2002 be recorded when they are incurred and can be measured at fair value. The adoption of SFAS No. 146 had no effect on the consolidated financial statements of the Company.

The Company has adopted the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107, and a rescission of FASB Interpretation No. 34.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. The application of this interpretation had no effect on the consolidated financial statements of the Company.

In December 2003, the FASB issued Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities (FIN 46R), primarily to clarify the required accounting for interests in variable interest entities (VIEs). This standard replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, that was issued in January 2003 to address certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. For the Company, application of FIN 46R is required for interests in certain VIEs that are commonly referred to as special-purpose entities, or SPEs, as of December 31, 2003 and for interests in all other types of VIEs as of March 31, 2004. The application of FIN 46R has not and is not expected to have a material impact on the consolidated financial statements of the Company.

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has adopted the provisions of SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies financial accounting and reporting for derivative instruments and hedging activities. The adoption of SFAS No. 149, which was effective for derivative contracts and hedging relationships entered into or modified after June 30, 2003, had no impact on the Company’s consolidated financial statements.

On July 1, 2003, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which requires certain financial instruments, which were previously accounted for as equity, to be classified as liabilities. The adoption of SFAS No. 150 had no effect on the consolidated financial statements of the Company.


3.	PUBLIC OFFERING OF UNITS BY KPP

In March of 2003, KPP issued 3,122,500 limited partnership units in a public offering at $36.54 per unit, generating approximately $109.1 million in net proceeds. The proceeds were used to reduce bank borrowings (See Note 5). As a result of KPP issuing additional units to unrelated parties, the Company’s share of net assets of KPP increased by $10.9 million. Accordingly, the Company recognized a $10.9 million gain in 2003.


4.	PROPERTY AND EQUIPMENT

The cost of property and equipment is summarized as follows:


	Estimated		December 31,
	useful
	life (years)		2004		2003

Land		—	$	84,893,000	$	75,912,000
Buildings		25 — 35		39,077,000		36,244,000
Pipeline and terminalling equipment		15 — 40		1,187,323,000		1,115,458,000
Marine equipment		15 — 30		87,937,000		87,204,000
Furniture and fixtures		5 — 15		15,390,000		11,577,000
Transportation equipment		3 — 6		7,790,000		7,360,000
Construction and work-in-progress		—		28,766,000		26,768,000

Total property and equipment				1,451,176,000		1,360,523,000
Less accumulated depreciation				302,564,000		247,503,000

Net property and equipment			$	1,148,612,000	$	1,113,020,000

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	LONG-TERM DEBT

Long-term debt is summarized as follows:


	December 31,

	2004		2003

Revolving credit facility, due in July of 2008	$	14,000,000	$	16,500,000
Revolving credit facility of subsidiary, due in April of 2007		3,033,000		2,112,000
KPP $400 million revolving credit facility, due in April of 2006		95,669,000		54,169,000
KPP $250 million 5.875% senior unsecured notes, due in June of 2013		250,000,000		250,000,000
KPP $250 million 7.75% senior unsecured notes, due in February of 2012		250,000,000		250,000,000
KPP term loans, due in April of 2006		40,770,000		29,243,000
KPP Australian bank facility, due in April of 2006		35,513,000		34,284,000

Total long-term debt	$	688,985,000	$	636,308,000

The Company has an agreement with a bank that provides for a $50 million revolving credit facility through July 1, 2008. The credit facility, which bears interest at variable rates, is secured by 4.6 million KPP limited partnership units and has a variable rate commitment fee on unused amounts. At December 31, 2004, $14.0 million was drawn on the credit facility.

The Company’s product marketing subsidiary has a credit agreement with a bank that, as amended, provides for a $15 million revolving credit facility through April of 2007. The credit facility bears interest at variable rates, has a commitment fee of 0.25% per annum on unutilized amounts and contains certain financial and operational covenants. At December 31, 2004, the subsidiary was in compliance with all covenants. The credit facility, which is without recourse to the Company, is secured by essentially all of the tangible and intangible assets of the product marketing business and by 250,000 KPP limited partnership units held by a subsidiary of the Company. At December 31, 2004, $3.0 million was drawn on the facility.

In April of 2003, KPP entered into a credit agreement with a group of banks that provides for a $400 million unsecured revolving credit facility through April of 2006. The credit facility, which provides for an increase in the commitment up to an aggregate of $450 million by mutual agreement between KPP and the banks, bears interest at variable rates and has a variable commitment fee on unused amounts. The credit facility is without recourse to the Company and contains certain financial and operating covenants, including limitations on investments, sales of assets and transactions with affiliates and, absent an event of default, does not restrict distributions to the Company or to other partners. At December 31, 2004, KPP was in compliance with all covenants. Initial borrowings on the credit agreement ($324.2 million) were used to repay all amounts outstanding under KPP’s $275 million credit agreement and $175 million bridge loan agreement. At December 31, 2004, $95.7 million was outstanding under the credit agreement.

On May 19, 2003, KPP issued $250 million of 5.875% senior unsecured notes due June 1, 2013. The net proceeds from the public offering, $247.6 million, were used to reduce amounts due under KPP’s revolving credit agreement. Under the note indenture, interest is payable semi-annually in arrears on June 1 and December 1 of each year. The notes are redeemable, as a whole or in part, at the option of KPP, at any time, at a redemption price equal to the greater of 100% of the principal amount of the notes, or the sum of the present value of the remaining scheduled payments of principal and interest, discounted to the redemption date at the applicable U.S. Treasury rate, as defined in the indenture, plus 30 basis points. The note indenture contains certain financial and operational covenants, including certain limitations on investments, sales of assets and

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KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

transactions with affiliates and, absent an event of default, such covenants do not restrict distributions to the Company or to other partners. At December 31, 2004, KPP was in compliance with all covenants.

In February of 2002, KPP issued $250 million of 7.75% senior unsecured notes due February 15, 2012. The net proceeds from the public offering, $248.2 million, were used to repay the KPP’s revolving credit agreement and to partially fund the acquisition of all of the liquids terminating subsidiaries of Statia Terminals Group NV on February 28, 2002. Under the note indenture, interest is payable semi-annually in arrears on February 15 and August 15 of each year. The notes, which are without recourse to the Company, are redeemable, as a whole or in part, at the option of KPP, at any time, at a redemption price equal to the greater of 100% of the principal amount of the notes, or the sum of the present value of the remaining scheduled payments of principal and interest, discounted to the redemption date at the applicable U.S. Treasury rate, as defined in the indenture, plus 30 basis points. The note indenture contains certain financial and operational covenants, including certain limitations on investments, sales of assets and transactions with affiliates and, absent an event of default, such covenants do not restrict distributions to the Company or to other partners. At December 31, 2004, KPP was in compliance with all covenants.


6.	RETIREMENT PLANS

Substantially all of the Company’s domestic employees are covered by a defined contribution plan, which provides for varying levels of employer matching. The Company’s contributions under these plans were $1.6 million, $1.6 million and $1.2 million for 2004, 2003 and 2002, respectively.


7.	SHAREHOLDERS’ EQUITY

The changes in the number of issued and outstanding common shares of the Company are summarized as follows:


	Common Shares
	Issued and
	Outstanding

Balance at January 1, 2002		11,242,746
Common shares issued		73,091


Balance at December 31, 2002		11,315,837
Common shares issued		206,628


Balance at December 31, 2003		11,522,465
Common shares issued		169,863


Balance at December 31, 2004		11,692,328

On June 27, 2001, the Board of Directors of the Company declared a distribution of one right for each of its outstanding common shares to each shareholder of record on June 27, 2001. Each right entitles the holder, upon the occurrence of certain events, to purchase from the Company one of its common shares at a purchase price of $60.00 per common share, subject to adjustment. The rights will not separate from the common shares or become exercisable until a person or group either acquires beneficial ownership of 15% or more of the Company’s common shares or commences a tender or exchange offer that would result in ownership of 20% or more, whichever occurs earlier. The rights, which expire on June 27, 2011, are redeemable in whole, but not in part, at the Company’s option at any time for a price of $0.01 per right. On October 28, 2004, the rights agreement was amended to generally provide that events referred to in the Valero L.P. merger agreement (see Note 1) would not cause the rights to become exercisable.

F-94

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has various plans for officers, directors and key employees under which stock options, deferred stock units and restricted shares may be issued.

Stock Options

The options granted under the plan generally expire ten years from date of grant. All options were granted at prices greater than or equal to the market price at the date of grant.

At December 31, 2004, options on 506,307 shares at prices ranging from $5.26 to $28.75 were outstanding, of which 137,405 were exercisable at prices ranging from $5.26 to $19.73. At December 31, 2003, options on 374,200 shares at prices ranging from $3.27 to $19.73 were outstanding, of which 195,332 were exercisable at prices ranging from $3.27 to $19.73.

Deferred Stock Unit Plans

In 2002, the Company initiated a Deferred Stock Unit Plan (the “DSU Plan”), pursuant to which key employees of the Company have, from time to time, been given the opportunity to defer a portion of their compensation for a specified period toward the purchase of deferred stock units (“DSUs”), an instrument designed to track the Company’s common shares. Under the plan, DSUs are purchased at a value equal to the closing price of the Company’s common shares on the day by which the employee must elect (if they so desire) to participate in the DSU Plan; which date is established by the Compensation Committee, from time to time (the “Election Date”). During a vesting period of one to three years following the Election Date, a participant’s DSUs vest only in an amount equal to the lesser of the compensation actually deferred to date or the value (based upon the then-current closing price of the Company’s common shares) of the pro-rata portion (as of such date) of the number of DSUs acquired. After the expiration of the vesting period, which is typically the same length as the deferral period, the DSUs become fully vested, but may only be distributed through the issuance of a like number of shares of the Company’s common shares on a pre-selected date, which is irrevocably selected by the participant on the Election Date and which is typically at or after the expiration of the vesting period and no later than ten years after the Election Date, or at the time of a “change of control” of the Company, if earlier. DSU accounts are unfunded by the Company. Each person that elects to participate in the DSU Plan is awarded, under the Company’s Share Incentive Plan, an option to purchase a number of shares ranging from one-half to one and one-half times the number of DSUs purchased by such person at 100% of the closing price of the Company’s common shares on the Election Date, which options become exercisable over a specified period after the grant, according to a schedule determined by the Compensation Committee. At December 31, 2004, 3,802 DSUs had vested under the 2002 Plan.

In 1996, Kaneb Services, Inc. implemented a DSU plan whereby officers, directors and key executives were permitted to defer compensation on a pretax basis to receive shares of Kaneb Services, Inc. common stock at a predetermined date after the end of the compensation deferral period. In connection with the Distribution, the Company agreed to issue DSUs equivalent in price to the Company’s common shares at that time. For every three Kaneb Services, Inc. DSUs held, the Company issued one DSU, such that the intrinsic value of each holder’s deferred compensation account remained unchanged as a result of the Distribution. In addition, upon the payment date of any distributions on the Company’s common shares, the Company agreed to credit each deferred account with the equivalent value of the distribution. Upon the scheduled payment of the deferred accounts, the Company agreed to issue one common share for each DSU relative to Company DSUs previously issued and to pay the equivalent of the accumulated deferred distributions, plus interest, to the previously deferred account holder. All other terms of the DSU plan remained unchanged. Similarly, Kaneb Services, Inc. agreed to issue to employees of the Company who hold DSUs, the number of shares of Kaneb Services, Inc. (now Xanser) common stock subject to the Kaneb Services, Inc. DSUs held by those employees. At December 31, 2004, approximately 122,000 common shares of the Company are issuable under this arrangement.

F-95

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted Stock

In August 2004 and September 2001, the Company issued 60,000 and 30,000, respectively, of restricted common shares to the outside Directors of the Company. All of such shares vest or become transferable in one-third increments on each anniversary date after issuance. In conjunction will the issuance and commencement of vesting of the restricted shares, the Company recognized an expense of $0.5 million in 2004 and $0.1 million in 2003.


8.	COMMITMENTS AND CONTINGENCIES

Total rent expense under operating leases amounted to $14.6 million and $13.5 million for the years ended December 31, 2003 and 2004, respectively.

The following is a schedule by years of future minimum lease payments under the Company’s, and KPP’s, operating leases as of December 31, 2004:


Year ending December 31:
	2005	$	9,822,000
	2006		8,593,000
	2007		6,238,000
	2008		5,338,000
	2009		4,058,000
	Thereafter		18,140,000

Total minimum lease payments		$	52,189,000

The operations of KPP are subject to federal, state and local laws and regulations in the United States and various foreign locations relating to protection of the environment. Although KPP believes its operations are in general compliance with applicable environmental regulations, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance that significant costs and liabilities will not be incurred by KPP. 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 of KPP, could result in substantial costs and liabilities to KPP. KPP has recorded an undiscounted reserve for environmental claims in the amount of $23.0 million at December 31, 2004, including $16.9 million related to acquisitions of pipelines and terminals. During 2004 and 2003, respectively, KPP incurred $6.7 million and $2.1 million of costs related to such acquisition reserves and reduced the liability accordingly.

Certain subsidiaries of KPP were sued in a Texas state court in 1997 by Grace Energy Corporation (“Grace”), the entity from which KPP acquired ST Services in 1993. The lawsuit involves environmental response and remediation costs allegedly resulting from jet fuel leaks in the early 1970’s from a pipeline. The pipeline, which connected a former Grace terminal with Otis Air Force Base in Massachusetts (the “Otis pipeline” or the “pipeline”), ceased operations in 1973 and was abandoned before 1978, when the connecting terminal was sold to an unrelated entity. Grace alleged that subsidiaries of KPP acquired the abandoned pipeline as part of the acquisition of ST Services in 1993 and assumed responsibility for environmental damages allegedly caused by the jet fuel leaks. Grace sought a ruling from the Texas court that these subsidiaries are responsible for all liabilities, including all present and future remediation expenses, associated with these leaks and that Grace has no obligation to indemnify these subsidiaries for these expenses. In the lawsuit, Grace also sought indemnification for expenses of approximately $3.5 million that it had incurred since 1996 for response and remediation required by the State of Massachusetts and for additional expenses that it expects to incur in the future. The consistent position of KPP’s subsidiaries has been that they did not acquire the abandoned pipeline

F-96

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

as part of the 1993 ST Services transaction, and therefore did not assume any responsibility for the environmental damage nor any liability to Grace for the pipeline.

At the end of the trial, the jury returned a verdict including findings that (1) Grace had breached a provision of the 1993 acquisition agreement by failing to disclose matters related to the pipeline, and (2) the pipeline was abandoned before 1978 — 15 years before KPP’s subsidiaries acquired ST Services. On August 30, 2000, the Judge entered final judgment in the case that Grace take nothing from the subsidiaries on its claims seeking recovery of remediation costs. Although KPP’s subsidiaries have not incurred any expenses in connection with the remediation, the court also ruled, in effect, that the subsidiaries would not be entitled to indemnification from Grace if any such expenses were incurred in the future. Moreover, the Judge let stand a prior summary judgment ruling that the pipeline was an asset acquired by KPP’s subsidiaries as part of the 1993 ST Services transaction and that any liabilities associated with the pipeline would have become liabilities of the subsidiaries. Based on that ruling, the Massachusetts Department of Environmental Protection and Samson Hydrocarbons Company (successor to Grace Petroleum Company) wrote letters to ST Services alleging its responsibility for the remediation, and ST Services responded denying any liability in connection with this matter. The Judge also awarded attorney fees to Grace of more than $1.5 million. Both KPP’s subsidiaries and Grace have appealed the trial court’s final judgment to the Texas Court of Appeals in Dallas. In particular, the subsidiaries have filed an appeal of the judgment finding that the Otis pipeline and any liabilities associated with the pipeline were transferred to them as well as the award of attorney fees to Grace.

The Otis Air Force Base is a part of the Massachusetts Military Reservation (“MMR Site”), which has been declared a Superfund Site pursuant to CERCLA. The MMR Site contains a number of groundwater contamination plumes, two of which are allegedly associated with the Otis pipeline, and various other waste management areas of concern, such as landfills. The United States Department of Defense, pursuant to a Federal Facilities Agreement, has been responding to the Government remediation demand for most of the contamination problems at the MMR Site. Grace and others have also received and responded to formal inquiries from the United States Government in connection with the environmental damages allegedly resulting from the jet fuel leaks. KPP’s subsidiaries voluntarily responded to an invitation from the Government to provide information indicating that they do not own the pipeline. In connection with a court-ordered mediation between Grace and KPP’s subsidiaries, the Government advised the parties in April 1999 that it has identified two spill areas that it believes to be related to the pipeline that is the subject of the Grace suit. The Government at that time advised the parties that it believed it had incurred costs of approximately $34 million, and expected in the future to incur costs of approximately $55 million, for remediation of one of the spill areas. This amount was not intended to be a final accounting of costs or to include all categories of costs. The Government also advised the parties that it could not at that time allocate its costs attributable to the second spill area.

F-97

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

response costs. Representatives of ST Services have met with representatives of the Government on several occasions since September 6, 2001 to discuss the Government’s claims and to exchange information related to such claims. Additional exchanges of information are expected to occur in the future and additional meetings may be held to discuss possible resolution of the Government’s claims without litigation. KPP does not believe this matter will have a materially adverse effect on its financial condition, although there can be no assurances as to the ultimate outcome.

On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric Power Company (“PEPCO”) ruptured. Work performed with regard to the pipeline was conducted by a partnership of which ST Services is general partner. PEPCO has reported that it has incurred total cleanup costs of $70 million to $75 million. PEPCO probably will continue to incur some cleanup related costs for the foreseeable future, primarily in connection with EPA requirements for monitoring the condition of some of the impacted areas. Since May 2000, ST Services has provisionally contributed a minority share of the cleanup expense, which has been funded by ST Services’ insurance carriers. ST Services and PEPCO have not, however, reached a final agreement regarding ST Services’ proportionate responsibility for this cleanup effort, if any, and cannot predict the amount, if any, that ultimately may be determined to be ST Services’ share of the remediation expense, but ST Services believes that such amount will be covered by insurance and therefore will not materially adversely affect KPP’s financial condition.

As a result of the rupture, purported class actions were filed against PEPCO and ST Services in federal and state court in Maryland by property and business owners alleging damages in unspecified amounts under various theories, including under the Oil Pollution Act (“OPA”) and Maryland common law. The federal court consolidated all of the federal cases in a case styled as In re Swanson Creek Oil Spill Litigation. A settlement of the consolidated class action, and a companion state-court class action, was reached and approved by the federal judge. The settlement involved creation and funding by PEPCO and ST Services of a $2,250,000 class settlement fund, from which all participating claimants would be paid according to a court-approved formula, as well as a court-approved payment to plaintiffs’ attorneys. The settlement has been consummated and the fund, to which PEPCO and ST Services contributed equal amounts, has been distributed. Participating claimants’ claims have been settled and dismissed with prejudice. A number of class members elected not to participate in the settlement, i.e., to “opt out,” thereby preserving their claims against PEPCO and ST Services. All non-participant claims have been settled for immaterial amounts with ST Services’ portion of such settlements provided by its insurance carrier.

F-98

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2003, Exxon Mobil filed a lawsuit in a New Jersey state court against GATX Corporation, Kinder Morgan Liquid Terminals (“Kinder Morgan”), the successor in interest to GATX Terminals Corporation (“GATX”), and ST Services, seeking reimbursement for remediation costs associated with the Paulsboro, New Jersey terminal. The terminal was owned and operated by Exxon Mobil from the early 1950’s until 1990 when purchased by GATX. ST Services purchased the terminal in 2000 from GATX. GATX was subsequently acquired by Kinder Morgan. As a condition to the sale to GATX in 1990, Exxon Mobil undertook certain remediation obligations with respect to the site. In the lawsuit, Exxon Mobil is claiming that it has complied with its remediation and contractual obligations and is entitled to reimbursement from GATX Corporation, the parent company of GATX, Kinder Morgan, and ST Services for costs in the amount of $400,000 that it claims are related to releases at the site subsequent to its sale of the terminal to GATX. It is also alleging that any remaining remediation requirements are the responsibility of GATX Corporation, Kinder Morgan, or ST Services. Kinder Morgan has alleged that it was relieved of any remediation obligations pursuant to the sale agreement between its predecessor, GATX, and ST Services. ST Services believes that, except for remediation involving immaterial amounts, GATX Corporation or Exxon Mobil are responsible for the remaining remediation of the site. Costs of completing the required remediation depend on a number of factors and cannot be determined at the current time.

F-99

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Pursuant to the Distribution, the Company entered into an agreement (the “Distribution Agreement”) with Xanser whereby the Company is obligated to pay Xanser amounts equal to certain expenses and tax liabilities incurred by Xanser in connection with the Distribution. In January of 2002, the Company paid Xanser $10 million in tax liabilities due in connection with the Distribution Agreement. The Distribution Agreement also requires the Company to pay Xanser an amount calculated based on any income tax liability of Xanser that, in the sole judgment of Xanser, (i) is attributable to increases in income tax from past years arising out of adjustments required by federal and state tax authorities, to the extent that such increases are properly allocable to the businesses that became part of the Company, or (ii) is attributable to the distribution of the Company’s common shares and the operations of the Company’s businesses prior to the distribution date. In the event of an examination of Xanser by federal or state tax authorities, Xanser will have unfettered control over the examination, administrative appeal, settlement or litigation that may be involved, notwithstanding that the Company has agreed to pay any additional tax.

The Company, primarily KPP, has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes, after consulting with counsel, that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position, results of operations or liquidity of the Company.


9.	BUSINESS SEGMENT DATA

The Company conducts business through three principal operations: the “Pipeline Operations,” which consists primarily of the transportation of refined petroleum products and fertilizer in the Midwestern states as a common carrier; the “Terminalling Operations,” which provide storage for petroleum products, specialty chemicals and other liquids; and the “Product Marketing Operations,” which provides wholesale motor fuel marketing services throughout the Midwest and Rocky Mountain regions and, since KPP’s acquisition of Statia delivers bunker fuel to ships in the Caribbean and Nova Scotia, Canada and sells bulk petroleum products to various commercial interests. General corporate includes general and administrative costs, including accounting, tax, finance, legal, investor relations and employee benefit services. General corporate assets include cash and other assets not related to the segments.

The Company measures segment profit as operating income. Total assets are those assets controlled by each reportable segment. Business segment data is as follows:


		Year Ended December 31,

		2004		2003

Business segment revenues:
	Pipeline operations	$	119,803,000	$	119,633,000
	Terminalling operations		259,352,000		234,958,000
	Product marketing operations		676,093,000		511,200,000

		$	1,055,248,000	$	865,791,000

Business segment profit:
	Pipeline operations	$	48,853,000	$	51,860,000
	Terminalling operations		74,663,000		66,532,000

F-100

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


				Year Ended December 31,

				2004			2003

	Product marketing operations				17,262,000			12,233,000
	General corporate				(3,999,000	)		(2,121,000	)

		Operating income			136,779,000			128,504,000
	Interest and other income				336,000			365,000
	Interest expense				(43,579,000	)		(39,576,000	)

	Income before gain on issuance of units by KPP, income taxes, interest of outside non-controlling partners in KPP’s net income and cumulative effect of change in accounting principle			$	93,536,000		$	89,293,000

Business segment assets:
	Depreciation and amortization:
		Pipeline operations		$	14,538,000		$	14,117,000
		Terminalling operations			41,232,000			38,089,000
		Product marketing operations			906,000			989,000

				$	56,676,000		$	53,195,000

	Capital expenditures (excluding acquisitions):
			Pipeline operations	$	10,334,000		$	9,584,000
			Terminalling operations		29,511,000			34,572,000
			Product marketing operations		2,369,000			591,000

				$	42,214,000		$	44,747,000


		December 31,

		2004		2003

Total assets:
	Pipeline operations	$	351,195,000	$	352,901,000
	Terminalling operations		917,966,000		874,185,000
	Product marketing operations		83,404,000		58,161,000
	General corporate		4,323,000		6,320,000

		$	1,356,888,000	$	1,291,567,000

F-101

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following geographical area data includes revenues and operating income based on location of the operating segment and net property and equipment based on physical location.


		Year Ended December 31,

		2004		2003

Geographical area revenues:
	United States	$	658,814,000	$	535,895,000
	United Kingdom		29,540,000		26,392,000
	Netherlands Antilles		298,273,000		241,693,000
	Canada		43,671,000		41,689,000
	Australia and New Zealand		24,950,000		20,122,000

		$	1,055,248,000	$	865,791,000

Geographical area operating income:
	United States	$	93,954,000	$	87,965,000
	United Kingdom		7,704,000		8,583,000
	Netherlands Antilles		22,629,000		19,223,000
	Canada		5,248,000		6,777,000
	Australia and New Zealand		7,244,000		5,956,000

		$	136,779,000	$	128,504,000


		December 31,

		2004		2003

Geographical area net property and equipment:
	United States	$	718,257,000	$	693,345,000
	United Kingdom		63,968,000		51,392,000
	Netherlands Antilles		211,382,000		217,143,000
	Canada		71,374,000		74,995,000
	Australia and New Zealand		83,631,000		76,145,000

		$	1,148,612,000	$	1,113,020,000


10.	FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

The estimated fair value of all debt as of December 31, 2004 and 2003 was approximately $745 million and $654 million, as compared to the carrying value of $689 million and $636 million, respectively. These fair values were estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. These estimates are not necessarily indicative of the amounts that would be realized in a current market exchange. See Note 2 regarding derivative instruments.

The Company markets and sells its services to a broad base of customers and performs ongoing credit evaluations of its customers. The Company does not believe it has a significant concentration of credit risk at December 31, 2004. No customer constituted 10% of the Company’s consolidated revenues in 2004 or 2003.

F-102

KANEB SERVICES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	QUARTERLY FINANCIAL DATA (unaudited)

Quarterly operating results for 2004 and 2003 are summarized as follows:


			Quarter Ended

			March 31,			June 30,		September 30,		December 31,

2004:
	Revenues		$	233,179,000		$	254,202,000	$	272,242,000	$	295,625,000

	Operating income		$	32,915,000		$	36,534,000	$	34,927,000	$	32,403,000

	Net income		$	5,995,000		$	7,395,000	$	6,811,000	$	4,151,000

	Earnings per share:
		Basic	$	0.51		$	0.63	$	0.58	$	0.35

		Diluted	$	0.50		$	0.62	$	0.57	$	0.34

2003:
	Revenues		$	218,469,000		$	218,654,000	$	214,592,000	$	214,076,000

	Operating income		$	33,724,000		$	32,705,000	$	32,251,000	$	29,824,000

	Net income		$	16,559,000	(a)(b)	$	5,488,000	$	5,862,000	$	5,174,000

	Earnings per share:
		Basic	$	1.44		$	0.48	$	0.50	$	0.44

		Diluted	$	1.41		$	0.47	$	0.49	$	0.43


a)	Includes cumulative effect of change in accounting principle — adoption of new accounting standard for asset retirement obligations of approximately $0.3 million.

b)	See Note 3 regarding gains on issuance of units by KPP.

F-103

APPENDIX A

Form of Amended and Restated Limited Liability Company Agreement of Valero GP Holdings, LLC

A-1

LOGO

16,500,000 Units

Representing Limited Liability Company Interests

PROSPECTUS

, 2006

Lehman Brothers

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS


Item 13.	*Other Expenses of Issuance and Distribution.*

Set forth below are the expenses (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the securities registered hereby. With the exception of the SEC registration fee, the NASD filing fee and the NYSE listing fee, the amounts set forth below are estimates.


Commission registration fee		$	50,759
NASD filing fee			47,938
NYSE listing fee			150,000
Printing and engraving expenses			*
Fees and expenses of legal counsel			*
Accounting fees and expenses			*
Transfer agent and registrar fees			*
Miscellaneous			*

	Total	$	*


*	To be filed by amendment.


Item 14.	*Indemnification of Directors and Officers.*

The section of the prospectus entitled “Description of Our Limited Liability Company Agreement — Indemnification” discloses that we will generally indemnify officers and members of our board of directors to the fullest extent permitted by the law against all losses, claims, damages or similar events and is incorporated herein by this reference. Reference is also made to Section of the Underwriting Agreement to be filed as an exhibit to this registration statement in which we will agree to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments that may be required to be made with respect to these liabilities. Subject to any terms, conditions or restrictions set forth in the limited liability company agreement, Section 18-108 of the Delaware Limited Liability Company Act empowers a Delaware limited liability company to indemnify and hold harmless any member or manager or other person from and against all claims and demands whatsoever.

To the extent that the indemnification provisions of our limited liability company agreement purport to include indemnification for liabilities arising under the Securities Act of 1933, in the opinion of the SEC, such indemnification is contrary to public policy and is therefore unenforceable.


Item 15.	*Recent Sales of Unregistered Securities.*

In a transaction exempt from the registration requirements pursuant to Section 4(2) of the Securities Act, immediately prior to the closing of this offering, we will issue 44,510,258 units to subsidiaries of Valero Energy in exchange for their current ownership interests in us.

II-1


Item 16.	*Exhibits*

The following documents are filed as exhibits to this registration statement. With respect to exhibits that are incorporated by reference to Exchange Act filings, the SEC file number for Valero L.P. is 1-16417.


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	1	.01*	Form of Underwriting Agreement
	3	.01*	Certificate of Formation of Valero GP Holdings, LLC
	3	.02*	Form of Amended and Restated Limited Liability Company Agreement of Valero GP Holdings, LLC (included as Appendix A to the Prospectus)
	4	.01	Amended and Restated Certificate of Limited Partnership of Valero L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.3
	4	.02	Third Amended and Restated Agreement of Limited Partnership of Valero L.P.	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 3.1
	4	.03	First Amendment to Third Amended and Restated Agreement of Limited Partnership of Valero L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2003, Exhibit 4.3
	4	.04	Amendment No. 2 to Third Amended and Restated Agreement of Limited Partnership of Valero L.P., dated as of July 1, 2005	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.01
	4	.05	Certificate of Limited Partnership of Valero Logistics Operations, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.4
	4	.06	Certificate of Amendment to Certificate of Limited Partnership of Valero Logistics Operations, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.5
	4	.07	Second Amended and Restated Agreement of Limited Partnership of Valero Logistics Operations, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.9
	4	.08	Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Valero Logistics Operations, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.10
	4	.09	Certificate of Limited Partnership of Riverwalk Logistics, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.7
	4	.10	Agreement of Limited Partnership of Riverwalk Logistics, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.8
	4	.11	First Amended and Restated Limited Partnership Agreement of Riverwalk Logistics, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.16
	4	.12	Certificate of Formation of Valero GP, LLC	Registration Statement on Form S-1 (File No. 333-43668), Exhibit 3.9
	4	.13	Certificate of Amendment to Certificate of Formation of Valero GP, LLC	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.14
	4	.14*	First Amended and Restated LLC Agreement of Valero GP, LLC	Registration Statement on Form S-1 (File No. 333-43668), Exhibit 3.10
	4	.15	First Amendment to First Amended and Restated Limited Liability Company Agreement of Valero GP, LLC	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.15

II-2


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	4	.16	Indenture, dated July 15, 2002, among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee, relating to Senior Debt Securities	Valero L.P.’s Current Report on Form 8-K filed July 15, 2002, Exhibit 4.1
	4	.17	First Supplemental Indenture, dated as of July 15, 2002, to Indenture dated July 15, 2002, in each case among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee, relating to 6 ⁷ / 8 % Senior Notes Due 2012	Valero L.P.’s Current Report on Form 8-K filed July 15, 2002, Exhibit 4.2
	4	.18	Second Supplemental Indenture, dated as of March 18, 2003, to Indenture dated July 15, 2002, as amended and supplemented by a First Supplemental Indenture thereto dated as of July 15, 2002, in each case among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee (including, form of global note representing $250,000,000 6.05% Senior Notes due 2013)	Valero L.P.’s Current Report on Form 8-K filed May 9, 2003, Exhibit 4.1
	4	.19	Third Supplemental Indenture, dated as of July 1, 2005, to Indenture dated July 15, 2002, as amended and supplemented, among Valero Logistics Operations, L.P.; Valero L.P.; Kaneb Pipe Line Operating Partnership, L.P.; and The Bank of New York	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.02
	4	.20	Indenture, dated as of February 21, 2002, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (Senior Debt Securities)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.03
	4	.21	First Supplemental Indenture, dated as of February 21, 2002, to Indenture dated as of February 21, 2002, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (including form of 7.750% Senior Unsecured Notes due 2012)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.04
	4	.22	Second Supplemental Indenture, dated as of August 9, 2002 and effective as of April 4, 2002, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P.; Statia Terminals Canada Partnership; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.05
	4	.23	Third Supplemental Indenture, dated and effective as of May 16, 2003, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P.; Statia Terminals Canada Partnership; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.06

II-3


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	4	.24	Fourth Supplemental Indenture, dated and effective as of May 27, 2003, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (including form of 5.875% Senior Unsecured Notes due 2013)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.07
	4	.25	Fifth Supplemental Indenture, dated and effective as of July 1, 2005, to Indenture dated as of February 21, 2002, as amended and supplemented, among Kaneb Pipe Line Operating Partnership, L.P.; Valero L.P.; Valero Logistics Operations, L.P.; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.08
	4	.26*	Specimen certificate representing units of Valero GP Holdings, LLC
	5	.01*	Opinion of Andrews Kurth LLP as to the legality of the securities being registered
	8	.01*	Opinion of Andrews Kurth LLP relating to tax matters
	10	.01*	Form of Valero GP Holdings, LLC Credit Facility
	10	.02	5-Year Revolving Credit Agreement dated as of December 20, 2004 among Valero Logistics Operations, L.P., Valero L.P., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, Suntrust Bank, as Syndication Agent, and Barclays Bank PLC, Mizuho Corporate Bank Ltd., and Royal Bank of Canada, as Co-Documentation Agents	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.02
	10	.03	First Amendment dated as of June 30, 2005 to 5-Year Revolving Credit Agreement, dated as of December 20, 2004, among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan Chase Bank; and the Lenders party thereto	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 10.01
	10	.04	5-Year Term Credit Agreement, dated as of July 1, 2005, among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan Chase Bank; and the Lenders party thereto	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 10.02
	10	.05	Valero GP, LLC Amended and Restated 2003 Employee Unit Incentive Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.03
	10	.06	Valero GP, LLC Amended and Restated 2002 Unit Option Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.04
	10	.07	Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.05
	10	.08	Form of Restricted Unit Agreement under the Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Exhibit 10.4
	10	.09	Form of Unit Option Award Agreement under the Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Exhibit 10.6

II-4


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	10	.10	Valero GP, LLC Short-Term Incentive Plan	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 10.4
	10	.11	Valero GP, LLC Intermediate-Term Incentive Plan	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 10.9
	10	.12	Performance Award Agreement dated January 22, 2003 between Curtis V. Anastasio and Valero Energy Corporation	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2003, Exhibit 10.8
	10	.13	Pipelines and Terminals Usage Agreement by and among Ultramar Diamond Shamrock Corporation, Shamrock Logistics Operations, L.P., Shamrock Logistics, L.P., Riverwalk Logistics, L.P. and Shamrock Logistics GP, LLC, dated April 16, 2001	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 10.6
	10	.14**	Amended and Restated Omnibus Agreement among Valero Energy Corporation, Valero GP, LLC, Riverwalk Logistics, L.P., Valero L.P. and Valero Logistics Operations, L.P., dated March 31, 2006.
	10	.15**	Third Amended and Restated Services Agreement among Diamond Shamrock Refining and Marketing Company, Valero Corporate Services Company; Valero L.P., Valero Logistics Operations, L.P., Riverwalk Logistics, L.P.; and Valero GP, LLC, effective as of January 1, 2006
	10	.16	Operating Agreement by and between Shamrock Logistics Operations, L.P. and Valero Pipeline Company, dated January 1, 2002	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 10.13
	10	.17	Contribution Agreement by and among Valero Refining Company--California, Riverwalk Holdings, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.13
	10	.18	Contribution Agreement by and among Valero Refining Company--Texas, L.P., UDS Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.14
	10	.19	Contribution Agreement by and among Valero Pipeline Company, UDS Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.15
	10	.20	Handling and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.1
	10	.21	Amendment Number One to the Handling and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., effective as of April 27, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.3

II-5


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	10	.22	Services and Secondment Agreement between Valero Refining-Texas, L.P. and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.3
	10	.23	Services and Secondment Agreement between Valero Refining Company-California and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.2
	10	.24	Throughput Commitment Agreement by and among Valero Marketing and Supply Company, Valero Logistics Operations, L.P. and Valero L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.4
	10	.25	Terminalling Agreement (Edinburg) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.5
	10	.26	Terminalling Agreement (Houston Asphalt) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.6
	10	.27	Terminalling Agreement (Hobby Airport) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.7
	10	.28	Terminalling Agreement (Placedo) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.8
	10	.29	Terminalling Agreement (San Antonio East) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.9
	10	.30	Terminal Storage and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operation, L.P. effective as of January 15, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.2
	10	.31	Terminal Agreement (Corpus Christi Crude Terminal) between Valero Marketing Supply Company and Valero Logistics Operation, L.P. effective as of January 1, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.4
	10	.32**	Form of Administration Agreement between Valero GP Holdings, LLC and Valero GP, LLC
	10	.36**	Form of Non-Compete Agreement between Valero GP Holdings, LLC, Valero L.P., Riverwalk Logistics, L.P. and Valero GP, LLC
	21	.01*	List of Subsidiaries of Valero GP Holdings, LLC
	23	.01**	Consent of KPMG LLP, dated March 30, 2006
	23	.02*	Consent of Andrews Kurth LLP (contained in Exhibit 5.1 and Exhibit 8.1)

II-6


	*	To be filed by amendment.


**	Filed herewith.


Item 17.	*Undertakings*

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:


	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

	(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The registrant undertakes to send to each unitholder, at least on an annual basis, a detailed statement of any transactions with Valero Energy or its subsidiaries, and of fees, commissions, compensation and other benefits paid, or accrued to Valero Energy or its subsidiaries for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.

The registrant undertakes to provide to the unitholders the financial statements required by Form 10-K for the first full fiscal year of operations of the company.

II-7

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, State of Texas, on March 31, 2006.


	Valero GP Holdings, LLC


	By:	/s/ Curtis V. Anastasio



	Curtis V. Anastasio
	President and Chief Executive Officer

POWER OF ATTORNEY

The undersigned directors and officers of Valero GP Holdings, LLC hereby constitute and appoint Steven A. Blank and Bradley C. Barron, each with full power to act and with full power of substitution and resubstitution, our true and lawful attorneys-in -fact and agents with full power to execute in our name and behalf in the capacities indicated below any and all amendments (including post-effective amendments and amendments thereto) to this registration statement and to file the same, with all exhibits and other documents relating thereto and any registration statement relating to any offering made pursuant to this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act with the Securities and Exchange Commission and hereby ratify and confirm all that such attorney-in -fact or his substitute shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and the dates indicated.


Name	Title	Date


/s/ William E. Greehey William E. Greehey	Chairman of the Board	March 31, 2006

/s/ Curtis V. Anastasio Curtis V. Anastasio	President and Chief Executive Officer	March 31, 2006

/s/ Steven A. Blank Steven A. Blank	Senior Vice President, Chief Financial Officer and Treasurer	March 31, 2006

/s/ Thomas R. Shoaf Thomas R. Shoaf	Vice President and Controller	March 31, 2006

II-8

EXHIBIT INDEX


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	1	.01*	Form of Underwriting Agreement
	3	.01*	Certificate of Formation of Valero GP Holdings, LLC
	3	.02*	Form of Amended and Restated Limited Liability Company Agreement of Valero GP Holdings, LLC (included as Appendix A to the Prospectus)
	4	.01	Amended and Restated Certificate of Limited Partnership of Valero L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.3
	4	.02	Third Amended and Restated Agreement of Limited Partnership of Valero L.P.	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 3.1
	4	.03	First Amendment to Third Amended and Restated Agreement of Limited Partnership of Valero L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2003, Exhibit 4.3
	4	.04	Amendment No. 2 to Third Amended and Restated Agreement of Limited Partnership of Valero L.P., dated as of July 1, 2005	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.01
	4	.05	Certificate of Limited Partnership of Valero Logistics Operations, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.4
	4	.06	Certificate of Amendment to Certificate of Limited Partnership of Valero Logistics Operations, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.5
	4	.07	Second Amended and Restated Agreement of Limited Partnership of Valero Logistics Operations, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.9
	4	.08	Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Valero Logistics Operations, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.10
	4	.09	Certificate of Limited Partnership of Riverwalk Logistics, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.7
	4	.10	Agreement of Limited Partnership of Riverwalk Logistics, L.P.	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 3.8
	4	.11	First Amended and Restated Limited Partnership Agreement of Riverwalk Logistics, L.P.	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.16
	4	.12	Certificate of Formation of Valero GP, LLC	Registration Statement on Form S-1 (File No. 333-43668), Exhibit 3.9
	4	.13	Certificate of Amendment to Certificate of Formation of Valero GP, LLC	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.14
	4	.14*	First Amended and Restated LLC Agreement of Valero GP, LLC	Registration Statement on Form S-1 (File No. 333-43668), Exhibit 3.10
	4	.15	First Amendment to First Amended and Restated Limited Liability Company Agreement of Valero GP, LLC	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 3.15
	4	.16	Indenture, dated July 15, 2002, among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee, relating to Senior Debt Securities	Valero L.P.’s Current Report on Form 8-K filed July 15, 2002, Exhibit 4.1


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	4	.17	First Supplemental Indenture, dated as of July 15, 2002, to Indenture dated July 15, 2002, in each case among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee, relating to 6 ⁷ / 8 % Senior Notes Due 2012	Valero L.P.’s Current Report on Form 8-K filed July 15, 2002, Exhibit 4.2
	4	.18	Second Supplemental Indenture, dated as of March 18, 2003, to Indenture dated July 15, 2002, as amended and supplemented by a First Supplemental Indenture thereto dated as of July 15, 2002, in each case among Valero Logistics Operations, L.P., as Issuer, Valero L.P., as Guarantor, and The Bank of New York, as Trustee (including, form of global note representing $250,000,000 6.05% Senior Notes due 2013)	Valero L.P.’s Current Report on Form 8-K filed May 9, 2003, Exhibit 4.1
	4	.19	Third Supplemental Indenture, dated as of July 1, 2005, to Indenture dated July 15, 2002, as amended and supplemented, among Valero Logistics Operations, L.P.; Valero L.P.; Kaneb Pipe Line Operating Partnership, L.P.; and The Bank of New York	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.02
	4	.20	Indenture, dated as of February 21, 2002, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (Senior Debt Securities)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.03
	4	.21	First Supplemental Indenture, dated as of February 21, 2002, to Indenture dated as of February 21, 2002, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (including form of 7.750% Senior Unsecured Notes due 2012)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.04
	4	.22	Second Supplemental Indenture, dated as of August 9, 2002 and effective as of April 4, 2002, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P.; Statia Terminals Canada Partnership; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.05
	4	.23	Third Supplemental Indenture, dated and effective as of May 16, 2003, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P.; Statia Terminals Canada Partnership; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.06
	4	.24	Fourth Supplemental Indenture, dated and effective as of May 27, 2003, to Indenture dated as of February 21, 2002, as amended and supplemented, between Kaneb Pipe Line Operating Partnership, L.P. and JPMorgan Chase Bank (including form of 5.875% Senior Unsecured Notes due 2013)	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.07


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	4	.25	Fifth Supplemental Indenture, dated and effective as of July 1, 2005, to Indenture dated as of February 21, 2002, as amended and supplemented, among Kaneb Pipe Line Operating Partnership, L.P.; Valero L.P.; Valero Logistics Operations, L.P.; and JPMorgan Chase Bank	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 4.08
	4	.26*	Specimen certificate representing units of Valero GP Holdings, LLC
	5	.01*	Opinion of Andrews Kurth LLP as to the legality of the securities being registered
	8	.01*	Opinion of Andrews Kurth LLP relating to tax matters
	10	.01*	Form of Valero GP Holdings, LLC Credit Facility
	10	.02	5-Year Revolving Credit Agreement dated as of December 20, 2004 among Valero Logistics Operations, L.P., Valero L.P., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, Suntrust Bank, as Syndication Agent, and Barclays Bank PLC, Mizuho Corporate Bank Ltd., and Royal Bank of Canada, as Co-Documentation Agents	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.02
	10	.03	First Amendment dated as of June 30, 2005 to 5-Year Revolving Credit Agreement, dated as of December 20, 2004, among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan Chase Bank; and the Lenders party thereto	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 10.01
	10	.04	5-Year Term Credit Agreement, dated as of July 1, 2005, among Valero Logistics Operations, L.P.; Valero L.P.; JPMorgan Chase Bank; and the Lenders party thereto	Valero L.P.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005, Exhibit 10.02
	10	.05	Valero GP, LLC Amended and Restated 2003 Employee Unit Incentive Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.03
	10	.06	Valero GP, LLC Amended and Restated 2002 Unit Option Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.04
	10	.07	Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2004, Exhibit 10.05
	10	.08	Form of Restricted Unit Agreement under the Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Exhibit 10.4
	10	.09	Form of Unit Option Award Agreement under the Valero GP, LLC Amended and Restated 2000 Long-Term Incentive Plan	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, Exhibit 10.6
	10	.10	Valero GP, LLC Short-Term Incentive Plan	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 10.4
	10	.11	Valero GP, LLC Intermediate-Term Incentive Plan	Registration Statement on Form S-1 (File No. 333- 43668), Exhibit 10.9
	10	.12	Performance Award Agreement dated January 22, 2003 between Curtis V. Anastasio and Valero Energy Corporation	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2003, Exhibit 10.8


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	10	.13	Pipelines and Terminals Usage Agreement by and among Ultramar Diamond Shamrock Corporation, Shamrock Logistics Operations, L.P., Shamrock Logistics, L.P., Riverwalk Logistics, L.P. and Shamrock Logistics GP, LLC, dated April 16, 2001	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 10.6
	10	.14**	Amended and Restated Omnibus Agreement among Valero Energy Corporation, Valero GP, LLC, Riverwalk Logistics, L.P., Valero L.P. and Valero Logistics Operations, L.P., dated March 31, 2006.
	10	.15**	Third Amended and Restated Services Agreement among Diamond Shamrock Refining and Marketing Company, Valero Corporate Services Company, Valero L.P., Valero Logistics Operations, L.P., Riverwalk Logistics, L.P., and Valero GP, LLC; effective as of January 1, 2006.
	10	.16	Operating Agreement by and between Shamrock Logistics Operations, L.P. and Valero Pipeline Company, dated January 1, 2002	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2001, Exhibit 10.13
	10	.17	Contribution Agreement by and among Valero Refining Company--California, Riverwalk Holdings, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.13
	10	.18	Contribution Agreement by and among Valero Refining Company--Texas, L.P., UDS Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.14
	10	.19	Contribution Agreement by and among Valero Pipeline Company, UDS Logistics, LLC, Valero L.P., Valero GP, Inc. and Valero Logistics Operations, L.P. dated as of March 6, 2003	Valero L.P.’s Annual Report on Form 10-K for year ended December 31, 2002, Exhibit 10.15
	10	.20	Handling and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.1
	10	.21	Amendment Number One to the Handling and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., effective as of April 27, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.3
	10	.22	Services and Secondment Agreement between Valero Refining-Texas, L.P. and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.3
	10	.23	Services and Secondment Agreement between Valero Refining Company-California and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.2


Exhibit
Number			Description	Incorporated by Reference to the Following Document

	10	.24	Throughput Commitment Agreement by and among Valero Marketing and Supply Company, Valero Logistics Operations, L.P. and Valero L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.4
	10	.25	Terminalling Agreement (Edinburg) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.5
	10	.26	Terminalling Agreement (Houston Asphalt) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.6
	10	.27	Terminalling Agreement (Hobby Airport) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.7
	10	.28	Terminalling Agreement (Placedo) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.8
	10	.29	Terminalling Agreement (San Antonio East) between Valero Marketing and Supply Company and Valero Logistics Operations, L.P., dated as of March 18, 2003	Valero L.P.’s Quarterly Report on Form 10-Q for quarter ended March 31, 2003, Exhibit 10.9
	10	.30	Terminal Storage and Throughput Agreement between Valero Marketing and Supply Company and Valero Logistics Operation, L.P. effective as of January 15, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.2
	10	.31	Terminal Agreement (Corpus Christi Crude Terminal) between Valero Marketing Supply Company and Valero Logistics Operation, L.P. effective as of January 1, 2004	Valero L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, Exhibit 10.4
	10	.32**	Form of Administration Agreement between Valero GP Holdings, LLC and Valero GP, LLC
	10	.33**	Form of Non-Compete Agreement between Valero GP Holdings, LLC, Valero L.P., Riverwalk Logistics, L.P. and Valero GP, LLC
	21	.01*	List of Subsidiaries of Valero GP Holdings, LLC
	23	.01**	Consent of KPMG LLP, dated March 30, 2006
	23	.02*	Consent of Andrews Kurth LLP (contained in Exhibit 5.1 and Exhibit 8.1)
	23	.03**	Consent of Ernst & Young LLP, dated March 30, 2006
	24	.01	Powers of Attorney (included on signature page to this registration statement)

* To be filed by amendment.

** Filed herewith.

EXHIBIT 10.14

AMENDED AND RESTATED
OMNIBUS AGREEMENT

among

VALERO ENERGY CORPORATION

VALERO GP, LLC

RIVERWALK LOGISTICS, L.P.

VALERO L.P.

and

VALERO LOGISTICS OPERATIONS, L.P.

AMENDED AND RESTATED
OMNIBUS AGREEMENT

This AMENDED AND RESTATED OMNIBUS AGREEMENT (this “ Agreement ”) is entered into on, and effective as of, March 31, 2006 by and among Valero Energy Corporation (successor to Ultramar Diamond Shamrock Corporation), a Delaware corporation (“ Valero Energy ”), Valero GP, LLC (f/k/a Shamrock Logistics GP, LLC), a Delaware limited liability company (“ Valero GP ”), Riverwalk Logistics, L.P., a Delaware limited partnership and general partner of the MLP and the OLP (“ Riverwalk ”), Valero L.P. (f/k/a Shamrock Logistics, L.P.), a Delaware limited partnership (the “ MLP ”), and Valero Logistics Operations (f/k/a Shamrock Logistics Operations, L.P.), a Delaware limited partnership (the “ OLP ”).

RECITAL:

The parties entered into an Omnibus Agreement, dated effective April 16, 2001 (the “ Original Omnibus Agreement ”). The parties desire to amend and restate the Original Omnibus Agreement in its entirety as set forth herein to (i) reflect the changes to the names of the parties to the agreement as a result of the merger, effective December 31, 2001, of Valero Energy Corporation with Ultramar Diamond Shamrock Corporation and (ii) clarify that the provisions of Sections 2.1, 2.3 and 4.1 hereof shall apply for so long as Valero Energy or any Controlled Valero Affiliate (as defined below) is the general partner of Riverwalk, the MLP or the OLP.

In consideration of the premises and the covenants, conditions, and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

ARTICLE I.
Definitions

1.1 Definitions .

(a) Capitalized terms used herein but not defined herein shall have the meanings given them in the MLP Agreement.

(b) As used in this Agreement, the following terms shall have the respective meanings set forth below:

“Affiliate” shall have the meaning attributed to such term in the MLP Agreement.

“Agreement” means this Omnibus Agreement, as amended, modified, or supplemented from time to time in accordance with the terms hereof.

“Change of Control” shall have the meaning attributed to such term in Section 2.4.

” Claim ” means any claim, lawsuit, demand, suit, inquiry made, hearing, investigation, notice of a violation, litigation, proceeding, arbitration, or other dispute, whether civil, criminal, administrative or otherwise.

“Closing” means April 16, 2001, the closing of the initial public offering of the MLP.

“Conflicts Committee” shall have the meaning attributed to such term in the MLP Agreement.

” Contaminant ” means any substance regulated under any Environmental Law, or any substance defined by Environmental Law as being hazardous or toxic or as being a pollutant.

” Contract ” means any agreement, contract, commitment, or other binding arrangement or understanding, whether written or oral.

“Controlled Valero Affiliate” means any entity of which Valero Energy owns, directly or indirectly, 20% or more of the Voting Stock.

” Environmental Laws ” means any and all laws, statutes, judgments, ordinances, rules, regulations, orders, determinations, interpretations, or guidance of any Governmental Authority pertaining to health or the environment in effect in any and all jurisdictions in which any Valero Energy Entity or Partnership Entity or any of their respective Affiliates is conducting or at any time has conducted business, or where any property of any Valero Energy Entity or Partnership Entity or any of their respective Affiliates, whether leased or owned, is located, or where any hazardous substances generated or disposed of by any Valero Energy Entity or Partnership Entity or any of their respective Affiliates are located. The term “ Environmental Law ” includes, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 and as subsequently amended, 42 U.S.C. § 9601 et seq.; the Resource Conversation and Recovery Act, as amended, 42 U.S.C. § 6901 et seq.; the Clean Air Act, as amended, 42 U.S.C. § 7401 et seq.; and the Oil Pollution Act, as amended, 33 U.S.C. § 2701 et seq.

” Environmental Liabilities and Costs ” means all Losses from any Claim by any Person whether based on Contract, tort, implied or express warranty, strict liability, criminal or civil statute, including under any Remedial Action, Environmental Law, Environmental Permit, Environmental Lien, Order or agreement with any Governmental Authority, arising from environmental, health or safety conditions, or the release of a Contaminant into the environment.

” Environmental Lien ” means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.

” Environmental Permit ” shall mean any Permit, license, approval, consent or other authorization required by or pursuant to any applicable Environmental Law.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

” Formation Transactions” means (i) the contributions to the OLP of certain crude oil pipeline and storage assets and refined product pipeline and terminalling assets pursuant to those certain Conveyance, Assignment and Bill of Sale Agreements dated effective as of July 1, 2000, by and among the OLP and certain subsidiaries of Valero Energy and (ii) the transfers of certain crude oil pipeline and storage assets and refined product pipeline and terminalling assets and certain ownership interests in Skelly-Belview Pipeline Company, L.L.C. to the OLP by virtue of the mergers of certain subsidiaries of Valero Energy with and into the OLP effective as of July 1, 2000.

” Governmental Authorit y” shall mean (a) the United States of America, (b) any state, county, municipality, or other governmental subdivision within the United States of America, and (c) any court or any governmental department, commission, board, bureau, agency, or other instrumentality of the United States of America or of any state, county, municipality, water rights, taxing, or zoning authority, or other governmental subdivision within the United States of America.

“Indemnified Party” shall have the meaning assigned to such term in Section 3.2(a).

“Indemnifying Party” shall have the meaning assigned to such term in Section 3.2(a).

“Losses” means all liabilities, losses, costs, damages (including punitive, consequential and treble damages), penalties or expenses (including, without limitation, reasonable attorneys’ fees and expenses and costs of investigation and litigation), and also including any expenditures or expenses incurred to cover, remedy or rectify any such Losses.

“MLP” means Valero L.P., a Delaware limited partnership, and any successors thereto.

“MLP Agreement” means the Third Amended and Restated Agreement of Limited Partnership of the MLP, and any amendments thereto and restatements thereof.

“OLP” means Valero Logistics Operations, L.P., a Delaware limited partnership, and any successors thereto.

” Order ” means any decree, order, injunction, rule, judgment, consent of or by a Governmental Authority.

“Partnership Entities” means Valero GP, Riverwalk, the MLP and the OLP.

“Person” means an individual, partnership, corporation, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other legal entity of any kind.

“Permits” means any licenses, permits, registrations, variances, interim permits, permit applications, certificates, approvals or other authorizations under any Regulation applicable to any Valero Energy Entity or Partnership Entity.

“Regulation” means any law, statute, regulation, ruling, rule, Order or Permit, of, administered or enforced by or on behalf of any Governmental Authority, as may be amended from time to time.

“Remedial Action” means all actions required to (a) clean up, remove, treat or in any other way address Contaminants in the indoor or outdoor environment; (b) prevent the release or threat of release or minimize the further release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care.

“Restricted Business” has the meaning attributed to such term in Section 2.1.

“Riverwalk” means Riverwalk Logistics, L.P., a Delaware limited partnership and general partner of the MLP and OLP.

“Valero GP” means Valero Logistics GP, LLC, a Delaware limited liability company and general partner of Riverwalk.

“Transferred Assets” means the assets contributed or transferred to the Partnership Entities in the Formation Transactions.

“Valero Energy” means Valero Energy Corporation.

“Valero Energy Entities” means Valero Energy and all Controlled Valero Affiliates, other than the Partnership Entities.

“Voting Stock” means securities or membership interests of any class or series of classes entitling the holders thereof to vote on a regular basis in the election of members of the board of directors, board of managers or other governing body of such entity.

ARTICLE II.
Business Opportunities

2.1 Restricted Businesses . For so long as any Valero Energy Entity is the general partner of Riverwalk, the MLP or the OLP, Valero Energy and each Valero Energy Entity is prohibited from engaging in, whether by acquisition or otherwise, the business of transporting crude oil or refined petroleum products (including petrochemicals) or operating crude oil storage or refined petroleum products terminalling assets in the United States (a “ Restricted Business ”).

2.2 Permitted Exceptions . Notwithstanding any provision of Section 2.1, a Valero Energy Entity may pursue an opportunity to purchase or invest in, and may ultimately purchase, own and/or operate, a Restricted Business under any of the following circumstances:

(a) Any business retained by a Valero Energy Entity at the Closing;

(b) Any business with a fair market value (as determined by the board of directors of Valero Energy in good faith) of less than $10 million;

(c) Any business acquired by a Valero Energy Entity that constitutes less than 50% of the fair market value (as determined by a nationally recognized independent financial advisor) of a larger acquisition by such Valero Energy Entity; provided the MLP has been offered and declined (with the concurrence of a majority of the members of the Conflicts Committee) the opportunity to purchase such business in accordance with the procedures set forth in Section 2.3; or

(d) Any logistics assets newly constructed by a Valero Energy Entity that the MLP has not elected to purchase pursuant to Section 4.1.

2.3 Procedures. For so long as any Valero Energy Entity is the general partner of Riverwalk, the MLP or the OLP, the following procedures shall be followed with respect to any Restricted Businesses.

(a) If a Valero Energy Entity becomes aware of an opportunity to purchase a Restricted Business, then, as soon as practicable, such Valero Energy Entity shall notify Valero GP of such opportunity and deliver to Valero GP all information prepared by or on behalf of such Valero Energy Entity relating to such potential purchase. As soon as practicable but in any event within 30 days after receipt of such notification and information, Valero GP, on behalf of the MLP, shall notify the Valero Energy Entity that either (i) Valero GP, on behalf of the MLP, has elected, with the approval of a majority of the members of the Conflicts Committee, not to cause the MLP to pursue the opportunity to acquire such Restricted Business, or (ii) Valero GP, on behalf of the MLP, has elected to cause the MLP to pursue the opportunity to acquire such Restricted Business. If, at any time, Valero GP or its Affiliates abandons such opportunity (as evidenced in writing by Valero GP or such Affiliates following the request of the Valero Energy Entity), the Valero Energy Entity may pursue such opportunity. Any Restricted Business which is permitted to be purchased by an Valero Energy Entity must be so purchased (i) within 12 months of the time the Valero Energy Entity becomes able to pursue such acquisition in accordance with the provisions of this Section 2.3 and (ii) on terms not materially more favorable to the Valero Energy Entity than were offered to the MLP. If either of these conditions is not satisfied, the opportunity must be reoffered to the MLP.

(b) If a Valero Energy Entity acquires a Restricted Business as part of a larger transaction in accordance with the provisions of Section 2.2(d), then, within 30 days after the consummation of such purchase, such Valero Energy Entity shall notify Valero GP of such purchase and such Valero Energy Entity shall offer the MLP the opportunity to purchase the Restricted Business constituting a portion of such purchase and deliver to Valero GP all information prepared by or on behalf of or in the possession of such Valero Energy Entity relating to the Restricted Business. As soon as practicable but in any event within 30 days after receipt of such notification, Valero GP shall notify the Valero Energy Entity that either (i) Valero GP, on behalf of the MLP, has elected, with the approval of a majority of the members of the Conflicts Committee, not to cause the MLP to purchase such Restricted Business, in which event the Valero Energy Entity shall be free to continue to engage in such Restricted Business and shall be free to improve and expand such Restricted Business if necessary to maintain existing

market share, or (ii) Valero GP, on behalf of the MLP, has elected to cause the MLP to purchase such Restricted Business, in which event the following procedures shall be followed:

(i) The Valero Energy Entity shall submit a good faith offer to Valero GP to sell the Restricted Business (the “ Offer ”) to any member of the Partnership Group designated by Valero GP on the terms and for the consideration stated in the Offer.

(ii) The Valero Energy Entity and Valero GP shall negotiate in good faith, for 120 days after receipt of such Offer by Valero GP, the terms on which the Restricted Business will be sold to the MLP. The Valero Energy Entity shall provide all information concerning the business, operations and finances of such Restricted Business as may be reasonably requested by Valero GP.

(A) If the Valero Energy Entity and Valero GP agree on such terms within 120 days after receipt by Valero GP of the Offer, the MLP shall purchase the Restricted Business on such terms as soon as commercially practicable after such agreement has been reached.

(B) If the Valero Energy Entity and Valero GP are unable to agree on the terms of a sale during such 120-day period, the Valero Energy Entity shall attempt to sell the Restricted Business to a Person that is not an Affiliate of the Valero Energy Entity (a “ NonAffiliate Purchaser ”) within nine months of the termination of such 120-day period. Any such sale to a NonAffiliate Purchaser must be for a purchase price, as determined by the board of directors of Valero Energy, not less than 95% of the purchase price last offered by the MLP.

(C) During such 120-day period the Valero Energy Entity shall be free to make capital expenditures to maintain the Restricted Business and to improve or expand the Restricted Business if necessary to maintain the Restricted Business’ existing market share.

(iii) If, after the expiration of the nine-month period referred to in clause (ii)(B) above, the Valero Energy Entity has not sold the Restricted Business to a NonAffiliate Purchaser, it shall submit another Offer (the “ Second Offer ”) to Valero GP within seven days after the expiration of such nine-month period. The Valero Energy Entity shall provide all information concerning the business, operations and finances of such Restricted Business as may be reasonably requested by Valero GP.

(A) If Valero GP, with the concurrence of a majority of the members of the Conflicts Committee, elects not to cause the MLP to pursue the Second Offer, the Valero Energy Entity shall be free to continue to engage in such Restricted Business.

(B) If Valero GP shall elect to cause the MLP to purchase such Restricted Business, then Valero GP and the Valero Energy Entity shall negotiate the terms of such purchase for 60 days. If the Valero Energy Entity and Valero GP agree on such terms within 60 days after receipt by Valero GP of the Second

Offer, the MLP shall purchase the Restricted Business on such terms as soon as commercially practicable after such agreement has been reached.

(C) If during such 60-day period, no agreement has been reached between the Valero Energy Entity and Valero GP or a member of the Partnership Group, the Valero Energy Entity and Valero GP will engage an independent investment banking firm with a national reputation to determine the value of the Restricted Business. Such investment banking firm will determine the value of the Restricted Business within 30 days and furnish the Valero Energy Entity and Valero GP its opinion of such value. The Valero Energy Entity and Valero GP shall share equally the fees and expenses of such investment banking firm. Upon receipt of such opinion, Valero GP will have the option, subject to the approval of a majority of the members of the Conflicts Committee, to (A) cause the MLP to purchase the Restricted Business for an amount equal to the value determined by such investment banking firm or (B) decline to purchase such Restricted Business, in which event the Valero Energy Entity will be free to continue to engage in such Restricted Business.

2.4 Change of Control . If a Change of Control of Valero Energy or each of Valero GP or Riverwalk occurs, the provisions of this Article II shall not apply to the existing logistics activities of any acquiring entity. A Change of Control of Valero Energy or each of Valero GP or Riverwalk shall be deemed to have occurred upon the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Valero Energy or Valero GP to any Person or its Affiliates, unless immediately following such sale, lease, exchange or other transfer such assets are owned, directly or indirectly, by the Valero Energy Entities or Valero GP; (ii) the consolidation or merger of Valero Energy or Valero GP with or into another Person pursuant to a transaction in which the outstanding Voting Stock of Valero Energy or Valero GP is changed into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Stock of Valero Energy or Valero GP is changed into or exchanged for Voting Stock of the surviving corporation or its parent and (b) the holders of the Voting Stock of Valero Energy or Valero GP immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation or its parent immediately after such transaction; or (iii) a “person” or “group” (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) being or becoming the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of more than 50% of all Voting Stock of Valero Energy or Valero GP then outstanding, other than in a merger or consolidation which would not constitute a Change of Control under clause (ii) above.

2.5 Scope of Restricted Business Prohibition . Except as provided in this Article II and the MLP Agreement, Valero Energy and its Affiliates shall be free to engage in any business activity whatsoever, including those that may be in direct competition with any Partnership Entity.

2.6 Enforcement . The Valero Energy Entities agree and acknowledge that the Partnership Group does not have an adequate remedy at law for the breach by the Valero Energy Entities of the covenants and agreements set forth in this Article II, and that any breach by the Valero Energy Entities of the covenants and agreements set forth in Article II would result in

irreparable injury to the Partnership Group. The Valero Energy Entities further agree and acknowledge that any member of the Partnership Group may, in addition to the other remedies which may be available to the Partnership Group hereunder or under applicable law, file a suit in equity to enjoin the Valero Energy Entities from such breach, and consent to the issuance of injunctive relief hereunder.

ARTICLE III.
Indemnification

3.1 Indemnification of Partnership Entities by Valero Energy . In addition to its indemnification obligations under certain (i) Indemnity Agreements entered into in connection with the mergers of certain subsidiaries of Valero Energy with and into the OLP effective as of July 1, 2000, and (ii) Conveyance, Assignment and Bill of Sale Agreements dated effective as of July 1, 2000, by and among the OLP and certain subsidiaries of Valero Energy, Valero Energy, on behalf of each of its Affiliates (other than the Partnership Parties) shall indemnify, defend and hold harmless the Partnership Entities from and against (A) any and all Losses that are caused by, arise out of or are attributable to Environmental Liabilities and Costs related to the Transferred Assets that arose or relate to conditions existing prior to Closing and which are discovered by the MLP within 10 years of the Closing (excluding Environmental Liabilities and Costs to the extent such Environmental Liabilities and Costs result from a change in law after Closing) and (B) all federal, state and local income tax liabilities attributable to the operation of the Transferred Assets prior to the Closing, including any such income tax liabilities of Valero Energy and its Affiliates that may result from the consummation of the Formation Transactions.

3.2 Indemnification Procedures.

(a) As used in this Section 3.2, the term “Indemnifying Party” refers to Valero Energy in the case of any indemnification obligation arising under Section 3.1, and the term “Indemnified Party” refers to the Partnership Entities, as applicable, in the case of any indemnification obligation arising under Section 3.1.

(b) If any action, suit or proceeding shall be brought against an Indemnified Party, or if the Indemnified Party should otherwise become aware of facts giving rise to a claim for indemnification pursuant to Section 3.1, the Indemnified Party shall promptly notify the Indemnifying Party in writing specifying the nature of and specific basis for such claim.

(c) The Indemnifying Party shall have the right to control all aspects of the defense of (and any counterclaims with respect to) any claims brought against the Indemnified Party that are covered by the indemnification set forth in Section 3.1, including, without limitation, the selection of counsel, determination of whether to appeal any decision of any court and the settling of any such matter or any issues relating thereto; provided, however, that no such settlement shall be entered into without the consent of the Indemnified Party unless it includes a full release of the Indemnified Party from such matter or issues, as the case may be.

(d) The Indemnified Party agrees, at its own cost and expense, to cooperate fully with the Indemnifying Party with respect to all aspects of the defense of any claims covered by the indemnification set forth in Section 3.1, including, without limitation, the prompt furnishing to the Indemnifying Party of any correspondence or other notice relating thereto that the

Indemnified Party may receive, permitting the name(s) of the Indemnified Party to be utilized in connection with such defense, the making available to the Indemnifying Party of any files, records or other information of the Indemnified Party that the Indemnifying Party considers relevant to such defense and the making available to the Indemnifying Party of any employees of the Indemnified Party; provided, however, that in connection therewith the Indemnifying Party agrees to use reasonable efforts to minimize the impact thereof on the operations of such Indemnified Party. In no event shall the obligation of the Indemnified Party to cooperate with the Indemnifying Party as set forth in the immediately preceding sentence be construed as imposing upon the Indemnified Party an obligation to hire and pay for counsel in connection with the defense of any claims covered by the indemnification set forth in this Article III; provided, however , that an Indemnified Party may, at its own option, cost and expense, hire and pay for counsel in connection with any such defense. The Indemnifying Party agrees to keep any such counsel hired by the Indemnified Party reasonably informed as to the status of any such defense, but the Indemnifying Party shall have the right to retain sole control over such defense.

(e) In determining the amount of any Loss for which any Indemnified Party is entitled to indemnification under this Article III, the gross amount thereof will be reduced by any insurance proceeds realized or to be realized by such Indemnified Party, and such correlative insurance benefit shall be net of any insurance premium that becomes due as a result of such claim.

ARTICLE IV.
Purchase Option

4.1 Purchase Option for Logistics Assets Constructed by Valero Energy in the Future. For so long as any Valero Energy Entity is the general partner of Riverwalk, the MLP or the OLP, the following provision shall apply to any new logistics assets constructed by any Valero Energy Entity:

(a) If a Valero Energy Entity constructs any new logistics assets then, as soon as practicable, such Valero Energy Entity shall notify Valero GP of the completion of such construction and such Valero Energy Entity shall offer the MLP the opportunity to elect to purchase, or have a subsidiary elect to purchase, the newly constructed assets by written notice delivered to the Valero Energy Entity no later than one year from the date of notice. If Valero GP, with the concurrence of a majority of the members of the Conflicts Committee, elects to purchase such assets, then Valero GP and the Valero Energy Entity shall negotiate the terms of such purchase for 60 days. If the Valero Energy Entity and Valero GP agree on such terms within 60 days after receipt by the Valero Energy Entity of the notice of election to purchase, the MLP shall purchase the newly constructed assets on such terms as soon as commercially practicable after such agreement has been reached.

(b) If during such 60-day period, no agreement has been reached between the Valero Energy Entity and Valero GP, the Valero Energy Entity and Valero GP will engage an independent investment banking firm with a national reputation to determine the value of the newly constructed assets. Such investment banking firm will determine the value of the newly constructed assets within 30 days and furnish the Valero Energy Entity and Valero GP its opinion of such value. The Valero Energy Entity and Valero GP shall share equally the fees and expenses of such investment banking firm. Upon receipt of such opinion, Valero GP will have

the option, subject to the approval of a majority of the members of the Conflicts Committee, to (A) purchase the newly constructed assets for an amount equal to the value determined by such investment banking firm or (B) decline to purchase such newly constructed assets, in which event, the Valero Energy Entity will be free to continue to own and operate such newly constructed assets.

ARTICLE V.
Miscellaneous

5.1 Choice of Law; Submission to Jurisdiction . This Agreement shall be subject to and governed by the laws of the State of Delaware, excluding any conflicts-of-law rule or principle that might refer the construction or interpretation of this Agreement to the laws of another state.

5.2 Notice . All notices or requests or consents provided for or permitted to be given pursuant to this Agreement must be in writing and must be given by depositing same in the United States mail, addressed to the Person to be notified, postpaid, and registered or certified with return receipt requested or by delivering such notice in person or by telecopier or telegram to such party. Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient’s normal business hours, or at the beginning of the recipient’s next business day after receipt if not received during the recipient’s normal business hours. All notices to be sent to a party pursuant to this Agreement shall be sent to or made at the address set forth below such party’s signature to this Agreement, or at such other address as such party may stipulate to the other parties in the manner provided in this Section 5.2.

5.3 Entire Agreement; Supersedure . This Agreement constitutes the entire agreement of the parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein.

5.4 Effect of Waiver or Consent . No waiver or consent, express or implied, by any party to or of any breach or default by any Person in the performance by such Person of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such Person of the same or any other obligations of such Person hereunder. Failure on the part of a party to complain of any act of any Person or to declare any Person in default, irrespective of how long such failure continues, shall not constitute a waiver by such party of its rights hereunder until the applicable statute of limitations period has run.

5.5 Amendment or Modification . This Agreement may be amended or modified from time to time only by the written agreement of all the parties hereto; provided, however, that the MLP may not, without the prior approval of a majority of the members of the Conflicts Committee, agree to any amendment or modification of this Agreement that, in the reasonable discretion of Valero GP, will adversely affect the holders of Common Units. Each such instrument shall be reduced to writing and shall be designated on its face an “Amendment” or an “Addendum” to this Agreement.

5.6 Assignment . No party shall have the right to assign its rights or obligations under this Agreement without the consent of the other parties hereto.

5.7 Counterparts . This Agreement may be executed in any number of counterparts with the same effect as if all signatory parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument.

5.8 Severability . If any provision of this Agreement or the application thereof to any Person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

5.9 Gender, Parts, Articles and Sections . Whenever the context requires, the gender of all words used in this Agreement shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. All references to Article numbers and Section numbers refer to Parts, Articles and Sections of this Agreement, unless the context otherwise requires.

5.10 Further Assurances . In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions.

5.11 Withholding or Granting of Consent . Each party may, with respect to any consent or approval that it is entitled to grant pursuant to this Agreement, grant or withhold such consent or approval in its sole and uncontrolled discretion, with or without cause, and subject to such conditions as it shall deem appropriate.

5.12 Laws and Regulations . Notwithstanding any provision of this Agreement to the contrary, no party hereto shall be required to take any act, or fail to take any act, under this Agreement if the effect thereof would be to cause such party to be in violation of any applicable law, statute, rule or regulation.

5.13 Negotiation of Rights of Limited Partners, Assignees, and Third Parties . The provisions of this Agreement are enforceable solely by the parties to this Agreement, and no Limited Partner, Assignee or other Person shall have the right, separate and apart from the MLP, to enforce any provision of this Agreement or to compel any party to this Agreement to comply with the terms of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement on, and effective as of, the date first written above.


VALERO ENERGY CORPORATION

By:		/s/ MICHAEL S. CISKOWSKI

Name:		Michael S. Ciskowski

Title:		Executive Vice President


Address for Notice:		One Valero Way

		San Antonio, Texas 78249


Telecopy Number:		(210) 345-2497


VALERO GP, LLC

By:		/s/ CURTIS V. ANASTASIO

Name:		Curtis V. Anastasio

Title:		Chief Executive Officer

		and President


Address for Notice:		One Valero Way

		San Antonio, Texas 78249


Telecopy Number:		(210) 370-4392


RIVERWALK LOGISTICS, L.P.

By:		Valero Logistics GP, LLC
		its general partner

By:		/s/ Curtis V. Anastasio

Name:		Curtis V. Anastasio

Title:		Chief Executive Officer and President


Address for Notice:		One Valero Way


		San Antonio, Texas 78249


Telecopy Number:		(210)370-4392


VALERO L.P.

By:		Riverwalk Logistics, L.P.
		its general partner

By:		Valero GP, LLC
		Its general partner

By:		/s/ Curtis V. Anastasio

Name:		Curtis V. Anastasio

Title:		Chief Executive Officer and President


Address for Notice:		One Valero Way


		San Antonio, Texas 78249


Telecopy Number:		(210)370-4392


VALERO LOGISTICS OPERATIONS, L.P.

By:		Riverwalk Logistics, L.P.
		its general partner

By:		Valero GP, LLC
		Its general partner

By:		/s/ Curtis V. Anastasio

Name:		Curtis V. Anastasio

Title:		Chief Executive Officer and President


Address for Notice:		One Valero Way


		San Antonio, Texas 78249


Telecopy Number:		(210)370-4392

EXHIBIT 10.15

THIRD AMENDED AND RESTATED

SERVICES AGREEMENT

AMONG

DIAMOND SHAMROCK REFINING AND MARKETING COMPANY

VALERO CORPORATE SERVICES COMPANY

VALERO L.P.

VALERO LOGISTICS OPERATIONS, L.P.

RIVERWALK LOGISTICS, L.P.

AND

VALERO GP, LLC

DATED AS OF JANUARY 1, 2006

THIRD AMENDED AND RESTATED SERVICES AGREEMENT

This THIRD AMENDED AND RESTATED SERVICES AGREEMENT (this “ Agreement ”) is entered into effective as of January 1, 2006 (the “ Effective Date ”) by and among DIAMOND SHAMROCK REFINING AND MARKETING COMPANY, a Delaware corporation (“ DSRMC ”) and VALERO CORPORATE SERVICES COMPANY, a Delaware corporation (“ VCSC ”), both indirect wholly owned subsidiaries of Valero Energy Corporation (“ Valero Energy ”), VALERO L.P., a publicly traded Delaware limited partnership (the “ Partnership ”), VALERO LOGISTICS OPERATIONS, L.P. (the “ Operating Partnership ”), a Delaware limited partnership and an indirect wholly owned subsidiary of the Partnership, RIVERWALK LOGISTICS, L.P., the general partner (the “ General Partner ”) of the Partnership, and its general partner, VALERO GP, LLC (“ Valero GP ”).

RECITALS

WHEREAS, certain parties hereto entered into a Services Agreement effective July 1, 2000 pursuant to which DSRMC agreed to provide certain corporate, general and administrative services to the General Partner in exchange for an administrative services fee; and

WHEREAS, the Services Agreement was amended and restated (the “ First Amended and Restated Services Agreement ”) effective April 1, 2004; and

WHEREAS, on July 1, 2005, the Partnership completed its acquisition of Kaneb Services, LLC and Kaneb Pipe Line Partners, L.P., effectively doubling the Partnership’s operations; and

WHEREAS, the Services Agreement was amended and restated as of July 1, 2005 (the “ Second Amended and Restated Services Agreement ”) to reflect the significant changes in operations that resulted from the acquisition; and

WHEREAS, management of the General Partner has determined that some of the services currently being provided by affiliates of Valero Energy under the Second Amended and Restated Services Agreement should be performed by the Partnership Parties (as defined below) and has determined that the Second Amended and Restated Services Agreement should be further amended to more accurately reflect the provision of the corporate, general and administrative services; and

WHEREAS, on January 26, 2006, upon recommendation by management of the General Partner and the Conflicts Committee of the Board of Directors of the General Partner, the Board of Directors of the General Partner approved the terms of this Agreement; and

WHEREAS, VCSC, for itself and its Affiliates, has agreed to provide certain administrative services under this Agreement to Valero GP, the General Partner, the Partnership and the Operating Partnership (individually, a “ Partnership Party ,” and collectively, the “ Partnership Parties ”); and

NOW, THEREFORE, for and in consideration of the mutual covenants contained in this Agreement, the parties hereto hereby agree to amend and restate the Amended and Restated Services Agreement as follows:

ARTICLE I
PROVISION OF SERVICES

Section 1.1 Provision of Administrative Services by VCSC and its Affiliates.

(a) Administrative Services . VCSC or any Affiliate or designee of VCSC shall provide to the Partnership Parties certain non-exclusive management, employee-related and other services as set forth on Exhibit A hereto, and such other services as VCSC and Valero GP may from time to time agree (the “ Administrative Services ”).

For purposes of this Agreement, “ Affiliates ” means entities that directly or indirectly through one or more intermediaries control, or are controlled by, or are under common control with, such party, and the term “ control ” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise, provided, however, that with respect to VCSC or Valero Energy, the term “ Affiliate ” shall exclude Valero GP Holdings, LLC, Valero GP, the General Partner, the Partnership and the Operating Partnership.

(b) Telecommunications Services . VCSC or any Affiliate of VCSC shall provide the Partnership Parties with Telecommunication Services substantially similar to those provided to Affiliates of VCSC during the term of this Agreement. Telecommunications Services shall include costs of circuits related to telecommunications hardware, cell phones, Blackberries (or their functional equivalent) and other personal communications devices, and local and long distance carrier service.

(c) Additional Services . VCSC or any Affiliate of VCSC shall provide the Partnership Parties with such other services as Valero GP may request from time to time during the term of this Agreement and for such additional compensation as the parties may agree.

(d) Direct Charges . Notwithstanding Section 1.1 (a) above, the following items will be directly charged to the Partnership (“ Direct Charges ”):

all third party expenses directly related to the Partnership Parties, including, but not limited to, public company costs, outside legal fees, outside accounting fees, fees and expenses of external advisors and consultants, and insurance costs, including but not limited to, general liability, automobile liability, comprehensive liability, excess liability, property and directors and officers.

(e) Nature and Quality of Services . The quality of the Administrative Services and the Telecommunications Services shall be substantially identical to those provided to other subsidiaries and Affiliates of VCSC.

Section 1.2 Fees for Administrative Services.

(a) Commencing on the Effective Date of this Agreement, and for each contract year thereafter, the Partnership shall pay to VCSC an annual fee (the “ Administrative Services Fee ”). The Administrative Services Fee for the contract year ended December 31, 2006 shall be $765,000, for the contract year ended December 31, 2007 shall be $1.765 million, and such fee shall be $2.265 million for the contract year ended December 31, 2008 and the years following, subject to adjustment as provided in paragraph (b) below.

(b) On the last day of each contract year starting with the contract year ending December 31, 2006, and prior to the beginning of the next contract year, the Administrative Services Fee shall be increased by an amount equal to Valero Energy’s general annual merit increase percentage for the just completed contract year.

(c) The General Partner, with the approval and consent of the Conflicts Committee, may agree on behalf of the Partnership to further modifications in the Administrative Services Fee in connection with changed levels of Administrative Services provided to the Partnership Parties due to expansions of the Partnership’s operations through acquisition or construction of new assets or businesses.

(d) At the end of each contract year, the scope of the Administrative Services and the related Administrative Services Fee are subject to review either at the request of VCSC or the Partnership Parties, in either case by providing 10 days written notice to the other party but in no event later than 60 days before the end of the applicable contract year, with such review to be completed no later than March 31 of the immediately following contract year, with any modification of the Administrative Services Fee, other than as provided in paragraphs (a) and (b) above, subject to the consent and approval of the Conflicts Committee.

(e) Any fees payable hereunder for periods less than a full contract year shall be prorated for the period services were provided based on the actual number of days elapsed and a year of 365 days.

(f) The Partnership shall pay all applicable sales taxes on the portion of the Administrative Services Fee attributable to IS Support.

Section 1.3 Fees for Telecommunications Services.

Commencing on the Effective Date of this Agreement, and for each contract year thereafter, the Partnership shall pay to VCSC an annual fee for the provision of the Telecommunications Services (the “ Telecommunications Fee ”). The Telecommunications Fee for the contract year ending December 31, 2006 shall be $1.1 million.

(b) (i) The Telecommunications Fee will automatically escalate on the first anniversary date of this Agreement by the percentage increase in the Consumer Price Index for All Urban Consumers (“ CPI-U ”) as published by the U.S. Department of Labor, Bureau of Labor Statistics. The percentage increase in the CPI-U means the average percentage increase in the CPI-U over the first twelve (12) of the fifteen (15) months preceding the escalation date.

(ii) On the second anniversary of this Agreement and thereafter, the Telecommunications Fee shall be adjusted annually to reflect VCSC’s actual cost to provide the Telecommunications Services.

(c) At the end of each contract year, the scope of the Telecommunications Services and the related Telecommunications Fee are subject to review either at the request of VCSC or the Partnership Parties, in either case by providing 10 days written notice to the other party but in no event later than 60 days before the end of the applicable contract year, with such review to be completed no later than March 31 of the immediately following contract year, with any modification of the Telecommunications Fee, other than as provided in paragraphs (a) and (b) above, subject to the consent and approval of the Conflicts Committee.

(d) Any fees payable hereunder for periods less than a full contract year shall be prorated for the period services were provided based on the actual number of days elapsed and a year of 365 days.

Section 1.3 Payment of Fees.

(a) The fees to be paid pursuant to this Agreement shall be paid by the Partnership in equal monthly installments in arrears within 30 days of the end of the month.

(b) To the extent reasonably practicable, all third party invoices for Direct Charges shall be submitted to the Partnership Parties for payment. For Direct Charges not paid directly by the Partnership Parties, if any, VCSC shall present Valero GP with an invoice within 10 days after the end of each calendar month which reflects an amount equal to all Direct Charges reimbursable to VCSC. The Partnership shall pay such sum within 30 days of the end of the applicable calendar month.

Section 1.4 Cancellation or Reduction of Services. The Partnership Parties may terminate or reduce the level of any Administrative or Telecommunications Service on 60 days’ prior written notice to VCSC. Upon such termination or reduction, the Administrative Services Fee or the Telecommunications Fee shall be reduced accordingly, whether on a temporary or a permanent basis, for such time as such service is reduced or terminated.

Section 1.5. Term. The provisions of this Article I will apply until this Agreement is terminated or amended in accordance with Section 2.1 or Section 2.13, respectively .

ARTICLE II
MISCELLANEOUS

Section 2.1 Termination.

(a) This Agreement shall terminate on December 30, 2010 (the “ Initial Term ”); provided that this Agreement shall automatically continue for successive two year terms after the Initial Term unless or until one year’s advance notice is given by VCSC to terminate this Agreement, in which case this Agreement shall terminate one year after such notice is delivered. Notwithstanding the foregoing, any Partnership Party (a) may terminate the provision of one or more Administrative Services, reduce the level of one or more

Administrative Services in accordance with the provisions of Section 1.4 hereof or terminate or reduce the level of Telecommunications Services provided hereunder, and (b) shall have the right at any time to terminate this Agreement by giving written notice to VCSC, and in such event this Agreement shall terminate one hundred and eighty (180) days from the date on which such notice is given.

(b) Notwithstanding Section 2.1(a), if a Change of Control (as defined below) of Valero GP Holdings, LLC (“ Holdings ”) or Valero GP occurs, this Agreement shall terminate. The following shall constitute a Change of Control:

(i) Holdings shall cease to own, directly or indirectly, 100% of each of Valero GP and the General Partner;

(ii) both (A) the Valero Energy Affiliates (as defined below) shall be in the aggregate the legal or beneficial owners (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of less than a majority of the combined voting power of the then total membership interests (including all securities which are convertible into membership interests) of Holdings, and (B) any Person (as defined below) or Group of Persons (as defined below) acting in concert as a partnership or other Group (a “ Group of Persons ”), other than one or more of the Valero Energy Affiliates, shall be the legal or beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of 20% or more of the combined voting power of the then total membership interests (including all securities which are convertible into membership interests) of Holdings, provided, that a “ Group of Persons ” shall not include the underwriter in any firm underwriting undertaken in connection with the initial public offering or any subsequent public offering of Holdings; or

(iii) occupation of a majority of the seats (other than vacant seats) on the Board of Directors (or Board of Managers) of Holdings by Persons who were neither (A) nominated by the board of directors of Holdings nor (B) appointed by directors, a majority of whom were so nominated.

“Associate ” means, when used to indicate a relationship with any Person, (a) any corporation or organization which such Person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.

“Group ” means a Person that with our through any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to ten or more Persons), exercising investment power or disposing of any membership interests of Holdings with any other Person that beneficially owns,

or whose Affiliates or Associates beneficially own, directly or indirectly, membership interests of Holdings.

“Person ” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or other enterprise (including an employee benefit plan), association, government agency or political subdivision thereof or other entity.

“Valero Energy Affiliates” shall mean any and all Affiliates of Valero Energy.

Section 2.2 No Third Party Beneficiary. The provisions of this Agreement are enforceable solely by the parties to the Agreement and no limited partner, assignee or other person shall have the right, separate and apart from the parties hereto, to enforce any provisions of this Agreement or to compel a party to this Agreement to comply with the terms of this Agreement.

Section 2.3 No Fiduciary Duties. The parties hereto shall not have any fiduciary obligations or duties to the other parties by reason of this Agreement. Subject to the Omnibus Agreement among Valero Energy (as successor to Ultramar Diamond Shamrock Corporation), Valero GP, the General Partner, the Partnership and Valero Logistics Operations, L.P., dated as of April 16, 2001, as such agreement may be amended from time to time, any party hereto may conduct any activity or business for its own profit whether or not such activity or business is in competition with any activity or business of the other party.

Section 2.4 Limited Warranty; Limitation of Liability.

VCSC represents that it will provide or cause the services to be provided to the Partnership Parties with reasonable care and in accordance with all applicable laws, rules, and regulations, including without limitation those of the Federal Energy Regulatory Commission. EXCEPT AS SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE AND IN SECTION 1.1(d), ALL PRODUCTS OBTAINED FOR THE PARTNERSHIP PARTIES ARE AS IS, WHERE IS, WITH ALL FAULTS AND VCSC MAKES NO (AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES RENDERED OR PRODUCTS OBTAINED FOR THE PARTNERSHIP PARTIES. FURTHERMORE, THE PARTNERSHIP PARTIES MAY NOT RELY UPON ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO VCSC BY ANY PARTY (INCLUDING, AN AFFILIATE OF VCSC) PERFORMING SERVICES ON BEHALF OF VCSC HEREUNDER, UNLESS SUCH PARTY MAKES AN EXPRESS WARRANTY TO VALERO GP OR THE PARTNERSHIP PARTIES. HOWEVER, IN THE CASE OF SERVICES PROVIDED BY A THIRD PARTY FOR THE PARTNERSHIP PARTIES, IF THE THIRD PARTY PROVIDER OF SUCH SERVICES MAKES AN EXPRESS WARRANTY TO ANY OF THE PARTNERSHIP PARTIES, THE PARTNERSHIP PARTIES ARE ENTITLED TO CAUSE VCSC TO RELY ON AND TO ENFORCE SUCH WARRANTY.

IT IS EXPRESSLY UNDERSTOOD BY THE PARTNERSHIP PARTIES THAT VCSC AND ITS AFFILIATES SHALL HAVE NO LIABILITY FOR THE FAILURE OF THIRD PARTY PROVIDERS TO PERFORM ANY SERVICES HEREUNDER AND FURTHER THAT VCSC AND ITS AFFILIATES SHALL HAVE NO LIABILITY WHATSOEVER FOR THE SERVICES PROVIDED BY ANY SUCH THIRD PARTY UNLESS IN EITHER EVENT SUCH SERVICES ARE PROVIDED IN A MANNER WHICH WOULD EVIDENCE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT ON THE PART OF VCSC OR ITS AFFILIATES BUT VCSC SHALL, ON BEHALF OF THE PARTNERSHIP PARTIES, PURSUE ALL RIGHTS AND REMEDIES UNDER ANY SUCH THIRD PARTY CONTRACT. THE PARTNERSHIP PARTIES AGREE THAT THE REMUNERATION PAID TO VCSC HEREUNDER FOR THE SERVICES TO BE PERFORMED REFLECT THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. IN NO EVENT SHALL VCSC BE LIABLE TO THE PARTNERSHIP PARTIES OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES OR FROM THE BREACH OF THIS AGREEMENT, REGARDLESS OF THE FAULT OF VCSC, ANY VCSC AFFILIATE, OR ANY THIRD PARTY PROVIDER OR WHETHER VCSC, ANY VCSC AFFILIATE, OR THE THIRD PARTY PROVIDER ARE WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY NEGLIGENT. TO THE EXTENT ANY THIRD PARTY PROVIDER HAS LIMITED ITS LIABILITY TO VCSC OR ITS AFFILIATE FOR SERVICES UNDER AN OUTSOURCING OR OTHER AGREEMENT, THE PARTNERSHIP PARTIES AGREE TO BE BOUND BY SUCH LIMITATION OF LIABILITY FOR ANY PRODUCT OR SERVICE PROVIDED TO THE PARTNERSHIP PARTIES BY SUCH THIRD PARTY PROVIDER UNDER VCSC’S OR SUCH AFFILIATE’S AGREEMENT.

Section 2.5 Force Majeure. If any party to this Agreement is rendered unable by force majeure to carry out its obligations under this Agreement, other than a party’s obligation to make payments as provided for herein, that party shall give the other parties prompt written notice of the force majeure with reasonably full particulars concerning it. Thereupon, the obligations of the party giving the notice, insofar as they are affected by the force majeure, shall be suspended during, but no longer than the continuance of, the force majeure. The affected party shall use all reasonable diligence to remove or remedy the force majeure situation as quickly as practicable.

The requirement that any force majeure situation be removed or remedied with all reasonable diligence shall not require the settlement of strikes, lockouts or other labour difficulty by the party involved, contrary to its wishes. Rather, all such difficulties may be handled entirely within the discretion of the party concerned.

The term “ force majeure ” means any one or more of: (a) an act of God, (b) a strike, lockout, labour difficulty or other industrial disturbance, (c) an act of a public enemy, war, blockade, insurrection or public riot, (d) lightning, fire, storm, flood or explosion, (e) governmental action, delay, restraint or inaction, (f) judicial order or injunction, (g) material shortage or unavailability of equipment, or (h) any other cause or event, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension.

Section 2.6 Further Assurances. In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments as may be required for a party to provide the services hereunder and to perform such other additional acts as may be necessary or appropriate to effectuate, carry out, and perform all of the terms and provisions of this Agreement.

Section 2.7 Time of the Essence. Time is of the essence in this Agreement.

Section 2.8 Notices. Any notice, request, demand, direction or other communication required or permitted to be given or made under this Agreement to a party shall be in writing and may be given by hand delivery, postage prepaid first-class mail delivery, delivery by a reputable international courier service guaranteeing next business day delivery or by facsimile (if confirmed by one of the foregoing methods) to such party at its address noted below:

(a) in the case of VCSC, to:

Valero Corporate Services Company
One Valero Way
San Antonio, Texas 78249
Attention: Legal Department
Telecopy: (210) 345-5889

(b) in the case of the General Partner and Valero GP, to:

Valero GP, LLC
One Valero Way
San Antonio, Texas 78249
Attention: Legal Department
Telecopy: (210) 345-4861

or at such other address of which notice may have been given by such party in accordance with the provisions of this Section.

Section 2.9 Counterparts. This Agreement may be executed in several counterparts, no one of which needs to be executed by all of the parties. Such counterpart, including a facsimile transmission of this Agreement, shall be deemed to be an original and shall have the same force and effect as an original. All counterparts together shall constitute but one and the same instrument.

Section 2.10 Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Texas, excluding any conflicts of law rule or principle that might refer the construction or interpretation hereof to the laws of another jurisdiction.

Section 2.11 Binding Effect; Assignment. Except for the ability of VCSC to cause one or more of the Administrative Services to be performed by a third party provider or an

Affiliate of VCSC, no party shall have the right to assign its rights or obligations under this Agreement without the consent of the other parties.

Section 2.12 Invalidity of Provisions. In the event that one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality or enforceability of the remaining provisions hereof shall not be affected or impaired thereby.

Section 2.13 Modification; Amendment. This Agreement may be amended or modified from time to time only by a written amendment signed by all parties hereto; provided however, that the Partnership Parties may not, without the prior approval of the Conflicts Committee, agree to any amendment or modification to this Agreement that, in the reasonable discretion of the General Partner, will adversely affect the holders of common units of the Partnership.

Section 2.14 Entire Agreement. This Agreement constitutes the whole and entire agreement between the parties hereto and supersedes any prior agreement, undertaking, declarations, commitments or representations, verbal or oral, in respect of the subject matter hereof.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement with effect as of the date first above written.


Diamond Shamrock Refining And Marketing Company

By:	/s/ Michael S. Ciskowski

	Name: Michael S. Ciskowski
	Title: Senior Vice President

Valero Corporate Services Company

By:	/s/ Michael S. Ciskowski

	Name: Michael S. Ciskowski
	Title: Senior Vice President

Valero L.P

By:	Riverwalk Logistics, L.P.

	By:	Valero GP, LLC

		By:	/s/ Curtis V. Anastasio

			Name: Curtis V. Anastasio
			Title: President

Valero Logistics Operations, L.P.

By:	Valero GP, Inc.

	By:	/s/ Curtis V. Anastasio

		Name: Curtis V. Anastasio
		Title: President

Valero GP, LLC

	By:	/s/ Curtis V. Anastasio

		Name: Curtis V. Anastasio
		Title: President

Riverwalk Logistics, L.P .

By:	Valero GP, LLC

	By:	/s/ Curtis V. Anastasio

		Name: Curtis V. Anastasio
		Title: President

SIGNATURE PAGE TO THIRD AMENDED AND RESTATED SERVICES AGREEMENT

EXHIBIT A

Administrative Services provided to the Partnership Parties:

IS Support
Corporate Tax
Ad Valorem Tax
Human Resources (benefits, compensation, employment, payroll, corporate HR support)
PR/Community Relations
Governmental Affairs
Graphic Services
Risk Control & Analysis
Risk Management
Corporate Records
Corporate Travel/Aviation ^(a)
Office Services ^(b)
Facility Services ^(b)
Corporate Services Department ^(b)
Security Services ^(b)
Other Administrative Services as the parties may agree.

In providing the foregoing services, VCSC shall be acting on behalf of and as agent for the Partnership Parties.

Notes:

(a) Aviation Services may be documented under a time-share arrangement, in which case, the Administrative Services Fee will be reduced by $70,250.

(b) Upon the Commencement Date, as that term is defined in that certain Office Lease Agreement between Valero Corporate Services Company and Valero Logistics Operations, L.P., dated as of January 1, 2006 (the “ Lease Agreement ”), the Administrative Services Fee shall be reduced by $130,000 to account for the assumption of Office Services, Facility Services, Corporate Services and Security that will be provided to the Partnership Parties pursuant to the Lease Agreement.

A-1

EXHIBIT 10.32

FORM OF

ADMINISTRATION AGREEMENT

BETWEEN

VALERO GP HOLDINGS, LLC

AND

VALERO GP, LLC

DATED AS OF[. . . . . . .], 2006

ADMINISTRATION AGREEMENT

This ADMINISTRATION AGREEMENT (this “ Agreement ”) is entered into as of [___], 2006 and effective as of Effective Date , as defined below, between VALERO GP HOLDINGS, LLC, a Delaware limited liability company (“ Holdings ”), and VALERO GP, LLC, a Delaware limited liability company (“ Valero GP ”).

RECITALS

WHEREAS, management of Holdings has determined that certain executive management, accounting, legal, cash management, corporate finance and other administrative services required by Holdings should be performed by Valero GP in exchange for an administrative services fee;

WHEREAS, on March 10, 2006, upon recommendation by management of Valero GP and the Conflicts Committee of the Board of Directors of Valero GP (the “ Conflicts Committee ”), the Board of Directors of Valero GP approved the terms of this Agreement;

WHEREAS, Valero GP has agreed to provide certain administrative services under this Agreement to Holdings; and

NOW, THEREFORE, for and in consideration of the mutual covenants contained in this Agreement, the parties hereto hereby agree as follows:

ARTICLE I
DEFINITIONS

Section 1.1 Definitions. The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

(a) “ Affiliates ” means entities that directly or indirectly through one or more intermediaries control, or are controlled by, or are under common control with, such party, and the term “ control ” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise; provided , however , that with respect to Valero GP, the term “ Affiliate ” shall exclude Holdings.

(b) “ Associate ” means, when used to indicate a relationship with any Person, (a) any corporation or organization which such Person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.

(d) “ Force majeure ” means any one or more of: (a) an act of God, (b) a strike, lockout, labor difficulty or other industrial disturbance, (c) an act of a public enemy, war, blockade, insurrection or public riot, (d) lightning, fire, storm, flood or explosion, (e) governmental action, delay, restraint or inaction, (f) judicial order or injunction, (g) material shortage or unavailability of equipment, or (h) any other cause or event, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension.

(e) “ Group ” means a Person that with or through any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to ten or more Persons), exercising investment power or disposing of any membership interests in Holdings with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, membership interests in Holdings.

(f) “ Person ” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or other enterprise (including an employee benefit plan), association, government agency or political subdivision thereof or other entity.

(g) “ Valero Energy Affiliates ” shall mean any and all Affiliates of Valero Energy Corporation.

ARTICLE II
PROVISION OF SERVICES

Section 2.1 Provision of Administrative Services by Valero GP.

(a) Administrative Services . Valero GP or any Affiliate or designee of Valero GP shall provide to Holdings non-exclusive executive management, accounting, legal, cash management, corporate finance and other administrative services, and such other services as Valero GP and Holdings may from time to time agree (the “ Administrative Services ”).

(b) Additional Services . Valero GP or any Affiliate or designee of Valero GP shall provide Holdings with such other services as Holdings may request from time to time during the term of this Agreement and for such additional compensation as the parties may agree.

(c) Direct Charges . Notwithstanding Section 1.1(a) above, the following items will be directly charged to Holdings (“ Direct Charges ”):

all third party expenses directly related to Holdings, including, but not limited to, public company costs, outside legal fees, outside accounting fees, fees and expenses of directors, external advisors and consultants, and insurance costs, including but not limited to, directors and officers.

(d) Nature and Quality of Services . The quality of the Administrative Services shall be substantially identical to those provided to subsidiaries and Affiliates of Valero GP.

Section 2.2 Fees for Administrative Services.

(a) Commencing on the Effective Date of this Agreement, and for each contract year thereafter, Holdings shall pay to Valero GP an annual fee (the “ Administrative Services Fee ”). The Administrative Services Fee shall be $500,000 per year, subject to adjustment as provided in Section 2.2(b).

(b) On the last day of each contract year starting with the contract year ending December 31, 2006, and prior to the beginning of the next contract year, the Administrative Services Fee shall be increased by an amount equal to Valero GP’s general annual merit increase percentage for the just completed contract year.

(c) Valero GP, with the approval and consent of the Conflicts Committee, may agree to further modifications in the Administrative Services Fee in connection with changed levels of Administrative Services provided to Holdings due to modifications of Holdings’ operations through acquisitions or otherwise.

(d) The parties hereto acknowledge that the Administrative Services Fee is intended to reflect Valero GP’s actual costs to provide the Administrative Services. At the end of each contract year, the scope of the Administrative Services and the related Administrative Services Fee are subject to review either at the request of Valero GP or Holdings, in either case by providing 10 days written notice to the other party but in no event later than 60 days before the end of the applicable contract year, with such review to be completed no later than March 31 of the immediately following contract year, with any modification of the Administrative Services Fee, other than as provided in Sections 2.2(b) and 2.4, subject to the consent and approval of the Conflicts Committee.

(e) Any fees payable hereunder for periods less than a full contract year shall be prorated for the period for which services were provided based on the actual number of days elapsed and a year of 365 days.

Section 2.3 Payment of Fees.

(a) The fees to be paid pursuant to this Agreement shall be paid by Holdings in equal monthly installments in arrears within 30 days of the end of the month.

(b) To the extent reasonably practicable, all third party invoices for Direct Charges shall be submitted to Holdings for payment. For Direct Charges not paid directly by Holdings, if any, Valero GP shall present Holdings with an invoice within 10 days after the end of each calendar month that reflects an amount equal to all Direct Charges reimbursable to Valero GP. Holdings shall pay such sum within 30 days of the end of the applicable calendar month.

Section 2.4 Cancellation or Reduction of Services. Holdings may terminate or reduce the level of any Administrative Service on 60 days’ prior written notice to Valero GP. Upon such termination or reduction, the Administrative Services Fee shall be reduced

accordingly, whether on a temporary or a permanent basis, for such time as such service is reduced or terminated.

Section 2.5 Term. The provisions of this Article II will apply until this Agreement is terminated or amended in accordance with Section 3.1 or Section 3.12, respectively .

ARTICLE III
MISCELLANEOUS

Section 3.1 Termination/Change of Control.

(a) This Agreement shall terminate on December 31, 2011 (the “ Initial Term ”); provided that this Agreement shall automatically continue for successive two-year terms after the Initial Term unless or until six months’ advance notice is given by Valero GP to terminate this Agreement, in which case this Agreement shall terminate six months after such notice is delivered. Notwithstanding the foregoing, Holdings (i) may terminate the provision of one or more Administrative Services or reduce the level of one or more Administrative Services, in each case in accordance with the provisions of Section 2.4 hereof and (ii) shall have the right at any time to terminate this Agreement by giving written notice to Valero GP, and in such event this Agreement shall terminate six months from the date on which such notice is given.

(b) Notwithstanding Section 3.1(a), if a Change of Control of Holdings or Valero GP occurs, this Agreement shall terminate. The following shall constitute a Change of Control:

(i) Holdings shall cease to own, directly or indirectly, 100% of each of Valero GP and Riverwalk Logistics, L.P., a Delaware limited partnership (“ Riverwalk ”);

(ii) both (A) the Valero Energy Affiliates shall be in the aggregate the legal or beneficial owners (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of less than a majority of the combined voting power of the then total membership interests (including all securities which are convertible into membership interests) of Holdings, and (B) any Person or Group of Persons acting in concert as a partnership or other Group (a “ Group of Persons ”), other than one or more of the Valero Energy Affiliates, shall be the legal or beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of more than 20% of the combined voting power of the then total membership interests (including all securities which are convertible into membership interests) of Holdings, provided, that a “Group of Persons” shall not include the underwriter in any firm underwriting undertaken in connection with the initial public offering or any subsequent public offering of Holdings; or

Section 3.2 No Third Party Beneficiary. The provisions of this Agreement are enforceable solely by the parties to the Agreement and no limited partner, assignee, member or other person shall have the right, separate and apart from the parties hereto, to enforce any provisions of this Agreement or to compel a party to this Agreement to comply with the terms of this Agreement.

Section 3.3 No Fiduciary Duties. Neither party hereto shall have any fiduciary obligations or duties to the other party by reason of this Agreement. Subject to the (i) Omnibus Agreement among Valero Energy Corporation (as successor to Ultramar Diamond Shamrock Corporation), Valero GP, Riverwalk, Valero L.P. and Valero Logistics Operations, L.P., dated as of April 16, 2001, as such agreement may be amended from time to time, and (ii) Non-Compete Agreement among Holdings, Valero GP, Riverwalk and Valero L.P., dated as of [ ], 2006, as such agreement may be amended from time to time, any party hereto may conduct any activity or business for its own profit whether or not such activity or business is in competition with any activity or business of the other party.

Section 3.4 Limited Warranty; Limitation of Liability.

Valero GP represents that it will provide or cause the services to be provided to Holdings with reasonable care and in accordance with all applicable laws, rules, and regulations, including without limitation those of the Federal Energy Regulatory Commission. EXCEPT AS SET FORTH IN THE IMMEDIATELY PRECEDING SENTENCE AND IN SECTION 2.1(d), ALL PRODUCTS OBTAINED FOR HOLDINGS ARE AS IS, WHERE IS, WITH ALL FAULTS AND VALERO GP MAKES NO (AND HEREBY DISCLAIMS AND NEGATES ANY AND ALL) REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES RENDERED OR PRODUCTS OBTAINED FOR HOLDINGS. FURTHERMORE, HOLDINGS MAY NOT RELY UPON ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE MADE TO VALERO GP BY ANY PARTY (INCLUDING, AN AFFILIATE OR DESIGNEE OF VALERO GP) PERFORMING SERVICES ON BEHALF OF VALERO GP HEREUNDER, UNLESS SUCH PARTY MAKES AN EXPRESS WARRANTY TO HOLDINGS. HOWEVER, IN THE CASE OF SERVICES PROVIDED BY A THIRD PARTY FOR HOLDINGS, IF THE THIRD PARTY PROVIDER OF SUCH SERVICES MAKES AN EXPRESS WARRANTY TO HOLDINGS, HOLDINGS IS ENTITLED TO CAUSE VALERO GP TO RELY ON AND TO ENFORCE SUCH WARRANTY.

IT IS EXPRESSLY UNDERSTOOD BY HOLDINGS THAT VALERO GP AND ITS AFFILIATES AND DESIGNEES SHALL HAVE NO LIABILITY FOR THE FAILURE OF THIRD PARTY PROVIDERS TO PERFORM ANY SERVICES HEREUNDER AND FURTHER THAT VALERO GP AND ITS AFFILIATES AND DESIGNEES SHALL HAVE NO LIABILITY WHATSOEVER FOR THE SERVICES PROVIDED BY ANY SUCH THIRD PARTY UNLESS IN EITHER EVENT SUCH SERVICES ARE PROVIDED IN A MANNER WHICH WOULD EVIDENCE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT ON THE PART OF VALERO GP OR ITS AFFILIATES OR DESIGNEES BUT VALERO GP SHALL, ON BEHALF OF HOLDINGS, PURSUE ALL RIGHTS AND REMEDIES UNDER

ANY SUCH THIRD PARTY CONTRACT. HOLDINGS AGREES THAT THE REMUNERATION PAID TO VALERO GP HEREUNDER FOR THE SERVICES TO BE PERFORMED REFLECT THIS LIMITATION OF LIABILITY AND DISCLAIMER OF WARRANTIES. IN NO EVENT SHALL VALERO GP BE LIABLE TO HOLDINGS OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM ANY ERROR IN THE PERFORMANCE OF SERVICES OR FROM THE BREACH OF THIS AGREEMENT, REGARDLESS OF THE FAULT OF VALERO GP, ANY VALERO GP AFFILIATE OR DESIGNEE, OR ANY THIRD PARTY PROVIDER OR WHETHER VALERO GP, ANY VALERO GP AFFILIATE OR DESIGNEE, OR THE THIRD PARTY PROVIDER ARE WHOLLY, CONCURRENTLY, PARTIALLY, OR SOLELY NEGLIGENT. TO THE EXTENT ANY THIRD PARTY PROVIDER HAS LIMITED ITS LIABILITY TO VALERO GP OR ITS AFFILIATE OR DESIGNEE FOR SERVICES UNDER AN OUTSOURCING OR OTHER AGREEMENT, HOLDINGS AGREES TO BE BOUND BY SUCH LIMITATION OF LIABILITY FOR ANY PRODUCT OR SERVICE PROVIDED TO HOLDINGS BY SUCH THIRD PARTY PROVIDER UNDER VALERO GP’S OR SUCH AFFILIATE’S OR DESIGNEE’S AGREEMENT.

Section 3.5 Force Majeure. If either party to this Agreement is rendered unable by force majeure to carry out its obligations under this Agreement, other than a party’s obligation to make payments as provided for herein, that party shall give the other party prompt written notice of the force majeure with reasonably full particulars concerning it. Thereupon, the obligations of the party giving the notice, insofar as they are affected by the force majeure, shall be suspended during, but no longer than the continuance of, the force majeure. The affected party shall use all reasonable diligence to remove or remedy the force majeure situation as quickly as practicable.

The requirement that any force majeure situation be removed or remedied with all reasonable diligence shall not require the settlement of strikes, lockouts or other labor difficulty by the party involved, contrary to its wishes. Rather, all such difficulties may be handled entirely within the discretion of the party concerned.

Section 3.6 Further Assurances. In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments as may be required for a party to provide the services hereunder and to perform such other additional acts as may be necessary or appropriate to effectuate, carry out, and perform all of the terms and provisions of this Agreement.

Section 3.7 Notices. Any notice, request, demand, direction or other communication required or permitted to be given or made under this Agreement to a party shall be in writing and may be given by hand delivery, postage prepaid first-class mail delivery, delivery by a reputable international courier service guaranteeing next business day delivery or by facsimile (if confirmed by one of the foregoing methods) to such party at its address noted below:

	(a)		in the case of Valero GP, to:

			Valero GP, LLC

			One Valero Way San Antonio, Texas 78249 Attention: Legal Department Telecopy: (210) 345-4861

	(b)		in the case of Holdings, to:

			Valero GP Holdings, LLC One Valero Way San Antonio, Texas 78249 Attention: Legal Department Telecopy: (210) 345-xxxx

or at such other address of which notice may have been given by such party in accordance with the provisions of this Section.

Section 3.8 Counterparts. This Agreement may be executed in several counterparts, no one of which needs to be executed by all of the parties. Such counterpart, including a facsimile transmission of this Agreement, shall be deemed to be an original and shall have the same force and effect as an original. All counterparts together shall constitute but one and the same instrument.

Section 3.9 Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Texas, excluding any conflicts of law rule or principle that might refer the construction or interpretation hereof to the laws of another jurisdiction.

Section 3.10 Binding Effect; Assignment. Except for the ability of Valero GP to cause one or more of the Administrative Services to be performed by a third party provider or an Affiliate of Valero GP, no party shall have the right to assign its rights or obligations under this Agreement (by operation of law or otherwise) without the consent of the other parties.

Section 3.11 Invalidity of Provisions. In the event that one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality or enforceability of the remaining provisions hereof shall not be affected or impaired thereby.

Section 3.12 Modification; Amendment. This Agreement may be amended or modified from time to time only by a written amendment signed by both parties hereto; provided however, that Valero GP may not, without the prior approval of the Conflicts Committee, agree to any amendment or modification to this Agreement that, in the reasonable discretion of Valero GP, will adversely affect the holders of common units of the Partnership.

Section 3.13 Entire Agreement. This Agreement constitutes the whole and entire agreement between the parties hereto and supersedes any prior agreement, undertaking, declarations, commitments or representations, verbal or oral, in respect of the subject matter hereof.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement with effect as of the date first above written.


		Valero GP, LLC

		By:

				Name: Curtis V. Anastasio
				Title: President

		Valero GP Holdings, LLC

		By:

				Name: Curtis V. Anastasio
				Title: President

Exhibit 10.33

FORM OF NON-COMPETE AGREEMENT

THIS NON-COMPETE AGREEMENT (this “ Agreement ”) is entered into this [ ] day of [ ], 2006, but effective as of the Effective Time (as defined below), by and among Valero GP Holdings, LLC, a Delaware limited liability company (“ Holdings ”), Valero L.P., a Delaware limited partnership (the “ MLP ”), Riverwalk Logistics, L.P., a Delaware limited partnership and general partner of the MLP (“ Riverwalk ”), and Valero GP, LLC, a Delaware limited liability company and general partner of Riverwalk (“ Valero GP ” and together with the MLP, Riverwalk, and their respective Subsidiaries, the “ Partnership Parties ”).

R E C I T A L

The parties hereto desire, by their execution of this Agreement, to evidence the terms and conditions pursuant to which business opportunities available to the Partnership Parties and Holdings and their respective affiliates (other than the Partnership Parties) will be addressed.

WHEREAS, Valero Energy Corporation (“ Valero Energy ”), Valero GP, Riverwalk, the MLP and Valero Logistics Operations, L.P. are parties to the Amended and Restated Omnibus Agreement, dated as of [ ], 2006 (the “ Omnibus Agreement ”), pursuant to which Holdings, as a Controlled Valero Affiliate (as defined in the Omnibus Agreement), is prohibited from engaging in a Restricted Business (as defined in the Omnibus Agreement);

WHEREAS, Valero Energy has stated its intent to reduce its ownership of Holdings, which would result in Holdings no longer being a Controlled Valero Affiliate and no longer being bound by the terms of the Omnibus Agreement; and

WHEREAS , it is the intent of the parties hereto to be bound by the provisions of this Agreement effective immediately upon Holdings no longer being bound by the provisions of the Omnibus Agreement.

ARTICLE I:
Definitions

1.1 Definitions .

(a) Capitalized terms used herein but not defined herein shall have the meanings given them in the MLP Agreement.

(b) As used in this Agreement, the following terms shall have the respective meanings set forth below:

“ Affiliate ” shall have the meaning attributed to such term in the MLP Agreement.

“ Agreement ” shall mean this Non-Compete Agreement, as it may be amended, modified, or supplemented from time to time.

“ Conflicts Committee ” means a committee of the Board of Directors of Holdings or Valero GP, as applicable, as defined in the Holdings Agreement or the MLP Agreement, respectively.

“ Effective Time ” means the time at which Holdings is no longer a Controlled Valero Affiliate under the terms of the Omnibus Agreement.

“ Holdings ” means Valero GP Holdings, LLC, a Delaware limited liability company, and any successors thereto.

“ Holdings Agreement ” means the Second Amended and Restated Limited Liability Company Agreement of Holdings, and any amendments thereto and restatements thereof.

“ Logistics Business ” means any business, asset or group of assets related to the transportation, storage or terminalling of crude oil, feedstocks or refined petroleum products (including petrochemicals), in the United States or internationally that is not a Public Equity Security.

“ Logistics Business Notice ” shall have the meaning set forth in Section 2.1(b).

“ MLP ” means Valero L.P., a Delaware limited partnership, and any successors thereto.

“ MLP Agreement ” means the Third Amended and Restated Agreement of Limited Partnership of the MLP, and any amendments thereto and restatements thereof.

“ Partnership Parties ” means Valero GP, the MLP, Riverwalk and their respective Subsidiaries.

“ Person ” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

“ Public Equity Securities ” shall mean (i) general partner interests (or securities which have characteristics similar to general partner interests) and incentive distribution rights or similar rights in publicly traded partnerships or interests in Persons that own or control such general partner or similar interests (collectively, “ GP Interests ”) and securities convertible, exercisable, exchangeable or otherwise representing ownership or control of such GP Interests and (ii) incentive distribution rights and limited partner interests (or securities which have characteristics similar to incentive distribution rights or limited partner interests) in publicly traded partnerships or interests in Persons that own or control such limited partner or similar interests (collectively, “ non-GP Interests ”); provided that such non-GP Interests are owned by the owners of the GP Interests being acquired or their respective Affiliates.

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“ Public Equity Securities Notice ” shall have the meaning set forth in Section 2.1(b).

“ Riverwalk ” means Riverwalk Logistics, L.P., a Delaware limited partnership, and any successors thereto.

“ Valero GP ” means Valero GP, LLC, a Delaware limited liability company, and any successors thereto.

ARTICLE II:
Business Opportunities

2.1 Public Equity Securities Opportunity . (a) During the term of this Agreement, the Partnership Parties are prohibited from acquiring Public Equity Securities unless and until the opportunity to acquire such Public Equity Securities has been offered to Holdings and Holdings has declined or abandoned such opportunity as provided in Section 2.1(b).

(b) If any of the Partnership Parties becomes aware of an opportunity to acquire Public Equity Securities from a third party that it wishes to pursue, then as soon as practicable, Valero GP (on behalf of the Partnership Parties) shall notify Holdings of such opportunity (the “ Public Equity Securities Notice ”) and deliver to Holdings all information prepared by or on behalf of the Partnership Parties relating to the Public Equity Securities. As soon as practicable, but in any event within 30 days after receipt of such notification and information, Holdings shall notify the Partnership Parties that either (i) Holdings has elected, with the approval of a majority of the members of the Conflicts Committee, not to cause Holdings to pursue the opportunity to acquire such Public Equity Securities, or (ii) Holdings has elected to pursue the opportunity to acquire such Public Equity Securities. If at any time Holdings abandons such opportunity, as evidenced (x) in writing by Holdings, or (y) by Holdings’ failure to consummate the acquisition of the Public Equity Securities within one year of the Public Equity Securities Notice, the Partnership Parties shall have the unrestricted right to pursue such opportunity.

2.2 Logistics Business Opportunity . (a) During the term of this Agreement, Holdings is prohibited from acquiring a Logistics Business unless and until the opportunity to acquire such Logistics Business has been offered to the Partnership Parties and the Partnership Parties have declined or abandoned such opportunity as provided in Section 2.2(b).

(b) If Holdings becomes aware of an opportunity to acquire a Logistics Business from a third party that it wishes to pursue, then as soon as practicable, Holdings shall notify Valero GP (on behalf of the Partnership Parties) of such opportunity (the “ Logistics Business Notice ”) and deliver to Valero GP all information prepared by or on behalf of Holdings relating to the Logistics Business. As soon as practicable, but in any event within 30 days after receipt of such notification and information, Valero GP (on behalf of the Partnership Parties) shall notify Holdings that either (i) Valero GP has elected, with the approval of a majority of the members of the Conflicts Committee, not to cause the Partnership Parties to pursue the opportunity to acquire such Logistics Business, or (ii) Valero GP (on behalf of the Partnership Parties) has elected to pursue the opportunity to acquire such Logistics Business. If at any time the Partnership Parties abandon such opportunity, as evidenced (x) in writing by Valero GP (on behalf of the Partnership

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Parties), or (y) by the Partnership Parties’ failure to consummate the acquisition of the Logistics Business within one year of the Logistics Business Notice, Holdings shall have the unrestricted right to pursue such opportunity.

2.3 No Obligation to Present Business Opportunities . Other than as set forth in Section 2.1 with respect to Public Equity Securities, none of the Partnership Parties shall have any obligation to present any business opportunity (including, but not limited to, Logistics Businesses) to Holdings and its Affiliates. Other than as set forth in Section 2.2 with respect to Logistics Businesses, Holdings shall have no obligation to present any business opportunity (including, but not limited to, Public Equity Securities) to the Partnership Parties and their Affiliates.

2.4 Term .

This Agreement shall remain in effect for as long as Holdings or any of its Affiliates owns directly or indirectly 20% or more of Valero GP or Riverwalk or their successors.

ARTICLE III:
Miscellaneous

3.1 Choice of Law . This Agreement shall be subject to and governed by the laws of the State of Texas, excluding any conflicts-of-law rule or principle that might refer to the construction or interpretation of this Agreement to the laws of another state.

3.2 Notice . All notices or requests or consents provided for or permitted to be given pursuant to this Agreement must be in writing and must be given by depositing same in the United States mail, addressed to the Person to be notified, postpaid, and registered or certified with return receipt requested or by delivering such notice in person or by telecopier or telegram to such party. Notice given by personal delivery or mail shall be effective upon actual receipt. Notice given by telegram or telecopier shall be effective upon actual receipt if received during the recipient’s normal business hours, or at the beginning of the recipient’s next business day after receipt if not received during the recipient’s normal business hours. All notices to be sent to a party pursuant to this Agreement shall be sent to or made at the address set forth below such party’s signature to this Agreement, or at such other address as such party may stipulate to the other parties in the manner provided in this Section 3.2.

3.3 Entire Agreement; Supersedure . This Agreement constitutes the entire agreement of the parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written, relating to the matters contained herein.

3.4 Effect of Waiver or Consent . No waiver or consent, express or implied, by any party to or of any breach or default by any Person in the performance by such Person of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such Person of the same or any other obligations of such Person hereunder. Failure on the part of a party to complain of any act of any Person or to declare any Person in default, irrespective of how long such failure continues, shall not constitute

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a waiver by such party of its rights hereunder until the applicable statute of limitations period has run.

3.5 Amendment or Modification . This Agreement may be amended or modified from time to time only by the written agreement of all the parties hereto. Each such instrument shall be reduced to writing and shall be designated on its face an “Amendment” or an “Addendum” to this Agreement.

3.6 Assignment . No party shall have the right to assign its rights or obligations under this Agreement, by operation of law or otherwise, without the consent of the other parties hereto.

3.7 Counterparts . This Agreement may be executed in any number of counterparts with the same effect as if all signatory parties had signed the same document. All counterparts shall be construed together and shall constitute one and the same instrument.

3.8 Severability . If any provision of this Agreement or the application thereof to any Person or circumstance shall be held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

3.9 Gender, Parts, Articles and Sections . Whenever the context requires, the gender of all words used in this Agreement shall include the masculine, feminine and neuter, and the number of all words shall include the singular and plural. All references to Article numbers and Section numbers refer to Parts, Articles and Sections of this Agreement, unless the context otherwise requires.

3.10 Further Assurances . In connection with this Agreement and all transactions contemplated by this Agreement, each signatory party hereto agrees to execute and deliver such additional documents and instruments and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement and all such transactions.

3.11 Withholding or Granting of Consent . Each party may, with respect to any consent or approval that it is entitled to grant pursuant to this Agreement, grant or withhold such consent or approval in its sole and uncontrolled discretion, with or without cause, and subject to such conditions as it shall deem appropriate.

3.12 Laws and Regulations . Notwithstanding any provision of this Agreement to the contrary, no party hereto shall be required to take any act, or fail to take any act, under this Agreement if the effect thereof would be to cause such party to be in violation of any applicable law, statute, rule or regulation.

3.13 Binding Effect . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

3.14 Negotiation of Rights of Limited Partners, Assignees, and Third Parties . The provisions of this Agreement are enforceable solely by the parties to this Agreement, and no

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limited Partner, assignee, member or other Person shall have the right to enforce any provision of this Agreement or to compel any party to this Agreement to comply with the terms of this Agreement.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date.


VALERO GP HOLDINGS, LLC

By:

Name:		Steven A. Blank
Title:		Senior Vice President

Address for Notice :

One Valero Way
San Antonio, Texas 78249
Facsimile No.: (210) 353-8361

VALERO L.P.

By:	Riverwalk Logistics, L.P.,
	its general partner

	By:	Valero GP, LLC,
		its general partner

By:

Name:		Curtis V. Anastasio
Title:		Chief Executive Officer and President

Address for Notice :

One Valero Way
San Antonio, Texas 78249
Facsimile No.: (210) 370-4392

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RIVERWALK LOGISTICS, L.P.

By:	Valero Logistics GP, LLC,
	its general partner

By:


Name:		Curtis V. Anastasio
Title:		Chief Executive Officer and President

Address for Notice :

One Valero Way
San Antonio, Texas 78249
Facsimile No.: (210) 370-4392

VALERO GP, LLC

By:

Name:		Curtis V. Anastasio
Title:		Chief Executive Officer and President

Address for Notice :

One Valero Way
San Antonio, Texas 78249
Facsimile No.: (210) 370-4392

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Exhibit 23.01

Consent of Independent Registered Public Accounting Firm

The Board of Directors of
Valero GP Holdings, LLC:

We consent to the use of our reports with respect to the combined balance sheets of Valero GP Holdings, LLC as of December 31, 2005 and 2004, and the related combined statements of income, members’ equity and cash flows for the years then ended, the consolidated balance sheets of Valero L.P. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, cash flows and partners’ equity for the years then ended, and the consolidated balance sheets of Kaneb Services LLC and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended, included herein, and to the reference to our firm under the heading “Experts” in the registration statement.

The audit report covering the December 31, 2003 consolidated financial statements of Kaneb Services LLC and subsidiaries refers to a change in the method of accounting for asset retirement obligations.

/s/ KPMG LLP

San Antonio, Texas
March 30, 2006

Exhibit 23.03

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption “Experts” in the Registration Statement on Form S-1 of Valero GP Holdings, LLC for the registration of its units and to the use of our reports dated: (i) February 3, 2006, with respect to the combined financial statements of Valero GP Holdings, LLC, and (ii) March 11, 2004, with respect to the consolidated financial statements of Valero L.P.

/s/ Ernst & Young LLP

San Antonio, Texas

March 30, 2006


		use Valero L.P.’s pipelines if there is a material change in the market conditions for the transportation of crude oil and refined products, or in the markets for refined products served by these refineries, that has a material adverse effect on Valero Energy;

	•	For some of the refined product pipelines and terminals connected to Valero Energy’s Corpus Christi East, Corpus Christi West and Three Rivers refineries, Valero Energy has agreed to specified minimum commitment percentages for certain pipelines and terminals, which generally represent approximately 75% of 2002 historical volumes, but may use other transportation and storage methods and providers for any volumes exceeding such minimum commitments;

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

	•	Valero L.P.’s general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to unitholders. As a result of purchasing Valero L.P.’s common units, unitholders have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;

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

	•	Valero L.P.’s general partner determines in its sole discretion which costs incurred by Valero Energy and its affiliates are reimbursable by Valero L.P.;

	•	Valero L.P.’s general partner may cause Valero L.P. to pay the general partner or its affiliates for any services rendered on terms that are fair and reasonable to Valero L.P. or enter into additional contractual arrangements with any of these entities on Valero L.P.’s behalf;

	•	Valero L.P.’s general partner controls the enforcement of obligations owed to Valero L.P. by Valero Energy and its affiliates, including under the handling and throughput agreement, the throughput commitment agreement, the terminalling agreements and the pipelines and terminals usage agreement with Valero Energy;

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

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


		establishment of those reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

	•	While our limited liability company agreement requires us to distribute our available cash, our limited liability company agreement, including our cash distribution policy contained therein, may be amended by a vote of the holders of a majority of our units.

	•	Under Section 18-607 of the Delaware Limited Liability Company Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

	•	Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, Valero L.P. may not make a distribution to us if the distribution would cause its liabilities to exceed the fair value of its assets.

	•	We may lack sufficient cash to pay distributions to our unitholders due to increases in general and administrative expenses, principal and interest payments required under any outstanding debt, working capital requirements and anticipated cash needs of us or Valero L.P. and its subsidiaries.


		the approval of a unit majority. Please read “— Amendment of Our Limited Liability Company Agreement.”

Merger of our company or the sale of all or substantially all of our assets		Unit majority. Please read “— Merger, Sale or Other Disposition of Assets.”

Dissolution of our company		Unit majority. Please read “— Termination and Dissolution.”


		compliance with any of which our board of directors deems to be in the best interests of us and our unitholders;

	•	are necessary or appropriate for any action taken by our board of directors relating to splits or combinations of units under the provisions of our limited liability company agreement; or

	•	are required to effect the intent expressed in this prospectus or the intent of the provisions of our limited liability company agreement or are otherwise contemplated by our limited liability company agreement.


		related distribution to the general partner, and (b) there are no cumulative arrearages on the common units; and

	•	the date on which the general partner is removed as general partner of the partnership other than for cause and units held by the general partner and its affiliates are not voted in favor of such removal. Upon such removal, existing arrearages on the common units will be extinguished and the common units will no longer be entitled to arrearages if Valero L.P. fails to pay the minimum quarterly distribution in any quarter.