<SUBMISSION>
<ACCESSION-NUMBER>0001137154-04-000022
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>7
<PERIOD>20040930
<FILING-DATE>20041108
<DATE-OF-FILING-DATE-CHANGE>20041108
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>KANEB SERVICES LLC
<CIK>0001137154
<ASSIGNED-SIC>5172
<IRS-NUMBER>752931295
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>001-16405
<FILM-NUMBER>041126787
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
<PHONE>9726994019
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>ksl3q04.txt
<DESCRIPTION>KSL FORM 10-Q 3RD QTR 2004
<TEXT>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 2004

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                        Commission File Number 001-16405

                               KANEB SERVICES LLC
             (Exact name of registrant as specified in its charter)

           DELAWARE                                              75-2931295
(State or other jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

                          2435 North Central Expressway
                             Richardson, Texas 75080
          (Address of principle executive offices, including zip code)

                                 (972) 699-4062
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

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

         Yes     X                                         No
             ----------                                       ----------

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

Class of Common Shares                           Outstanding at October 29, 2004
----------------------                           -------------------------------
     No par value                                      11,692,328 shares

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

<PAGE>
KANEB SERVICES LLC  AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                               Page No.
                         Part I. Financial Information

<S>               <C>                                                                          <C>
Item 1   (a) (1). Financial Statements (Unaudited)

                  Consolidated Statements of Income - Three and Nine Months Ended
                     September 30, 2004 and 2003                                                  1

                  Condensed Consolidated Balance Sheets - September 30, 2004
                     and December 31, 2003                                                        3

                  Condensed Consolidated Statements of Cash Flows - Nine
                     Months Ended September 30, 2004 and 2003                                     4

                  Notes to Consolidated Financial Statements                                      5

         (a)(2). Financial Statement Schedules (Unaudited)

                  Schedule I - Kaneb Services LLC (Parent Company)
                      Condensed Financial Statements:

                         Statements of Income - Three and Nine Months
                             Ended September 30, 2004 and 2003                                   16

                         Balance Sheets - September 30, 2004 and December 31, 2003               17

                         Statements of Cash Flows - Nine Months Ended
                             September 30, 2004 and 2003                                         18

Item 2.           Management's Discussion and Analysis of
                     Financial Condition and Results of Operations                               19

Item 3.           Quantitative and Qualitative Disclosure About Market Risk                      32

Item 4.           Controls and Procedures                                                        32

                           Part II. Other Information

Item 6.           Exhibits                                                                       33

</TABLE>

<PAGE>


KANEB SERVICES LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                       -----------------------------  -----------------------------
                                                            2004           2003           2004            2003
                                                       --------------  -------------  -------------  --------------

<S>                                                    <C>             <C>            <C>            <C>
Revenues:
   Services                                            $       95,898  $      89,539  $     280,654  $      265,694
   Products                                                   176,344        125,053        478,969         386,021
                                                       --------------  -------------  -------------  --------------
      Total revenues                                          272,242        214,592        759,623         651,715
                                                       --------------  -------------  -------------  --------------
Costs and expenses:
   Cost of products sold                                      168,458        119,767        458,253         366,531
   Operating costs                                             46,648         42,577        133,443         126,190
   Depreciation and amortization                               14,056         13,198         41,701          39,845
   General and administrative                                   8,153          6,799         21,850          20,469
                                                       --------------  -------------  -------------  --------------
      Total costs and expenses                                237,315        182,341        655,247         553,035
                                                       --------------  -------------  -------------  --------------
Operating income                                               34,927         32,251        104,376          98,680
Interest and other income                                         148             69            241             208
Interest expense                                              (10,930)       (10,855)       (32,279)        (28,816)
                                                       --------------  -------------  -------------  --------------
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                           24,145         21,465         72,338          70,072
Gain on issuance of units by KPP                                -               -              -             10,898
Income tax expense                                             (1,259)          (969)        (3,028)         (3,597)
Interest of outside non-controlling
   partners in KPP's net income                               (16,075)       (14,634)       (49,109)        (49,151)
                                                       --------------  -------------  -------------  --------------
Income before cumulative effect of
   change in accounting principle                               6,811          5,862         20,201          28,222

Cumulative effect of change in accounting
   principle - adoption of new accounting
   standard for asset retirement obligations                     -              -              -               (313)
                                                       --------------  -------------  -------------  --------------
Net income                                             $        6,811  $       5,862  $      20,201  $       27,909
                                                       ==============  =============  =============  ==============

</TABLE>

                      See notes to consolidated financial statements.
                                        1


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - Continued
(In Thousands -- Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                       -----------------------------  -----------------------------
                                                            2004           2003           2004            2003
                                                       --------------  -------------  -------------  --------------

<S>                                                    <C>             <C>            <C>            <C>
Earnings per share:
   Basic:
      Before cumulative effect of change
        in accounting principle                        $          .58  $         .50  $        1.72  $        2.45
      Cumulative effect of change in
        accounting principle                                    -               -              -              (.03)
                                                       --------------  -------------  -------------  -------------
                                                       $          .58  $         .50  $        1.72  $        2.42
                                                       ==============  =============  =============  =============
   Diluted:
      Before cumulative effect of change
        in accounting principle                        $          .57  $         .49  $        1.70  $        2.41
      Cumulative effect of change in
        accounting principle                                    -               -              -              (.03)
                                                       --------------  -------------  -------------  -------------
                                                       $          .57  $         .49  $        1.70  $        2.38
                                                       ==============  =============  =============  =============


</TABLE>

                 See notes to consolidated financial statements.
                                        2

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             September 30,          December 31,
                                                                                 2004                   2003
                                                                           ---------------       ------------------
                                                                              (Unaudited)
            ASSETS
<S>                                                                        <C>                   <C>
Current assets:
    Cash and cash equivalents                                              $        50,019       $        43,457
    Accounts receivable                                                             84,940                60,684
    Inventories                                                                     22,101                18,637
    Prepaid expenses and other                                                       8,933                 9,650
                                                                           ---------------       ---------------
        Total current assets                                                       165,993               132,428
                                                                           ---------------       ---------------
Property and equipment                                                           1,422,132             1,360,523
Less accumulated depreciation                                                      286,447               247,503
                                                                           ---------------       ---------------
    Net property and equipment                                                   1,135,685             1,113,020
                                                                           ---------------       ---------------
Investment in affiliates                                                            26,277                25,456
Excess of cost over fair value of net assets of
    acquired business and other assets                                              22,332                20,663
                                                                           ---------------       ---------------
                                                                           $     1,350,287       $     1,291,567
                                                                           ===============       ===============

                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                       $        51,857       $        36,916
    Accrued expenses                                                                38,582                39,307
    Accrued interest payable                                                         8,729                 9,303
    Accrued distributions payable to shareholders                                    5,801                 5,567
    Accrued distributions payable to outside non-controlling
        partners in KPP                                                             19,863                19,507
    Deferred terminaling fees                                                        8,669                 7,061
                                                                           ---------------       ---------------
        Total current liabilities                                                  133,501               117,661
                                                                           ---------------       ---------------
Long-term debt                                                                     685,775               636,308

Other liabilities and deferred taxes                                                52,746                52,242

Interest of outside non-controlling partners in KPP                                397,305               407,635

Commitments and contingencies

Shareholders' equity                                                                80,960                77,721
                                                                           ---------------       ---------------
                                                                           $     1,350,287       $     1,291,567
                                                                           ===============       ===============

</TABLE>

                 See notes to consolidated financial statements.
                                        3


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                         Nine Months Ended
                                                                                            September 30,
                                                                           ----------------------------------------
                                                                                2004                      2003
                                                                           -------------             --------------
<S>                                                                        <C>                       <C>
Operating activities:
   Net income                                                              $      20,201             $       27,909
   Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization                                             41,701                     39,845
        Equity in earnings of affiliates, net of distributions                      (821)                       123
        Interest of outside non-controlling partners
           in KPP's net income                                                    49,109                     49,151
        Gain on issuance of units by KPP                                            -                       (10,898)
        Deferred income taxes                                                        112                      2,361
        Cumulative effect of change in accounting principle                         -                           313
        Changes in working capital components                                    (11,697)                     6,512
                                                                           -------------             --------------
           Net cash provided by operating activities                              98,605                    115,316
                                                                           -------------             --------------
Investing activities:
   Acquisitions by KPP, net of cash acquired                                     (41,066)                    (1,644)
   Capital expenditures                                                          (25,754)                   (32,059)
   Other, net                                                                         16                     (2,196)
                                                                           -------------             --------------
        Net cash used in investing activities                                    (66,804)                   (35,899)
                                                                           -------------             --------------
Financing activities:
   Issuance of debt                                                               53,017                    286,360
   Payment of debt                                                                (2,500)                  (387,055)
   Distributions to shareholders                                                 (16,985)                   (14,915)
   Distributions to outside non-controlling
      partners in KPP                                                            (58,869)                   (53,498)
   Net proceeds from issuance of units by KPP                                       -                       109,056
   Other                                                                              98                        170
                                                                           -------------             --------------
        Net cash used in financing activities                                    (25,239)                   (59,882)
                                                                           -------------             --------------
Increase in cash and cash equivalents                                              6,562                     19,535
Cash and cash equivalents at beginning of period                                  43,457                     24,477
                                                                           -------------             --------------
Cash and cash equivalents at end of period                                 $      50,019             $       44,012
                                                                           =============             ==============
Supplemental cash flow information - cash paid for interest                $      31,900             $       26,489
                                                                           =============             ==============

</TABLE>

                 See notes to consolidated financial statements.
                                        4

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


Notes to Consolidated Financial Statements
(Unaudited)
--------------------------------------------------------------------------------

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  as  of  September   30,  2004.   All   significant   intercompany
     transactions and balances have been eliminated.

     The unaudited condensed  consolidated  financial  statements of the Company
     for the three and nine month  periods  ended  September  30, 2004 and 2003,
     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,  2003.  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 September 30, 2004, and the
     consolidated  results of their  operations  and cash flows for the  periods
     ended September 30, 2004 and 2003. Operating results for the three and nine
     months  ended  September  30, 2004 are not  necessarily  indicative  of the
     results that may be expected for the year ending December 31, 2004. Certain
     prior year financial statement items have been reclassified to conform with
     the 2004 presentation.

     In December of 2002,  the Financial  Accounting  Standards  Board  ("FASB")
     issued  Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  148
     "Accounting for Stock-Based  Compensation-Transition  and Disclosure." SFAS
     No. 148,  which amends SFAS No. 123,  provides for  alternative  methods of
     transition  for a  voluntary  change  to the fair  value  based  method  of
     accounting for stock-based  employee  compensation and requires  additional
     disclosures in annual and interim financial statements regarding the method
     of accounting for stock-based  employee  compensation and the effect of the
     method used on financial results. In accordance with the provisions of SFAS
     No. 123, the Company applies APB Opinion 25 and related  interpretations in
     accounting for its share 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 Black-Scholes  option pricing model has
     been used to estimate the fair value of share options issued.



<PAGE>


     The  following  illustrates  the effect on net income and basic and diluted
     earnings per share if the fair value based method had been applied:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                       -----------------------------  -----------------------------
                                                            2004            2003          2004            2003
                                                       --------------   ------------  -------------  --------------
                                                                  (in thousands - except per share data)
<S>                                                    <C>              <C>           <C>            <C>
      Reported net income                              $        6,811   $      5,862  $      20,201  $       27,909

      Share-based employee compensation
        expense determined under the fair
        value based method                                        (74)           (21)          (108)            (63)
                                                       --------------   ------------  -------------  --------------
      Pro forma net income                             $        6,737   $      5,841  $      20,093  $       27,846
                                                       ==============   ============  =============  ==============
      Earning per share:
        Basic - as reported                            $          .58   $        .50  $        1.72  $         2.42
                                                       ==============   ============  =============  ==============
        Basic - pro forma                              $          .57   $        .50  $        1.71  $         2.42
                                                       ==============   ============  =============  ==============
        Diluted - as reported                          $          .57   $        .49  $        1.70  $         2.38
                                                       ==============   ============  =============  ==============
        Diluted - pro forma                            $          .56   $        .49  $        1.67  $         2.37
                                                       ==============   ============  =============  ==============
</TABLE>


2.   KPP FINANCINGS

     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  the  amount  of
     indebtedness  under  KPP's  bridge  facility.  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 the first quarter of 2003.

     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 September
     30, 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 September 30, 2004, $90.7 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
     transactions  with  affiliates  and,  absent  an  event  of  default,  such
     covenants do not restrict  distributions  to the Company or other partners.
     At  September  30,  2004,  KPP was in  compliance  with all  covenants.  In
     connection  with the offering,  on May 8, 2003, KPP entered into a treasury
     lock  contract for the 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 has been recorded as a component of accumulated  other
     comprehensive income and is being amortized,  as interest expense, over the
     life of the debt.


3.   COMPREHENSIVE INCOME

     Comprehensive income for the three and nine months ended September 30, 2004
     and 2003, is as follows:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                       -----------------------------  -----------------------------
                                                            2004            2003          2004            2003
                                                       --------------   ------------  -------------  --------------
                                                                              (in thousands)
<S>                                                    <C>              <C>           <C>            <C>
     Net income                                      $          6,811  $       5,862  $      20,201  $       27,909
     Foreign currency translation
       adjustment                                                 370             72            (81)          1,404
       KPP interest rate hedging transactions                      10             10             27            (341)
                                                     ----------------  -------------  -------------  --------------
     Comprehensive income                            $          7,191  $       5,944  $      20,147  $       28,972
                                                     ================  =============  =============  ==============
</TABLE>

     Accumulated other comprehensive income aggregated $2.4 million at September
     30, 2004 and $2.4 million at December 31, 2003, respectively.

4.   CASH DISTRIBUTIONS

     The Company makes 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 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.  Cash distributions of $0.475 and $0.495
     per share with  respect to the first and second  quarters of 2004 were paid
     on May 14, 2004 and August 13, 2004,  respectively.  A cash distribution of
     $0.495 per share with respect to the third  quarter of 2004 was declared to
     holders  of record on October  31,  2004 and will be paid on  November  12,
     2004.


5.   EARNINGS PER SHARE

     Earnings per share for the three and nine months ended  September  30, 2004
     and 2003, is  calculated  using the  Company's  basic and diluted  weighted
     average  shares  outstanding  for the period.  For the three  months  ended
     September 30, 2004 and 2003, basic weighted average shares outstanding were
     11,785,000  and  11,635,000,  respectively,  and diluted  weighted  average
     shares  outstanding were 11,968,000 and 11,889,000,  respectively.  For the
     nine months  ended  September  30, 2004 and 2003,  basic  weighted  average
     shares  outstanding  were  11,716,000  and  11,521,000,  respectively,  and
     diluted weighted average shares outstanding were 11,902,000 and 11,751,000,
     respectively.


6.   CONTINGENCIES

     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.

     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  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.

     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.

     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.

     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 believes  it has  incurred  costs
     exceeding  $40  million,  and expects 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.  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 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.

     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.  The DOT
     granted  ST  Services'  request  to  extend  the time to file a  motion  to
     reconsider the final order.  ST Services has moved for  reconsideration  of
     the order based on facts which were not previously available to the DOT and
     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 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.

     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.


7.   BUSINESS SEGMENT DATA

     The Company  conducts  business  through three  principal  operations:  the
     "Pipeline   Operations"   of  KPP,   which   consists   primarily   of  the
     transportation  of  refined  petroleum   products  and  fertilizer  in  the
     Midwestern states as a common carrier; the "Terminaling Operations" of KPP,
     which  provides  storage for petroleum  products,  specialty  chemicals and
     other  liquids;  and  the  "Product  Marketing  Services,"  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, receivable 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:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                 September 30,
                                                       -----------------------------  -----------------------------
                                                            2004            2003          2004            2003
                                                       --------------   ------------  -------------  --------------
                                                                              (in thousands)
<S>                                                    <C>              <C>           <C>            <C>
    Business segment revenues:
       Pipeline operations                             $       30,589  $      31,449  $      89,102  $       88,807
       Terminaling operations                                  65,309         58,090        191,552         176,887
       Product marketing operations                           176,344        125,053        478,969         386,021
                                                       --------------  -------------  -------------  --------------
                                                       $      272,242  $     214,592  $     759,623  $      651,715
                                                       ==============  =============  =============  ==============
     Business segment profit:
       Pipeline operations                             $       11,569  $      14,839  $      34,803  $       39,036
       Terminaling operations                                  19,181         15,732         58,541          51,567
       Product marketing operations                             4,877          2,219         12,787           9,634
       General corporate                                         (700)          (539)        (1,755)         (1,557)
                                                       --------------  -------------  -------------  --------------
         Operating income                                      34,927         32,251        104,376          98,680
       Interest and other income                                  148             69            241             208
       Interest expense                                       (10,930)       (10,855)       (32,279)        (28,816)
                                                       --------------  -------------  -------------  --------------
       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      $       24,145  $      21,465  $      72,338  $       70,072
                                                       ==============  =============  =============  ==============
</TABLE>

<TABLE>
<CAPTION>

                                                                                    September 30,      December 31,
                                                                                        2004               2003
                                                                                    -------------    -----------------
                                                                                            (in thousands)
<S>                                                                                 <C>              <C>
     Total assets:
       Pipeline operations                                                          $     358,474    $      352,901
       Terminaling operations                                                             898,600           874,185
       Product marketing operations                                                        88,300            58,161
       General corporate                                                                    4,913             6,320
                                                                                    -------------    --------------
                                                                                    $   1,350,287    $    1,291,567
                                                                                    =============    ==============
</TABLE>


8.   ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

     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  terminaling  facilities,  including  petroleum  and chemical
     storage  tanks,  terminaling  facilities  and  barges.  The Company did not
     record  a  retirement   obligation   for  certain  of  KPP's  pipeline  and
     terminaling  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  September  30,  2004,  the Company had no assets that were
     legally  restricted for purposes of settling asset retirement  obligations.
     The  application  of SFAS No.  143 did not have a  material  impact  on the
     results of  operations  of the Company for the three and nine months  ended
     September 30, 2004 or 2003.

     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," which 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 did not  have a
     material impact on the consolidated financial statements of the Company.


9.   SUBSEQUENT EVENT

     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  approval  of the
     unitholders of Valero L.P. and the shareholders of the Company,  as well as
     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, which requires the approval of its
     unitholders.  The Company and KPP will become wholly owned  subsidiaries of
     Valero L.P.





<PAGE>
                                                                      Schedule I

KANEB SERVICES LLC (PARENT COMPANY)

CONDENSED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                                September 30,                  September 30,
                                                       -----------------------------  -----------------------------
                                                            2004           2003            2004            2003
                                                       --------------  -------------  -------------  --------------

<S>                                                    <C>             <C>            <C>            <C>
General and administrative expenses                    $         (652) $        (509) $      (1,593) $       (1,462)
Interest expense                                                 (143)          (147)          (417)           (474)
Interest and other income                                           1              3              2               9
Equity in earnings of subsidiaries                              7,605          6,515         22,209          19,271
Equity in earnings of subsidiaries - gain
    on issuance of units by KPP                                 -                -             -             10,878
                                                       --------------  -------------  -------------  --------------
Income before cumulative effect of change
   in accounting principle                                      6,811          5,862         20,201          28,222

Cumulative effect of change in accounting
   principle - adoption of new accounting
   standard for asset retirement obligations                    -               -              -               (313)
                                                       --------------  -------------  -------------  --------------
Net income                                             $        6,811  $       5,862  $      20,201  $       27,909
                                                       ==============  =============  =============  ==============
Earnings per share:
   Basic:
      Before cumulative effect of change
        in accounting principle                        $          .58  $         .50  $        1.72  $         2.45
      Cumulative effect of change in
        accounting principle                                    -               -               -              (.03)
                                                       --------------  -------------  -------------  --------------
                                                       $          .58  $         .50  $        1.72  $         2.42
                                                       ==============  =============  =============  ==============
   Diluted:
      Before cumulative effect of change
        in accounting principle                        $          .57  $         .49  $        1.70  $         2.41
      Cumulative effect of change in
        accounting principle                                    -               -               -              (.03)
                                                       --------------  -------------  -------------  --------------
                                                       $          .57  $         .49  $        1.70  $         2.38
                                                       ==============  =============  =============  ==============

</TABLE>

              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       16

<PAGE>
                                                                      Schedule I
                                                                     (Continued)
KANEB SERVICES LLC (PARENT COMPANY)


CONDENSED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            September 30,           December 31,
                                                                                2004                    2003
                                                                          ---------------          -------------
                                                                             (Unaudited)
            ASSETS
<S>                                                                        <C>                     <C>
Current assets:
    Cash and cash equivalents                                              $        1,127          $       1,544
    Prepaid expenses and other                                                        239                    149
                                                                           --------------          -------------
        Total current assets                                                        1,366                  1,693
                                                                           --------------          -------------
Investments in and advances to subsidiaries                                       107,514                106,068
Other assets                                                                          415                    498
                                                                           --------------          -------------
                                                                           $      109,295          $     108,259
                                                                           ==============          =============

                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accrued expenses                                                       $          990          $       1,112
    Accrued distributions payable to shareholders                                   5,801                  5,567
                                                                           --------------          -------------
        Total current liabilities                                                   6,791                  6,679
                                                                           --------------          -------------

Long-term debt                                                                     14,000                 16,500

Long-term payables and other liabilities                                            7,544                  7,359

Commitments and contingencies

Shareholders' equity                                                               80,960                 77,721
                                                                           --------------          -------------
                                                                           $      109,295          $     108,259
                                                                           ==============          =============
</TABLE>

              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       17
<PAGE>
                                                                      Schedule I
                                                                     (Continued)
KANEB SERVICES LLC (PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                         Nine Months Ended
                                                                                            September 30,
                                                                           ----------------------------------------
                                                                                2004                      2003
                                                                           -------------             --------------

<S>                                                                        <C>                       <C>
Operating activities:
    Net income                                                             $      20,201             $       27,909
    Adjustments to reconcile net income to net cash
        provided by operating activities:
           Equity in earnings of subsidiaries, net of
               distributions                                                      (1,499)                   (11,958)
           Cumulative effect of change in accounting
               principle                                                            -                           313
           Changes in current assets and liabilities                                (212)                       664
                                                                           -------------             --------------
               Net cash provided by operating activities                          18,490                     16,928
                                                                           -------------             --------------
Investing activities:
    Changes in other assets                                                           83                         83
                                                                           -------------             --------------
               Net cash provided by investing activities                              83                         83
                                                                           -------------             --------------
Financing activities:
    Payments on debt                                                              (2,500)                    (2,625)
    Distributions to shareholders                                                (16,985)                   (14,915)
    Changes in long-term payables and other liabilities                              185                        344
    Other                                                                            310                        170
                                                                           -------------             --------------
               Net cash used in financing activities                             (18,990)                   (17,026)
                                                                           -------------             --------------
Decrease in cash and cash equivalents                                               (417)                       (15)
Cash and cash equivalents at beginning of period                                   1,544                      1,695
                                                                           -------------             --------------
Cash and cash equivalents at end of period                                 $       1,127             $        1,680
                                                                           =============             ==============
</TABLE>

              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       18

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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


     This  discussion   should  be  read  in  conjunction   with  the  condensed
     consolidated financial statements of Kaneb Services LLC (the "Company") and
     notes thereto included elsewhere in this report. The consolidated financial
     information  reflects the results of operations of the Company,  its wholly
     owned subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP").

     Overview

     In September 1989, Kaneb Pipe Line Company LLC ("KPL"),  now a wholly owned
     subsidiary  of the  Company,  formed  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 an 18% (at
     September 30, 2004) limited partner  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.

     KPP's petroleum pipeline business consists primarily of the transportation,
     as a common carrier,  of refined  petroleum  products in Kansas,  Nebraska,
     Iowa, South Dakota, North Dakota, Colorado,  Wyoming and Minnesota.  Common
     carrier  activities  are  those  under  which  transportation  through  the
     pipelines  is  available  at  published  tariffs  filed,  in  the  case  of
     interstate  shipments,  with the Federal Energy Regulatory  Commission (the
     "FERC"),  or in the case of intrastate  shipments,  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  petroleum  pipelines  primarily  transport  gasoline,
     diesel  oil,  fuel  oil and  propane.  Substantially  all of the  petroleum
     pipeline  operations  constitute common carrier operations that are subject
     to  federal or state  tariff  regulations.  KPP also owns an  approximately
     2,000-mile  anhydrous  ammonia  pipeline system acquired from Koch Pipeline
     Company,  L.P. in November of 2002. The fertilizer  pipeline  originates in
     southern Louisiana,  proceeds north through Arkansas and Missouri, and then
     branches  east into  Illinois  and Indiana and north and west into Iowa and
     Nebraska.  KPP's petroleum pipeline business depends on the level of demand
     for refined  petroleum  products in the markets served by the pipelines and
     the ability and  willingness of refineries  and marketers  having access to
     the  pipelines to supply such demand by deliveries  through the  pipelines.
     KPP's pipeline  revenues are based on volumes shipped and the distance over
     which such volumes are transported.

     KPP's  terminaling  business  is one of the largest  independent  petroleum
     products and specialty liquids terminaling businesses in the United States.
     In the United  States,  KPP operates 37 facilities  in 20 states.  KPP also
     owns and  operates  six  terminals  located  in the United  Kingdom,  eight
     terminals  in Australia  and New  Zealand,  a terminal on the Island of St.
     Eustatius,  Netherlands  Antilles,  and a terminal  at Point  Tupper,  Nova
     Scotia, Canada.  Independent terminal owners generally compete on the basis
     of the  location  and  versatility  of the  terminals,  service  and price.
     Terminal  versatility  is a  function  of the  operator's  ability to offer
     handling for diverse  products  with  complex  handling  requirements.  The
     service  functions  typically  provided  by the  terminal  include the safe
     storage of product at specified temperatures and other conditions,  as well
     as receipt and delivery from the terminal. The ability to obtain attractive
     pricing is dependent largely on the quality,  versatility and reputation of
     the facility. Terminaling revenues are earned based on fees for the storage
     and handling of products.

     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.

     Consolidated Results of Operations

<TABLE>
<CAPTION>

                                                          Three Months  Ended                 Nine Months Ended
                                                              September 30,                      September 30,
                                                     ---------------------------        --------------------------
                                                         2004            2003               2004            2003
                                                     -----------     -----------        -----------     ------------
                                                                (in thousands - except per share amounts)
<S>                                                  <C>             <C>                <C>             <C>
       Consolidated revenues                         $   272,242     $   214,592        $   759,623     $   651,715
                                                     ===========     ===========        ===========     ===========
       Consolidated operating income                 $    34,927     $    32,251        $   104,376     $    98,680
                                                     ===========     ===========        ===========     ===========
       Consolidated income before gain
            on issuance of units by KPP and
            cumulative effect of change in
            accounting principle                     $     6,811     $     5,862        $    20,201     $    17,324
                                                     ===========     ===========        ===========     ===========
       Consolidated net income                       $     6,811     $     5,862        $    20,201     $    27,909
                                                     ===========     ===========        ===========     ===========
       Earnings per share:
            Basic:
                Before cumulative effect of
                    change in accounting
                    principle                        $      0.58     $      0.50        $      1.72     $      2.45
                Cumulative effect of change
                    in accounting principle                 -               -                  -              (0.03)
                                                     -----------     -----------        -----------     -----------
                                                     $      0.58     $      0.50        $      1.72     $      2.42
                                                     ===========     ===========        ===========     ===========
            Diluted:
                Before cumulative effect of
                    change in accounting
                    principle                        $      0.57     $      0.49        $      1.70     $      2.41
                Cumulative effect of change
                    in accounting principle                 -              -                   -              (0.03)
                                                     -----------     -----------        -----------     -----------
                                                     $      0.57     $      0.49        $      1.70     $      2.38
                                                     ===========     ===========        ===========     ===========
       Cash distributions declared per share         $     0.495     $     0.475        $     1.465     $      1.35
                                                     ===========     ===========        ===========     ===========
       Consolidated capital expenditures,
             excluding acquisitions                  $     8,414     $     9,543        $    25,754     $    32,059
                                                     ===========     ===========        ===========     ===========
</TABLE>

     For the three  months  ended  September  30,  2004,  consolidated  revenues
     increased by $57.7  million,  or 27%, when compared to the third quarter of
     2003, due to a $51.3 million increase in product  marketing  revenues and a
     $7.2 million increase in terminaling business revenues, partially offset by
     a $0.9 million decrease in pipeline revenues. Consolidated operating income
     for the three months ended September 30, 2004 increased by $2.7 million, or
     8%,  when  compared  to the  same  period  in 2003,  due to a $3.4  million
     increase in  terminaling  operating  income and a $2.7 million  increase in
     product  marketing  operating  income,  partially  offset by a $3.3 million
     decrease in pipeline  operating income.  Overall,  net income for the three
     months ended  September 30, 2004  increased by $0.9  million,  or 16%, when
     compared to the three month period ended September 30, 2003.

     For the  nine  months  ended  September  30,  2004,  consolidated  revenues
     increased by $107.9 million, or 17%, when compared to the same 2003 period,
     due to a $92.9  million  increase in product  marketing  revenues,  a $14.7
     million  increase  in  terminaling  business  revenues  and a $0.3  million
     increase in pipeline revenues.  Consolidated  operating income for the nine
     months ended  September  30, 2004  increased by $5.7  million,  or 6%, when
     compared  to the same  period in 2003,  due to a $7.0  million  increase in
     terminaling  operating  income  and a  $3.2  million  increase  in  product
     marketing operating income,  partially offset by a $4.2 million decrease in
     pipeline  operating  income.  Interest  expense for the nine  months  ended
     September  30, 2004  increased by $3.5  million,  when compared to the nine
     months ended September 30, 2003. Income for the nine months ended September
     30, 2004,  before gain on issuance of units by KPP and cumulative effect of
     change in accounting  principle,  increased by $2.9  million,  or 17%, when
     compared to the nine months ended September 30, 2003.  Overall,  net income
     for the nine months ended  September  30, 2004  decreased by $7.7  million,
     when  compared to the nine month period  ended  September  30, 2003,  which
     includes a $10.9  million gain on issuance of units by KPP (see  "Liquidity
     and Capital Resources").

Pipeline Operations

<TABLE>
<CAPTION>

                                                          Three Months  Ended                 Nine Months Ended
                                                              September 30,                      September 30,
                                                     ---------------------------        --------------------------
                                                         2004            2003               2004            2003
                                                     -----------     -----------        -----------     ------------
                                                                             (in thousands)
<S>                                                  <C>             <C>                <C>             <C>

     Revenues                                        $    30,589     $    31,449        $    89,102     $    88,807
     Operating costs                                      13,534          11,067             38,201          34,374
     Depreciation and amortization                         3,649           3,540             10,872          10,548
     General and administrative                            1,837           2,003              5,226           4,849
                                                     -----------     -----------        -----------     -----------
         Operating income                            $    11,569     $    14,839        $    34,803     $    39,036
                                                     ===========     ===========        ===========     ===========
</TABLE>

     Pipeline revenues are based on volumes shipped and the distances over which
     such volumes are  transported.  Because  tariff rates are  regulated by the
     FERC or the Surface  Transportation  Board, the pipelines compete primarily
     on the basis of quality of  service,  including  delivery  of  products  at
     convenient  locations  on a  timely  basis  to  meet  the  needs  of  their
     customers.  For the three and nine month periods ended  September 30, 2004,
     revenues   decreased  by  $0.9  million  and  increased  by  $0.3  million,
     respectively,  when compared to the same 2003 periods. The decrease for the
     three months ended  September 30, 2004, when compared to the same period in
     2003,  is due to  decreases  both in volumes  shipped and the price per ton
     received on the anhydrous ammonia  pipeline,  partially offset by increases
     in barrel  miles of products  shipped on petroleum  pipelines.  The revenue
     increase for the nine months ended  September 30, 2004, is due to increases
     in barrel miles of products shipped on the petroleum  pipelines,  partially
     offset by a decrease in volumes shipped on the anhydrous  ammonia pipeline.
     Barrel miles on petroleum pipelines totaled 5.9 billion and 5.4 billion for
     the three months ended September 30, 2004 and 2003, respectively,  and 16.7
     billion and 15.8 billion for the nine months ended  September  30, 2004 and
     2003, respectively. Total volumes shipped on the anhydrous ammonia pipeline
     aggregated  246 tons and 288 tons for the three months ended  September 30,
     2004 and 2003, respectively,  and 822 tons and 876 tons for the nine months
     ended September 30, 2004 and 2003, respectively.

     Operating  costs,  which  include  fuel  and  power  costs,  materials  and
     supplies,  maintenance  and  repair  costs,  salaries,  wages and  employee
     benefits,  and property and other taxes, increased by $2.5 million and $3.8
     million, respectively, for the three and nine month periods ended September
     30, 2004,  when  compared to the same 2003 periods,  due to unusually  high
     expenses   relating  to  preventive  and  other  maintenance  and  repairs,
     including those required by government  regulation,  and increases in power
     and fuel costs.  For the three and nine months  ended  September  30, 2004,
     depreciation and  amortization  increased by $0.1 million and $0.3 million,
     respectively,  when  compared to the same 2003  periods,  due  primarily to
     routine maintenance capital expenditures. General and administrative costs,
     which include  managerial,  accounting and administrative  personnel costs,
     office  rent  and  expense,   legal  and   professional   costs  and  other
     non-operating  costs,  decreased  by $0.2  million  and  increased  by $0.4
     million for the three and nine month  periods  ended  September  30,  2004,
     respectively, when compared to the same 2003 periods.

     Terminaling Operations
<TABLE>
<CAPTION>

                                                          Three Months  Ended                 Nine Months Ended
                                                              September 30,                      September 30,
                                                     ---------------------------        --------------------------
                                                         2004            2003               2004            2003
                                                     -----------     -----------        -----------     ------------
                                                                             (in thousands)
<S>                                                  <C>             <C>                <C>             <C>

     Revenues                                        $    65,309     $    58,090        $   191,552     $   176,887
     Operating costs                                      31,272          29,338             90,213          84,673
     Depreciation and amortization                        10,182           9,433             30,162          28,533
     General and administrative                            4,674           3,587             12,636          12,114
                                                     -----------     -----------        -----------     -----------
         Operating income                            $    19,181     $    15,732        $    58,541     $    51,567
                                                     ===========     ===========        ===========     ===========
</TABLE>

     For the three and nine month periods ended September 30, 2004,  terminaling
     revenues  increased  by $7.2  million,  or 12%, and $14.7  million,  or 8%,
     respectively,  when compared to the same 2003 periods,  due to increases in
     both tankage  utilized and the average price realized per barrel of tankage
     utilized.  Average tankage utilization for the three and nine month periods
     ended  September 30, 2004 was 48.7 million and 48.2 million,  respectively,
     compared to 45.9 million and 47.1 million, respectively, for the same prior
     year  periods.  For the three and nine month  periods  ended  September 30,
     2004, average annualized  revenues per barrel of tankage utilized increased
     to $5.33 per barrel and $5.31 per barrel,  respectively,  compared to $5.02
     per  barrel  and $5.02 per  barrel,  respectively,  for the same prior year
     periods,  due primarily to favorable market conditions  domestically and in
     Australia and New Zealand.

     For the three and nine month  periods ended  September 30, 2004,  operating
     costs  increased  by $1.9  million  and $5.5  million,  respectively,  when
     compared to the same 2003 periods, a result of overall increases in planned
     terminal  maintenance.  For the three and nine months ended  September  30,
     2004,  depreciation  and  amortization  increased  by $0.7 million and $1.6
     million,  respectively,  when  compared  to the same 2003  periods,  due to
     expansion  and  routine  maintenance  capital  expenditures.   General  and
     administrative  costs for the three and nine month periods ended  September
     30, 2004,  increased by $1.1 million and $0.5 million,  respectively,  when
     compared  to  the  same  2003  periods,   due  primarily  to  increases  in
     personnel-related costs.

     Product Marketing Operations

<TABLE>
<CAPTION>

                                                          Three Months  Ended                 Nine Months Ended
                                                              September 30,                      September 30,
                                                     ---------------------------        --------------------------
                                                         2004            2003               2004            2003
                                                     -----------     -----------        -----------     ------------
                                                                             (in thousands)
<S>                                                  <C>             <C>                <C>             <C>
     Revenues                                        $   176,344     $   125,053        $   478,969     $   386,021
     Cost of products sold                               168,458         119,767            458,253         366,531
                                                     -----------     -----------        -----------     -----------
     Gross margin                                    $     7,886     $     5,286        $    20,716     $    19,490
                                                     ===========     ===========        ===========     ===========
     Operating income                                $     4,877     $     2,219        $    12,787     $     9,634
                                                     ===========     ===========        ===========     ===========
</TABLE>


     For the three and nine month periods ended September 30, 2004, revenues for
     the product  marketing  business  increased by $51.3  million,  or 41%, and
     $92.9  million,  or 24%,  respectively,  when  compared  to the  same  2003
     periods.  The  increase in 2004  revenues,  when  compared to the same 2003
     periods,  was the result of  increases in both volumes sold and the overall
     increase in sales price realized.  Gallons sold totaled 179 million and 151
     million,  respectively,  for the three months ended  September 30, 2004 and
     2003,  and 510 million and 463 million,  respectively,  for the nine months
     ended  September  30, 2004 and 2003.  For the three and nine month  periods
     ended  September 30, 2004, the average price realized per gallon of product
     sold  increased  to $0.99 and $0.94 per gallon,  respectively,  compared to
     $0.83 and $0.83 per gallon,  respectively,  for the same 2003 periods.  For
     the three and nine months ended September 30, 2004,  gross margin increased
     by $2.6 million and $1.2 million,  respectively,  when compared to the same
     2003 periods,  due to the increase in volumes sold and favorable variations
     in prices  resulting from the timing of purchases and sales.  For the three
     and nine months ended  September 30, 2004,  operating  income  increased by
     $2.7 million and $3.2 million, respectively, when compared to the same 2003
     periods,  due  to  the  higher  sales  volumes.   Product  inventories  are
     maintained at minimum  levels to meet  customers'  needs;  however,  market
     prices for petroleum products can fluctuate  significantly in short periods
     of time.

     Interest Expense

     For the nine months ended September 30, 2004, interest expense increased by
     $3.5 million,  when compared to the same 2003 period, due to KPP's May 2003
     refinancing  of variable  rate bank debt with $250 million of 5.875% senior
     unsecured  notes,  partially  offset by  overall  declines  in debt  levels
     outstanding due to KPP's March 2003 issuance of limited  partnership  units
     (see "Liquidity and Capital Resources").

     Income Taxes

     KPP's  partnership  operations  are not subject to federal or state  income
     taxes.  However,  certain KPP  operations  are conducted  through  separate
     taxable  wholly-owned U.S. and foreign corporate  subsidiaries.  The income
     tax expense for these  subsidiaries  was $1.3  million and $1.1 million for
     the three month  periods ended  September 30, 2004 and 2003,  respectively,
     and $3.1 million and $3.8 million for the nine months ended  September  30,
     2004 and 2003, respectively.

     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,  which was acquired on February 28, 2002, 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.

     Liquidity and Capital Resources

     Cash provided by  operations,  including  the  operations of KPP, was $98.6
     million and $115.3 million for the nine months ended September 30, 2004 and
     2003, respectively. The decrease in operating cash flows for the first nine
     months of 2004, when compared to the same 2003 period, was due primarily to
     changes in working  capital  components  resulting  from the timing of cash
     receipts and  disbursements,  primarily in the Company's  product marketing
     business.

     Capital expenditures  (related primarily to KPP) were $25.8 million for the
     nine months ended  September  30, 2004,  compared to $32.1  million for the
     same 2003  period.  Such  expenditures  included  $17.4  million  and $13.6
     million in maintenance and environmental  expenditures and $8.3 million and
     $18.5 million in expansion expenditures for the nine months ended September
     30, 2004 and 2003,  respectively.  The decrease in capital expenditures for
     the first nine months of 2004,  when  compared to the same 2003 period,  is
     the result of decreases in planned expansion capital  expenditures  related
     to KPP's  terminaling  business.  During  all  periods,  adequate  pipeline
     capacity  existed  to  accommodate  volume  growth,  and  the  expenditures
     required for  environmental  and safety  improvements were not, and are not
     expected to be,  significant.  KPP  anticipates  that capital  expenditures
     (including routine  maintenance and expansion  expenditures,  but excluding
     acquisitions) will total  approximately $30 million to $35 million in 2004.
     Future capital  expenditures of KPP,  however,  will depend on many factors
     beyond KPP's control,  including,  without  limitation,  demand for refined
     petroleum products and terminaling  services in KPP's market areas,  local,
     state and federal government regulations, fuel conservation efforts and the
     availability  of financing on acceptable  terms.  No assurance can be given
     that required  capital  expenditures  will not exceed  anticipated  amounts
     during  the  year,  or  thereafter,  or that KPP will have the  ability  to
     finance such expenditures through borrowings, or will choose to do so.

     The Company makes 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 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.  Cash distributions of $0.475 and $0.495
     per share with  respect to the first and second  quarters of 2004 were paid
     on May 14, 2004 and August 13, 2004,  respectively.  A cash distribution of
     $0.495 per share with respect to the third  quarter of 2004 was declared to
     holders  of record on October  31,  2004 and will be paid on  November  12,
     2004.

     The Company expects to fund future cash distributions with anticipated cash
     flows from KPP distributions. KPP expects to fund future cash distributions
     and  maintenance  capital  expenditures  with existing cash and anticipated
     cash flows from operations.  Expansionary capital expenditures are expected
     to be funded  through  additional  KPP bank  borrowings  and/or  future KPP
     public equity or debt offerings.

     The  Company has a credit  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,  has a variable  rate
     commitment  fee on  unused  amounts  and  contains  certain  financial  and
     operational covenants. At September 30, 2004, the Company was in compliance
     with all  covenants.  The credit  facility  is secured by 4.6  million  KPP
     limited  partnership  units. At September 30, 2004, $14.0 million was drawn
     on the credit facility.

     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  the  amount  of
     indebtedness  under  KPP's  bridge  facility.  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 the first quarter of 2003.

     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 September
     30, 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 September 30, 2004, $90.7 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
     transactions  with  affiliates  and,  absent  an  event  of  default,  such
     covenants do not restrict  distributions to the Company and other partners.
     At  September  30,  2004,  KPP was in  compliance  with all  covenants.  In
     connection  with the offering,  on May 8, 2003, KPP entered into a treasury
     lock  contract for the 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  Statement of Financial
     Accounting  Standards  ("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
     has been recorded as a component of accumulated other comprehensive  income
     and is being amortized, as interest expense, over the life of the debt.

     The  following is a schedule by period of the Company's  (including  KPP's)
     debt  repayment  obligations  and material  contractual  commitments  as of
     September 30, 2004:

<TABLE>
<CAPTION>


                                                          Less than                                       After
                                              Total        1 year       1 -3 years     4 -5 years        5 years
                                          ----------   ------------     -----------  -------------   --------------
                                                                      (in thousands)
<S>                                       <C>          <C>              <C>          <C>             <C>
     Debt:
       Revolving credit facility          $   14,000   $      -         $    -       $     14,000    $      -
       Revolving credit facility
          of subsidiary                        9,584          -               9,584         -               -
       KPP revolving credit facility          90,669          -              90,669         -               -
       KPP 7.75% senior unsecured
          notes                              250,000          -              -              -               250,000
       KPP 5.875% senior unsecured
          notes                              250,000          -              -              -               250,000
       Other KPP bank debt                    71,522          -              71,522         -               -
                                          ----------   ------------     -----------  ------------    --------------
          Debt subtotal                      685,775          -             171,775        14,000           500,000
                                          ----------   ------------     -----------  ------------    --------------
     Contractual commitments:
       Operating leases, primarily KPP        16,478          5,696           9,424         1,075               283
                                          ----------   ------------     -----------  ------------    --------------
          Contractual commitments
              subtotal                        16,478          5,696           9,424         1,075               283
                                          ----------   ------------     -----------  ------------    --------------
          Total                           $  702,253   $      5,696     $   181,199  $     15,075    $      500,283
                                          ==========   ============     ===========  ============    ==============
</TABLE>

     Additional information relative to sources and uses of cash is presented in
     the consolidated financial statements included in this report.

     Off-Balance Sheet Transactions

     The  Company  was not a party  to any  off-balance  sheet  transactions  at
     September 30, 2004.

     Critical Accounting Policies and 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.  Significant  accounting
     policies  are  presented  in  the  Notes  to  the  Consolidated   Financial
     Statements of the  Company's  Annual Report on Form 10-K for the year ended
     December 31,  2003.  Critical  accounting  policies are those that are most
     important to the portrayal of the Company's  financial position and results
     of  operations.   These  policies  require   management's  most  difficult,
     subjective or complex judgments, often employing the use of estimates about
     the effect of matters that are  inherently  uncertain.  The Company's  most
     critical  accounting  policies  pertain to impairment of KPP's property and
     equipment and environmental costs.

     The  carrying  value  of  KPP's  property  and  equipment  is  periodically
     evaluated using management's  estimates of undiscounted  future cash flows,
     or, in some cases, third-party appraisals,  as the basis for determining if
     impairment exists under the provisions of SFAS No. 144, "Accounting for the
     Impairment  or the  Disposal  of  Long-Lived  Assets",  which  was  adopted
     effective  January 1, 2002.  To the extent that  impairment is indicated to
     exist,  an impairment loss is recognized by KPP under SFAS No. 144 based on
     fair value.  The application of SFAS No. 144 did not have a material impact
     on the results of  operations  of KPP for the three and nine month  periods
     ended September 30, 2004 and 2003. However,  future evaluations of carrying
     value are  dependent  on many  factors,  several  of which are out of KPP's
     control,  including demand for refined  petroleum  products and terminaling
     services in KPP's market areas, and local,  state and federal  governmental
     regulations.  To the extent that such factors or conditions  change,  it is
     possible that future  impairments might occur,  which could have a material
     effect on the results of operations of KPP.

     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.  The  application  of KPP's
     environmental  accounting  policies  did not have a material  impact on the
     results of  operations  of KPP for the three and nine month  periods  ended
     September 30, 2004 and 2003.  Although KPP believes that its operations are
     in general compliance with applicable environmental  regulations,  risks of
     substantial  costs and liabilities are inherent in pipeline and terminaling
     operations.  Moreover,  it is  possible  that other  developments,  such as
     increasingly  strict   environmental  laws,   regulations  and  enforcement
     policies  thereunder,  and legal  claims for damages to property or persons
     resulting from the operations of KPP could result in substantial  costs and
     liabilities,  any of which  could have a material  effect on the results of
     operations of KPP.

     Recent Accounting Pronouncement

     In December 2003, the Financial  Accounting Standards Board ("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,"  which 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 did not have a  material  impact on the
     consolidated financial statements of the Company.

     Subsequent Event

     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 a fixed  cash price of $525
     million, or $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  approval  of the
     unitholders of Valero L.P. and the shareholders of the Company,  as well as
     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, which requires the approval of its
     unitholders.  The Company and KPP will become wholly owned  subsidiaries of
     Valero L.P.

     The above  description  of the Company's  definitive  agreement with Valero
     L.P. does not purport to be a complete statement of the parties' rights and
     obligations  under that agreement and the transactions  contemplated by it.
     The above  description  is  qualified  in its  entirety by reference to the
     definitive  agreement,  a copy of which is  attached  as Exhibit 2.1 to the
     Company's  Current  Report  on  Form  8-K  and is  incorporated  herein  by
     reference.





<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES



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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The principal market risks pursuant to this Item (i.e., the risk of loss arising
from adverse changes in market rates and prices) to which the Company is exposed
are interest  rates on the Company's and KPP's debt and  investment  portfolios,
fluctuations  in petroleum  product  prices on  inventories  held for resale and
fluctuations in foreign currency.

The Company's  investment  portfolio consists of cash equivalents;  accordingly,
the carrying amounts  approximate fair value. The Company's  investments are not
material to its financial  position or performance.  Assuming variable rate debt
of $185.8  million  (including  KPP's debt) at September 30, 2004, a one percent
increase  in  interest  rates  would  increase  annual net  interest  expense by
approximately $1.9 million.

The product marketing  business  purchases refined petroleum products for resale
as  motor  fuel,  bunker  fuel  and  sales to  commercial  interests.  Petroleum
inventories are generally held for short periods of time, not exceeding 90 days.
As the Company  and KPP do not engage in  derivative  transactions  to hedge the
value of the  inventory,  they are subject to market risk from changes in global
oil markets.

A portion of KPP's  terminaling  business is exposed to  fluctuations in foreign
currency  exchange rates.  Such  fluctuations were not significant for the three
and nine months ended September 30, 2004 or 2003.


Item 4. Controls and Procedures

The Company's principal executive officer and principal financial officer, after
evaluating,  as of  September  30,  2004,  the  effectiveness  of the  Company's
disclosure  controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities  Exchange Act of 1934),  have concluded that, as of such date,
the Company's  disclosure  controls and procedures are adequate and effective to
ensure that material  information  relating to the Company and its  consolidated
subsidiaries would be made known to them by others within those entities.

During the quarter ended  September 30, 2004,  there have been no changes in the
Company's  internal  controls  over  financial  reporting  that have  materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the  evaluation.  As a result,  no corrective  actions
were required or undertaken.


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES



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


                           Part II - Other Information


Item 6. Exhibits

     3.1  Amended  and  Restated   Limited   Liability   Company   Agreement  of
          Registrant,  filed as Exhibit 3.1 to the exhibits to Registrant's Form
          10-Q,  for the period  ended June 30,  2001,  which  exhibit is hereby
          incorporated by reference.

     10.1 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and Michael L. Rose.

     10.2 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and Rebecca Dorshorst.

     10.3 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and Max A. Elghandour.

     10.4 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and Robert A. McElroy.

     10.5 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and Mary F. Morgan.

     10.6 Change of Control Agreement,  dated as of August 31, 2004, between the
          Registrant and James L. Tidmore.

     31.1 Certification of Chief Executive  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated November 8, 2004.

     31.2 Certification of Chief Financial  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated November 8, 2004.

     32.1 Certification of Chief Executive  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated November 8, 2004.

     32.2 Certification of Chief Financial  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated November 8, 2004.



<PAGE>
                                    Signature

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

                                         KANEB SERVICES LLC
                                         (Registrant)


Date:   November 8, 2004                    //s//  HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Howard C. Wadsworth
                                        Vice President, Treasurer and Secretary
                                        (Principal Financial Officer and
                                        Duly Authorized Officer)


<PAGE>
                                                                    Exhibit 31.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, John R. Barnes, Chief Executive Officer of Kaneb Services LLC certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

     d)   disclosed  in this  quarterly  report any  change in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial  reporting to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Date:  November 8, 2004




                                                //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer


<PAGE>
                                                                    Exhibit 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Howard C. Wadsworth,  Chief  Financial  Officer of Kaneb Services LLC certify
that:

1.   I have reviewed this quarterly report on Form 10-Q of Kaneb Services LLC;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this quarterly report is being prepared;

     b)   [intentionally omitted pursuant to SEC Release No. 34-47986];

     c)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

     d)   disclosed  in this  quarterly  report any  change in the  registrant's
          internal  control over financial  reporting  that occurred  during the
          registrant's most recent fiscal quarter that has materially  affected,
          or  is  reasonably  likely  to  materially  affect,  the  registrant's
          internal control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial  reporting to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   all significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.



Date: November 8, 2004



                                           //s//  HOWARD C. WADSWORTH
                                         ---------------------------------------
                                         Howard C. Wadsworth
                                         Chief Financial Officer






<PAGE>
                                                                    Exhibit 32.1



                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002


The  undersigned,  being the Chief Executive  Officer of Kaneb Services LLC (the
"Company"),  hereby  certifies that, to his knowledge,  the Company's  Quarterly
Report on Form 10-Q for the quarterly  period ended  September  30, 2004,  filed
with the United States  Securities and Exchange  Commission  pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

This  written  statement  is being  furnished  to the  Securities  and  Exchange
Commission  as an exhibit to such Form 10-Q.  A signed  original of this written
statement  required by Section 906 has been  provided to Kaneb  Services LLC and
will be retained by Kaneb  Services  LLC and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.

Date:    November 8, 2004


                                               //s//  JOHN R. BARNES
                                           -------------------------------------
                                           John R. Barnes
                                           President and Chief Executive Officer



<PAGE>
                                                                    Exhibit 32.2


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
          PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002


The  undersigned,  being the Chief Financial  Officer of Kaneb Services LLC (the
"Company"),  hereby  certifies that, to his knowledge,  the Company's  Quarterly
Report on Form 10-Q for the quarterly  period ended  September  30, 2004,  filed
with the United States  Securities and Exchange  Commission  pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

This  written  statement  is being  furnished  to the  Securities  and  Exchange
Commission  as an exhibit to such Form 10-Q.  A signed  original of this written
statement  required by Section 906 has been  provided to Kaneb  Services LLC and
will be retained by Kaneb  Services  LLC and  furnished  to the  Securities  and
Exchange Commission or its staff upon request.

Date:    November 8, 2004


                                           //s//  HOWARD C. WADSWORTH
                                         ---------------------------------------
                                         Howard C. Wadsworth
                                         Vice President, Treasurer and Secretary
                                         (Chief Financial Officer)



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>kslexh101.txt
<DESCRIPTION>EXHIBIT 10.1 CHANGE OF CONTROL - M L ROSE
<TEXT>
                                                                    Exhibit 10.1

                               Kaneb Services LLC

                                 August 31, 2004

Mr. Michael L. Rose
3797 Park Place
Addison, TX 75001

Dear Mr. Rose:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 200% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

     If you are in agreement with the foregoing, please indicate your acceptance
by executing and  returning a copy of this letter to my  attention.  A duplicate
original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President



AGREED and ACCEPTED this 31st day of August, 2004:

   //s//  MICHAEL L. ROSE
-------------------------------------
Michael L. Rose


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>kslexh102.txt
<DESCRIPTION>EXHIBIT 10.2 CHANGE OF CONTROL R DORSHORST
<TEXT>
                                                                    Exhibit 10.2


                               Kaneb Services LLC

                                 August 31, 2004

Ms. Rebecca Dorshorst
280 W. Renner Road, #721
Richardson, TX 75080

Dear Ms. Dorshorst:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 100% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

If   you are in agreement with the foregoing, please indicate your acceptance by
     executing and returning a copy of this letter to my attention.  A duplicate
     original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President




AGREED and ACCEPTED this 31st day of August, 2004:

   //s//  REBECCA DORSHORST
-------------------------------------
Rebecca Dorshorst


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>kslexh103.txt
<DESCRIPTION>EXHIBIT 10.3 CHANGE OF CONTROL - M A ELGHANDOUR
<TEXT>
                                                                    Exhibit 10.3

                                Kaneb Services LLC

                                 August 31, 2004

Mr. Max A. Elghandour
420 Oak Ridge Drive
Fairview, TX 75069

Dear Mr. Elghandour:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 100% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

     If you are in agreement with the foregoing, please indicate your acceptance
by executing and  returning a copy of this letter to my  attention.  A duplicate
original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President




AGREED and ACCEPTED this 31st day of August, 2004:

  //s//  MAX A ELGHANDOUR
-------------------------------------
Max A. Elghandour


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>kslexh104.txt
<DESCRIPTION>EXHIBIT 10.4 CHANGE OF CONTROL - R A MCELROY
<TEXT>
                                                                    Exhibit 10.4

                                Kaneb Services LLC

                                 August 31, 2004

Mr. Robert A. McElroy
1811 Sparrows Ridge
Katy, TX 77450

Dear Mr. McElroy:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 100% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

     If you are in agreement with the foregoing, please indicate your acceptance
by executing and  returning a copy of this letter to my  attention.  A duplicate
original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President



AGREED and ACCEPTED this 31st day of August, 2004:

   //s//  ROBERT A. MCELROY
-------------------------------------
Robert A. McElroy


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>kslexh105.txt
<DESCRIPTION>EXHIBIT 10.5 CHANGE OF CONTROL - MARY F. MORGAN
<TEXT>
                                                                    Exhibit 10.5

                                Kaneb Services LLC

                                 August 31, 2004

Ms. Mary F. Morgan
280 W. Renner Rd.
Apt. 2911
Richardson, TX 75080

Dear Ms. Morgan:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 100% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

     If you are in agreement with the foregoing, please indicate your acceptance
by executing and  returning a copy of this letter to my  attention.  A duplicate
original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President



AGREED and ACCEPTED this 31st day of August, 2004:

   //s//  MARY F. MORGAN
-------------------------------------
Mary F. Morgan


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>kslexh106.txt
<DESCRIPTION>EXHIBIT 10.6 CHANGE OF CONTROL - JAMES L. TIDMORE
<TEXT>
                                                                    Exhibit 10.6

                                 Kaneb Services LLC

                                 August 31, 2004

Mr. James L. Tidmore
3205 Wrangler Road
Plano, TX 75074

Dear Mr. Tidmore:

     You are and have been a valuable  and key  employee of Kaneb  Services  LLC
(the "Company") and/or one or more of its Subsidiaries (as hereinafter defined).
The Company  recognizes  that an attempt to effect a major change in the control
of the Company could have a disturbing  and  disruptive  adverse effect upon you
and your employment  relationship.  In writing this letter to you, management of
the Company is endeavoring to foster and encourage your continued  attention and
dedication  to  your  assigned  duties  in the  face of  potentially  disturbing
circumstances.  Accordingly,  the  Company  agrees,  in  consideration  of  your
continued service, as follows:

     In the event a third party begins a tender or exchange  offer,  initiates a
proxy contest or takes other steps to effect a Change of Control (as hereinafter
defined) of the Company,  the Company will pay to an escrow account  established
at any appropriate banking or trust institution selected by the Company ("Bank")
an amount  equal to 100% of your  then-current  annual base  salary.  The escrow
account will be governed by a standard form of escrow agreement,  an actual copy
of which will be furnished to you upon its execution  and funding.  In addition,
the Company will pay into escrow any incentive  compensation  amounts accrued or
earned to which you are then  entitled  otherwise  than as a result of Change of
Control.  The amounts so  deposited  with Bank are  collectively  referred to as
Escrowed Funds.

     Thereafter, you agree that you will not voluntarily leave the employ of the
Company and all of its Subsidiaries and will perform the services of your office
until the third party has abandoned or terminated  efforts to effect a Change of
Control  or until a Change of  Control  has  occurred.  In the event a Change of
Control occurs,  and your employment by the Company and all of its  Subsidiaries
terminates,  voluntarily or involuntarily, for any reason, you shall be paid the
Escrowed Funds upon your written demand.  In the event such Change of Control is
supported  and endorsed by management  of the Company,  you agree,  upon written
request of the Board of  Directors of the  Company,  to assist,  for a period of
ninety (90) days from the date of Change of Control,  in the orderly  transition
of  management  of the Company,  provided the Company shall pay any expenses you
incur in connection with such assistance.

     For the purposes of this letter,  a "Change of Control"  shall be deemed to
have  taken  place if:  (i) a third  person,  including  a "group" as defined in
Section  13  (d)  (3) of the  Securities  Exchange  Act  of  1934,  becomes  the
beneficial  owner of Member  Interests  (as  defined  in the  Limited  Liability
Company  Agreement of Kaneb  Services LLC) of the Company  having 20% or more of
the total  number of votes that may be cast for the election of directors of the
Company;  or (ii) as a result  of, or in  connection  with,  any cash  tender or
exchange offer, merger or other business combination,  restructure or proceeding
under  the  bankruptcy  laws,  sale or  assets  or  contested  election,  or any
combination of the foregoing transactions,  the persons who are directors of the
Company  before the  transaction  cease to constitute a majority of the Board of
Directors  of the  Company  or any  successor  to the  Company;  or  (iii)  as a
consequence  of a tender or  exchange  offer or a proxy  contest or third  party
consent  solicitation,  a majority of the fair market value of the assets of the
Company are distributed to the Company's securities holders.

     For the purposes of this letter, a "Subsidiary"  means, with respect to the
Company,  (i) a  corporation  a majority of whose  voting  stock is at the time,
directly  or  indirectly,  owned by the  Company,  by one or more  wholly  owned
subsidiaries  of the  Company or by the  Company  and one or more  wholly  owned
subsidiaries of the Company, (ii) a partnership in which the Company or a wholly
owned subsidiary of the Company is, at the date of  determination,  a general or
limited partner of such partnership, but only if the Company or its wholly owned
subsidiary  is entitled to receive more than fifty percent of the assets of such
partnership  upon its  dissolution  or (iii)  any  other  entity  (other  than a
corporation or partnership) in which the Company,  a wholly owned  subsidiary of
the  Company or the Company and one or more  wholly  owned  subsidiaries  of the
Company,  directly or indirectly,  at the date of determination thereof, has (x)
at least a majority  ownership  interest or (y) the power to elect or direct the
election of a majority of the directors or other governing body of such entity.

     The Company may withdraw the Escrowed  Funds held in the escrow  account if
one year elapses from the date of deposit by the Company of said Escrowed  Funds
into the escrow  account  and if no written  demand for payment has been made by
you during said one year period.  If, prior to the  expiration  of said one year
period,  there shall occur  another event of the type set forth in the preceding
paragraph,  the Company  will not be required to make an  additional  deposit of
Escrowed  Funds,  but the one year period  described  herein  shall be deemed to
commence on the date of the occurrence of the last such event; provided however,
if a period of six (6) months has expired  from the date of the initial  deposit
of Escrowed Funds, any incentive compensation to which you are entitled shall be
recomputed pursuant to the terms of the applicable  incentive  compensation plan
and an appropriate  deposit or withdrawal  adjustment based upon such recomputed
incentive compensation shall be made.

     The  Company  shall  pay the usual and  customary  charges  of the Bank for
acting as escrow  agent.  The Company will be entitled to the payment of any and
all interest and other income  earned by the Bank through the  investment of the
Escrowed Funds.

     The obligations of the Company  contained  herein shall be binding upon the
Company and upon its successors and assigns. Your rights to receive Escrow Funds
are personal to you and may not be assigned.

     If your  employment  with the  Company and all of its  Subsidiaries  should
terminate for any reason prior to the occurrence of the Change of Control events
described  above,  this agreement  shall  terminate and the Company will have no
further obligation to you hereunder.

     If you are in agreement with the foregoing, please indicate your acceptance
by executing and  returning a copy of this letter to my  attention.  A duplicate
original is enclosed for your files.

                                     Very truly yours,

                                     KANEB SERVICES LLC



                                     By:     //s// HOWARD C. WADSWORTH
                                        ----------------------------------------
                                        Name:  Howard C. Wadsworth
                                        Title:    Vice President



AGREED and ACCEPTED this 31st day of August, 2004:

   //s//  JAMES L. TIDMORE
-------------------------------------
James L. Tidmore


</TEXT>
</DOCUMENT>
</SUBMISSION>
