

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

                                    FORM 10-K
(Mark One)

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

                   For the fiscal year ended December 31, 2004

                                       OR

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

                        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                                (IRS Employer
incorporation or organization)                               Identification No.)

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

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

           Securities registered pursuant to Section 12(b) of the Act:

     Title of each class               Name of each exchange on which registered
------------------------------         -----------------------------------------
           Shares                               New York Stock Exchange

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


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

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of  Regulation  S-K  (Subsection  229.405 of this  chapter) is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.

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

     Aggregate market value of the voting shares held by  non-affiliates  of the
registrant: $309,666,530. This figure is estimated as of June 30, 2004, at which
date the closing price of the registrant's shares on the New York Stock Exchange
was  $28.21  per share and  assumes  that only  officers  and  directors  of the
registrant were affiliates of the registrant.

     Number  of  Shares  of  the  Registrant   outstanding  at  March  4,  2005:
11,696,129.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is filed herewith.



<PAGE>
                                     PART I


Item 1. Business


GENERAL

     Kaneb Services LLC (the "Company") is a limited liability company organized
under the laws of the State of  Delaware.  The Company  manages  and  operates a
refined  petroleum  products and  anhydrous  ammonia  pipeline  business and the
terminaling  of  petroleum  products  and  specialty  liquids  terminal  storage
business  through the general partner  interest owned by one of its subsidiaries
in Kaneb Pipe Line Partners, L.P., a Delaware limited partnership ("KPP"), which
in turn owns those systems and facilities through its subsidiaries.

     KPP is a separate public entity whose limited partner units are traded over
the New York Stock Exchange (NYSE:  KPP). The Company's wholly owned subsidiary,
Kaneb Pipe Line Company LLC, a Delaware limited liability company, ("KPL"), owns
the general  partner  interest and 5.1 million limited partner units of KPP. For
financial  statement purposes,  the assets,  liabilities and earnings of KPP are
included in the Company's  consolidated  financial  statements,  with the public
unitholders' interest reflected as interest of outside non-controlling  partners
in KPP. For  purposes of this report,  the  business,  operations,  revenues and
other  information  about KPP are presented as a whole,  even though the Company
does  not,  directly  or  indirectly,  own 100% of KPP.  The  Company's  product
marketing services are conducted by Martin Oil LLC, a Delaware limited liability
company ("Martin"),  a 100% owned subsidiary of KPL and, since KPP's acquisition
of Statia (see  "Liquidity  and Capital  Resources"),  by Statia which  delivers
bunker fuel to ships in the  Caribbean  and Nova  Scotia,  Canada and sells bulk
petroleum  products to various commercial  interests.  Martin provides wholesale
motor fuel  marketing  services  throughout  the Great Lakes and Rocky  Mountain
regions.

     On October  31,  2004,  Valero  L.P.  agreed to acquire by merger (the "KSL
Merger") all of the outstanding common shares of the Company for cash. Under the
terms  of that  agreement,  Valero  L.P.  is  offering  to  purchase  all of the
outstanding shares of the Company at $43.31 per share.

     In a separate  definitive  agreement,  on October 31, 2004, Valero L.P. and
KPP agreed to merge (the "KPP Merger"). Under the terms of that agreement,  each
holder of units of limited partnership interests in KPP will receive a number of
Valero L.P.  common units based on an exchange  ratio that  fluctuates  within a
fixed  range to provide  $61.50 in value of Valero  L.P.  units for each unit of
KPP. The actual  exchange ratio will be determined at the time of the closing of
the proposed merger and is subject to a fixed value collar of plus or minus five
percent of Valero L.P.'s per unit price of $57.25 as of October 7, 2004.  Should
Valero L.P.'s per unit price fall below $54.39 per unit, the exchange ratio will
remain fixed at 1.1307 Valero L.P. units for each unit of KPP. Likewise,  should
Valero  L.P.'s per unit price exceed  $60.11 per unit,  the exchange  ratio will
remain fixed at 1.0231 Valero L.P. units for each unit of KPP.

     The  completion  of the KSL Merger is subject to the  customary  regulatory
approvals  including those under the  Hart-Scott-Rodino  Antitrust  Improvements
Act. The  completion  of the KSL Merger is also subject to completion of the KPP
Merger.  All required  shareholder and unitholder  approvals have been obtained.
Upon completion of the mergers,  the general partner of the combined partnership
will be owned by affiliates of Valero Energy Corporation and the Company and KPP
will become wholly owned subsidiaries of Valero L.P.


PIPELINE BUSINESS

Introduction

     KPP's pipeline business consists primarily of the transportation of refined
petroleum products as a common carrier in Kansas,  Nebraska, Iowa, South Dakota,
North  Dakota,  Colorado,  Wyoming and  Minnesota.  On December  24,  2002,  KPP
acquired  the  Northern  Great Plains  Product  System from Tesoro  Refining and
Marketing Company for approximately  $100 million.  This product pipeline system
is now referred to as KPP's North Pipeline.  On November 1, 2002, KPP acquired a
2,000 mile anhydrous  ammonia pipeline from Koch Pipeline  Company,  LP and Koch
Fertilizer  Storage and Terminal Company for approximately  $139 million.  KPP's
three refined  petroleum  products  pipelines and the anhydrous ammonia pipeline
are described below.

East Pipeline

     Construction  of the  East  Pipeline  commenced  in 1953  with a line  from
southern Kansas to Geneva, Nebraska.  During subsequent years, the East Pipeline
was extended northward to its present terminus at Jamestown,  North Dakota, west
to North Platte,  Nebraska and east into the State of Iowa.  The East  Pipeline,
which moves refined products from south to north, now consists of 2,090 miles of
pipeline ranging in size from 6 inches to 16 inches.

     The East  Pipeline  system also  includes 17 product  terminals  in Kansas,
Nebraska,  Iowa,  South Dakota and North Dakota with total  storage  capacity of
approximately  3.5 million barrels and an additional 23 product tanks with total
storage   capacity  of  approximately   1,082,555   barrels  at  its  tank  farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump  stations in Kansas and 38 booster  pump  stations  throughout  the system.
Additionally,  the system maintains various office and warehouse facilities, and
an extensive quality control laboratory.

     The East Pipeline transports refined petroleum products, including propane,
received from refineries in southeast Kansas and other  connecting  pipelines to
its terminals along the system and to receiving pipeline  connections in Kansas.
Shippers on the East Pipeline obtain refined petroleum  products from refineries
connected to the East Pipeline or through other pipelines  directly connected to
the pipeline system. Five connecting  pipelines can deliver propane for shipment
through  the East  Pipeline  from gas  processing  plants in Texas,  New Mexico,
Oklahoma and Kansas.

     Much of the refined petroleum  products delivered through the East Pipeline
are  ultimately  used as  fuel  for  railroads  or in  agricultural  operations,
including  fuel  for  farm  equipment,   irrigation  systems,  trucks  used  for
transporting  crops and crop drying  facilities.  Demand for  refined  petroleum
products for  agricultural  use, and the relative mix of products  required,  is
affected  by weather  conditions  in the  markets  served by the East  Pipeline.
Government  agricultural  policies and crop prices also affect the  agricultural
sector.  Although  periods  of  drought  suppress  agricultural  demand for some
refined petroleum products,  particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.

     The mix of refined petroleum  products  delivered varies  seasonally,  with
gasoline  demand  peaking in early  summer,  diesel fuel demand  peaking in late
summer and propane demand higher in the fall. In addition, weather conditions in
the areas served by the East Pipeline  affect both the demand for and the mix of
the refined petroleum  products  delivered  through the East Pipeline,  although
historically  any impact on total volumes shipped has been  short-term.  Tariffs
charged to shippers for  transportation of products do not vary according to the
type of product delivered.

West Pipeline

     KPP acquired the West Pipeline in February 1995,  increasing KPP's pipeline
business in South Dakota and  expanding it into Wyoming and  Colorado.  The West
Pipeline  system  includes  approximately  550  miles of  pipeline  in  Wyoming,
Colorado and South  Dakota,  four  truck-loading  terminals  and  numerous  pump
stations  situated along the system.  The system's four product terminals have a
total storage capacity of over 1.7 million barrels.

     The West Pipeline  originates  near Casper,  Wyoming,  where it serves as a
connecting  point  with  Sinclair's  Little  America  Refinery  and the  Seminoe
Pipeline which transports  product from Billings,  Montana area  refineries.  At
Douglas,  Wyoming,  a 6 inch  pipeline  branches  off to serve KPP's Rapid City,
South Dakota  terminal  approximately  190 miles away.  The 6 inch pipeline also
receives product from Wyoming  Refining's  pipeline at a connection located near
the  Wyoming/South  Dakota  border.  From  Douglas,   KPP's  pipeline  continues
southward  through a  delivery  point at the  Burlington  Northern  junction  to
terminals at  Cheyenne,  Wyoming,  the Denver  metropolitan  area and  Fountain,
Colorado.

     The West Pipeline  system  parallels  KPP's East Pipeline to the west.  The
East Pipeline's North Platte line terminates in western Nebraska,  approximately
200 miles  east of the West  Pipeline's  Cheyenne,  Wyoming  terminal.  The West
Pipeline serves Denver and other eastern  Colorado markets and supplies jet fuel
to Ellsworth Air Force Base at Rapid City, South Dakota, as compared to the East
Pipeline's largely agricultural service area. The West Pipeline has a relatively
small number of shippers  who, with few  exceptions,  are also shippers on KPP's
East Pipeline system.

North Pipeline

     The North  Pipeline,  acquired by KPP in December  2002,  runs from west to
east  approximately  440  miles  from its  origin  at the  Tesoro  Refining  and
Marketing Company's Mandan, North Dakota refinery to the Minneapolis,  Minnesota
area. It has four product terminals, one in North Dakota and three in Minnesota,
with a total tankage capacity of 1.3 million barrels. The North Pipeline crosses
KPP's East  Pipeline  near  Jamestown,  North Dakota where the two pipelines are
connected.  The North Pipeline is currently  supplied  exclusively by the Mandan
refinery,  however, it is capable of delivering or receiving products to or from
the East Pipeline.

Ammonia Pipeline

     In November 2002, KPP acquired the anhydrous ammonia pipeline (the "Ammonia
Pipeline")  from two Koch  companies.  Anhydrous  ammonia is  primarily  used as
agricultural  fertilizer  through  direct  application.  Other  uses  are  as  a
component of various types of dry  fertilizer as well as use as a cleaning agent
in power plant  scrubbers.  The 2,000 mile pipeline  originates in the Louisiana
delta area  where it has access to three  marine  terminals  on the  Mississippi
River.  It moves north through  Louisiana and Arkansas into  Missouri,  where at
Hermann,  Missouri,  one branch splits going east into Illinois and Indiana, and
the other branch  continues north into Iowa and then turning west into Nebraska.
KPP acquired a storage and loading terminal near Hermann,  Missouri a portion of
which was leased back to Koch  Nitrogen.  The Ammonia  Pipeline is  connected to
twenty-two  other third party owned  terminals  and also has several  industrial
facility delivery locations.  Product is primarily supplied to the pipeline from
plants in Louisiana  and  foreign-source  product  delivered  through the marine
terminals.

Other Systems

     KPP also owns three single-use  pipelines,  located near Umatilla,  Oregon;
Rawlins, Wyoming and Pasco, Washington,  each of which supplies diesel fuel to a
railroad fueling facility.  The Oregon and Washington lines are fully automated,
however the Wyoming line utilizes a coordinated  startup  procedure  between the
refinery and the  railroad.  For the year ended  December 31, 2004,  these three
systems  combined  transported  a total of 3.8 million  barrels of diesel  fuel,
representing an aggregate of $1.55 million in revenues.

Pipelines Products and Activities

     The revenues for the East Pipeline, West Pipeline, North Pipeline,  Ammonia
Pipeline and Other  Pipelines  (collectively,  the  "Pipelines")  are based upon
volumes and distances of product shipped. The following table reflects the total
volume,  barrel miles of refined petroleum  products shipped and total operating
revenues earned by the Pipelines for each of the periods indicated, but does not
include any  information  on the  Ammonia  Pipeline.  During 2004 and 2003,  the
Ammonia Pipeline  shipped  1,122,618 tons and 1,156,549 tons,  respectively,  of
ammonia generating $19.6 million and $21.3 million, respectively, of revenue.

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                               ------------------------------------------------------------------------------------
                                    2004             2003              2002             2001              2000
                               -------------     -------------    --------------    -------------    --------------
<S>                            <C>               <C>              <C>               <C>              <C>
Volume (1)..................         104,344           102,928            89,780           92,116            89,192
Barrel miles (2)............          22,243            21,327            18,275           18,567            17,843
Revenues (3)................        $100,241           $98,329           $78,240          $74,976           $70,685

</TABLE>
(1)  Volumes are expressed in thousands of barrels of refined petroleum product.

(2)  Barrel  miles are shown in  millions.  A barrel mile is the movement of one
     barrel of refined petroleum product one mile.

(3)  Revenues are expressed in thousands of dollars.

     The  following  table sets forth  volumes of propane and  various  types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              (thousands of barrels)
                               ------------------------------------------------------------------------------------
                                    2004             2003              2002             2001              2000
                               -------------     -------------    --------------    -------------    --------------
<S>                            <C>               <C>               <C>              <C>               <C>
Gasoline....................          54,745            53,205            45,106           46,268            44,215
Diesel and fuel oil.........          46,223            46,072            40,450           42,354            41,087
Propane.....................           3,376             3,651             4,224            3,494             3,890
                               -------------     -------------    --------------    -------------    --------------
Total.......................         104,344           102,928            89,780           92,116            89,192
                               =============     =============    ==============    =============    ==============
</TABLE>

     Diesel and fuel oil are used in farm machinery and equipment, over-the-road
transportation, railroad fueling and residential fuel oil. Gasoline is primarily
used in  over-the-road  transportation  and  propane  is used for  crop  drying,
residential  heating  and to  power  irrigation  equipment.  The mix of  refined
petroleum products delivered varies seasonally,  with gasoline demand peaking in
early  summer,  diesel  fuel demand  peaking in late  summer and propane  demand
higher in the fall. In addition,  weather  conditions in the areas served by the
East  Pipeline  affect both the demand for and the mix of the refined  petroleum
products delivered through the East Pipeline,  although historically any overall
impact on the total  volumes  shipped has been  short-term.  Tariffs  charged to
shippers  for  transportation  of products do not vary  according to the type of
product  delivered.  Demand  on  the  North  Pipeline  is  mainly  of  the  same
agricultural  nature as that of the East  Pipeline  except  for the  Minneapolis
terminal area which is more metropolitan.

Maintenance and Monitoring

     The  Pipelines  have  been  constructed  and  are  maintained  in a  manner
consistent  with  applicable  federal,  state  and local  laws and  regulations,
standards  prescribed by the American Petroleum  Institute and accepted industry
practice.   Further,  protective  measures  are  taken  and  routine  preventive
maintenance  is  performed  on the  Pipelines  in order to prolong  their useful
lives. Such measures include cathodic  protection to prevent external corrosion,
inhibitors  to  prevent  internal  corrosion  and  periodic  inspection  of  the
Pipelines.  Additionally,  the Pipelines  are patrolled at regular  intervals to
identify equipment or activities by third parties that, if left unchecked, could
result in encroachment upon the Pipelines'  rights-of-way and possible damage to
the Pipelines.

     KPP uses  Supervisory  Control  and  Data  Acquisition  remote  supervisory
control software programs to continuously monitor and control the Pipelines from
the Wichita, Kansas headquarters and from the Roseville,  Minnesota terminal for
the North Pipeline.  The system monitors  quantities of products injected in and
delivered  through  the  Pipelines  and  automatically  signals  the  Wichita or
Roseville  personnel  upon  deviations  from  normal  operations  that  requires
attention.

Pipeline Operations

     For pipeline  operations,  integrity management and public safety, the East
Pipeline,  the West Pipeline,  the North  Pipeline and the Ammonia  Pipeline are
subject  to  federal  regulation  by one or more of the  following  governmental
agencies or laws: the Federal Energy Regulatory Commission ("FERC"), the Surface
Transportation  Board  (the  "STB"),  the  Department  of  Transportation,   the
Environmental  Protection Agency,  and the Homeland Security Act.  Additionally,
the  operations  and integrity of the  Pipelines  are subject to the  respective
state jurisdictions along the route of the systems. See "Regulation."

     Except for the three single-use  pipelines and certain ethanol  facilities,
all of KPP's pipeline  operations  constitute common carrier  operations and are
subject to federal  tariff  regulation.  In May 1998,  KPP was authorized by the
FERC to adopt market-based rates in approximately one-half of its markets on the
East  and  West  systems.   Common  carrier   activities  are  those  for  which
transportation  through KPP's Pipelines is available at published tariffs filed,
in the case of interstate petroleum product shipments,  with the FERC or, in the
case of intrastate petroleum product shipments in Kansas, Colorado,  Wyoming and
North  Dakota,  with the  relevant  state  authority,  to any shipper of refined
petroleum  products who requests such services and satisfies the  conditions and
specifications  for  transportation.  The Ammonia Pipeline is subject to federal
regulation by the STB, rather than the FERC.

     In general,  a shipper on one of KPP's refined petroleum products pipelines
delivers  products to the pipeline from refineries or third party pipelines that
connect to the Pipelines.  The Pipelines' refined petroleum products  operations
also include 25 truck-loading terminals through which refined petroleum products
are delivered to storage tanks and then loaded into petroleum  transport trucks.
Five of the 25 terminals  also receive  propane into storage tanks and then load
it into transport  trucks.  The Ammonia Pipeline receives product from anhydrous
ammonia plants or from the marine  terminals for imported  product.  Tariffs for
transportation  are  charged  to  shippers  based upon  transportation  from the
origination  point on the pipeline to the point of  delivery.  Such tariffs also
include  charges  for  terminaling  and  storage of  product  at the  Pipeline's
terminals.  Pipelines are generally the lowest cost method for  intermediate and
long-haul overland transportation of refined petroleum products.

     Each shipper  transporting  product on a pipeline is required to supply KPP
with a notice of shipment  indicating sources of products and destinations.  All
shipments are tested or receive  refinery  certifications  to ensure  compliance
with KPP's  specifications.  Petroleum  shippers are  generally  invoiced by KPP
immediately upon the product entering one of the Petroleum Pipelines.

     The following  table shows the number of tanks owned by KPP at each refined
petroleum  product terminal  location at December 31, 2004, the storage capacity
in barrels and truck capacity of each terminal location.
<TABLE>
<CAPTION>

                Location of                     Number                 Tankage          Truck
                  Terminals                    of Tanks               Capacity       Capacity(a)
              ------------------------         ---------             ----------      -----------
<S>           <C>                              <C>                  <C>             <C>
              Colorado:
                    Dupont                         18                  692,000              6
                    Fountain                       13                  391,000              5
              Iowa:
                    LeMars                          9                  103,000              2
                    Milford(b)                     11                  172,000              2
                    Rock Rapids                    12                  366,000              2
              Kansas:
                    Concordia(c)                    7                   79,000              2
                    Hutchinson                      9                  161,000              2
                    Salina                         10                   98,000              3
              Minnesota
                    Moorhead                       17                  498,000              3
                  Sauk Centre                      11                  114,000              2
                  Roseville                        13                  594,000              5
              Nebraska:
                    Columbus(d)                    12                  191,000              2
                    Geneva                         39                  678,000              6
                    Norfolk                        16                  187,000              4
                    North Platte                   22                  197,000              5
                    Osceola                         8                   79,000              2
              North Dakota:
                    Jamestown(e)                   19                  315,000              4
              South Dakota:
                    Aberdeen                       12                  181,000              2
                    Mitchell                        8                   72,000              2
                    Rapid City                     13                  256,000              3
                    Sioux Falls                     9                  381,000              2
                    Wolsey                         21                  149,000              4
                    Yankton                        25                  246,000              4
              Wyoming:
                    Cheyenne                       15                  345,000              2
                                               ------              -----------
              Totals                              349                6,545,000
                                               ======              ===========
</TABLE>

(a)  Number of trucks that may be simultaneously loaded.

(b)  This  terminal  is situated  on land  leased  through  August 7, 2007 at an
     annual  rental of  $2,400.  KPP has the  right to renew the lease  upon its
     expiration  for an  additional  term of 20 years at the same annual  rental
     rate.

(c)  This terminal is situated on land leased  through the year 2060 for a total
     rental of $2,000.

(d)  Also loads rail tank cars.

(e)  Two terminals.

     The East Pipeline also has intermediate storage facilities consisting of 12
storage tanks at El Dorado,  Kansas and 10 storage  tanks at McPherson,  Kansas,
with  aggregate  capacities  of  approximately   548,555  and  534,000  barrels,
respectively.   During  2004,  approximately  57.3%,  87.6%  and  90.0%  of  the
deliveries of the East,  the West and the North  Pipelines,  respectively,  were
made through their terminals,  and the remainder of the respective deliveries of
such lines were made to other pipelines and customer owned storage tanks.

     Storage of product at terminals pending delivery is considered by KPP to be
an integral part of the petroleum  product  delivery  service of the  pipelines.
Shippers  generally  store  refined  petroleum  products for less than one week.
Ancillary  services,   including  injection  of  shipper-furnished  and  generic
additives, are available at each terminal.

     KPP owns 1,500  tons of  ammonia  storage  at the  terminal  near  Hermann,
Missouri. One half of the capacity is leased to Koch Nitrogen.


Demand for and Sources of Refined Petroleum Products

     KPP's  pipeline  business  depends in large part on the level of demand for
refined  petroleum  products  in the  markets  served by the  pipelines  and the
ability and willingness of refiners and marketers having access to the pipelines
to supply such demand by deliveries through the pipelines.

     Much of the refined petroleum  products delivered through the East Pipeline
and the western three terminals on the North Pipeline is ultimately used as fuel
for railroads or in agricultural operations,  including fuel for farm equipment,
irrigation  systems,   trucks  used  for  transporting  crops  and  crop  drying
facilities.  Demand for refined petroleum products for agricultural use, and the
relative  mix of products  required,  is affected by weather  conditions  in the
markets served by the East and North Pipelines.  The agricultural sector is also
affected by government  agricultural policies and crop prices.  Although periods
of drought suppress  agricultural  demand for some refined  petroleum  products,
particularly  those used for  fueling  farm  equipment,  the demand for fuel for
irrigation systems often increases during such times.

     While there is some agricultural  demand for the refined petroleum products
delivered through the West Pipeline,  as well as military jet fuel volumes, most
of the demand is  centered  in the Denver and  Colorado  Springs  area.  Because
demand on the West  Pipeline  and the  Minneapolis  area  terminal  of the North
Pipeline is significantly  weighted toward urban and suburban areas, the product
mix on the West  Pipeline  and that  terminal  includes a  substantially  higher
percentage of gasoline than the product mix on the East Pipeline.

     KPP's refined petroleum products pipelines are also dependent upon adequate
levels of production of refined  petroleum  products by refineries  connected to
the Pipelines,  directly or through connecting pipelines. The refineries are, in
turn,  dependent  upon  adequate  supplies of suitable  grades of crude oil. The
refineries  connected  directly  to the  East  Pipeline  obtain  crude  oil from
producing fields located primarily in Kansas, Oklahoma and Texas, and, to a much
lesser extent, from other domestic or foreign sources.  In addition,  refineries
in Kansas,  Oklahoma and Texas are also  connected to the East Pipeline  through
other  pipelines.  These  refineries  obtain their  supplies of crude oil from a
variety of sources.  The refineries  connected directly to the West Pipeline are
located in Casper and  Cheyenne,  Wyoming and Denver,  Colorado.  Refineries  in
Billings and Laurel,  Montana are connected to the West  Pipeline  through other
pipelines.  These  refineries  obtain their supplies of crude oil primarily from
Rocky Mountain  sources.  The North Pipeline is heavily  dependent on the Tesoro
Mandan refinery which  primarily  operates on North Dakota crude oil although it
has the ability to access other crude oils.  If  operations  at any one refinery
were discontinued, KPP believes (assuming unchanged demand for refined petroleum
products in markets served by the refined petroleum products pipelines) that the
effects  thereof would be short-term in nature and KPP's  business  would not be
materially  adversely  affected  over the long term  because  such  discontinued
production could be replaced by other refineries or by other sources.

     The majority of the refined petroleum product  transported through the East
Pipeline in 2004 was produced at three  refineries  located at McPherson  and El
Dorado,  Kansas  and  Ponca  City,  Oklahoma,   and  operated  by  the  National
Cooperative Refining Association ("NCRA"),  Frontier Refining and ConocoPhillips
Company,  respectively.  The NCRA and Frontier Refining refineries are connected
directly to the East Pipeline.  The McPherson,  Kansas refinery operated by NCRA
accounted for  approximately  31.8% of the total amount of product  shipped over
the East  Pipeline in 2004.  The East  Pipeline  also has direct access by third
party  pipelines to four other  refineries in Kansas,  Oklahoma and Texas and to
Gulf Coast  supplies of  products  through  connecting  pipelines  that  receive
products from pipelines originating on the Gulf Coast. Five connecting pipelines
can deliver propane from gas processing  plants in Texas,  New Mexico,  Oklahoma
and Kansas to the East Pipeline for shipment.

     The majority of the refined petroleum products transported through the West
Pipeline is produced at the Frontier Refinery located at Cheyenne,  Wyoming, the
Valero Energy Corporation and Suncor Refineries located at Denver, Colorado, and
Sinclair's Little America Refinery located at Casper,  Wyoming, all of which are
connected  directly to the West  Pipeline.  The West Pipeline also has access to
three Billings, Montana, area refineries through a connecting pipeline.

Demand for and Sources of Anhydrous Ammonia

     KPP's Ammonia Pipeline business depends on overall nitrogen fertilizer use,
management  practice,  the level of demand for direct  application  of anhydrous
ammonia as a fertilizer for crop production ("Direct  Application" or "DA"), the
weather (DA is not  effective if the ground is too wet or too dry) and the price
of natural gas (the primary component of anhydrous ammonia).

     The Ammonia Pipeline is the largest of three anhydrous ammonia pipelines in
the United States and the only one that has the capability of receiving  foreign
production directly into the system and transporting  anhydrous ammonia into the
nation's corn belt. This ability to receive either domestic or foreign anhydrous
ammonia is a competitive  advantage  over the next largest  ammonia system which
originates in Oklahoma and Texas, then extends into Iowa.

     Corn producers have several fertilizer  alternatives such as liquid, dry or
Direct  Application.  Liquid and dry  fertilizers are both upgrades of anhydrous
ammonia  and  therefore  are  generally  more costly but are less  sensitive  to
weather conditions during  application.  DA is the cheapest method of fertilizer
application but cannot be applied if the ground is too wet or extremely dry.

Principal Customers

     KPP had a total  of  approximately  48  shippers  in  2004.  The  principal
shippers include integrated oil companies, refining companies, farm cooperatives
and a railroad. Transportation revenues attributable to the top 10 shippers were
$90.4 million, $86.6 million and $61.5 million, which accounted for 75%, 72% and
74% of total  Pipeline  revenues  shipped for each of the years  2004,  2003 and
2002, respectively.

Competition and Business Considerations

     The East and North Pipelines' major competitor is an independent, regulated
common  carrier  pipeline  system  owned by Magellan  Midstream  Partners,  L.P.
("Magellan"), formerly the Williams Companies, Inc., that operates approximately
100 miles east of and parallel to the East  Pipeline  and in close  proximity to
the North Pipeline. The Magellan system is a substantially more extensive system
than the East and North Pipelines.  Competition with Magellan is based primarily
on  transportation  charges,  quality of customer  service and  proximity to end
users,  although  refined product pricing at either the origin or terminal point
on  a  pipeline  may  outweigh  transportation  costs.  Seventeen  of  the  East
Pipeline's and all four of the North Pipeline's  delivery  terminals are located
within 2 to 145 miles of, and in direct competition with Magellan's terminals.

     The West Pipeline competes with the truck-loading racks of the Cheyenne and
Denver  refineries and the Denver  terminals of the Chase  Terminal  Company and
ConocoPhillips.  Valero L.P. terminals in Denver and Colorado Springs, connected
to a Valero  L.P.  pipeline  from  their  Texas  Panhandle  Refinery,  are major
competitors to the West Pipeline's Denver and Fountain Terminals, respectively.

     Because pipelines are generally the lowest cost method for intermediate and
long-haul  movement  of  refined  petroleum  products,  KPP's  more  significant
competitors are common carrier and  proprietary  pipelines owned and operated by
major integrated and large  independent oil companies and other companies in the
areas where KPP delivers products.  Competition between common carrier pipelines
is based primarily on  transportation  charges,  quality of customer service and
proximity to end users.  KPP believes  high capital  costs,  tariff  regulation,
environmental  considerations  and problems in acquiring  rights-of-way  make it
unlikely that other competing  pipeline systems  comparable in size and scope to
KPP's Pipelines will be built in the near future,  provided KPP's Pipelines have
available  capacity  to satisfy  demand  and its  tariffs  remain at  reasonable
levels.

     The costs associated with transporting  products from a loading terminal to
end  users  limit  the  geographic  size  of  the  market  that  can  be  served
economically  by any  terminal.  Transportation  to end users  from the  loading
terminals of KPP is conducted  principally  by trucking  operations of unrelated
third parties.  Trucks may  competitively  deliver products in some of the areas
served  by  KPP's  Pipelines.  However,  trucking  costs  render  that  mode  of
transportation not competitive for longer hauls or larger volumes.  KPP does not
believe  that trucks are, or will be,  effective  competition  to its  long-haul
volumes over the long term.

     Competitors  of the Ammonia  Pipeline  include  another  anhydrous  ammonia
pipeline  which  originates in Oklahoma and Texas,  and  terminates in Iowa. The
competitor  pipeline  has the same DA demand and  weather  issues as the Ammonia
Pipeline but is restricted to domestically  produced anhydrous ammonia.  Midwest
production barges and railroads  represent other forms of direct  competition to
the pipeline under certain market conditions.


LIQUIDS TERMINALING BUSINESS

Introduction

     KPP's  terminaling  business is  conducted  through  the  Support  Terminal
Services  operation ("ST Services" or "ST") and Statia  Terminals  International
N.V.  ("Statia").  ST  Services  is  one of the  largest  independent  petroleum
products and  specialty  liquids  terminaling  companies  in the United  States.
Statia,  acquired on February 28, 2002 for a purchase price of $178 million (net
of cash  acquired),  plus the  assumption  of $107  million  of  debt,  owns and
operates KPP's two largest terminals and provides related value-added  services,
including crude oil and petroleum  product blending and processing,  berthing of
vessels at their marine  facilities,  and emergency and spill response services.
In addition to its terminaling services, Statia sells bunkers, which is the fuel
marine  vessels  consume,  and bulk  petroleum  products  to various  commercial
interests.

     For the year ended December 31, 2004, KPP's terminaling  business accounted
for approximately 41% of KPP's revenues. As of December 31, 2004, ST operated 41
facilities in 20 states,  with a total storage  capacity of  approximately  34.9
million barrels. ST also owns and operates seven terminals located in the United
Kingdom,  having a total capacity of approximately  6.0 million barrels.  In May
and September  2004, ST acquired  terminals in  Philadelphia,  Pennsylvania  and
Linden,  New Jersey from Exxon-Mobil.  In September 2004, ST acquired a chemical
and petroleum terminal in Grangemouth,  Scotland. In September 2002, ST acquired
eight  terminals  in  Australia  and  New  Zealand  with  a  total  capacity  of
approximately  1.2 million  barrels for  approximately  $47 million in cash.  ST
Services and its  predecessors  have a long history in the terminaling  business
and handle a wide  variety of  liquids  from  petroleum  products  to  specialty
chemicals to edible liquids. At the end of 2004, Statia's tank capacity was 18.8
million  barrels,  including an 11.3 million  barrel  storage and  transshipment
facility located on the Netherlands Antilles island of St. Eustatius,  and a 7.5
million barrel storage and transshipment  facility located at Point Tupper, Nova
Scotia, Canada.

     KPP's terminal  facilities  provide storage and handling  services on a fee
basis for petroleum products,  specialty chemicals and other liquids.  KPP's six
largest  terminal  facilities  are  located  on the  Island  of  St.  Eustatius,
Netherlands  Antilles;  in Point Tupper,  Nova Scotia,  Canada;  in Piney Point,
Maryland;  in  Linden,  New Jersey  (50%  owned  joint  venture);  in  Crockett,
California; and in Martinez, California.

Description of Largest Terminal Facilities

     St. Eustatius, Netherlands Antilles

     Statia  owns and  operates an 11.3  million  barrel  petroleum  terminaling
facility located on the Netherlands  Antilles island of St. Eustatius,  which is
located  at a point of  minimal  deviation  from  major  shipping  routes.  This
facility is capable of handling a wide range of  petroleum  products,  including
crude oil and refined products,  and can accommodate the world's largest tankers
for loading and discharging  crude oil. A two-berth jetty, a two-berth  monopile
with platform and buoy systems, a floating hose station,  and an offshore single
point mooring buoy with loading and unloading  capabilities serve the terminal's
customers' vessels. The St. Eustatius facility has a total of 51 tanks. The fuel
oil  and  petroleum  product   facilities  have  in-tank  and  in-line  blending
capabilities,  while the crude tanks have  tank-to-tank  blending  capability as
well as in-tank mixers.  In addition to the storage and blending services at St.
Eustatius,  the facility has the flexibility to utilize certain storage capacity
for both feedstock and refined products to support its atmospheric  distillation
unit,  which is capable of processing up to 15,000 barrels per day of feedstock,
ranging from condensates to heavy crude oil. Statia owns and operates all of the
berthing  facilities at its St. Eustatius terminal and charges vessels a fee for
their use.  Vessel owners or charterers  may incur  separate fees for associated
services  such as pilotage,  tug  assistance,  line  handling,  launch  service,
emergency response services and other ship services.

     Point Tupper, Nova Scotia, Canada

     Statia owns and operates a 7.5 million barrel terminaling  facility located
at Point  Tupper on the  Strait of Canso,  near Port  Hawkesbury,  Nova  Scotia,
Canada,  which is located  approximately 700 miles from New York City, 850 miles
from  Philadelphia and 2,500 miles from Mongstad,  Norway.  This facility is the
deepest  independent,  ice-free marine  terminal on the North American  Atlantic
coast, with access to the East Coast and Canada as well as the Midwestern United
States via the St. Lawrence  Seaway and the Great Lakes system.  With one of the
premier  jetty  facilities  in North  America,  the Point  Tupper  facility  can
accommodate  substantially  all of the world's  largest,  fully-laden very large
crude carriers and ultra large crude carriers for loading and discharging  crude
oil, petroleum  products,  and  petrochemicals.  The Point Tupper facility has a
total of 37 tanks.  Its butane sphere is one of the largest of its kind in North
America. The facility's tanks were renovated in 1994 to comply with construction
standards  that meet or exceed  American  Petroleum  Institute,  NFPA, and other
material  industry  standards.  Crude oil and petroleum product movements at the
terminal  are fully  automated.  Separate  Statia  fees apply for the use of the
jetty  facility  as  well  as  associated  services,   including  pilotage,  tug
assistance,  line handling,  launch service,  spill response  services and other
ship services. Statia also charters tugs, mooring launches, and other vessels to
assist  with the  movement  of vessels  through the Strait of Canso and the safe
berthing of vessels at Point Tupper and to provide other services to vessels.

     Piney Point, Maryland

     The  largest  domestic  terminal  currently  owned  by  ST  is  located  on
approximately  400 acres on the Potomac River. The facility was acquired as part
of the purchase of the liquids  terminaling  assets of Steuart Petroleum Company
and certain of its  affiliates in December  1995.  The Piney Point  terminal has
approximately  5.4  million  barrels of storage  capacity in 28 tanks and is the
closest  deep-water  facility to  Washington,  D.C. This terminal  competes with
other large petroleum  terminals in the East Coast water-borne  market extending
from New York  Harbor  to  Norfolk,  Virginia.  The  terminal  currently  stores
petroleum products consisting  primarily of fuel oils and asphalt.  The terminal
has a dock with a 36-foot draft for tankers and four berths for barges.  It also
has truck-loading facilities,  product-blending capabilities and is connected to
a pipeline which supplies residual fuel oil to two power generating stations.

     Linden, New Jersey

     In  October  1998,  ST  entered  into a  joint  venture  relationship  with
Northville  Industries Corp.  ("Northville") to acquire a 50% ownership interest
in and the  management of the terminal  facility at Linden,  New Jersey that was
previously owned by Northville. The 44-acre facility provides ST with deep-water
terminaling  capabilities  at New York  Harbor and  primarily  stores  petroleum
products,  including gasoline,  jet fuel and fuel oils. The facility has a total
capacity of approximately  3.9 million barrels in 22 tanks, can receive products
via ship, barge and pipeline and delivers product by ship,  barge,  pipeline and
truck.  The terminal  owns two docks and leases a third with draft limits of 35,
24 and 24 feet,  respectively.  In  September  2004,  ST,  outside  of the joint
venture, acquired an adjacent 375,000 barrel terminal from Exxon-Mobil.

     Crockett, California

     The  Crockett  Terminal was acquired in January 2001 as a part of the Shore
acquisition.  The terminal has approximately 3 million barrels of tankage and is
located in the San Francisco Bay area. The facility  provides  deep-water access
for handling  petroleum  products and gasoline  additives  such as ethanol.  The
terminal offers  pipeline  connections to various  refineries and pipelines.  It
receives  and delivers  product by vessel,  barge,  pipeline  and  truck-loading
facilities. The terminal also has railroad tank car unloading capability.

     Martinez, California

     The Martinez Terminal, also acquired in January 2001 as a part of the Shore
acquisition,  is located  in the  refinery  area of San  Francisco  Bay.  It has
approximately  3.1  million  barrels of tankage and  handles  refined  petroleum
products as well as crude oil.  The  terminal is  connected to a pipeline and to
area refineries by pipelines and can also receive and deliver products by vessel
or barge. It also has a truck rack for product delivery.

     KPP's facilities have been designed with engineered  structural measures to
minimize the  possibility of the occurrence and the level of damage in the event
of a spill or fire.  All  loading  areas,  tanks,  pipes and  pumping  areas are
"contained" to collect any spillage and insure that only properly  treated water
is discharged from the site.

     Other Terminal Sites

     In addition  to the four major  domestic  facilities  described  above,  ST
Services has 37 other terminal  facilities located throughout the United States,
seven  facilities in the United  Kingdom,  four facilities in Australia and four
facilities in New Zealand.  These other  facilities  primarily  store  petroleum
products for a variety of  customers,  with the  exception of the  facilities in
Texas City, Texas, which handles specialty chemicals;  Columbus,  Georgia, which
handles aviation  gasoline and specialty  chemicals;  Winona,  Minnesota,  which
handles  nitrogen  fertilizer  solutions;   Savannah,   Georgia,  which  handles
chemicals,  lube  oils,  potash  and  caustic  solutions,  as well as  petroleum
products;  Vancouver,   Washington,  which  handles  chemicals  and  fertilizer;
Eastham,  United Kingdom, which handles chemicals and animal fats;  Grangemouth,
United  Kingdom,  which  handles  chemicals  and  molasses as well as  petroleum
products;  and Runcorn,  United Kingdom,  which handles molten sulphur,  and the
Australian and New Zealand  terminals which handle chemicals and animal fats and
oil.  Overall,  these  facilities  provide ST Services with locations  which are
diverse geographically, in products handled and in customers served.

     The following table outlines KPP's terminal  locations,  capacities,  tanks
and primary products handled:
<TABLE>
<CAPTION>

                                    Tankage         No. of               Primary Products
          Facility                  Capacity         Tanks                     Handled
--------------------------------   ------------   ------------   -----------------------------------
<S>                                <C>            <C>            <C>
Major U. S. Terminals:
Piney Point, MD                    5,403,000            28       Petroleum
Linden, NJ(a)                      3,884,000            22       Petroleum
Crockett, CA                       3,048,000            24       Petroleum, ethanol
Martinez, CA                       3,106,000            19       Petroleum
Jacksonville, FL                   2,069,000            30       Petroleum
Texas City, TX                     2,008,000           124       Chemicals, petrochemicals,
                                                                 petroleum

Other U. S. Terminals:
Montgomery, AL(b)                    162,000             7       Petroleum, jet fuel
Moundville, AL                       310,000             6       Jet Fuel
Tucson, AZ(a)                        174,000             7       Petroleum
Los Angeles, CA                      597,000            20       Petroleum
Richmond, CA                         617,000            25       Petroleum, ethanol
Stockton, CA                         706,000            32       Petroleum, ethanol, fertilizer,
                                                                 caustic
Bremen, GA                           182,000             9       Petroleum, jet fuel
Brunswick, GA                        302,000             3       Fertilizer, pulp liquor
Columbus, GA                         175,000            24       Petroleum, chemicals, fertilizers
Macon, GA(b)                         307,000            10       Petroleum, jet fuel
Savannah, GA                         903,000            28       Petroleum, chemicals
Blue Island, IL                      752,000            19       Petroleum, ethanol
Chillicothe, IL(a)                   270,000             6       Petroleum
Peru, IL                             221,000             8       Fertilizer
Indianapolis, IN                     410,000            18       Petroleum
Westwego, LA                         849,000            53       Molasses, fertilizer, caustic,
                                                                 chemicals, lube oil
Andrews AFB Pipeline, MD(b)           72,000             3       Jet fuel
Baltimore, MD                        832,000            50       Chemicals, asphalt, jet fuel
Salisbury, MD                        177,000            14       Petroleum
Winona, MN                           267,000             8       Fertilizer
Reno, NV                             107,000             7       Petroleum
Linden, NJ                           375,000            11       Petroleum
Paulsboro, NJ                      1,580,000            18       Petroleum
Alamogordo, NM(b)                    120,000             5       Jet Fuel
Drumright, OK                        315,000             4       Petroleum
Portland, OR                       1,119,000            31       Petroleum
Philadelphia, PA                     894,000            11       Petroleum
Philadelphia, PA                     665,000            11       Petroleum
Texas City, TX                       153,000            12       Chemicals, petrochemicals,
                                                                 petroleum
Dumfries, VA                         554,000            16       Petroleum, asphalt
Virginia Beach, VA(b)                 40,000             2       Jet fuel
Tacoma, WA                           377,000            15       Petroleum
Vancouver, WA                        227,000            49       Chemicals, fertilizer, petroleum
Vancouver, WA                        316,000             6       Petroleum, chemicals, fertilizer
Milwaukee, WI                        308,000             7       Petroleum, ethanol

Foreign Terminals:
St. Eustatius, Netherlands
Antilles.                         11,350,000            60       Petroleum, crude oil
Point Tupper, Canada               7,514,000            40       Petroleum, crude oil
Sydney, Australia                    330,000            65       Chemicals, fats and oils
Melbourne, Australia                 468,000           118       Specialty chemicals
Geelong, Australia                   145,000            14       Specialty chemicals, petroleum
Adelaide, Australia                   90,000            24       Chemicals, tallow, petroleum
Auckland, New Zealand (a)             74,000            44       Fats, oils and chemicals
New Plymouth, New Zealand             35,000            10       Fats, oils and chemicals
Mt. Maunganui, New Zealand            83,000            24       Fats, oils and chemicals
Wellington, New Zealand               50,000            13       Fats, oils and chemicals
Grays, England                     1,945,000            53       Petroleum
Eastham, England                   2,185,000           162       Chemicals, petroleum, animal fats
Runcorn, England                     146,000             4       Molten sulfur
Grangemouth, Scotland                530,000            46       Petroleum, chemicals and molasses
Glasgow, Scotland                    344,000            16       Petroleum
Leith, Scotland                      459,000            34       Petroleum, chemicals
Belfast, Northern Ireland            407,000            41       Petroleum
                                 ---------------  --------------
                                  61,108,000         1,570
                                 ===============  ==============
</TABLE>

(a)  The terminal is 50% owned by ST.

(b)  Facility  also  includes  pipelines  to  U.S.   government   military  base
     locations.

Customers

     Statia provides  terminaling  services for crude oil and refined  petroleum
products to many of the world's largest  producers of crude oil,  integrated oil
companies, oil traders and refiners.  Statia's crude oil transshipment customers
include an oil producer that leases and utilizes 5.0 million  barrels of storage
at St. Eustatius and a major international oil company which leases and utilizes
3.6 million  barrels of storage at Point  Tupper,  both of which have  long-term
contracts with Statia.  In addition,  two different  international oil companies
each lease and  utilize  1.0 million  barrels of clean  products  storage at St.
Eustatius  and  Point  Tupper,  respectively.   Also  in  Canada,  a  consortium
consisting  of major oil  companies  sends  natural gas liquids via  pipeline to
certain  processing  facilities  on land leased from Statia.  After  processing,
certain  products  are stored at the Point  Tupper  facility  under a  long-term
contract.  In addition,  Statia's blending capabilities have attracted customers
who  have  leased  capacity   primarily  for  blending  purposes  and  who  have
contributed to Statia's bunker fuel and bulk product sales.

     The storage and transport of jet fuel for the U.S. Department of Defense is
an important part of ST's  business.  Eleven of ST's terminal sites are involved
in the terminaling or transport (via pipeline) of jet fuel for the Department of
Defense and four of the eleven  locations have been utilized  solely by the U.S.
Government.  Of the eleven  locations,  five include pipelines which deliver jet
fuel directly to nearby military bases.


 Competition and Business Considerations

     In addition to the terminals owned by independent terminal operators,  such
as KPP, many major energy and chemical  companies own extensive terminal storage
facilities.  Although  such  terminals  often  have  the  same  capabilities  as
terminals  owned  by  independent  operators,  they  generally  do  not  provide
terminaling  services to third  parties.  In many  instances,  major  energy and
chemical  companies  that  own  storage  and  terminaling  facilities  are  also
significant  customers of  independent  terminal  operators,  such as KPP.  Such
companies  typically  have  strong  demand for  terminals  owned by  independent
operators when independent terminals have more cost effective locations near key
transportation  links,  such as  deep-water  ports.  Major  energy and  chemical
companies  also need  independent  terminal  storage  when their  owned  storage
facilities are inadequate, either because of size constraints, the nature of the
stored material or specialized handling requirements.

     Independent  terminal owners generally compete on the basis of the location
and versatility of terminals,  service and price. A favorably  located  terminal
will have access to various cost effective transportation modes both to and from
the terminal.  Transportation  modes  typically  include  waterways,  railroads,
roadways and pipelines.  Terminals  located near  deep-water port facilities are
referred to as "deep-water  terminals" and terminals without such facilities are
referred to as "inland terminals"; although some inland facilities located on or
near navigable rivers are served by barges.

     Terminal  versatility  is a  function  of the  operator's  ability to offer
handling for diverse  products with complex handling  requirements.  The service
function typically  provided by the terminal  includes,  among other things, the
safe  storage  of the  product  at  specified  temperature,  moisture  and other
conditions,  as well as receipt at and delivery from the terminal,  all of which
must be in compliance  with  applicable  environmental  regulations.  A terminal
operator's  ability  to obtain  attractive  pricing  is often  dependent  on the
quality,  versatility  and reputation of the  facilities  owned by the operator.
Although many products  require  modest  terminal  modification,  operators with
versatile storage  capabilities  typically  require less  modification  prior to
usage, ultimately making the storage cost to the customer more attractive.

     A few companies offering liquid  terminaling  facilities have significantly
more  capacity  than KPP.  However,  much of KPP's  tankage can be  described as
"niche" facilities that are equipped to properly handle  "specialty"  liquids or
provide facilities or services where management believes KPP enjoys an advantage
over  competitors.  As a result,  many of KPP's terminals  compete against other
large petroleum products  terminals,  rather than specialty liquids  facilities.
Such specialty or "niche"  tankage is less abundant in the U.S. and  "specialty"
liquids typically command higher terminal fees than lower-price bulk terminaling
for petroleum products.

     The main  competition  to crude oil storage at Statia's  facilities is from
"lightering"  which is the  process  by which  liquid  cargo is  transferred  to
smaller vessels, usually while at sea. The price differential between lightering
and terminaling is primarily  driven by the charter rates for vessels of various
sizes.  Lightering  generally takes  significantly  longer than discharging at a
terminal.  Depending on charter rates, the longer charter period associated with
lightering is generally  offset by various costs  associated  with  terminaling,
including  storage  costs,  dock  charges  and  spill  response  fees.  However,
terminaling  is  generally  safer and reduces the risk of  environmental  damage
associated  with  lightering,  provides more  flexibility  in the  scheduling of
deliveries, and allows customers of Statia to deliver their products to multiple
locations. Lightering in U.S. territorial waters creates a risk of liability for
owners and  shippers of oil under the U.S. Oil  Pollution  Act of 1990 and other
state and federal  legislation.  In Canada,  similar  liability exists under the
Canadian Shipping Act.  Terminaling also provides  customers with the ability to
access value-added terminal services.

     In the bunkering business, Statia competes with ports offering bunker fuels
to which, or from which, each vessel travels or are along the route of travel of
the vessel.  Statia also  competes  with bunker  delivery  locations  around the
world. In the Western Hemisphere,  alternative bunker locations include ports on
the U.S.  East coast and Gulf coast and in Panama,  Puerto  Rico,  the  Bahamas,
Aruba,  Curacao,  and Halifax.  In addition,  Statia competes with Rotterdam and
various North Sea locations.


PRODUCT MARKETING SERVICES

     In March 1998, the Company entered the product  marketing  business through
an acquisition by Martin,  one of the Company's wholly owned  subsidiaries.  For
over 40 years,  this operation and its predecessors have engaged in the business
of  acquiring  quantities  of motor fuels and  reselling  them at  wholesale  in
smaller  lots at truck  racks  located  in  terminal  storage  facilities  along
pipelines  primarily  located  throughout  Colorado,  Illinois,  Indiana,  Ohio,
Wisconsin and Wyoming. This business does not own any retail outlets,  pipelines
or  terminals.  KPP's  product  sales,  as  discussed  in  "Liquids  Terminaling
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. For
the year ended  December 31, 2004,  the product  marketing  segment's  revenues,
gross margin and operating  income were $676.1 million,  $28.4 million and $17.3
million, respectively.


CAPITAL EXPENDITURES

     Capital  expenditures by KPP relating to its pipelines,  including  routine
maintenance and expansion expenditures,  but excluding acquisitions,  were $10.3
million,  $9.6 million and $9.5 million for 2004,  2003 and 2002,  respectively.
During these periods,  adequate capacity existed on the Pipelines to accommodate
volume growth, and the expenditures  required for environmental matters were not
material in amount.  Capital  expenditures,  including  routine  maintenance and
expansion  expenditures,  but  excluding  acquisitions,  by KPP  relating to its
terminaling  operations were $29.5 million,  $34.6 million and $21.0 million for
2004, 2003 and 2002, respectively.

     Capital  expenditures of KPP during 2005, including routine maintenance and
expansion  expenditures,   but  excluding  acquisitions,   are  expected  to  be
approximately  $40 million to $44  million.  See  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources."  Additional  expansion-related  capital  expenditures  will
depend  on  future  opportunities  to  expand  KPP's  operations.   Such  future
expenditures,  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
governmental  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 choose to do so.


REGULATION

Interstate Regulation

     The interstate common carrier petroleum product pipeline  operations of KPP
are subject to rate  regulation by FERC under the  Interstate  Commerce Act. The
Interstate  Commerce Act  provides,  among other  things,  that to be lawful the
rates of common carrier  petroleum  pipelines must be "just and  reasonable" and
not unduly  discriminatory.  New and changed  rates must be filed with the FERC,
which may investigate  their  lawfulness on protest or its own motion.  The FERC
may  suspend  the  effectiveness  of such rates for up to seven  months.  If the
suspension  expires before  completion of the  investigation,  the rates go into
effect,  but the pipeline can be required to refund to shippers,  with interest,
any difference  between the level the FERC determines to be lawful and the filed
rates under  investigation.  Rates that have become final and  effective  may be
challenged  by a  complaint  to FERC  filed by a shipper  or on the  FERC's  own
initiative.  Reparations  may be recovered by the party filing the complaint for
the  two-year  period  prior  to the  complaint,  if FERC  finds  the rate to be
unlawful.

     The FERC  allows  for a rate of return  for  petroleum  products  pipelines
determined  by adding (i) the  product of a rate of return  equal to the nominal
cost of debt  multiplied  by the  portion  of the rate base that is deemed to be
financed  with debt and (ii) the  product of a rate of return  equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity.  The appropriate rate of return for a
petroleum  pipeline is determined on a case-by-case  basis,  taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.

     Under  Title XVIII of the Energy  Policy Act of 1992 (the "EP Act"),  rates
that were in effect on  October  24,  1991 that were not  subject  to a protest,
investigation  or complaint  are deemed to be just and  reasonable.  Such rates,
commonly  referred to as grandfathered  rates, are subject to challenge only for
limited  reasons.  Any  relief  granted  pursuant  to  such  challenges  may  be
prospective  only.  Because KPP's rates that were in effect on October 24, 1991,
were not subject to investigation and protest at that time, those rates could be
deemed to be just and  reasonable  pursuant to the EP Act.  KPP's  current rates
became final and  effective in July 2000,  and KPP believes  that its  currently
effective  tariffs are just and reasonable and would  withstand  challenge under
the FERC's cost-based rate standards.  Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.

     On  October  22,  1993,  the FERC  issued  Order No.  561  which  adopted a
simplified  rate making  methodology for future oil pipeline rate changes in the
form of  indexation.  Indexation,  which is also known as price cap  regulation,
establishes  ceiling  prices on oil  pipeline  rates based on  application  of a
broad-based  measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for  such  rate  increases,  there  will be no need to file  cost-of-service  or
supporting data.  Moreover,  so long as the ceiling is not exceeded,  a pipeline
may make a limitless  number of rate change  filings.  This  indexing  mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the  ceiling  rate below a  pipeline's  existing  rates.  The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.

     The  indexation  method  is  to  serve  as  the  principal  basis  for  the
establishment  of oil  pipeline  rate changes in the future.  However,  the FERC
determined  that a pipeline  may  utilize any one of the  following  alternative
methodologies to indexing: (i) a cost-of-service  methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate  that its
increased  costs  are  prudently  incurred  and  that  there  is  a  substantial
divergence  between such increased  costs and the rate that would be produced by
application  of the  index;  and  (ii) a  pipeline  may base  its  rates  upon a
"light-handed"  market-based  form of regulation if it is able to  demonstrate a
lack of significant market power in the relevant markets.

     On  September  15,  1997,  KPP  filed  an  Application   for  Market  Power
Determination with the FERC seeking market based rates for approximately half of
its markets.  In May 1998, the FERC granted KPP's  application and approximately
half of the markets  served by the East and West Pipelines  subsequently  became
subject to market force regulation.

     In the FERC's  Lakehead  decision  issued June 15, 1995, the FERC partially
disallowed  Lakehead's  inclusion  of  income  taxes  in its  cost  of  service.
Specifically,  the FERC held that Lakehead was entitled to receive an income tax
allowance with respect to income attributable to its corporate partners, but was
not entitled to receive such an allowance for income attributable to partnership
interests held by individuals. Lakehead's motion for rehearing was denied by the
FERC  and  Lakehead  appealed  the  decision  to  the  U.S.  Court  of  Appeals.
Subsequently,  the case was settled by Lakehead and the appeal was withdrawn. In
another FERC proceeding  involving a different oil pipeline limited partnership,
various shippers challenged such pipeline's inclusion of an income tax allowance
in its cost of  service.  The FERC  decided  this case on the same  basis as its
holding in the Lakehead  case. On July 20, 2004,  the District of Columbia Court
of Appeals  vacated  the  Commission's  determination  regarding  the proper tax
allowance in that case and remanded the income tax allocation  issue for further
FERC consideration. FERC has requested and received comments as to the issue. If
the FERC were to partially or  completely  disallow the income tax  allowance in
the cost of service of the East and West Pipelines on the basis set forth in the
Lakehead  order,  KPL believes  that KPP's ability to pay  distributions  to the
holders  of  the  Units  would  not  be  impaired;   however,  in  view  of  the
uncertainties involved in this issue, there can be no assurance in this regard.

     The  Ammonia  Pipeline  rates  are  regulated  by  the  STB.  The  STB  was
established  in 1996 when the Interstate  Commerce  Commission was terminated by
the ICC Termination Act of 1995. The STB is headed by Board Members appointed by
the  President  and  confirmed  by the  Senate and is  authorized  to have three
members.  The STB  jurisdiction  generally  includes  railroad  rate and service
issues,  rail  restructuring  transactions  and labor matters  related  thereto;
certain trucking company,  moving van, and non-contiguous ocean shipping company
rate  matters;  and certain  pipeline  matters not regulated by the FERC. In the
performance  of  its  functions,  the  STB  is  charged  with  promoting,  where
appropriate,  substantive  and  procedural  regulatory  reform  in the  economic
regulation  of surface  transportation,  and with  providing  an  efficient  and
effective  forum for the  resolution  of disputes.  The STB seeks to  facilitate
commerce by providing an effective  forum for efficient  dispute  resolution and
facilitation of appropriate market-based business transactions.

     KPP issued a STB tariff that  became  effective  April 1, 2003.  The tariff
filing combined the STB interstate  tariff and the Louisiana  intrastate  tariff
into one  document  and  standardized  the  tariff  regulation  between  the two
regulatory bodies. The tariff filing modified the capacity allocation procedures
and  established  a minimum  tariff  rate of $5.00 per ton.  The  tariff  filing
implemented a 7% tariff increase across all tariff rates.  Another  modification
was the  removal  of the  "Industrial  User"  classification  which  effectively
increases the tariff rates actually paid for  transportation to certain shippers
by more than 7%. Dyno Nobel, an industrial  user in Missouri,  and CF Industries
filed  protests  against  the tariff  filing.  See "Item 3.  Legal  Proceedings,
Ammonia Pipeline Matters" for a description of those matters.

Intrastate Regulation

     The  intrastate  operations  of the East  Pipeline in Kansas are subject to
regulation by the Kansas Corporation  Commission,  the intrastate  operations of
the West  Pipeline in Colorado  and  Wyoming  are subject to  regulation  by the
Colorado  Public Utility  Commission and the Wyoming Public Service  Commission,
respectively, and the intrastate operations of the North Pipeline are subject to
regulation by the North Dakota Public  Utility  Commission.  Like the FERC,  the
state  regulatory  authorities  require  that  shippers  be notified of proposed
intrastate  tariff  increases and have an opportunity to protest such increases.
KPP also files with such state  authorities  copies of interstate tariff changes
filed  with the FERC.  In  addition  to  challenges  to new or  proposed  rates,
challenges to intrastate  rates that have already become effective are permitted
by complaint of an interested person or by independent action of the appropriate
regulatory authority.

     The intrastate  operations of the Ammonia Pipeline in Louisiana are subject
to regulation by the Louisiana  Public  Service  Commission.  Shippers under the
Louisiana  intrastate  tariff  have  rights  similar to those  mentioned  in the
paragraph above.


ENVIRONMENTAL MATTERS

General

     The  operations  of KPP are  subject to  federal,  state and local laws and
regulations  relating to the protection of the  environment in the United States
and to the environmental laws and regulations of the host countries in regard to
the terminals acquired  overseas.  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  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  strict  environmental  laws,  regulations and enforcement
policies  thereunder,  and claims for damages to  property or persons  resulting
from the operations of KPP, past and present,  could result in substantial costs
and liabilities to KPP.

     See "Item 3 - Legal Proceedings" for information concerning several matters
pending against certain  subsidiaries of KPP involving claims for  environmental
damages.

Water

     The Oil Pollution Act ("OPA") was enacted in 1990 and amends  provisions of
the  Federal  Water  Pollution  Control  Act of 1972 and other  statutes as they
pertain to  prevention  and response to oil spills.  The OPA subjects  owners of
facilities  to strict,  joint and  potentially  unlimited  liability for removal
costs and certain other  consequences of an oil spill,  where such spill is into
navigable  waters,  along  shorelines or in the exclusive  economic zone. In the
event of an oil spill into such waters, substantial liabilities could be imposed
upon KPP. Regulations concerning the environment are continually being developed
and revised in ways that may impose additional regulatory burdens on KPP.

     Contamination  resulting  from  spills or  releases  of  refined  petroleum
products is not unusual  within the petroleum  pipeline and liquids  terminaling
industries.   The  East  Pipeline  and  ST  Services  have  experienced  limited
groundwater  contamination at various terminal and pipeline sites resulting from
various causes including activities of previous owners. Remediation projects are
underway or under construction using various remediation  techniques.  The costs
to remediate  contamination at several ST terminal  locations are being borne by
the former owners under indemnification  agreements.  Although no assurances can
be made, KPP believes that the aggregate cost of these remediation  efforts will
not be material.

     The EPA has  promulgated  regulations  that may  require  KPP to apply  for
permits to discharge storm water runoff.  Storm water discharge permits also may
be required in certain states in which KPP operates. Where such requirements are
applicable,  KPP has  applied  for such  permits  and,  after  the  permits  are
received,  will be required to sample storm water effluent before  releasing it.
KPP believes that effluent  limitations  could be met, if necessary,  with minor
modifications  to existing  facilities and operations.  Although no assurance in
this regard can be given, KPP believes that the changes will not have a material
effect on KPP's financial condition or results of operations.

Aboveground Storage Tank Acts

     A number of the  states in which KPP  operates  in the United  States  have
passed statutes  regulating  aboveground  tanks  containing  liquid  substances.
Generally,  these statutes require that such tanks include secondary containment
systems or that the operators  take certain  alternative  precautions  to ensure
that no contamination  results from any leaks or spills from the tanks. Although
there is not total federal  regulation  of all above ground  tanks,  the DOT has
adopted an industry standard that addresses tank inspection,  repair, alteration
and  reconstruction.  This action requires pipeline companies to comply with the
standard for tank  inspection and repair for all tanks regulated by the DOT. KPP
is in  substantial  compliance  with all above  ground  storage tank laws in the
states with such laws. Although no assurance can be given, KPP believes that the
future  implementation  of above ground  storage tank laws by either  additional
states or by the federal  government will not have a material  adverse effect on
KPP's financial condition or results of operations.

Air Emissions

     The  operations  of KPP  are  subject  to the  Federal  Clean  Air  Act and
comparable  state and local statutes.  KPP believes that the operations of KPP's
pipelines and terminals are in substantial  compliance with such statutes in all
states in which they operate.

     Amendments  to the Federal  Clean Air Act  enacted in 1990  require or will
require most industrial  operations in the United States to incur future capital
expenditures in order to meet the air emission control  standards that have been
and are to be  developed  and  implemented  by the EPA and  state  environmental
agencies.  Pursuant  to  these  Clean  Air  Act  Amendments,  those  Partnership
facilities that emit volatile organic  compounds  ("VOC") or nitrogen oxides are
subject to  increasingly  stringent  regulations,  including  requirements  that
certain sources install maximum or reasonably  available control technology.  In
addition,  the 1999 Federal  Clean Air Act  Amendments  include a new  operating
permit for major  sources  ("Title V Permits"),  which  applies to some of KPP's
facilities.  Additionally,  new dockside loading facilities owned or operated by
KPP in the United States will be subject to the New Source Performance Standards
that were  proposed  in May  1994.  These  regulations  require  control  of VOC
emissions from the loading and unloading of tank vessels.

     Although KPP is in  substantial  compliance  with  applicable air pollution
laws, in anticipation of the implementation of stricter air control regulations,
KPP is taking actions to substantially reduce its air emissions.

Solid Waste

     KPP generates non-hazardous solid waste that is subject to the requirements
of the Federal  Resource  Conservation  and Recovery Act ("RCRA") and comparable
state  statutes in the United  States.  The EPA is  considering  the adoption of
stricter  disposal  standards for  non-hazardous  wastes.  RCRA also governs the
disposal of hazardous wastes.  At present,  KPP is not required to comply with a
substantial  portion of the RCRA requirements  because KPP's operations generate
minimal  quantities  of  hazardous  wastes.  However,  it  is  anticipated  that
additional  wastes,  which  could  include  wastes  currently  generated  during
pipeline  operations,  will in the future be designated  as "hazardous  wastes".
Hazardous  wastes are subject to more rigorous and costly disposal  requirements
than are  non-hazardous  wastes.  Such changes in the  regulations may result in
additional capital expenditures or operating expenses by KPP.

     At the terminal sites at which groundwater  contamination is present, there
is also limited soil contamination as a result of the aforementioned spills. KPP
is under no present requirements to remove these contaminated soils, but KPP may
be required to do so in the future.  Soil  contamination  also may be present at
other  Partnership  facilities at which spills or releases have occurred.  Under
certain circumstances,  KPP may be required to clean up such contaminated soils.
Although  these  costs  should not have a  material  adverse  effect on KPP,  no
assurance can be given in this regard.

Superfund

     The Comprehensive  Environmental  Response,  Compensation and Liability Act
("CERCLA" or  "Superfund")  imposes  liability,  without  regard to fault or the
legality of the original act, on certain classes of persons that  contributed to
the release of a  "hazardous  substance"  into the  environment.  These  persons
include  the  owner or  operator  of the site and  companies  that  disposed  or
arranged for the disposal of the hazardous  substances found at the site. CERCLA
also authorizes the EPA and, in some instances, third parties to act in response
to threats to the public health or the  environment  and to seek to recover from
the  responsible  classes of persons the costs they incur.  In the course of its
ordinary  operations,  KPP may  generate  waste  that may fall  within  CERCLA's
definition of a "hazardous  substance".  KPP may be responsible under CERCLA for
all or part of the costs  required  to clean up sites at which such  wastes have
been disposed.

Environmental Impact Statement

     The United States  National  Environmental  Policy Act of 1969 (the "NEPA")
applies to certain extensions or additions to a pipeline system.  Under NEPA, if
any  project  that would  significantly  affect the  quality of the  environment
requires a permit or approval from any United States federal agency,  a detailed
environmental  impact statement must be prepared.  The effect of the NEPA may be
to delay or prevent  construction  of new facilities or to alter their location,
design or method of construction.

Indemnification

     KPL has  agreed to  indemnify  KPP  against  liabilities  for damage to the
environment  resulting from  operations of the East Pipeline prior to October 3,
1989. Such  indemnification  does not extend to any liabilities that arise after
such date to the extent such  liabilities  result  from change in  environmental
laws or  regulations.  Under such  indemnity,  KPL is  presently  liable for the
remediation of  contamination  at certain East Pipeline sites. In addition,  KPP
was wholly or partially indemnified under certain acquisition contracts for some
environmental  costs. Most of such contracts contain time and amount limitations
on the  indemnities.  To the extent that  environmental  liabilities  exceed the
amount of such indemnity, KPP has affirmatively assumed the excess environmental
liabilities.


SAFETY REGULATION

     KPP's  Pipelines are subject to regulation by the United States  Department
of Transportation  (the "DOT") under the Hazardous Liquid Pipeline Safety Act of
1979  ("HLPSA")  relating to the design,  installation,  testing,  construction,
operation,  replacement and management of their pipeline  facilities.  The HLPSA
covers  anhydrous  ammonia,  petroleum  and  petroleum  products  pipelines  and
requires  any entity that owns or operates  pipeline  facilities  to comply with
such safety  regulations  and to permit  access to and copying of records and to
make certain  reports and provide  information  as required by the  Secretary to
Transportation.  The Federal  Pipeline  Safety Act of 1992  amended the HLPSA to
include  requirements of the future use of internal inspection devices. KPP does
not  believe  that  it  will  be  required  to  make  any  substantial   capital
expenditures to comply with the requirements of HLPSA as so amended.

     On November 3, 2000, the DOT issued new regulations  intended by the DOT to
assess the integrity of hazardous liquid pipeline segments that, in the event of
a leak  or  failure,  could  adversely  affect  highly  populated  areas,  areas
unusually   sensitive  to  environmental   impact  and  commercially   navigable
waterways.  Under the regulations,  an operator is required, among other things,
to conduct baseline  integrity  assessment tests (such as internal  inspections)
within seven  years,  conduct  future  integrity  tests at  typically  five-year
intervals  and  develop  and follow a written  risk-based  integrity  management
program  covering the designated high  consequence  areas.  KPP does not believe
that the increased  costs of compliance with these  regulations  will materially
affect KPP's results of operations.

     KPP  is  subject  to  the   requirements   of  the  United  States  Federal
Occupational  Safety and Health Act ("OSHA") and comparable  state statutes that
regulate the  protection of the health and safety of workers.  In addition,  the
OSHA  hazard  communication   standard  requires  that  certain  information  be
collected  regarding hazardous materials used or produced in operations and that
this  information  be provided to  employees,  state and local  authorities  and
citizens.  KPP believes that it is in general compliance with OSHA requirements,
including general industry standards, record keeping requirements and monitoring
of occupational exposure to benzene.

     The OSHA hazard  communication  standard,  the EPA community  right-to-know
regulations   under  Title  III  of  the   Federal   Superfund   Amendment   and
Reauthorization  Act,  and  comparable  state  statutes  require KPP to organize
information about the hazardous materials used in its operations.  Certain parts
of this information must be reported to employees,  state and local governmental
authorities,  and local  citizens  upon  request.  In  general,  KPP  expects to
increase its  expenditures  during the next decade to comply with more stringent
industry and regulatory  safety  standards such as those described  above.  Such
expenditures cannot be accurately  estimated at this time, although they are not
expected to have a material adverse impact on KPP.


EMPLOYEES

     At December 31, 2004,  the Company,  and its  subsidiaries  and  affiliates
employed  approximately  1,133  persons.  Approximately  154  persons  at  seven
terminal   locations   in  the  United   States  and  Canada  were   subject  to
representation by labor unions and collective bargaining or similar contracts at
that date. The Company considers relations with its employees to be good.


AVAILABLE INFORMATION

     The  Company  files  annual,   quarterly,   and  other  reports  and  other
information  with the  Securities  and  Exchange  Commission  ("SEC")  under the
Securities  Exchange Act of 1934 (the "Exchange Act"). You may read and copy any
materials that the Company files with the SEC at the SEC's Public Reference Room
at 450 Fifth  Street,  NW,  Washington,  DC  20549.  You may  obtain  additional
information   about  the  Public   Reference   Room  by   calling   the  SEC  at
1-800-SEC-0330.    In   addition,   the   SEC   maintains   an   Internet   site
(http://www.sec.gov)  that contains reports, proxy information  statements,  and
other information regarding issuers that file electronically with the SEC.

     The Company also makes available free of charge on or through the Company's
Internet site  (http://www.kaneb.com)  the Company's Annual Report on Form 10-K,
Quarterly  Reports  on Form  10-Q,  Current  Reports  on  Form  8-K,  and  other
information statements and, if applicable,  amendments to those reports filed or
furnished  pursuant to Section  13(a) of the Exchange Act as soon as  reasonably
practicable  after the reports and other  information  is  electronically  filed
with, or furnished to, the SEC.


Item 2.     Properties

     The properties  owned or utilized by the Company and its  subsidiaries  are
generally described in Item 1 of this Report.  Additional information concerning
the  obligations  of the  Company  and KPP for lease and rental  commitments  is
presented under the caption  "Commitments  and  Contingencies"  in Note 9 to the
Company's consolidated  financial statements.  Such descriptions and information
are hereby incorporated by reference into this Item 2.

     The properties  used in the operations of KPP's Pipelines are owned by KPP,
through its  subsidiary  entities,  except for KPL's  operational  headquarters,
located in Wichita,  Kansas,  which is held under a lease that  expires in 2009.
Statia's  facilities  are owned  through  subsidiaries  and the majority of ST's
facilities  are  owned,  while the  remainder,  including  some of its  terminal
facilities  located in port areas and its operational  headquarters,  located in
Richardson,  Texas,  are  held  pursuant  to  lease  agreements  having  various
expiration dates, rental rates and other terms.


Item 3.     Legal Proceedings

     Grace  Litigation.  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.

     PEPCO  Litigation.  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.  On September 14, 2004, ST Services  petitioned for
reconsideration of the order.

     By letter  dated  January 4, 2002,  the Attorney  General's  Office for the
State of Maryland advised ST Services that it intended to seek penalties from ST
Services  in  connection  with the April 7, 2000  spill.  The State of  Maryland
subsequently asserted that it would seek penalties against ST Services and PEPCO
totaling up to $12 million.  A settlement  of this claim was reached in mid-2002
under  which ST  Services'  insurer  will pay a total of  slightly  more than $1
million  in  installments  over a five year  period.  PEPCO  has also  reached a
settlement of these claims with the State of Maryland. Accordingly, KPP believes
that this  matter  will not have a  material  adverse  effect  on its  financial
condition.

     On  December  13,  2002,  ST  Services  sued PEPCO in the  Superior  Court,
District of Columbia,  seeking, among other things, a declaratory judgment as to
ST Services' legal obligations,  if any, to reimburse PEPCO for costs of the oil
spill.  On  December  16,  2002,  PEPCO sued ST  Services  in the United  States
District Court for the District of Maryland,  seeking  recovery of all its costs
for  remediation  of and  response to the oil spill.  Pursuant  to an  agreement
between ST Services  and PEPCO,  ST  Services'  suit was  dismissed,  subject to
refiling.  ST  Services  has moved to  dismiss  PEPCO's  suit.  ST  Services  is
vigorously   defending   against   PEPCO's   claims  and  is  pursuing  its  own
counterclaims  for  return of  monies  ST  Services  has  advanced  to PEPCO for
settlements and cleanup costs. KPP believes that any costs or damages  resulting
from  these  lawsuits  will be  covered  by  insurance  and  therefore  will not
materially  adversely affect KPP's financial  condition.  The amounts claimed by
PEPCO,  if  recovered,  would  trigger an excess  insurance  policy  which has a
$600,000 retention,  but KPP does not believe that such retention,  if incurred,
would materially adversely affect KPP's financial condition.

     Paulsboro Litigation.  In 2003, Exxon Mobil filed a lawsuit in a New Jersey
state court against GATX  Corporation,  Kinder Morgan Liquid Terminals  ("Kinder
Morgan"),  the successor in interest to GATX Terminals Corporation ("GATX"), and
the Company's  subsidiary,  ST Services,  seeking  reimbursement for remediation
costs associated with the Paulsboro, New Jersey terminal. The terminal was owned
and operated by Exxon Mobil from the early  1950's until 1990 when  purchased by
GATX.  ST  Services   purchased  the  terminal  in  2000  from  GATX.  GATX  was
subsequently  acquired by Kinder  Morgan.  As a condition to the sale to GATX in
1990, Exxon Mobil undertook certain remediation  obligations with respect to the
site.  In the lawsuit,  Exxon Mobil is claiming  that it has  complied  with its
remediation and contractual  obligations and is entitled to  reimbursement  from
GATX Corporation, the parent company of GATX, Kinder Morgan, and ST Services for
costs in the amount of  $400,000  that it claims are  related to releases at the
site  subsequent  to its sale of the terminal to GATX.  It is also alleging that
any  remaining   remediation   requirements  are  the   responsibility  of  GATX
Corporation,  Kinder Morgan,  or ST Services.  Kinder Morgan has alleged that it
was  relieved of any  remediation  obligations  pursuant  to the sale  agreement
between its  predecessor,  GATX,  and ST Services.  ST Services  believes  that,
except for remediation  involving immaterial amounts,  GATX Corporation or Exxon
Mobil are  responsible  for the  remaining  remediation  of the  site.  Costs of
completing the required  remediation depend on a number of factors and cannot be
determined at the current time.

     Ammonia Pipeline  Matters.  A subsidiary of KPP purchased the approximately
2,000-mile  ammonia  pipeline system from Koch Pipeline  Company,  L.P. and Koch
Fertilizer  Storage  and  Terminal  Company  in 2002.  The rates of the  ammonia
pipeline  are subject to  regulation  by the Surface  Transportation  Board (the
"STB"). The STB had issued an order in May 2000,  prescribing  maximum allowable
rates KPP's predecessor could charge for  transportation to certain  destination
points on the pipeline system.  In 2003, KPP instituted a 7% general increase to
pipeline rates. On August 1, 2003, CF Industries, Inc. ("CFI") filed a complaint
with the STB challenging  these rate increases.  On August 11, 2004, STB ordered
KPP to pay reparations to CFI and to return CFI's rates to the levels  permitted
under the rate prescription.  KPP has complied with the order. The STB, however,
indicated in the order that it would lift the rate prescription in the event KPP
could show "materially  changed  circumstances."  KPP has submitted  evidence of
"materially  changed  circumstances,"  which  specifically  includes its capital
investment in the pipeline.  CFI has argued that KPP's  acquisition costs should
not be considered by the STB as a measure of KPP's  investment  base. The STB is
expected to decide the issue within the second quarter of 2005.

     Also, on June 16, 2003, Dyno Nobel Inc. ("Dyno") filed a complaint with the
STB  challenging  the 2003 rate increase on the basis that (i) the rate increase
constitutes a violation of a contract rate,  (ii) rates are  discriminatory  and
(iii)  the rates  exceed  permitted  levels.  Dyno  also  intervened  in the CFI
proceeding  described above.  Unlike CFI, Dyno's rates are not subject to a rate
prescription.  As of December 31, 2004, Dyno would be entitled to  approximately
$2 million in rate refunds, should it be successful. KPP believes, however, that
Dyno's claims are without merit.

     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.


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

     The Company did not hold a meeting of shareholders or otherwise  submit any
matter to a vote of security holders in the fourth quarter of 2004.


                                     PART II

Item 5. Market for the Registrant's Shares and Related Shareholder Matters

     The Company's  shares  ("Shares")  were listed and began trading on the New
York Stock  Exchange  (the "NYSE")  effective  June 29,  2001,  under the symbol
"KSL." At March 4, 2005, there were  approximately  4,000 shareholders of record
for the Company.  Set forth below are prices on the NYSE and cash  distributions
for the periods indicated for such Shares.

<TABLE>
<CAPTION>
                                                       Share Prices                     Per Share Cash
         Year                                        High           Low                  Distributions
         ------------------------------            ----------------------               --------------
<S>                                                <C>          <C>                     <C>
         2003:
                   First quarter                   $ 21.11      $  18.35                $    .4375
                   Second quarter                    29.35         20.90                     .4375
                   Third quarter                     29.70         24.99                     .475
                   Fourth quarter                    32.31         26.81                     .475

         2004:
                   First quarter                     31.47         28.98                     .475
                   Second quarter                    31.17         25.11                     .495
                   Third quarter                     31.42         27.28                     .495
                   Fourth quarter                    42.91         30.99                     .495

         2005:
                   First quarter                     43.08         42.61                         (a)
                      (through March 4, 2005)

</TABLE>

(a)  The cash distribution with respect to the first quarter of 2005 has not yet
     been declared.

     Under the terms of its financing agreements, the Company is prohibited from
declaring or paying any distribution if a default exists thereunder.


<PAGE>


Item 6. Summary Historical Financial and Operating Data

     The following table sets forth, for the periods and at the dates indicated,
certain selected historical  consolidated  financial data for Kaneb Services LLC
and its  subsidiaries  (the  "Company").  The data in the table  (in  thousands,
except  per share  amounts)  should be read in  conjunction  with the  Company's
audited financial statements.  See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                        --------------------------------------------------------------------------
                                             2004           2003         2002 (a)          2001           2000
                                        ------------   ------------    ------------   ------------   -------------

<S>                                     <C>            <C>             <C>            <C>            <C>
Income Statement Data:
Revenues:
   Services...........................  $    379,155   $    354,591    $    288,669   $    207,796   $     156,232
   Products...........................       676,093        511,200         381,159        327,542         381,186
                                        ------------   ------------    ------------   ------------   -------------
                                        $  1,055,248   $    865,791    $    669,828   $    535,338   $     537,418
                                        ============   ============    ============   ============   =============

Operating income......................  $    136,779   $    128,504    $    106,359   $     79,791   $      61,174
                                        ============   ============    ============   ============   =============

Income before gain on issuance of
   units by KPP, income taxes and
   cumulative effect of change in
   accounting principle...............  $     27,603   $     27,385    $     24,931   $     16,051   $      15,467

Income tax benefit (expense) (b)......        (3,251)        (4,887)         (2,585)         2,413          (2,824)
Gain on issuance of units by KPP (c)..           -           10,898          24,882          9,859            -
                                        ------------   ------------    ------------   ------------   -------------
Income before cumulative effect
   of change in accounting principle..        24,352         33,396          47,228         28,323          12,643

Cumulative effect of change in
   accounting principle - adoption of
   new accounting standard for asset
   retirement obligations.............           -             (313)            -              -              -
                                        ------------   ------------    ------------   ------------   -------------
Net income............................  $     24,352   $     33,083    $     47,228   $     28,323   $      12,643
                                        ============   ============    ============   ============   =============
Per Share Data:
Earnings per share:
   Basic:
     Before cumulative effect of
       change in accounting principle.  $       2.07   $       2.89    $       4.13   $       2.57   $        1.19
     Cumulative effect of change in
       accounting principle...........          -              (.03)            -              -              -
                                        ------------   ------------    ------------   ------------   -------------
                                        $       2.07   $       2.86    $       4.13   $       2.57   $        1.19
                                        ============   ============    ============   ============   =============
   Diluted:
     Before cumulative effect of
       change in accounting principle.  $       2.03   $       2.84    $       4.02   $       2.46   $        1.15
     Cumulative effect of change in
       accounting principle...........          -              (.03)            -              -              -
                                        ------------   ------------    ------------   ------------   -------------
                                        $       2.03   $       2.81    $       4.02   $       2.46   $        1.15
                                        ============   ============    ============   ============   =============
Cash distributions declared
   per share (d)......................  $       1.96   $      1.825    $       1.65   $      0.725   $       -
                                        ============   ============    ============   ============   =============
Weighted average diluted shares
   outstanding........................        11,981         11,792          11,755         11,509          11,029
                                        ============   ============    ============   ============   =============

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                        --------------------------------------------------------------------------
                                             2004           2003         2002 (a)          2001           2000
                                        ------------   ------------    ------------   ------------   -------------

<S>                                     <C>            <C>             <C>            <C>            <C>
Balance Sheet Data (at year end):
Property and equipment, net...........  $  1,148,612   $  1,113,020    $  1,092,276   $    481,396   $     321,448
Total assets..........................     1,356,888      1,291,567       1,244,101        571,767         429,852
Long-term debt........................       688,935        636,308         718,162        277,302         184,052
Shareholders' equity..................        80,355         77,721          63,654         33,932          71,369

</TABLE>

(a)  See Note 4 to Consolidated Financial Statements regarding KPP acquisitions.

(b)  Effective  with the  Distribution  (See  Note 1 to  Consolidated  Financial
     Statements) the Company became a pass-through  entity with its income,  for
     federal and state purposes,  taxed at the shareholder  level instead of the
     Company  paying such taxes.  Additionally,  in 2000 the Company  recognized
     expected  benefits  from  prior  years  tax  losses  (change  in  valuation
     allowance) of $4.6 million.

(c)  See Note 3 to Consolidated Financial Statements regarding the 2003 and 2002
     gains on issuance of units by KPP.

(d)  The Company makes  quarterly  distributions  of 100% of available  cash, as
     defined  in  the  limited  liability  company  agreement,   to  the  common
     shareholders of record on the applicable  record date, within 45 days after
     the end of each quarter.  Available cash consists generally of all the cash
     receipts of the Company, less all cash disbursements and reserves.



<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

     This  discussion  should  be  read in  conjunction  with  the  consolidated
financial  statements  of the  Company  and the notes  thereto  and the  summary
historical financial and operating data included elsewhere in this report.


OVERVIEW

     On November  27,  2000,  the Board of  Directors  of Kaneb  Services,  Inc.
authorized the distribution of its pipeline,  terminaling and product  marketing
businesses (the "Distribution") to its stockholders in the form of a new limited
liability  company,  Kaneb Services LLC (the  "Company").  On June 29, 2001, the
Distribution  was  completed,  with each  stockholder  of Kaneb  Services,  Inc.
receiving  one  common  share of the  Company  for each  three  shares  of Kaneb
Services,  Inc.'s  common stock held on June 20,  2001,  the record date for the
Distribution,  resulting  in the  distribution  of 10.85  million  shares of the
Company. On August 7, 2001, the stockholders of Kaneb Services, Inc. approved an
amendment  to its  certificate  of  incorporation  to change  its name to Xanser
Corporation ("Xanser").

     In September 1989, Kaneb Pipe Line Company LLC ("KPL"),  now a wholly owned
subsidiary of the Company,  formed Kaneb Pipe Line Partners, L.P. ("KPP") to own
and operate its refined petroleum  products pipeline  business.  KPL manages and
controls the operations of KPP through its general partner  interests and an 18%
(at December 31, 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.

     On October  31,  2004,  Valero  L.P.  agreed to acquire by merger (the "KSL
Merger") all of the outstanding common shares of the Company for cash. Under the
terms  of that  agreement,  Valero  L.P.  is  offering  to  purchase  all of the
outstanding shares of the Company at $43.31 per share.

     In a separate  definitive  agreement,  on October 31, 2004, Valero L.P. and
KPP agreed to merge (the "KPP Merger"). Under the terms of that agreement,  each
holder of units of limited partnership interests in KPP will receive a number of
Valero L.P.  common units based on an exchange  ratio that  fluctuates  within a
fixed  range to provide  $61.50 in value of Valero  L.P.  units for each unit of
KPP. The actual  exchange ratio will be determined at the time of the closing of
the proposed merger and is subject to a fixed value collar of plus or minus five
percent of Valero L.P.'s per unit price of $57.25 as of October 7, 2004.  Should
Valero L.P.'s per unit price fall below $54.39 per unit, the exchange ratio will
remain fixed at 1.1307 Valero L.P. units for each unit of KPP. Likewise,  should
Valero  L.P.'s per unit price exceed  $60.11 per unit,  the exchange  ratio will
remain fixed at 1.0231 Valero L.P. units for each unit of KPP.

     The  completion  of the KSL Merger is subject to the  customary  regulatory
approvals  including those under the  Hart-Scott-Rodino  Antitrust  Improvements
Act. The  completion  of the KSL Merger is also subject to completion of the KPP
Merger.  All required  shareholder and unitholder  approvals have been obtained.
Upon completion of the mergers,  the general partner of the combined partnership
will be owned by affiliates of Valero Energy Corporation and the Company and KPP
will become wholly owned subsidiaries of Valero L.P.

     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  (see  "Liquidity  and  Capital
Resources"). 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  companies in the United States. In
the United States,  ST Services operates 41 facilities in 20 states. ST Services
also owns and operates seven  terminals  located in the United Kingdom and eight
terminals in Australia and New Zealand.  ST Services and its predecessors have a
long  history in the  terminaling  business and handle a wide variety of liquids
from  petroleum  products to  specialty  chemicals  to edible  liquids.  Statia,
acquired on February 28, 2002 ("see "Liquidity and Capital  Resources"),  owns 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
function typically provided by the terminal includes 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>

                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                               2004          2003          2002
                                                                           -----------   -----------    -----------
                                                                           (in thousands, except per share amounts)
<S>                                                                        <C>           <C>            <C>
Consolidated revenues..................................................    $ 1,055,248   $   865,791    $   669,828
                                                                           ===========   ===========    ===========
Consolidated operating income..........................................    $   136,779   $   128,504    $   106,359
                                                                           ===========   ===========    ===========
Consolidated income before gain on issuance of units by KPP, income
   taxes and cumulative effect of change in accounting
   principle...........................................................    $    27,603   $    27,385    $    24,931
                                                                           ===========   ===========    ===========
Consolidated net income................................................    $    24,352   $    33,083    $    47,228
                                                                           ===========   ===========    ===========
Earnings per share:
   Basic:
     Before cumulative effect of change in accounting principle........    $      2.07   $      2.89    $      4.13
     Cumulative effect of change in accounting principle...............           -             (.03)          -
                                                                           -----------   -----------    -----------
                                                                           $      2.07   $      2.86    $      4.13
                                                                           ===========   ===========    ===========
   Diluted:
     Before cumulative effect of change in accounting principle........    $      2.03   $      2.84    $      4.02
     Cumulative effect of change in accounting principle...............           -             (.03)          -
                                                                           -----------   -----------    -----------
                                                                           $      2.03   $      2.81    $      4.02
                                                                           ===========   ===========    ===========
   Cash distributions declared per share...............................    $      1.96   $     1.825    $      1.65
                                                                           ===========   ===========    ===========
   Consolidated capital expenditures...................................    $    42,214   $    44,747    $    31,101
                                                                           ===========   ===========    ===========

</TABLE>


     For the year ended December 31, 2004,  consolidated  revenues  increased by
$189.5  million,  or 22%, when compared to the year ended December 31, 2003, due
to a $164.9 million increase in revenues in the product marketing  business (see
"Product Marketing Services" below), a $24.4 million increase in revenues in the
teminaling  business  (see  "Terminaling  Operations"  below) and a $0.2 million
increase in revenues  from the  pipeline  business  (see  "Pipeline  Operations"
below).  Consolidated  operating  income for the year ended  December  31,  2004
increased by $8.3 million,  or 6%, when compared to 2003, due to an $8.1 million
increase in terminaling  operating income and a $5.0 million increase in product
marketing  operating  income,  partially  offset by a $3.0  million  decrease in
pipeline  operating income and a $1.9 million increase in corporate  general and
administrative  expenses.  Operating  income for 2004 is after  $3.9  million of
costs  associated with the Valero L.P. merger  agreement and compliance with the
Sarbanes-Oxley Act of 2002.  Consolidated 2004 income before gain on issuance of
units by KPP,  income  taxes,  and  cumulative  effect of  change in  accounting
principle,   increased  by  $0.2  million,   when  compared  to  2003.  Overall,
consolidated  net income  decreased by $8.7  million,  or 26%,  when compared to
2003,  which  includes a $10.9  million  gain on  issuance  of units by KPP (see
"Liquidity and Capital Resources").

     For the year ended December 31, 2003,  consolidated  revenues  increased by
$196.0  million,  or 29%, when compared to the year ended December 31, 2002, due
to a $36.9  million  increase  in  revenues in the  pipeline  business,  a $29.0
million  increase in revenues in the  teminaling  business and a $130.0  million
increase in revenues from the product marketing business. Consolidated operating
income for the year ended December 31, 2003 increased by $22.1 million,  or 21%,
when  compared to 2002,  due to a $13.2 million  increase in pipeline  operating
income,  a $1.5  million  increase in  terminaling  operating  income and a $7.5
million  increase in product  marketing  operating  income.  See  "Liquidity and
Capital Resources"  regarding KPP's 2002 acquisitions.  Consolidated 2003 income
before gain on issuance of units by KPP, income taxes, and cumulative  effect of
change in accounting principle, increased by $2.5 million, or 10%, when compared
to 2002. Consolidated net income for the year ended December 31, 2003 includes a
$10.9  million  gain on  issuance  of units by KPP (see  "Liquidity  and Capital
Resources")   and  $0.3   million  of  expense,   net  of  interest  of  outside
non-controlling  partners  in KPP's net  income,  for the  cumulative  effect of
change in accounting  principle - adoption of new accounting  standard for asset
retirement obligations.


PIPELINE OPERATIONS

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ---------------------------------------------------
                                                             2004                 2003                2002
                                                          -----------        -----------          -----------
                                                                             (in thousands)

<S>                                                       <C>                <C>                  <C>
Revenues.............................................     $   119,803        $   119,633          $    82,698
Operating costs......................................          48,306             46,379               33,744
Depreciation and amortization........................          14,538             14,117                6,408
General and administrative...........................           8,106              7,277                3,923
                                                          -----------        -----------          -----------
Operating income.....................................     $    48,853        $    51,860          $    38,623
                                                          ===========        ===========          ===========
</TABLE>


     KPP's 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 STB, the pipelines compete on the basis of quality of service, including
delivering products at convenient  locations on a timely basis to meet the needs
of its customers.  For the year ended December 31, 2004,  revenues  increased by
$0.2  million,  when  compared  to 2003,  due to  increases  in barrel  miles of
products shipped on petroleum  pipelines,  substantially  offset by lower prices
received for products shipped on the anhydrous  ammonia  pipeline.  For the year
ended  December 31, 2003,  revenues  increased by $36.9  million,  or 45%,  when
compared to 2002,  due  entirely to the  November  and  December  2002  pipeline
acquisitions (see "Liquidity and Capital Resources").  Barrel miles on petroleum
pipelines  totaled 22.2  billion,  21.3 billion  (including  4.7 billion for the
petroleum  pipeline  acquired in December  2002) and 18.3  billion for the years
ended December 31, 2004, 2003 and 2002,  respectively.  Total volumes shipped on
the anhydrous ammonia pipeline  aggregated 1,123 thousand tons in 2004 and 1,157
thousand tons in 2003.

     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 $1.9  million  in 2004 and $12.6
million  in 2003.  The  increase  in 2004,  when  compared  to 2003,  was 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.  The increase in 2003,  when compared to 2002,  was due to
the pipeline  acquisitions and increases in expenditures for routine repairs and
maintenance. For the year ended December 31, 2004, depreciation and amortization
increased  by $0.4  million,  when  compared to 2003,  due  primarily to routine
maintenance  capital  expenditures.  For  the  year  ended  December  31,  2003,
depreciation and amortization  increased by $7.7 million, when compared to 2002,
due to the pipeline  acquisitions and routine maintenance capital  expenditures.
General and  administrative  costs,  which includes  managerial,  accounting and
administrative  personnel costs,  office rental expense,  legal and professional
costs and other  non-operating  costs  increased by $0.8  million in 2004,  when
compared to 2003, due primarily to costs associated with the Valero, L.P. merger
agreement,  compliance  with the  Sarbanes-Oxley  Act of 2002 and  increases  in
personnel-related  costs.  General and  administrative  costs for the year ended
December 31, 2003  increased by $3.4 million,  when compared to 2002, due to the
pipeline acquisitions and increases in personnel-related costs.


TERMINALING OPERATIONS

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ---------------------------------------------------
                                                             2004                 2003                2002
                                                          -----------        -----------          -----------
                                                                            (in thousands)

<S>                                                       <C>                <C>                  <C>
Revenues.............................................     $   259,352        $   234,958          $   205,971
Operating costs......................................         122,791            114,030               94,480
Depreciation and amortization........................          41,232             38,089               32,368
Gain on sale of assets...............................           -                   -                    (609)
General and administrative...........................          20,666             16,307               14,692
                                                          -----------        -----------          -----------
Operating income.....................................     $    74,663        $    66,532          $    65,040
                                                          ===========        ===========          ===========
</TABLE>

     For the year ended December 31, 2004, KPP's terminaling  revenues increased
by $24.4  million,  or 10%,  when  compared to 2003,  due to  increases  in both
tankage  utilization  and the  average  price  realized  per  barrel of  tankage
utilized.  For the year ended  December 31,  2003,  KPP's  terminaling  revenues
increased  by $29.0  million,  or 14%,  when  compared to 2002,  due to the 2002
terminal  acquisitions  (see  "Liquidity  and  Capital  Resources")  and overall
increases  in the  average  price  realized  per  barrel  of  tankage  utilized.
Approximately  $25  million  of the 2003  revenue  increase  was a result of the
terminal  acquisitions.  Average  annual  tankage  utilized  for the years ended
December 31, 2004, 2003 and 2002 aggregated 48.9 million  barrels,  46.7 million
barrels and 46.5 million barrels,  respectively.  Average revenues per barrel of
tankage utilized for the years ended December 31, 2004, 2003 and 2002 was $5.30,
$5.02 and $4.43, respectively.  The increase in 2004 average revenues per barrel
of tankage  utilized was  primarily  the result of favorable  market  conditions
domestically  and in Australia  and New Zealand and favorable  foreign  currency
exchange  differences.  The  increase  in 2003  average  revenues  per barrel of
tankage  utilized  was the result of changes in product mix  resulting  from the
2002 terminals acquisitions and favorable foreign currency exchange differences.

     For year  ended  December  31,  2004,  operating  costs  increased  by $8.8
million,  when compared to 2003, due to an overall  increase in planned terminal
maintenance.  In 2003, operating costs increased by $19.6 million, when compared
to 2002, due to the 2002 terminal  acquisitions,  repair costs  associated  with
hurricane  Isabel  and  increases  in  planned  maintenance.  For the year ended
December 31, 2004, depreciation and amortization increased by $3.1 million, when
compared to 2003, due to expansion and routine maintenance capital expenditures.
For the year ended December 31, 2003, depreciation and amortization increased by
$5.7 million, when compared to 2002, due to the 2002 terminal  acquisitions.  In
2002, KPP sold land and other  terminaling  business  assets for net proceeds of
approximately $1.1 million,  recognizing a gain on disposition of assets of $0.6
million.  General and administrative expenses increased by $4.4 million in 2004,
when  compared to 2003,  due to increases in  personnel-related  costs and costs
associated  with the  Valero  L.P.  merger  agreement  and  compliance  with the
Sarbanes-Oxley  Act of 2002.  General and  administrative  expenses increased by
$1.6 million in 2003,  when compared to 2002,  due to the terminal  acquisitions
and increases in personnel-related costs.


PRODUCT MARKETING SERVICES
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ----------------------------------------
                                                                               2004          2003          2002
                                                                           -----------   -----------    -----------
                                                                                         (in thousands)

<S>                                                                        <C>           <C>            <C>
Revenues...............................................................    $   676,093   $   511,200    $   381,159
Cost of products sold..................................................        647,733       486,310        367,870
                                                                           -----------   -----------    -----------
Gross margin...........................................................    $    28,360   $    24,890    $    13,289
                                                                           ===========   ===========    ===========
Operating income.......................................................    $    17,262   $    12,233    $     4,692
                                                                           ===========   ===========    ===========

</TABLE>

     For the year ended December 31, 2004, revenues increased by $164.9 million,
or 32%, when  compared to 2003,  due to an increase in both volumes sold and the
overall  increase in sales price realized.  Total volumes sold and average sales
price per gallon  received for the year ended  December 31, 2004  aggregated 697
million  gallons and $0.97,  respectively,  compared to 612 million  gallons and
$0.84,  respectively,  for the year ended  December 31, 2003. For the year ended
December 31, 2004,  gross margin and operating  income increased by $3.5 million
and $5.0 million,  respectively,  when compared to 2003,  due to the increase in
volumes sold.

     For the year ended December 31, 2003, revenues increased by $130.0 million,
or 34%, when compared to 2002,  due to an increase in both sales volumes and the
average  sales price  realized.  Total  volumes sold and average sales price per
gallon for the year ended December 31, 2003  aggregated 612 million  gallons and
$0.84,  respectively,  compared to 517 million gallons and $0.74,  respectively,
for the year ended December 31, 2002. The volume increase was due to the product
sales  operations  acquired with Statia on February 28, 2002 (see "Liquidity and
Capital Resources").  The price increase was due to increases in overall average
market  prices,  partially  offset by changes in product mix resulting  from the
Statia  acquisition.  For the year ended  December  31,  2003,  gross margin and
operating income increased by $11.6 million and $7.5 million,  respectively, due
to the increase in both the volumes sold and favorable product margins.

     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 AND OTHER INCOME

     In September of 2002, KPP entered into a treasury lock  contract,  maturing
on November 4, 2002, for the purpose of locking in the US Treasury interest rate
component on $150 million of anticipated thirty-year public debt offerings.  The
treasury lock contract  originally  qualified as a cash flow hedging  instrument
under Statement of Financial  Accounting  Standards ("SFAS") No. 133. In October
of 2002,  KPP, due to various market  factors,  elected to defer issuance of the
public  debt   securities,   effectively   eliminating  the  cash  flow  hedging
designation  for the treasury lock  contract.  On October 29, 2002, the contract
was settled resulting in a net realized gain of $3.0 million, before interest of
outside non-controlling  partners in KPP's net income, which was recognized as a
component of interest and other income.


INTEREST EXPENSE

     For the year ended December 31, 2004,  interest  expense  increased by $4.0
million,  when compared to 2003,  due to KPP's May 2003  refinancing of variable
rate debt with $250 million of 5.875% senior unsecured notes (see "Liquidity and
Capital  Resources")  and  overall  increases  in  interest  rates on  remaining
variable rate debt.

     For the year ended December 31, 2003,  interest expense  increased by $10.6
million,  when compared to 2002,  due to increases in fixed rate debt  resulting
from KPP's 2002 pipeline and terminal  acquisitions  (see "Liquidity and Capital
Resources"),  partially offset by overall declines in interest rates on variable
rate debt.

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 $3.3 million, $5.2 million and $4.1 million for the years
ended December 31, 2004, 2003 and 2002, respectively.

     Income tax expense for the year ended  December 31, 2002 includes a benefit
of $1.3 million relating to favorable developments  pertaining to the resolution
of certain state income tax matters.

     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 with Statia 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 operating activities, including the operations of KPP, was
$126.7  million,  $144.9  million and $89.0 million for the years ended December
31,  2004,  2003 and 2002,  respectively.  The decrease in 2004  operating  cash
flows,  when compared to 2003,  was due primarily to changes in working  capital
resulting  from  the  timing  of  cash  receipts  and  disbursements  and  costs
associated  with the  Valero  L.P.  merger  agreement  and  compliance  with the
Sarbanes-Oxley  Act of 2002,  partially offset by overall increases in operating
income.  The  increase in 2003,  when  compared to 2002,  was due to increase in
pipeline,  terminaling  and product  marketing  revenues and  operating  income,
primarily as a result of the 2002  acquisitions,  and changes in working capital
components resulting from the timing of receipts and disbursements.

     Capital   expenditures,   including   routine   maintenance  and  expansion
expenditures, but excluding acquisitions,  were $42.2 million, $44.7 million and
$31.1  million  for  the  years  ended   December  31,  2004,   2003  and  2002,
respectively,  and almost exclusively relate to KPP. Such expenditures  included
$30.8 million and $20.3 million in maintenance  and  environmental  expenditures
and $11.4  million and $24.4  million in  expansion  expenditures  for the years
ended  December  31, 2004 and 2003,  respectively.  The decrease in 2004 capital
expenditures,  when  compared to 2003,  is primarily  the result of decreases in
planned expansion capital expenditures related to the terminaling business.  The
increase in 2003 capital  expenditures,  when compared to 2002, is the result of
planned  maintenance  and  expansion  capital  expenditures  related  to the KPP
pipeline and  terminaling  operations  acquired in 2002 and planned  maintenance
capital expenditures in the existing pipeline and terminaling businesses. 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  in the  future  to be,  significant.  Environmental
damages are included under KPP's insurance coverages (subject to deductibles and
limits).   KPP  anticipates  that  capital   expenditures   (including   routine
maintenance and expansion  expenditures,  but excluding acquisitions) will total
approximately  $40 million to $44 million in 2005.  Such future  expenditures by
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 choose to do so.

     The Company makes  quarterly  distributions  of 100% of available  cash, as
defined in the limited liability agreement, to the common shareholders of record
on the  applicable  record date,  within 45 days after the end of each  quarter.
Available cash consists generally of all the cash receipts of the Company,  less
all  cash  disbursements  and  reserves.  Excess  cash  flow  of  the  Company's
wholly-owned  product  marketing  operations  is being  used to  reduce  working
capital  borrowings.  Distributions  of $1.96,  $1.825  and $1.65 per share were
declared and paid to  shareholders  with respect to the years ended December 31,
2004, 2003 and 2002, respectively.

     KPP expects to fund its future cash  distributions and routine  maintenance
capital expenditures (excluding acquisitions) with existing cash and anticipated
cash  flows  from  operations.  Expansionary  capital  expenditures  of KPP  are
expected to be funded through  additional KPP bank borrowings  and/or future KPP
public equity or debt offerings.

     The Company has an  agreement  with a bank that  provides for a $50 million
revolving credit facility through July 1, 2008. The credit facility, which bears
interest at variable  rates,  is secured by 4.6 million KPP limited  partnership
units and has a variable rate commitment fee on unused amounts.  At December 31,
2004, $14.0 million was drawn on the credit facility.

     The Company's  product  marketing  subsidiary has a credit agreement with a
bank that,  as amended,  provides for a $15 million  revolving  credit  facility
through April of 2007. The credit facility bears interest at variable rates, has
a commitment fee of 0.25% per annum on unutilized  amounts and contains  certain
financial and operational covenants. At December 31, 2004, the subsidiary was in
compliance with all covenants. The credit facility, which is without recourse to
the Company, is secured by essentially all of the tangible and intangible assets
of the Company's  wholly-owned  products  marketing  business and by 250,000 KPP
limited partnership units held by the product marketing subsidiary.  At December
31, 2004, $3.0 million was drawn on the facility.

     In January of 2002, KPP issued  1,250,000  limited  partnership  units in a
public offering at $41.65 per unit,  generating  approximately  $49.7 million in
net proceeds.  The proceeds were used to reduce borrowings under KPP's revolving
credit  agreement.  As a result of KPP  issuing  additional  units to  unrelated
parties,  the  Company's  share of net assets of KPP  increased by $8.6 million.
Accordingly, the Company recognized an $8.6 million gain in 2002.

     In February  of 2002,  KPP issued $250  million of 7.75%  senior  unsecured
notes due February 15, 2012. The net proceeds from the public  offering,  $248.2
million,  were used to repay KPP's revolving  credit  agreement and to partially
fund the  acquisition of all of the liquids  terminaling  subsidiaries of Statia
Terminals  Group NV ("Statia").  Under the note  indenture,  interest is payable
semi-annually  in arrears on February 15 and August 15 of each year.  The notes,
which are without  recourse to the  Company,  are  redeemable,  as a whole or in
part,  at the option of KPP,  at any time,  at a  redemption  price equal to the
greater of 100% of the principal  amount of the notes, or the sum of the present
value of the remaining scheduled payments of principal and interest,  discounted
to the redemption date at the applicable  U.S.  Treasury rate, as defined in the
indenture,  plus 30 basis points.  The note indenture contains certain financial
and operational covenants,  including certain limitations on investments,  sales
of assets and transactions with affiliates and, absent an event of default, such
covenants do not restrict  distributions to the Company or to other partners. At
December 31, 2004, KPP was in compliance with all covenants.

     On February 28, 2002, KPP acquired Statia for approximately $178 million in
cash (net of acquired cash). The acquired Statia  subsidiaries had approximately
$107 million in outstanding debt,  including $101 million of 11.75% notes due in
November 2003.  The cash portion of the purchase  price was initially  funded by
KPP's  revolving  credit  agreement and proceeds from KPP's February 2002 public
debt offering.  In April of 2002,  KPP redeemed all of Statia's  11.75% notes at
102.938% of the principal  amount,  plus accrued  interest.  The  redemption was
funded by KPP's revolving  credit  facility.  Under the provisions of the 11.75%
notes, KPP incurred a $3.0 million  prepayment  penalty,  of which $2.0 million,
before  interest of outside  non-controlling  partners in KPP's net income,  was
recognized   in  the   Consolidated   Financial   Statements  as  loss  on  debt
extinguishment in 2002.

     In May of 2002, KPP issued 1,565,000 limited  partnership units in a public
offering at a price of $39.60 per unit,  generating  approximately $59.1 million
in net  proceeds.  A portion  of the  offering  proceeds  was used to fund KPP's
September  2002  acquisition  of the Australia and New Zealand  terminals.  As a
result of KPP issuing additional units to unrelated parties, the Company's share
of net  assets  of KPP  increased  by $8.8  million.  Accordingly,  the  Company
recognized an $8.8 million gain in 2002.

     On September 18, 2002, KPP acquired eight bulk liquid storage  terminals in
Australia  and New Zealand  from Burns Philp & Co. Ltd.  for  approximately  $47
million in cash.

     On November 1, 2002,  KPP acquired an  approximately  2,000-mile  anhydrous
ammonia pipeline system from Koch Pipeline Company,  L.P. for approximately $139
million  in  cash.  This  fertilizer  pipeline  system  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.  The
acquisition was initially financed with KPP bank debt.

     In November of 2002, KPP issued 2,095,000  limited  partnership  units in a
public offering at $33.36 per unit,  generating  approximately  $66.7 million in
net proceeds.  The offering  proceeds were used to reduce KPP's bank  borrowings
for the fertilizer pipeline  acquisition.  As a result of KPP issuing additional
units to unrelated  parties,  the Company's share of net assets of KPP increased
by $7.5  million.  Accordingly,  the Company  recognized  a $7.5 million gain in
2002.

     On December 24, 2002, KPP acquired a 400-mile  petroleum  products pipeline
and four  terminals  in North  Dakota and  Minnesota  from Tesoro  Refining  and
Marketing  Company for  approximately  $100  million in cash,  subject to normal
post-closing  adjustments.  The acquisition  was initially  funded with KPP bank
debt.

     In March of 2003,  KPP  issued  3,122,500  limited  partnership  units in a
public offering at $36.54 per unit,  generating  approximately $109.1 million in
net proceeds.  The proceeds were used to reduce bank borrowings.  As a result of
KPP issuing  additional units to unrelated  parties,  the Company's share of net
assets of KPP increased by $10.9 million.  Accordingly, the Company recognized a
$10.9 million gain in 2003.

     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 and other
partners.  At December  31,  2004,  KPP was in  compliance  with all  covenants.
Initial  borrowings on the credit agreement  ($324.2 million) were used to repay
all amounts  outstanding  under KPP's $275  million  credit  agreement  and $175
million  bridge  loan  agreement.  At  December  31,  2004,  $95.7  million  was
outstanding under the credit agreement.

     On May 19, 2003, KPP issued $250 million of 5.875% senior  unsecured  notes
due June 1, 2013.  The net proceeds from the public  offering,  $247.6  million,
were used to reduce amounts due under the 2003 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 to other partners. At
December 31, 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,  net of interest of
outside  non-controlling  partners  in  KPP's  accumulated  other  comprehensive
income,  has been  recorded as a component of  accumulated  other  comprehensive
income and is being amortized, as interest expense, over the life of the debt.

     Pursuant to the  Distribution,  the Company  entered into an agreement (the
"Distribution  Agreement")  with Xanser  whereby the Company is obligated to pay
Xanser amounts equal to certain expenses and tax liabilities  incurred by Xanser
in connection with the Distribution. In January of 2002, the Company paid Xanser
$10  million  for tax  liabilities  due  under  the  terms  of the  Distribution
Agreement. The Distribution Agreement also requires the Company to pay Xanser an
amount  calculated based on any income tax liability of Xanser that, in the sole
judgement of Xanser,  (i) is  attributable  to increases in income tax from past
years arising out of adjustments  required by federal and state tax authorities,
to the extent that such increases are properly  allocable to the businesses that
became part of the Company,  or (ii) is attributable to the  distribution of the
Company's common shares and the operations of the Company's  businesses prior to
the  distribution  date. In the event of an  examination of Xanser by federal or
state tax authorities, Xanser will have unfettered control over the examination,
administrative   appeal,   settlement  or  litigation   that  may  be  involved,
notwithstanding that the Company has agreed to pay any additional tax.

         The following is a schedule by period of the Company's, including
KPP's, debt repayment obligations and material contractual commitments at
December 31, 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......................        3,033           -              -            3,033           -
    KPP revolving credit facility.....       95,669           -           95,669            -             -
    KPP 7.75% senior unsecured
      notes...........................      250,000           -              -              -         250,000
    KPP 5.875% senior unsecured
      notes...........................      250,000           -              -              -         250,000
    Other KPP bank debt...............       76,283           -           76,283            -             -
                                        -----------   -----------      ---------     ----------    ----------

       Debt subtotal..................      688,985           -          185,952          3,033       500,000
                                        -----------   -----------      ---------     ----------    ----------

Contractual commitments -
    Operating leases..................       52,189         9,822         14,831          9,396        18,140
                                        -----------   -----------      ---------     ----------    ----------

       Total..........................  $   741,174   $     9,822      $ 200,783     $   12,429    $  518,140
                                        ===========   ===========      =========     ==========    ==========

</TABLE>

     See also "Item 1 - Environmental Matters" and "Item 3 - Legal Proceedings".


OFF-BALANCE SHEET TRANSACTIONS

     The  Company  was not a party  of any  off-balance  sheet  transactions  at
December 31,  2004,  or for any of the years ended  December  31, 2004,  2003 or
2002.


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.

     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 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 of 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 years ended December 31, 2004, 2003 or 2002. 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 years ended
December 31, 2004,  2003 or 2002.  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 of 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123  (revised  2004),  "Share-Based  Payment"  (SFAS No.  123R),  which
addresses  the  accounting  for  share-based  payment  transactions  in which an
enterprise  receives employee services in exchange for equity instruments of the
enterprise,  or liabilities that are based on the fair value of the enterprise's
equity  instruments  or that  may be  settled  by the  issuance  of such  equity
instruments.  SFAS No. 123R  eliminates  the ability to account for  share-based
compensation  transactions  using the  intrinsic  value method under  Accounting
Principles  Board (APB) Opinion 25,  "Accounting for Stock Issued to Employees",
and  generally  requires  that  such  transactions  be  accounted  for  using  a
fair-value-based  method. The Company is currently  evaluating the provisions of
SFAS  No.  123R to  determine  which  fair-value-based  model  and  transitional
provision to follow upon  adoption.  The  alternatives  for  transition  include
either the modified  prospective  or the  modified  retrospective  methods.  The
modified  prospective method requires that compensation  expense be recorded for
all unvested  stock options and  restricted  stock as the  requisite  service is
rendered   beginning   with  the  first   quarter  of  adoption.   The  modified
retrospective  method requires recording  compensation expense for stock options
and  restricted  stock  beginning  with the  first  period  restated.  Under the
modified  retrospective  method,  prior periods may be restated either as of the
beginning  of the year of adoption or for all periods  presented.  SFAS No. 123R
will be effective for the Company  beginning in the third  quarter of 2005.  The
impact of adoption on the Company's  consolidated  financial statements is still
being evaluated.


Item 7(a). Quantitative and Qualitative Disclosures About Market Risk

     The principal  market risks  pursuant to this Item (i.e.,  the risk of loss
arising  from the  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 of 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 $148.2  million  (including  KPP's debt) at December  31,
2004,  a one  percent  increase  in interest  rates  would  increase  annual net
interest  expense by  approximately  $1.5  million,  before  interest of outside
non-controlling  partners  in KPP's  net  income.  Information  regarding  KPP's
interest rate hedging  transactions  was included in "Item 7 -Interest and Other
Income" and "Item 7 - Liquidity and Capital Resources".

     The product  marketing  business  periodically  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 does not engage in derivative transactions
to hedge the value of the  inventory,  it is subject to market risk from changes
in global oil markets.


Item 8. Financial Statements and Supplementary Data

     The financial  statements  and  supplementary  data of the Company begin on
page F-1 of this report.  Such  information is hereby  incorporated by reference
into this Item 8.


Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

     None.


Item 9(a). Controls and Procedures

     Kaneb Services LLC's principal  executive  officer and principal  financial
officer,  after  evaluating as of December 31, 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.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Kaneb Services LLC (the  "Company"),  is responsible for  establishing  and
maintaining  adequate  internal  control over financial  reporting as defined in
Rules  13a-15(f)  and  15d-15(f)  under  the  Securities  Exchange  Act of 1934.
Management  assessed the  effectiveness  of the Company's  internal control over
financial  reporting  as of  December  31,  2004.  In  making  this  assessment,
management   used  the  criteria  set  forth  by  the  Committee  of  Sponsoring
Organizations of the Treadway  Commission (COSO) in Internal  Control-Integrated
Framework.  Based on  management's  assessment  and those  criteria,  management
believes that the Company  maintained  effective internal control over financial
reporting as of December 31,  2004.  The  Company's  independent  auditors  have
issued  an  attestation  report  on  management's  assessment  of the  Company's
internal control over financial reporting. That report appears below.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Kaneb Services LLC

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report on Internal  Control Over Financial  Reporting,  that Kaneb
Services LLC and  subsidiaries  (the "Company")  maintained  effective  internal
control over  financial  reporting  as of December  31, 2004,  based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring  Organizations  of the  Treadway  Commission  (COSO).  The  Company's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  management's  assessment that the Company maintained  effective
internal  control over  financial  reporting as of December 31, 2004,  is fairly
stated,  in all material  respects,  based on criteria  established  in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of the Treadway  Commission  (COSO).  Also,  in our opinion,  the
Company  maintained,  in all material respects,  effective internal control over
financial  reporting as of December 31, 2004,  based on criteria  established in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Kaneb  Services LLC and  subsidiaries  as of December 31, 2004 and 2003, and the
related  consolidated  statements of income, cash flows and shareholders' equity
for each of the years in the three-year  period ended December 31, 2004, and our
report  dated  March  11,  2005  expressed  an  unqualified   opinion  on  those
consolidated financial statements.

KPMG LLP

Dallas, Texas
March 11, 2005


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     During  the  fourth  quarter  of 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>
                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     The Company's Amended and Restated Limited Liability Company Agreement (the
"Company Agreement") provides for classifications of its Board of Directors into
three classes, with each class holding office for a three-year term.


<TABLE>
<CAPTION>
                                                                                     Years of Service
       Name                         Age             Position with KSL                    With KSL
       --------------------------- ------- ------------------------------------ ---------------------------
<S>                                  <C>   <C>                                                <C>
       John R. Barnes                60    President, Chairman of the Board                   3   (a)
                                             and Chief Executive Officer
       Howard C. Wadsworth           60    Vice President, Treasurer                          3   (b)
                                             and Secretary
       Sangwoo Ahn                   66    Director                                           3   (c)
       Murray R. Biles               74    Director                                           3   (d)
       Frank M. Burke                65    Director                                           3   (e)
       Charles R. Cox                62    Director                                           3   (f)
       Hans Kessler                  55    Director                                           3   (g)
       James R. Whatley              78    Director                                           3   (h)

</TABLE>

(a)  Mr. Barnes, Chairman of the Board, President and Chief Executive Officer of
     Kaneb  Services LLC (the  "Company")  is also a director of Kaneb Pipe Line
     Company  LLC  ("KPL").  Mr.  Barnes  also  serves as a  director  of Xanser
     Corporation.

(b)  Mr.  Wadsworth  serves as Vice President,  Treasurer and Secretary of Kaneb
     Services LLC. Mr. Wadsworth joined the Kaneb companies in October 1990.

(c)  Mr.  Ahn,  a  director  of the  Company  since the  Distribution  is also a
     director  of KPL.  Mr.  Ahn has served as  Chairman  of the Board of Quaker
     Fabric  Corporation since 1993 and currently serves as a director of Xanser
     Corporation and PAR Technology Corporation.

(d)  Mr.  Biles,  a director of the  Company  since the  Distribution  is also a
     director  of KPL.  Mr.  Biles  joined  KPL in  November  1953 and served as
     President from January 1985 until his retirement at the close of 1993.

(e)  Mr.  Burke,  a director of the  Company  since the  Distribution  is also a
     director of KPL. Mr. Burke has been Chairman and Managing  General  Partner
     of Burke,  Mayborn Company,  Ltd., a private investment  company,  for more
     than the past five years.  Mr. Burke also currently serves as a director of
     Xanser Corporation,  Arch Coal, Inc.,  Crosstex Energy,  Inc., and Crosstex
     Energy GP, LLC.

(f)  Mr.  Cox,  a  director  of the  Company  since the  Distribution  is also a
     director of KPL. Mr. Cox has been Chairman of the Board and Chief Executive
     Officer of WRS Infrastructure  and Environment,  Inc., a technical services
     company,  since  March  2001.  He served as a private  business  consultant
     following his retirement in January 1998, from Fluor Daniel, Inc., where he
     served in senior  executive  level  positions  during a 29 year career with
     that  organization.  Mr. Cox also currently  serves as a director of Xanser
     Corporation.

(g)  Mr.  Kessler,  a director of the Company since the  Distribution  is also a
     director of KPL. Mr.  Kessler has served as Chairman and Managing  Director
     of KMB Kessler + Partner  GmbH since  1992.  He was  previously  a Managing
     Director and Vice  President of a European  Division of Tyco  International
     Ltd. Mr. Kessler also currently serves as a director of Xanser Corporation.

(h)  Mr.  Whatley,  a director of the Company since the  Distribution  is also a
     director of KPL. Mr.  Whatley  served as Chairman of the Board of Directors
     of Xanser  Corporation  (formerly Kaneb Services,  Inc.) from February 1981
     until April 1989, and continues to serve as a member of the Board.

     During 2004,  the Board of Directors of the Company held nine meetings and,
with the exception of one meeting which Mr.  Whatley was unable to attend,  each
director attended 100% of these meetings.


CODE OF ETHICS

     The  Company  has  adopted a Code of Ethics  applicable  to all  employees,
including the  principal  executive  officer,  principal  financial  officer and
directors  of the  General  Partner.  The  Company  has also  adopted  Corporate
Governance Guidelines, which address director qualification standards;  director
access to management,  and as necessary and appropriate,  independent  advisors;
director compensation; director orientation and continuing education; management
succession and annual performance evaluation of the board. Copies of the Code of
Ethics and the Corporate Governance  Guidelines are available on Kaneb's website
at  www.kaneb.com  and will be  provided  without  charge by written  request to
Investor Relations, 2435 North Central Expressway, Richardson, Texas 75080.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE STATEMENT

     Section 16(a) of the Securities  Exchange Act of 1934, as amended ("Section
16(a)") requires the Company's  executive officers and directors,  among others,
to file  reports of  ownership  and changes of  ownership  in the  Partnership's
equity  securities with the Securities and Exchange  Commission and the New York
Stock Exchange. Such persons are also required by related regulations to furnish
the Company with copies of all Section 16(a) forms that they file.

     Based solely on its review of the copies of such forms  received by it, the
Company believes that, during the year ended December 31, 2004, its officers and
directors have complied with all applicable  filing  requirements  under Section
16(a).


AUDIT COMMITTEE

     The Company's Board has an Audit Committee, which is currently comprised of
Sangwoo Ahn (Chairman), Frank M. Burke and James R. Whatley. Each of the members
of the Audit Committee is independent as defined under the listing  standards of
the New York Stock  Exchange and the  Securities  Exchange Act of 1934,  and the
Board of  Directors  of KPL has  determined  that  Frank M.  Burke is an  "audit
committee  financial  expert"  as  defined  in the rules of the  Securities  and
Exchange Commission.  Messrs. Ahn and Burke each serve on the audit committee of
more than two public  companies  other than KPL and KSL. The Audit Committee and
the KPL  Board  have  determined  that Mr.  Ahn's and Mr.  Burke's  simultaneous
services on other audit  committees will not impair their ability to effectively
serve on the Audit Committee. The Audit Committee held four meetings during 2004
and, with the  exception of one meeting which Mr.  Whatley was unable to attend,
each committee member attended 100% of these meetings.

     The  functions  of  the  Audit  Committee  include  the  selection  of  the
independent auditors, the planning of, and fee estimate approval for, the annual
audit of the consolidated financial statements, the review of the results of the
examination  by  the  independent   auditors  of  the   consolidated   financial
statements,  and  the  approval  of  any  non-audit  services  performed  by the
independent  auditors and consideration of the effect of such non-audit services
on the auditors'  independence.  The Audit Committee has the authority to engage
independent  counsel and other advisers as it determines  necessary to carry out
its duties.  The Audit Committee operates under a written charter adopted by the
Board of  Directors of the  Company,  which is  available on Kaneb's  website at
www.kaneb.com  or in print to any  shareholder  who sends a written  request  to
Investor Relations, 2435 North Central Expressway, Richardson, Texas 75080.

     The Audit Committee has established procedures for the receipt,  retention,
and treatment of complaints received regarding  accounting,  internal accounting
controls,  or auditing  matters and the  confidential,  anonymous  submission by
employees of concerns  regarding  questionable  accounting or auditing  matters.
Persons wishing to communicate  with the Audit Committee may do so by writing in
care of Chairman of the Audit Committee,  Kaneb Services LLC, 2435 North Central
Expressway, Suite 700, Richardson, Texas 75080.


COMPENSATION COMMITTEE

     The Company has a Compensation  Committee comprised of Charles R. Cox, Hans
Kessler  and  James R.  Whatley  (Chairman),  each of whom is  "independent"  as
defined under the listing standards of the New York Stock Exchange. The function
of the  Compensation  Committee  is to  establish  and review  the  compensation
programs for the Named Executive  Officers of Kaneb and its  subsidiaries and to
formulate,  recommend and implement incentive, share option or other bonus plans
or programs for the  officers of Kaneb and its  subsidiaries.  The  Compensation
Committee held four meetings  during 2004,  which were attended by all committee
members, except for Mr. Whatley, who attended three meetings.

     The Compensation  Committee operates under a written charter adopted by the
Board of  Directors of the  Company,  which is  available on Kaneb's  website at
www.kaneb.com.


NYSE CORPORATE GOVERNANCE LISTING STANDARDS

Annual CEO Certification

     As the Chief  Executive  Officer of Kaneb  Services  LLC and as required by
Section  303A.12(a) of the New York Stock  Exchange  Listed  Company  Manual,  I
hereby certify that as of the date hereof I am not aware of any violation by the
Company of NYSE's Corporate  Governance listing  standards,  other than has been
notified to the Exchange pursuant to Section 303A.12(b) and disclosed as Exhibit
H to the Company's Section 303A Annual Written Affirmation.

                                By:      //s//  JOHN R. BARNES
                                Print Name:       John R. Barnes
                                Title:    Chairman of the Board and
                                          Chief Executive Officer
                                Date:    March 15, 2005

Executive Sessions Of Non-Management Directors

     Messrs.  Ahn,  Biles,  Burke,  Cox,  Kessler  and  Whatley,   who  are  the
non-management  directors of the Company,  meet at regularly scheduled executive
sessions  without  management.  Sangwoo Ahn serves as the presiding  director at
those executive sessions. Persons wishing to communicate with the non-management
directors may do so by writing Mr. Ahn,  Kaneb  Services LLC, 2435 North Central
Expressway, Suite 700, Richardson, Texas 75080.

     Messrs.  Ahn,  Biles,  Burke,  Cox,  Kessler  and  Whatley,   who  are  the
independent  non-management  directors of the Company, meet at least annually in
executive session without management and the other directors. Sangwoo Ahn serves
as the  presiding  director  at those  executive  sessions.  Persons  wishing to
communicate with the Company's independent non-management directors may do so by
by writing Mr. Ahn,  Kaneb  Services LLC, 2435 North Central  Expressway,  Suite
700, Richardson, Texas 75080.


Item 11.    Executive Compensation

     The  following  table  sets  forth  information  concerning  the annual and
long-term  compensation  paid for services to the Company in all  capacities for
the fiscal years ended December 31, 2004,  2003 and 2002 to the Chief  Executive
Officer  and the other  executive  officer  of Kaneb  Services  LLC (the  "Named
Executive Officers").

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                             Annual Compensation (2)           Long Term Compensation
                             -----------------------  -----------------------------------------
                                                           DSUs         Options
                                                        Related to    Related to       Other
    Name and                                             Deferred      Deferred        Share          All Other
Principal Position     Year     Salary      Bonus     Compensation(3)Compensation     Options     Compensation (4)
--------------------   ----   ----------  ---------   ---------------------------   -----------   ----------------

<S>                     <C>   <C>           <C>         <C>            <C>           <C>          <C>
John R.  Barnes (1)     2004  $  130,000    $ -0-            505           -0-          300,000      $   2,823
Chairman of the Board   2003     122,917      -0-            547           -0-             -0-           2,629
President and Chief     2002     118,760      -0-          9,835         13,970            -0-           2,504
Executive Officer of
the Company

Howard C.  Wadsworth(1) 2004      75,750    25,000            98           -0-             -0-           2,975
Vice President,         2003      72,375      -0-            109           -0-             -0-           2,444
Treasurer and           2002      70,282      -0-            731           855             -0-           2,504
Secretary

</TABLE>

(1)  Messrs.  Barnes  and  Wadsworth  also  receive  compensation  for  services
     provided to and paid for by Kaneb Pipe Line Partners,  L.P.,  none of which
     is included in the foregoing table.

(2)  Amounts  for  2004,  2003  and  2002,  respectively,  exclude  compensation
     voluntarily  deferred  for the  purchase of Deferred  Share Units  ("DSUs")
     pursuant  to the Kaneb  Deferred  Stock Unit Plan by Mr.  Barnes  ($61,250,
     $61,250 and $48,490) and Mr. Wadsworth ($3,750,  $3,750 and $2,969) and for
     the purchase of DSUs pursuant to the Kaneb Supplement Deferred Compensation
     Plan by Mr. Barnes ($8,750,  $7,500 and $7,750) and Mr. Wadsworth  ($1,695,
     $1,500 and $1,750).

(3)  Reflects DSUs from salary  deferrals and those acquired in connection  with
     the Supplemental Deferred Compensation Plan.

(4)  Includes the amount of the Company's contribution to the Savings Investment
     Plan (the "401(k) Plan") and the imputed value of  Company-paid  group term
     life insurance coverage exceeding $50,000.


OPTIONS/SAR'S GRANTED DURING LAST FISCAL YEAR

     The following  table  includes the details of options  granted to the Chief
Executive  Officer  during 2004.  All options were priced at 100% of the closing
price of the  Company's  Common  Shares on the date of grant.  For  illustrative
purposes only, the Black-Scholes  option pricing model has been used to estimate
the  value  of  options  issued  by the  Company.  The  assumptions  used in the
calculations  under such model include share price variance or volatility  based
on weekly  average  variances of the shares and similar  shares for the ten-year
period preceding issuance,  a risk-free rate of return based on the 30-year U.S.
Treasury bill rate for the ten-year  expected life of the options,  and exercise
of the  options  at the end of their  expected  life.  The actual  option  value
realized,  if such  option is  exercised,  will be based  upon the excess of the
market  price of the  Company's  Common  Shares over the  exercise  price of the
option on the date of  exercise.  There is no  relationship  between  the actual
option value upon exercise and the illustration below.

<TABLE>
<CAPTION>
                                             % of Total                                            Computed Value
                          Number of            Granted                                               Using Black
                        Options/SAR's       To Employees        Exercise Price      Expiration     Scholes Option
       Name                Granted           During Year           ($/Share)           Date         Pricing Model
------------------    ----------------   -------------------   ---------------     -----------    -----------------
<S>                       <C>                   <C>                 <C>             <C>            <C>
John R. Barnes            300,000               100%                $28.75          08/03/2014         $780,000

</TABLE>


AGGREGATED OPTION/SAR EXERCISES IN MOST RECENT FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                             Number of Unexercised         Value of Unexercised
                                                                Options Held at            In-the-Money Options
                                Shares                          Fiscal Year End             at Fiscal Year End
                              Acquired On      Value     ----------------------------   ----------------------------
       Name                    Exercise      Realized    Exercisable   Unexercisable    Exercisable   Unexercisable
---------------------       -------------    --------    -----------   -------------    -----------   -------------
<S>                           <C>            <C>          <C>          <C>              <C>           <C>
John R. Barnes                    -0-        $   -0-          -0-         300,000       $     -0-     $   4,332,000
Howard C.  Wadsworth             1,670         34,097        1,670          3,380           52,033           92,149

</TABLE>


EQUITY COMPENSATION PLAN INFORMATION

     The  following  table sets forth  information  about the  Company's  equity
compensation plans as of December 31, 2004.  Securities to be issued as shown in
the table are the result of options  granted and Deferred Share Units  purchased
including "Keep Whole Options" granted pursuant to the Distribution.

<TABLE>
<CAPTION>
                            Number of Securities to                                         Number of Securities
                          be Issued Upon Exercise         Weighted-Average Exercise        Remaining Available for
                            of Outstanding Options,     Price of Outstanding Options,       Future Issuance Under
    Plan Category             Warrants and Rights            Warrants and Rights          Equity Compensation Plans
----------------------    --------------------------   ------------------------------   ----------------------------
<S>                          <C>                            <C>                           <C>
Equity Compensation
Plans Approved by
Security Holders (1)                 506,307                        $21.66                        287,826

Equity Compensation
Plans Not Approved
By Security Holders                     -                              -                             -
                                 --------------                   ---------                    -------------
Total                                506,307                        $21.66                        287,826
                                 ==============                   =========                    =============
</TABLE>

(1)  All shares  utilized  for equity  compensation  are issued  under the Kaneb
     Services  LLC 2001  Incentive  Plan,  including  those  Keep-Whole  Options
     related to Kaneb  Services,  Inc.  options granted up to ten years prior to
     the Distribution.


KEEP-WHOLE OPTIONS GRANTED PURSUANT TO THE DISTRIBUTION

     In order to preserve the value of options which were  outstanding  prior to
the  Distribution,  the Company issued options to purchase  shares of its Common
Shares to all holders of Kaneb Services, Inc. common stock options. No value was
created  by the  grants  and the  same  intrinsic  value  of  options  held  was
maintained  for  each  holder  as at  the  time  of  the  Distribution.  At  the
Distribution  date,  the  exercise  price for each option to purchase  shares of
Kaneb  Services,  Inc. common stock was reduced to an amount equal to the result
of (1) the fair market value of a share of Kaneb  Services,  Inc.'s common stock
on the ex-dividend date multiplied by (2) a fraction, the numerator of which was
the original  exercise price for the option and the denominator of which was the
fair market value of a share of Kaneb Services,  Inc.'s common stock on the last
trading date prior to the ex-dividend  date. The number of shares subject to the
Kaneb  Services,  Inc.  stock  option  was  not  changed  as  a  result  of  the
Distribution.  With  regard to options  issued for  shares of the  Company,  the
exercise price applicable was that price that created the same ratio of exercise
price to  market  price as in the  adjusted  exercise  price  applicable  to the
holders of Kaneb Services,  Inc. options. The number of Common Shares subject to
options issued by the Company was such number  necessary to produce an intrinsic
value  (determined as of the ex-dividend date) that, when added to the intrinsic
value  of  the  adjusted  Kaneb  Services,  Inc.  option  (determined  as of the
ex-dividend  date),  equaled the  pre-distribution  intrinsic value of the Kaneb
Services,  Inc. option,  if any (determined as of the last trading date prior to
the ex-dividend date).  However options to purchase  fractional Common Shares of
the  Company  were not  granted.  The fair  market  values  of  shares  of Kaneb
Services,  Inc.'s common stock and the  Company's  Common Shares were based upon
the  closing  sales  price of the stock on the last  trading  date  prior to the
ex-distribution  date  and  the  opening  sales  price  of  the  shares  on  the
ex-distribution date.

DESCRIPTION OF OTHER PROGRAMS

Deferred Share Unit Plans

     In 1996,  Kaneb  Services,  Inc.,  now Xanser,  implemented  a  share-based
deferred  compensation  plan ("Deferred  Stock Unit Plan" or "DSU Plan") whereby
officers, directors and key executives were permitted to defer compensation on a
pretax  basis  in  return  for  common  stock  of  Kaneb  Services,  Inc.  at  a
predetermined  date  after  the  end of the  compensation  deferral  period.  In
connection  with the  Distribution,  the Company  agreed to issue Deferred Share
Units ("DSUs")  equivalent in price to the Company's Common Shares at that time.
For every three Kaneb Services, Inc. DSUs held, the Company issued one DSU, such
that the intrinsic value of each holder's deferred compensation account remained
unchanged as a result of the Distribution. In addition, upon the payment date of
any  distribution on the Company's  Common Shares,  the Company agreed to credit
each deferred  account with the equivalent value of the  distribution.  Upon the
scheduled  payment of the  deferred  accounts,  the Company  agreed to issue one
common share for each DSU relative to Company DSUs previously  issued and to pay
the  equivalent of the  accumulated  deferred  distributions  to the  previously
deferred  account  holder.  All other terms of the DSU Plan remained  unchanged.
Similarly,  Kaneb Services, Inc. agreed to issue to employees of the Company who
hold DSUs the number of shares of Kaneb Services,  Inc. common shares subject to
the Kaneb  Services,  Inc.  DSUs held by those  employees.  In March  2002,  the
Company implemented its own Deferred Share Unit Plan with substantially  similar
terms as the prior Kaneb Services, Inc. plan for its officers and key employees.
At December 31, 2004,  approximately  183,704  Common  Shares of the Company are
issuable  under the prior Kaneb  Services,  Inc. plan and the Company's  current
plan.

     Effective  March 10,  2005,  the  Company  terminated  its DSU Plan and all
participants were fully vested. All accounts will be distributed to participants
during 2005.


DIRECTOR'S FEES

     During 2004,  each member of the  Company's  Board of Directors who was not
also an employee of the Company was paid an annual retainer of $25,000.  Members
of the Company  Board's Audit  Committee,  comprised of Sangwoo Ahn  (Chairman),
Frank M.  Burke and James R.  Whatley,  received  attendance  fees of $1,000 per
meeting for the Audit  Committee  meetings  held during  2004.  Messrs.  Ahn and
Burke, who attended four meetings of the Audit  Committee,  received $4,000 each
and Mr. Whatley, who attended three meetings, received $3,000. In addition, each
member of the Compensation Committee,  comprised of Charles R. Cox, Hans Kessler
and James R.  Whatley  received  attendance  fees of $500 per meeting  attended.
Messrs.  Cox and Kessler  each  received  $2,000 for 2004 for the four  meetings
attended  during 2004 and Mr. Whatley  received $1,500 for the three meetings he
attended.

     In August 2004, the Company issued an aggregate of 60,000 restricted Common
Shares to the  outside  Directors  of the  Company.  All of such  shares vest or
become  transferable  in one-third  increments  on each  anniversary  date after
issuance. In conjunction with the issuance of the restricted shares, the Company
recognized a total expense of $0.4 million in 2004.


Item 12. Security Ownership of Certain Beneficial Owners and Management

BENEFICIAL OWNERSHIP OF COMMON SHARES
BY DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                                                  Number of Common        Percent
                                                                                 Shares Beneficially      of Out-
                                                                                      Owned at           standing
            Name                          Position Held with Company              March 4, 2005 (1)       Shares
-------------------------------     ---------------------------------------      -------------------     ---------
<S>                                 <C>                                           <C>                    <C>
John R.  Barnes                     Chairman of the Board, President and                390,482 (2)          3.34%
                                    Chief Executive Officer

Sangwoo Ahn                         Director                                             97,306 (3)             *%

Murray R.  Biles                    Director                                             15,100                 *%

Frank M.  Burke                     Director                                             63,125                 *%

Charles R.  Cox                     Director                                             78,872 (4)             *%

Hans Kessler                        Director                                             27,144                 *%

James R.  Whatley                   Director                                             69,353 (5)             *%

Howard C.  Wadsworth                Vice President, Treasurer and Secretary              47,562 (6)             *%

All Directors and Executive Officers as a group (8 persons)                             788,944              6.75%

</TABLE>

* Less than one percent.

(1)  Shares listed include those  beneficially owned by the person determined in
     accordance with Rule 13d-3 under the Exchange Act.

(2)  Includes 142,114 shares that Mr. Barnes has the right to acquire,  pursuant
     to  options or  otherwise,  within 60 days of March 4,  2005,  and  248,368
     shares for which Mr. Barnes has voting power.

(3)  Includes  23,029 shares that Mr. Ahn has the right to acquire,  pursuant to
     options or otherwise, within 60 days of March 4, 2005.

(4)  Includes  31,227 shares that Mr. Cox has the right to acquire,  pursuant to
     options or otherwise, within 60 days of March 4, 2005.

(5)  Includes 16,700 shares that Mr. Whatley has the right to acquire,  pursuant
     to options or otherwise, within 60 days of March 4, 2005.

(6)  Includes 3,380 shares that Mr. Wadsworth has the right to acquire, pursuant
     to options or otherwise, within 60 days of March 4, 2005.


Item 13. Certain Relationships and Related Transactions

     The Company is entitled to certain  reimbursements  under the  Distribution
Agreement.  For additional  information  regarding the nature and amount of such
reimbursements,   see  Note  9  to  the  Partnership's   consolidated  financial
statements.


Item 14. Principal Accounting Fees and Services

     The following  table sets forth the aggregate fees billed for  professional
services rendered by KPMG LLP, the Company's principal accountant, for the audit
of the Company's financial  statements for the years ended December 31, 2004 and
2003, and for fees billed for other  services  rendered by KPMG LLP during those
periods.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                           -------------------------------
                                                                                2004             2003
                                                                           -------------     -------------
<S>                                                                        <C>               <C>
         Audit (1)(3)                                                      $   1,232,000     $     512,000
         Audit-related Fees (3)                                                   83,000             -
         Tax Fees (2)                                                             30,000            83,000
         All Other Fees                                                             -                -
                                                                           -------------     -------------
                                                                           $   1,345,000     $     595,000
                                                                           =============     =============
</TABLE>

          (1)  Fees for the audit of the Company's annual financial  statements,
               review  of  financial   statements   included  in  the  Company's
               Quarterly  Reports on Form 10-Q,  and services  that are normally
               provided by KPMG LLP in connection  with statutory and regulatory
               filings or  engagements  for the fiscal year shown.  Less than 50
               percent of the hours  expended on KPMG LLP's  engagement to audit
               the  Company's  financial   statements  in  2004  and  2003  were
               attributed  to work  performed  by persons  other than KPMG LLP's
               full-time, permanent employees.

          (2)  Fees for  professional  services  rendered by KPMG LLP for income
               tax return review,  income tax  consultation and other income tax
               compliance  work.  2003 amount  includes  services  performed  in
               connection with acquisitions made in foreign countries.

          (3)  Audit Fees and  Audit-related  Fees for 2004 include $625,000 and
               $22,800, respectively, for compliance with the Sarbanes-Oxley Act
               of 2002.

     The Company's  Audit Committee must  pre-approve all auditing  services and
permitted  non-audit  services  (including  the fees and  terms  thereof)  to be
performed  for the  Company by its  independent  auditor.  The  Company's  Audit
Committee may form and delegate authority to subcommittees  consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit  and  permitted  non-audit  services,  provided  that  decisions  of  such
subcommittee  to grant  pre-approvals  shall  be  presented  to the  full  Audit
Committee at its next scheduled  meeting.  Since May 6, 2003, the effective date
of the SEC rules requiring pre-approval of audit and non-audit services, 100% of
the  services  identified  in the  preceding  table were  approved  by the Audit
Committee.

     The Audit  Committee of the Board of  Directors  of the Company  considered
whether  the  provision  of  services  other than audit  services  for 2004 were
compatible with maintaining the principal accountants'  independence.  The Audit
Committee  of the Board of  Directors  has not yet met to select  the  principal
accountants  to audit the accounts of the Company for the  calendar  year ending
December 31, 2005.


<PAGE>
                                     PART IV

Item 15. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
    (a) (1)Financial Statements Beginning                                                                 Page

         Set forth below is a list of financial statements appearing in this
report.

<S>                                                                                                       <C>
         Kaneb Services LLC Financial Statements:
           Report of Independent Registered Public Accounting Firm...................................     F - 1
           Consolidated Statements of Income - Three Years Ended December 31, 2004...................     F - 2
           Consolidated Balance Sheets - December 31, 2004 and 2003..................................     F - 3
           Consolidated Statements of Cash Flows - Three Years Ended December 31, 2004...............     F - 4
           Consolidated Statements of Shareholders' Equity - Three Years
              Ended December 31, 2004................................................................     F - 5
           Notes to Consolidated Financial Statements................................................     F - 6

    (a) (2)Financial Statement Schedules

     Set forth below are the  financial  statement  schedules  appearing in this
report.

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

         Statements of Income - Years ended December 31, 2004, 2003 and 2002.........................     F - 24
           Balance Sheets - December 31, 2004 and 2003...............................................     F - 25
           Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002...................     F - 26

         Schedule II - Kaneb Services LLC Valuation and Qualifying Accounts - Years Ended
           December 31, 2004, 2003 and 2002..........................................................     F - 27

          Schedules, other than those listed above, have been omitted because of
     the absence of the conditions  under which they are required or because the
     required  information is included in the consolidated  financial statements
     or related notes thereto.

</TABLE>

    (a)(3)List of Exhibits

     2.1  Agreement  and Plan of Merger dated as of October 31,  2004,  filed as
          Exhibit 2.1 to  Registrant's  Form 8-K, filed October 31, 2004,  which
          exhibit is hereby incorporated by reference.

     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.

     4.1  Specimen  Common  Share  Certificate,  filed  as  Exhibit  4.01 to the
          exhibits to Registrant's  Form 10/A,  dated May 1, 2001, which exhibit
          is hereby incorporated by reference.

     4.2* Amended and Restated Kaneb Services LLC 2001 Incentive Plan,  filed as
          Exhibit 10.1 to the exhibits to Registrant's Form 10-Q, for the period
          ended  June  30,  2003,  which  exhibit  is  hereby   incorporated  by
          reference.

     10.1 Distribution  Agreement  by  and  between  the  Registrant  and  Kaneb
          Services,  Inc., filed as Exhibit 10.1 to the exhibits to Registrant's
          Form 10-Q, for the period ended June 30, 2001, which exhibit is hereby
          incorporated by reference.

     10.2 Administrative  Services  Agreement by and between the  Registrant and
          Kaneb  Services,  Inc.,  filed  as  Exhibit  10.2 to the  exhibits  to
          Registrant's  Form 10-Q,  for the period  ended June 30,  2001,  which
          exhibit is hereby incorporated by reference.

     10.3 Rights   Agreement  by  and  between  the  Registrant  and  The  Chase
          Manhattan Bank,  filed as Exhibit 10.3 to the exhibits to Registrant's
          Form 10-Q, for the period ended June 30, 2001, which exhibit is hereby
          incorporated by reference.

     10.4*Employee  Benefits  Agreement by and between the  Registrant and Kaneb
          Services, Inc., filed as Exhibit 10.04 to the exhibits to Registrant's
          Form 10/A, dated May 24, 2001, which exhibit is hereby incorporated by
          reference.

     10.5 Formation  and  Purchase  Agreement,  by and  among  Support  Terminal
          Operating  Partnership,  L.P.,  Northville Industries Corp. and AFFCO,
          Corp., dated October 30, 1998, filed as Exhibit 10.9 to the Kaneb Pipe
          Line Partners,  L.P.'s Form 10-K for the year ended December 31, 1998,
          which exhibit is hereby incorporated by reference.

     10.6 Credit   Agreement,   by  and  among,   Kaneb   Pipe  Line   Operating
          Partnership, L.P., ST Services, Ltd. and SunTrust Bank, Atlanta, dated
          January  27,  1999,  filed as  Exhibit  10.11 to the  Kaneb  Pipe Line
          Partners, L.P.'s Form 10-K for the year ended December 31, 1998, which
          exhibit is hereby incorporated by reference.

     10.7 Revolving  Credit  Agreement,  dated as of  December  28,  2000 by and
          among Kaneb Pipe Line  Operating  Partnership,  L.P.,  Kaneb Pipe Line
          Partners,  L.P.,  the Lenders  party  thereto,  and SunTrust  Bank, as
          Administrative  Agent,  filed as  Exhibit  10.11 to  Kaneb  Pipe  Line
          Partners, L.P.'s Form 10-K for the year ended December 31, 2000, which
          exhibit is hereby incorporated by reference.

     10.8*Kaneb Services LLC 401(k) Savings Plan,  filed as Exhibit 10.16 to the
          exhibits to Registrant's  Form 10/A, dated May 24, 2001, which exhibit
          is hereby incorporated by reference.

     10.9 Loan Agreement by and between the Registrant,  Kaneb Pipe Line Company
          LLC and the Bank of Scotland, filed as Exhibit 10.6 to the exhibits to
          Registrant's  Form 10-Q,  for the period  ended June 30,  2001,  which
          exhibit is hereby incorporated by reference.

     21   List of Subsidiaries, filed herewith.

     22   Form S-4, as amended and filed January 25, 2005,  by Valero L.P.,  and
          incorporated herein by reference.

     23   Consent of KPMG LLP, filed herewith.

     31.1 Certification of Chief Executive  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated as of March 16, 2005.

     31.2 Certification of Chief Financial  Officer,  Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002, dated as of March 16, 2005.

     32.1 Certification of Chief Executive  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated as of March 16, 2005.

     32.2 Certification of Chief Financial  Officer,  Pursuant to Section 906(a)
          of the Sarbanes-Oxley Act of 2002, dated as of March 16, 2005.

     *    Denotes management contracts.


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors of Kaneb Services LLC


We have audited the  accompanying  consolidated  financial  statements  of Kaneb
Services  LLC and its  subsidiaries  (the  "Company")  as  listed  in the  index
appearing in Item 15(a)(1).  In connection  with our audits of the  consolidated
financial statements,  we have also audited the financial statement schedules as
listed in the index appearing under Item 15(a)(2).  These consolidated financial
statements  and  financial  statement  schedules are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
consolidated financial statements and financial statement schedules based on our
audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Standards Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the years in the  three-year  period ended  December  31,  2004,  in
conformity with U.S.  generally  accepted  accounting  principles.  Also, in our
opinion, the related financial statement schedules,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects the information set forth therein.

As described in Note 2, the Company  adopted  Statement of Financial  Accounting
Standards No. 143 "Accounting for Asset Retirement Obligations" in 2003.

We have also  audited,  in accordance  with the Standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal  control over  financial  reporting  as of December 31, 2004,  based on
criteria  established in Internal Controls - Integrated  Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 11, 2005  expressed an  unqualified  opinion on  management's
assessment of, and the effective  operation of, internal  control over financial
reporting.


                                           KPMG LLP


Dallas, Texas
March 11, 2005



                                      F - 1

<PAGE>
                               KANEB SERVICES LLC
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------    --------------

<S>                                                              <C>               <C>               <C>
Revenues:
   Services...................................................   $   379,155,000   $  354,591,000    $  288,669,000
   Products...................................................       676,093,000      511,200,000       381,159,000
                                                                 ---------------   --------------    --------------
      Total revenues..........................................     1,055,248,000      865,791,000       669,828,000
                                                                 ---------------   --------------    --------------

Costs and expenses:
   Cost of products sold......................................       647,733,000      486,310,000       367,870,000
   Operating costs............................................       177,829,000      169,380,000       132,269,000
   Depreciation and amortization..............................        56,676,000       53,195,000        39,471,000
   Gain on sale of assets.....................................             -                 -             (609,000)
   General and administrative.................................        36,231,000       28,402,000        24,468,000
                                                                 ---------------   --------------    --------------
      Total costs and expenses................................       918,469,000      737,287,000       563,469,000
                                                                 ---------------   --------------    --------------

Operating income..............................................       136,779,000      128,504,000       106,359,000

Interest and other income.....................................           336,000          365,000         3,664,000
Interest expense..............................................       (43,579,000)     (39,576,000)      (29,171,000)
Loss on debt extinguishment...................................             -                 -           (3,282,000)
                                                                 ---------------   --------------    --------------

Income before gain on issuance of units by KPP, income taxes,
   interest of outside non-controlling partners in KPP's net
   income and cumulative effect of change in accounting
   principle..................................................        93,536,000       89,293,000        77,570,000

Gain on issuance of units by KPP..............................             -           10,898,000        24,882,000
Income tax expense............................................        (3,251,000)      (4,887,000)       (2,585,000)
Interest of outside non-controlling partners in KPP's
   net income.................................................       (65,933,000)     (61,908,000)      (52,639,000)
                                                                 ---------------   --------------    --------------
Income before cumulative effect of change in accounting
   principle..................................................        24,352,000       33,396,000        47,228,000

Cumulative effect of change in accounting principle -
   adoption of new accounting standard for asset retirement
   obligations................................................             -             (313,000)             -
                                                                 ---------------   --------------    --------------
Net income....................................................   $    24,352,000   $   33,083,000    $   47,228,000
                                                                 ===============   ==============    ==============
Earnings per share:
   Basic:
      Before cumulative effect of change in accounting
        principle.............................................   $          2.07   $         2.89    $         4.13
      Cumulative effect of change in accounting principle.....             -                 (.03)             -
                                                                 ---------------   --------------    --------------
        ......................................................   $          2.07   $         2.86    $         4.13
                                                                 ===============   ==============    ==============
   Diluted:
      Before cumulative effect of change in accounting
        principle.............................................   $         2.03    $         2.84    $         4.02
      Cumulative effect of change in accounting principle.....             -                 (.03)             -
                                                                 ---------------   --------------    --------------
                                                                 $         2.03    $         2.81    $         4.02
                                                                 ===============   ==============    ==============

</TABLE>

                 See notes to consolidated financial statements.

                                     F - 2

<PAGE>
                               KANEB SERVICES LLC
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                  ---------------------------------
                                                                                       2004               2003
                                                                                  ---------------    --------------

                                     ASSETS

<S>                                                                               <C>              <C>
Current assets:
   Cash and cash equivalents....................................................  $    38,415,000  $     43,457,000
   Accounts receivable (net of allowance for doubtful accounts of
      $2,255,000 in 2004 and $3,777,000 in 2003)................................       85,976,000        60,684,000
   Inventories..................................................................       25,448,000        18,637,000
   Prepaid expenses and other...................................................       12,614,000         9,650,000
                                                                                  ---------------  ----------------
      Total current assets......................................................      162,453,000       132,428,000
                                                                                  ---------------  ----------------
Property and equipment..........................................................    1,451,176,000     1,360,523,000
Less accumulated depreciation...................................................      302,564,000       247,503,000
                                                                                  ---------------  ----------------
      Net property and equipment................................................    1,148,612,000     1,113,020,000
                                                                                  ---------------  ----------------
Investment in affiliates........................................................       25,939,000        25,456,000

Excess of cost over fair value of net assets of acquired businesses and
   other assets.................................................................       19,884,000        20,663,000
                                                                                  ---------------  ----------------
                                                                                  $ 1,356,888,000  $  1,291,567,000
                                                                                  ===============  ================

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable.............................................................  $    54,280,000  $     36,916,000
   Accrued expenses.............................................................       38,142,000        39,307,000
   Accrued interest payable.....................................................        9,374,000         9,303,000
   Accrued distributions payable to shareholders................................        5,801,000         5,567,000
   Accrued distributions payable to outside non-controlling
      partners in KPP's net income..............................................       19,863,000        19,507,000
   Deferred terminaling fees....................................................        8,851,000         7,061,000
                                                                                  ---------------  ----------------
      Total current liabilities.................................................      136,311,000       117,661,000
                                                                                  ---------------  ----------------

Long-term debt..................................................................      688,985,000       636,308,000

Other liabilities and deferred taxes............................................       53,520,000        52,242,000

Interest of outside non-controlling partners in KPP.............................      397,717,000       407,635,000

Commitments and contingencies

Shareholders' equity:
   Shareholders' investment.....................................................       77,136,000        75,291,000
   Accumulated other comprehensive income.......................................        3,219,000         2,430,000
                                                                                  ---------------  ----------------
      Total shareholders' equity................................................       80,355,000        77,721,000
                                                                                  ---------------  ----------------
                                                                                  $ 1,356,888,000  $  1,291,567,000
                                                                                  ===============  ================

</TABLE>

                 See notes to consolidated financial statements.

                                     F - 3


<PAGE>
                               KANEB SERVICES LLC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------    --------------

<S>                                                              <C>               <C>               <C>
Operating activities:
   Net income.................................................   $    24,352,000   $   33,083,000    $   47,228,000
   Adjustments to reconcile net income to
      net cash provided by operating activities:
      Depreciation and amortization...........................        56,676,000       53,195,000        39,471,000
      Equity in earnings of affiliates, net of distributions..          (483,000)         148,000        (3,164,000)
      Interest of outside non-controlling partners in KPP's
        net income............................................        65,933,000       61,908,000        52,639,000
      Gain on issuance of units by KPP........................             -          (10,898,000)      (24,882,000)
      Gain on sale of assets .................................             -                 -             (609,000)
      Deferred income taxes...................................          (671,000)       1,683,000         3,105,000
      Cumulative effect of change in accounting principle.....             -              313,000             -
      Other...................................................        (1,191,000)       1,468,000          (559,000)
      Changes in working capital components:
        Accounts receivable...................................       (25,292,000)       1,151,000       (16,403,000)
        Inventories, prepaid expenses and other...............        (9,775,000)      (4,766,000)       (7,643,000)
        Accounts payable and accrued expenses.................        17,135,000        7,639,000          (165,000)
                                                                 ---------------   --------------    --------------
        Net cash provided by operating activities.............       126,684,000      144,924,000        89,018,000
                                                                 ---------------   --------------    --------------

Investing activities:
   Acquisitions, net of cash acquired.........................       (41,853,000)      (1,644,000)     (468,477,000)
   Capital expenditures.......................................       (42,214,000)     (44,747,000)      (31,101,000)
   Proceeds from sale of assets...............................             -                 -            1,107,000
   Other, net.................................................         2,684,000       (1,388,000)          361,000
                                                                 ---------------   --------------    --------------
        Net cash used in investing activities.................       (81,383,000)     (47,779,000)     (498,110,000)
                                                                 ---------------   --------------    --------------
Financing activities:
   Issuance of debt...........................................        52,001,000      291,377,000       756,087,000
   Payments of debt...........................................        (2,500,000)    (388,051,000)     (427,493,000)
   Distributions to shareholders..............................       (22,860,000)     (20,473,000)      (18,351,000)
   Distributions to outside non-controlling
      partners in KPP.........................................       (78,732,000)     (73,004,000)      (52,827,000)
   Changes in long-term payables and other liabilities........             -                 -          (10,026,000)
   Net proceeds from issuance of units by KPP.................             -          109,056,000       175,527,000
   Issuance of common shares upon exercise of stock options...           111,000          164,000           648,000
                                                                 ---------------   --------------    --------------
        Net cash provided by (used in) financing activities...       (51,980,000)     (80,931,000)      423,565,000
                                                                 ---------------   --------------    --------------
Effect of exchange rate changes on cash.......................         1,637,000        2,766,000             -
                                                                 ---------------   --------------    --------------
Increase (decrease) in cash and cash equivalents..............        (5,042,000)      18,980,000        14,473,000
Cash and cash equivalents at beginning of period..............        43,457,000       24,477,000        10,004,000
                                                                 ---------------   --------------    --------------
Cash and cash equivalents at end of period....................   $    38,415,000   $   43,457,000    $   24,477,000
                                                                 ===============   ==============    ==============
Supplemental cash flow information - cash paid for interest...   $    42,122,000   $   35,712,000    $   27,070,000
                                                                 ===============   ==============    ==============

</TABLE>

                 See notes to consolidated financial statements.

                                     F - 4

<PAGE>
                               KANEB SERVICES LLC
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                    Accumulated
                                                                       Other
                                                 Shareholders'     Comprehensive                      Comprehensive
                                                  Investment          Income            Total            Income
                                                 -------------    --------------    -------------    --------------
<S>                                             <C>              <C>               <C>               <C>
Balance at January 1, 2002..................     $  34,428,000    $     (496,000)   $  33,932,000

     Net income for the year................        47,228,000             -           47,228,000    $   47,228,000
     Distributions declared.................       (18,954,000)            -          (18,954,000)            -
     Issuance of common shares and other....           648,000             -              648,000             -
     Foreign currency translation adjustment              -              800,000          800,000           800,000
                                                 -------------    --------------    -------------    --------------
     Comprehensive income for the year......                                                         $   48,028,000
                                                                                                     ==============
Balance at December 31, 2002................        63,350,000           304,000       63,654,000

     Net income for the year................        33,083,000             -           33,083,000    $   33,083,000
     Distributions declared.................       (21,306,000)            -          (21,306,000)            -
     Issuance of common shares and other....           164,000             -              164,000             -
     Foreign currency translation adjustment              -            2,457,000        2,457,000         2,457,000
     Interest rate hedging transaction......              -             (331,000)        (331,000)         (331,000)
                                                 -------------    --------------    -------------    --------------
     Comprehensive income for the year......                                                         $   35,209,000
                                                                                                     ==============
Balance at December 31, 2003................        75,291,000         2,430,000       77,721,000

     Net income for the year................        24,352,000             -           24,352,000    $   24,352,000
     Distributions declared.................       (23,094,000)            -          (23,094,000)            -
     Issuance of common shares and other....           587,000             -              587,000             -
     Foreign currency translation adjustment              -              753,000          753,000           753,000
     Interest rate hedging transaction......              -               36,000           36,000            36,000
                                                 -------------    --------------    -------------    --------------
     Comprehensive income for the year......                                                         $   25,141,000
                                                                                                     ==============
Balance at December 31, 2004................     $  77,136,000    $    3,219,000    $  80,355,000
                                                 =============    ==============    =============

</TABLE>

                 See notes to consolidated financial statements.

                                     F - 5

<PAGE>
                               KANEB SERVICES LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   COMPANY ORGANIZATION

     General

     On November  27,  2000,  the Board of  Directors  of Kaneb  Services,  Inc.
authorized the distribution of its pipeline,  terminaling and product  marketing
businesses (the "Distribution") to its stockholders in the form of a new limited
liability  company,  Kaneb Services LLC (the  "Company").  On June 29, 2001, the
Distribution  was  completed,  with each  stockholder  of Kaneb  Services,  Inc.
receiving  one  common  share of the  Company  for each  three  shares  of Kaneb
Services,  Inc.'s  common stock held on June 20,  2001,  the record date for the
Distribution,  resulting  in the  distribution  of 10.85  million  shares of the
Company. On August 7, 2001, the stockholders of Kaneb Services, Inc. approved an
amendment  to its  certificate  of  incorporation  to change  its name to Xanser
Corporation ("Xanser").

     In September 1989, Kaneb Pipe Line Company LLC ("KPL"),  now a wholly owned
subsidiary of the Company,  formed Kaneb Pipe Line Partners, L.P. ("KPP") to own
and operate its refined petroleum  products pipeline  business.  KPL manages and
controls the operations of KPP through its general  partner  interests and a 18%
(at December 31, 2004) limited partnership interest.  KPP operates through Kaneb
Pipe Line Operating  Partnership,  L.P. ("KPOP"), a limited partnership in which
KPP holds a 99% interest as limited  partner.  KPL owns a 1% interest as general
partner of KPP and a 1% interest as general partner of KPOP.

     KPL owns a petroleum  product marketing  business which provides  wholesale
motor fuel marketing  services in the Great Lakes and Rocky Mountain  regions of
the United States.  KPP's product sales business  delivers bunker fuels to ships
in the Caribbean and Nova Scotia,  Canada,  and sells bulk petroleum products to
various commercial customers at those locations.  In the bunkering business, KPP
competes with ports offering bunker fuels along the route of the vessel.  Vessel
owners or charterers are charged berthing and other fees for associated services
such as pilotage,  tug assistance,  line handling,  launch service and emergency
response services.

     Valero L.P. Merger Agreement

     On October  31,  2004,  Valero  L.P.  agreed to acquire by merger (the "KSL
Merger") all of the outstanding common shares of the Company for cash. Under the
terms  of that  agreement,  Valero  L.P.  is  offering  to  purchase  all of the
outstanding shares of the Company at $43.31 per share.

     In a separate  definitive  agreement,  on October 31, 2004, Valero L.P. and
KPP agreed to merge (the "KPP Merger"). Under the terms of that agreement,  each
holder of units of limited partnership interests in KPP will receive a number of
Valero L.P.  common units based on an exchange  ratio that  fluctuates  within a
fixed  range to provide  $61.50 in value of Valero  L.P.  units for each unit of
KPP. The actual  exchange ratio will be determined at the time of the closing of
the proposed merger and is subject to a fixed value collar of plus or minus five
percent of Valero L.P.'s per unit price of $57.25 as of October 7, 2004.  Should
Valero L.P.'s per unit price fall below $54.39 per unit, the exchange ratio will
remain fixed at 1.1307 Valero L.P. units for each unit of KPP. Likewise,  should
Valero  L.P.'s per unit price exceed  $60.11 per unit,  the exchange  ratio will
remain fixed at 1.0231 Valero L.P. units for each unit of KPP.

     The  completion  of the KSL Merger is subject to the  customary  regulatory
approvals  including those under the  Hart-Scott-Rodino  Antitrust  Improvements
Act. The  completion  of the KSL Merger is also subject to completion of the KPP
Merger.  All required  shareholder and unitholder  approvals have been obtained.
Upon completion of the mergers,  the general partner of the combined partnership
will be owned by affiliates of Valero Energy Corporation and the Company and KPP
will become wholly owned subsidiaries of Valero L.P.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The following  significant  accounting policies are followed by the Company
in the preparation of the consolidated financial statements.

     Cash and Cash Equivalents

     The Company's  policy is to invest cash in highly liquid  investments  with
original  maturities  of three  months  or less.  Accordingly,  uninvested  cash
balances are kept at minimum levels.  Such investments are valued at cost, which
approximates market, and are classified as cash equivalents.

     Inventories

     Inventories consist primarily of petroleum products purchased for resale in
the product  marketing  business  and are valued at the lower of cost or market.
Cost is determined by using the weighted-average cost method.

     Property and Equipment

     Property and  equipment are carried at  historical  cost.  Additions of new
equipment  and  major  renewals  and  replacements  of  existing  equipment  are
capitalized.  Repairs and minor  replacements  that do not  materially  increase
values or extend  useful  lives  are  expensed.  Depreciation  of  property  and
equipment  is provided  on a  straight-line  basis at rates based upon  expected
useful  lives of various  classes of assets,  as  discussed in Note 5. The rates
used  for  pipeline  and  certain  storage  facilities,  which  are  subject  to
regulation,  are the same as those  which have been  promulgated  by the Federal
Energy  Regulatory  Commission.  Upon  disposal  of  assets  depreciated  on  an
individual basis, the gains and losses are included in current operating income.
Upon disposal of assets  depreciated on a group basis,  unless unusual in nature
or  amount,   residual  cost,  less  salvage,  is  charged  against  accumulated
depreciation.

     Effective  January 1, 2002,  the Company  adopted  Statement  of  Financial
Accounting  Standards  ("SFAS")  No.  144,  "Accounting  for the  Impairment  or
Disposal  of  Long-Lived  Assets",  which  addresses  financial  accounting  and
reporting for the impairment or disposal of long-lived  assets.  The adoption of
SFAS No.  144 did not  have a  material  impact  on the  consolidated  financial
statements  of the  Company.  Under  SFAS No.  144,  the  carrying  value of the
Company's  property and equipment is periodically  evaluated using  undiscounted
future cash flows as the basis for  determining  if  impairment  exists.  To the
extent  impairment is indicated to exist,  an impairment loss will be recognized
by the Company based on fair value.

     Revenue and Income Recognition

     The pipeline business provides pipeline transportation of refined petroleum
products, liquified petroleum gases, and anhydrous ammonia fertilizer.  Pipeline
revenues are  recognized as services are provided.  KPP's  terminaling  services
business  provides  terminaling and other ancillary  services.  Storage fees are
generally  billed one month in advance  and are  reported  as  deferred  income.
Terminaling revenues are recognized in the month services are provided. Revenues
for the product marketing business are recognized when product is sold and title
and risk pass to the customer.

     Sales of Securities by Subsidiaries

     The Company  recognizes gains and losses in the consolidated  statements of
income resulting from subsidiary sales of additional equity interest,  including
KPP limited partnership units, to unrelated parties.

     Foreign Currency Translation

     The Company  translates  the balance  sheet of KPP's  foreign  subsidiaries
using year-end  exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from  the  change  in  exchange  rates  from  year to year  have  been  reported
separately as a component of accumulated  other  comprehensive  income (loss) in
Shareholder's   Equity.   Gains  and  losses  resulting  from  foreign  currency
transactions  are included in the consolidated  statements of income.  The local
currency is considered to be the functional  currency,  except in the Netherland
Antilles and Canada, where the U.S. dollar is the functional currency.

     Excess of Cost Over Fair Value of Net Assets of Acquired Businesses

     Effective January 1, 2002, the Company adopted SFAS No. 142,  "Goodwill and
Other Intangible  Assets," which eliminates the amortization of goodwill (excess
of cost  over  fair  value of net  assets  of  acquired  businesses)  and  other
intangible assets with indefinite lives.  Under SFAS No. 142,  intangible assets
with lives restricted by contractual,  legal, or other means will continue to be
amortized  over their useful  lives.  At December  31, 2004,  the Company had no
intangible assets subject to amortization under SFAS No. 142. Goodwill and other
intangible assets not subject to amortization are tested for impairment annually
or more  frequently  if events or changes  in  circumstances  indicate  that the
assets might be impaired.  SFAS No. 142 requires a two-step  process for testing
impairment.  First,  the fair value of each  reporting  unit is  compared to its
carrying value to determine  whether an indication of impairment  exists.  If an
impairment is indicated, then the fair value of the reporting unit's goodwill is
determined  by  allocating  the unit's fair value to its assets and  liabilities
(including any unrecognized intangible assets) as if the reporting unit had been
acquired in a business  combination.  The amount of  impairment  for goodwill is
measured  as the  excess of its  carrying  value over its fair  value.  Based on
valuations and analysis performed by the Company at initial adoption date and at
each annual evaluation date, including December 31, 2004, the Company determined
that the  implied  fair  value of its  goodwill  exceeded  carrying  value  and,
therefore, no impairment charge was necessary.

     Environmental Matters

     KPP  environmental  expenditures  that  relate to  current  operations  are
expensed or capitalized, as appropriate. Expenditures that relate to an existing
condition caused by past  operations,  and which do not contribute to current or
future revenue  generation,  are expensed.  Liabilities are recorded by KPP when
environmental  assessments  and/or remedial efforts are probable,  and the costs
can be reasonably estimated.  Generally,  the timing of these accruals coincides
with the completion of a feasibility  study or KPP's commitment to a formal plan
of action.

     Asset Retirement Obligations

     Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset  Retirement   Obligations",   which   establishes   requirements  for  the
removal-type  costs associated with asset  retirements.  At the initial adoption
date of SFAS No. 143, the Company  recorded an asset  retirement  obligation  of
approximately  $5.5  million and  recognized  a  cumulative  effect of change in
accounting principle of $0.3 million, after interest of outside  non-controlling
partners in KPP's net income,  for its legal  obligations to dismantle,  dispose
of,  and  restore  certain  leased  KPP  pipeline  and  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 December 31,
2004,  the Company had no assets which were legally  restricted  for purposes of
settling  asset  retirement  obligations.  The effect of SFAS No. 143,  assuming
adoption on January 1, 2002,  was not material to the results of  operations  of
the Company for the years ended  December 31, 2004,  2003 and 2002.  In 2004 and
2003,  accretion  expense of $0.2 million and $0.4  million,  respectively,  was
included in operating costs.

     Comprehensive Income

     The  Company   follows  the   provisions   of  SFAS  No.  130,   "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial  statements.  SFAS No.
130 requires  additional  disclosure and does not affect the Company's financial
position or results of operations.

     Income Taxes

     Limited  liability  company  operations are not subject to federal or state
income taxes. However,  certain KPP terminaling operations are conducted through
separate  taxable  wholly-owned  corporate  subsidiaries.  The income before tax
expense for these subsidiaries was $18.4 million, $18.9 million and $6.3 million
for the years ended December 31, 2004, 2003 and 2002,  respectively.  The income
tax expense for KPP's  taxable  subsidiaries  for the years ended  December  31,
2004,  2003  and  2002  was  $3.3  million,   $5.2  million  and  $4.1  million,
respectively. KPP has recorded a net deferred tax liability of $21.5 million and
$20.6 million at December 2004 and 2003, respectively,  which is associated with
these subsidiaries.

     On June 1,  1989,  the  governments  of the  Netherlands  Antilles  and St.
Eustatius  approved a Free Zone and Profit Tax Agreement  retroactive to January
1,  1989,  which  expired  on  December  31,  2000.  This  agreement  required a
subsidiary of KPP, which was acquired with Statia on February 28, 2002 (see Note
4), to pay a 2% rate on taxable income, as defined therein, or a minimum payment
of 500,000 Netherlands  Antilles guilders ($0.3 million) per year. The agreement
further  provided  that any  amounts  paid in order to meet the  minimum  annual
payment were available to offset future tax  liabilities  under the agreement to
the extent that the minimum annual payment is greater than 2% of taxable income.
The  subsidiary  is  currently  engaged  in  discussions  with   representatives
appointed by the Island  Territory  of St.  Eustatius  regarding  the renewal or
modification of the agreement,  but the ultimate  outcome cannot be predicted at
this time. The subsidiary has accrued amounts  assuming a new agreement  becomes
effective,  and  continues to make  payments,  as  required,  under the previous
agreement.

     Cash Distributions

     The Company makes  quarterly  distributions  of 100% of available  cash, as
defined in the limited liability agreement, to the common shareholders of record
on the  applicable  record date,  within 45 days after the end of each  quarter.
Available cash consists generally of all the cash receipts of the Company,  less
all  cash  disbursements  and  reserves.  Excess  cash  flow  of  the  Company's
wholly-owned  product  marketing  operations  is being  used to  reduce  working
capital  borrowings.  Distributions  of $1.96,  $1.825  and $1.65 per share were
declared and paid to  shareholders  with respect to the years ended December 31,
2004, 2003 and 2002, respectively.

     Earnings Per Share

     Earnings  per share has been  calculated  using basic and diluted  weighted
average  shares  outstanding  for each of the periods  presented.  For the years
ended  December  31,  2004,  2003  and  2002,   basic  weighted  average  shares
outstanding  were  11,746,000,  11,554,000 and  11,448,000 and diluted  weighted
average  shares   outstanding  were   11,981,000,   11,792,000  and  11,755,000,
respectively.

     Derivative Instruments

     The  Company  follows  the  provisions  of SFAS No.  133,  "Accounting  For
Derivative Instruments and Hedging Activities", which establishes the accounting
and reporting standards for such activities.  Under SFAS No. 133, companies must
recognize  all  derivative  instruments  on their  balance  sheet at fair value.
Changes in the value of derivative instruments, which are considered hedges, are
offset against the change in fair value of the hedged item through earnings,  or
recognized in other comprehensive  income until the hedged item is recognized in
earnings,  depending  on the nature of the hedge.  SFAS No.  133  requires  that
unrealized  gains and losses on derivatives not qualifying for hedge  accounting
be recognized currently in earnings.

     On May 19, 2003, KPP issued $250 million of 5.875% senior  unsecured  notes
due June 1, 2013 (see Note 6). In connection with the offering,  on May 8, 2003,
KPP entered into a treasury  lock  contract for the purpose of locking in the US
Treasury  interest rate component on $100 million of the debt. The treasury lock
contract,  which qualified as a cash flow hedging instrument under SFAS No. 133,
was  settled on May 19,  2003 with a cash  payment by KPP of $1.8  million.  The
settlement  cost of the  contract,  net of interest  of outside  non-controlling
partners in KPP's accumulated other comprehensive income, has been recorded as a
component of accumulated other comprehensive  income and is being amortized,  as
interest  expense,  over the life of the debt.  For the year ended  December 31,
2004 and 2003, $0.2 million and $0.1 million,  respectively,  of amortization is
included in interest expense.

     In September of 2002, KPP entered into a treasury lock  contract,  maturing
on November 4, 2002, for the purpose of locking in the US Treasury interest rate
component on $150 million of anticipated thirty-year public debt offerings.  The
treasury lock contract  originally  qualified as a cash flow hedging  instrument
under SFAS No.  133. In October of 2002,  KPP,  due to various  market  factors,
elected to defer issuance of the public debt securities, effectively eliminating
the cash flow hedging designation for the treasury lock contract. On October 29,
2002, the contract was settled resulting in a net realized gain of $3.0 million,
before interest of outside  non-controlling  partners in KPP's net income, which
was recognized as a component of interest and other income.

     Stock Option Plans

     In December of 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123  (revised  2004),  "Share-Based  Payment"  (SFAS No.  123R),  which
addresses  the  accounting  for  share-based  payment  transactions  in which an
enterprise  receives employee services in exchange for equity instruments of the
enterprise,  or liabilities that are based on the fair value of the enterprise's
equity  instruments  or that  may be  settled  by the  issuance  of such  equity
instruments.  SFAS No. 123R  eliminates  the ability to account for  share-based
compensation  transactions  using the  intrinsic  value method under  Accounting
Principles  Board (APB) Opinion 25,  "Accounting for Stock Issued to Employees",
and  generally  requires  that  such  transactions  be  accounted  for  using  a
fair-value-based  method. The Company is currently  evaluating the provisions of
SFAS  No.  123R to  determine  which  fair-value-based  model  and  transitional
provision to follow upon  adoption.  The  alternatives  for  transition  include
either the modified  prospective  or the  modified  retrospective  methods.  The
modified  prospective method requires that compensation  expense be recorded for
all unvested  stock options and  restricted  stock as the  requisite  service is
rendered   beginning   with  the  first   quarter  of  adoption.   The  modified
retrospective  method requires recording  compensation expense for stock options
and  restricted  stock  beginning  with the  first  period  restated.  Under the
modified  retrospective  method,  prior periods may be restated either as of the
beginning  of the year of adoption or for all periods  presented.  SFAS No. 123R
will be effective for the Company  beginning in the third  quarter of 2005.  The
impact of adoption on the Company's  consolidated  financial statements is still
being evaluated.

     In  accordance  with  the  provisions  of SFAS  No.  123,  "Accounting  for
Stock-Based  Compensation",  the Company currently applies the provisions of APB
Opinion 25 and related  interpretations in accounting for its stock option plans
and, accordingly,  does not recognize  compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS 123. The Company also
applies the  disclosure  provisions of SFAS No. 123, as amended by SFAS No. 148,
"Accounting for Stock-based  Compensation - Transition and Disclosure" as if the
fair-value-based  method had been applied in measuring compensation expense. The
Black-Scholes  option  pricing model has been used to estimate the fair value of
stock options issued and the  assumptions in the  calculations  under such model
include stock price variance or volatility ranging from 3.40% to 4.39%, based on
weekly  average  variances  of KPP's  units  prior to the  Distribution  and the
Company's common shares after the Distribution for the ten year period preceding
issuance,  a risk-free rate of return ranging from 3.75% to 4.78%,  based on the
30-year U.S.  treasury bill rate for the ten-year  expected life of the options,
and an annual dividend yield ranging from 6.89% to 8.36%.

     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>
                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------    --------------
<S>                                                              <C>               <C>               <C>
      Reported net income.....................................   $    24,352,000   $   33,083,000    $   47,228,000

      Share-based employee compensation expense determined
        under the fair value based method.....................          (178,000)         (85,000)          (49,000)
                                                                 ---------------   --------------    --------------
      Pro forma net income....................................   $    24,174,000   $   32,998,000    $   47,179,000
                                                                 ===============   ==============    ==============
      Earning per share:
        Basic - as reported...................................   $          2.07   $         2.86    $         4.13
                                                                 ===============   ==============    ==============
        Basic - pro forma.....................................   $          2.06   $         2.86    $         4.03
                                                                 ===============   ==============    ==============
        Diluted - as reported.................................   $          2.03   $         2.81    $         4.02
                                                                 ===============   ==============    ==============
        Diluted - pro forma...................................   $          2.02   $         2.80    $         3.92
                                                                 ===============   ==============    ==============

</TABLE>


     Estimates

     The  preparation of the Company's  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and  disclosures  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.

     Recent Accounting Pronouncements

     Effective  January 1, 2003, the Company  adopted SFAS No. 146,  "Accounting
for Costs Associated with Exit or Disposal Activities",  which requires that all
restructurings  initiated  after  December  31, 2002 be  recorded  when they are
incurred and can be measured at fair value.  The adoption of SFAS No. 146 had no
effect on the consolidated financial statements of the Company.

     The  Company  has adopted the  provisions  of FASB  Interpretation  No. 45,
"Guarantor's  Accounting and Disclosure  Requirements  of Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  to  Others,  an  interpretation  of FASB
Statements No. 5, 57, and 107, and a rescission of FASB  Interpretation No. 34."
This  interpretation  elaborates on the disclosures to be made by a guarantor in
its  interim  and  annual  financial  statements  about  its  obligations  under
guarantees  issued.  The  interpretation  also  clarifies  that a  guarantor  is
required to  recognize,  at inception of a guarantee,  a liability  for the fair
value of the obligation  undertaken.  The initial  recognition  and  measurement
provisions of the interpretation are applicable to guarantees issued or modified
after December 31, 2002. The application of this interpretation had no effect on
the consolidated financial statements of the Company.

     In December 2003, the FASB issued  Interpretation  No. 46 (Revised December
2003),  "Consolidation  of Variable  Interest  Entities (FIN 46R),  primarily to
clarify the required  accounting  for  interests in variable  interest  entities
(VIEs).  This standard  replaces FASB  Interpretation  No. 46,  Consolidation of
Variable Interest  Entities,  that was issued in January 2003 to address certain
situations in which a company  should  include in its financial  statements  the
assets,   liabilities  and  activities  of  another  entity.  For  the  Company,
application  of FIN 46R is  required  for  interests  in  certain  VIEs that are
commonly referred to as  special-purpose  entities,  or SPEs, as of December 31,
2003 and for  interests  in all other  types of VIEs as of March 31,  2004.  The
application of FIN 46R has not and is not expected to have a material  impact on
the consolidated financial statements of the Company.

     The  Company  has adopted the  provisions  of SFAS No. 149,  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities",  which amends
and clarifies financial accounting and reporting for derivative  instruments and
hedging  activities.  The  adoption of SFAS No.  149,  which was  effective  for
derivative  contracts and hedging  relationships  entered into or modified after
June 30, 2003, had no impact on the Company's consolidated financial statements.

     On July 1, 2003, the Company adopted SFAS No. 150,  "Accounting for Certain
Financial  Instruments  with  Characteristics  of both  Liabilities and Equity",
which requires certain financial  instruments,  which were previously  accounted
for as equity, to be classified as liabilities. The adoption of SFAS No. 150 had
no effect on the consolidated financial statements of the Company.


3.   PUBLIC OFFERING OF UNITS BY KPP

     In March of 2003,  KPP  issued  3,122,500  limited  partnership  units in a
public offering at $36.54 per unit,  generating  approximately $109.1 million in
net proceeds.  The proceeds were used to reduce bank borrowings (See Note 6). As
a result of KPP issuing  additional  units to unrelated  parties,  the Company's
share of net assets of KPP increased by $10.9 million.  Accordingly, the Company
recognized a $10.9 million gain in 2003.

     In November of 2002, KPP issued 2,095,000  limited  partnership  units in a
public offering at $33.36 per unit,  generating  approximately  $66.7 million in
net proceeds.  The offering proceeds were used to reduce KPP bank borrowings for
the November  2002  fertilizer  pipeline  acquisition  (see Notes 4 and 6). As a
result of KPP issuing additional units to unrelated parties, the Company's share
of net  assets  of KPP  increased  by $7.5  million.  Accordingly,  the  Company
recognized a $7.5 million gain in 2002.

     In May of 2002, KPP issued 1,565,000 limited  partnership units in a public
offering at a price of $39.60 per unit,  generating  approximately $59.1 million
in net  proceeds.  A portion of the  offering  proceeds  were used to fund KPP's
September 2002 acquisition of the Australia and New Zealand  terminals (see Note
4).  As a result of KPP  issuing  additional  units to  unrelated  parties,  the
Company's share of net assets of KPP increased by $8.8 million. Accordingly, the
Company recognized an $8.8 million gain in 2002.

     In January of 2002, KPP issued  1,250,000  limited  partnership  units in a
public offering at $41.65 per unit,  generating  approximately  $49.7 million in
net proceeds.  The proceeds were used to reduce borrowings under KPP's revolving
credit  agreement (see Note 6). As a result of KPP issuing  additional  units to
unrelated  parties,  the Company's  share of net assets of KPP increased by $8.6
million. Accordingly, the Company recognized an $8.6 million gain in 2002.


4.   ACQUISITIONS

     On December 24, 2002, KPP acquired a 400-mile  petroleum  products pipeline
and four  terminals  in North  Dakota and  Minnesota  from Tesoro  Refining  and
Marketing  Company for  approximately  $100  million in cash,  subject to normal
post-closing  adjustments.  The acquisition  was initially  funded with KPP bank
debt (see Note 6). The  results  of  operations  and cash flows of the  acquired
business are included in the  consolidated  financial  statements of the Company
since the date of acquisition.  Based on the evaluations  performed,  no amounts
were assigned to goodwill or to other  intangible  assets in the purchase  price
allocation.

     On November 1, 2002,  KPP acquired an  approximately  2,000-mile  anhydrous
ammonia pipeline system from Koch Pipeline Company,  L.P. for approximately $139
million  in  cash.  This  fertilizer  pipeline  system  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.  The
acquisition was initially funded with KPP bank debt (see Note 6). The results of
operations  and  cash  flows  of  the  acquired  business  are  included  in the
consolidated  financial statements of the Company since the date of acquisition.
Based on the evaluations  performed,  no amounts were assigned to goodwill or to
other intangible assets in the purchase price allocation.

     On September 18, 2002, KPP acquired eight bulk liquid storage  terminals in
Australia  and New Zealand  from Burns Philp & Co. Ltd.  for  approximately  $47
million in cash.  The  results  of  operations  and cash  flows of the  acquired
business are included in the  consolidated  financial  statements of the Company
since the date of acquisition.  Based on the evaluations  performed,  no amounts
were assigned to goodwill or to other  intangible  assets in the purchase  price
allocation.

     On  February  28,  2002,  KPP  acquired  all  of  the  liquids  terminaling
subsidiaries  of Statia  Terminals  Group NV ("Statia") for  approximately  $178
million in cash (net of acquired  cash).  The acquired Statia  subsidiaries  had
approximately $107 million in outstanding debt, including $101 million of 11.75%
notes due in November 2003. The cash portion of the purchase price was initially
funded by KPP's revolving credit agreement and proceeds from KPP's February 2002
public  debt  offering  (see  Note 6).  In April of 2002,  KPP  redeemed  all of
Statia's  11.75%  notes  at  102.938%  of the  principal  amount,  plus  accrued
interest. The redemption was funded by KPP's revolving credit facility (see Note
6).  Under the  provisions  of the 11.75%  notes,  the  Company  incurred a $3.0
million prepayment  penalty,  of which $2.0 million,  before interest of outside
non-controlling  partners in KPP's net income,  was  recognized  as loss on debt
extinguishment in 2002.

     The  results of  operations  and cash flows of Statia are  included  in the
consolidated  financial statements of the Company since the date of acquisition.
Based on the  valuations  performed,  no amounts were assigned to goodwill or to
other tangible assets. A summary of the allocation of the Statia purchase price,
net of cash acquired, is as follows:

     Current assets.................................        $    10,898,000
     Property and equipment.........................            320,008,000
     Other assets...................................                 53,000
     Current liabilities............................            (39,052,000)
     Long-term debt.................................           (107,746,000)
     Other liabilities..............................             (5,957,000)
                                                            ---------------
         Purchase price.............................        $   178,204,000
                                                            ===============


5.   PROPERTY AND EQUIPMENT

     The cost of property and equipment is summarized as follows:

<TABLE>
<CAPTION>

                                                        Estimated                      December 31,
                                                         useful        -------------------------------------------
                                                      life (years)            2004                       2003
                                                     -------------     -----------------         -----------------

<S>                                                  <C>               <C>                       <C>
       Land......................................          --          $      84,893,000         $      75,912,000
       Buildings.................................        25 - 35              39,077,000                36,244,000
       Pipeline and terminaling equipment........        15 - 40           1,187,323,000             1,115,458,000
       Marine equipment..........................        15 - 30              87,937,000                87,204,000
       Furniture and fixtures....................        5 - 15               15,390,000                11,577,000
       Transportation equipment..................         3 - 6                7,790,000                 7,360,000
       Construction and work-in-progress.........          --                 28,766,000                26,768,000
                                                                       -----------------         -----------------
       Total property and equipment..............                          1,451,176,000             1,360,523,000
       Less accumulated depreciation.............                            302,564,000               247,503,000
                                                                       -----------------         -----------------
       Net property and equipment................                      $   1,148,612,000         $   1,113,020,000
                                                                       =================         =================

</TABLE>


6.   LONG-TERM DEBT

     Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              -------------------------------------
                                                                                    2004                  2003
                                                                              ---------------       ---------------
<S>                                                                           <C>                   <C>
       Revolving credit facility, due in July of 2008....................     $    14,000,000       $    16,500,000
       Revolving credit facility of subsidiary, due in April of 2007.....           3,033,000             2,112,000
       KPP $400 million revolving credit facility, due in April of 2006..          95,669,000            54,169,000
       KPP $250 million 5.875% senior unsecured notes, due in June
          of 2013........................................................         250,000,000           250,000,000
       KPP $250 million 7.75% senior unsecured notes, due in February
          of 2012........................................................         250,000,000           250,000,000
       KPP term loans, due in April of 2006..............................          40,770,000            29,243,000
       KPP Australian bank facility, due in April of 2006................          35,513,000            34,284,000
                                                                              ---------------        --------------
       Total long-term debt..............................................     $   688,985,000       $   636,308,000
                                                                              ===============       ===============

</TABLE>

     The Company has an  agreement  with a bank that  provides for a $50 million
revolving credit facility through July 1, 2008. The credit facility, which bears
interest at variable  rates,  is secured by 4.6 million KPP limited  partnership
units and has a variable rate commitment fee on unused amounts.  At December 31,
2004, $14.0 million was drawn on the credit facility.

     The Company's  product  marketing  subsidiary has a credit agreement with a
bank that,  as amended,  provides for a $15 million  revolving  credit  facility
through April of 2007. The credit facility bears interest at variable rates, has
a commitment fee of 0.25% per annum on unutilized  amounts and contains  certain
financial and operational covenants. At December 31, 2004, the subsidiary was in
compliance with all covenants. The credit facility, which is without recourse to
the Company, is secured by essentially all of the tangible and intangible assets
of the product marketing  business and by 250,000 KPP limited  partnership units
held by a  subsidiary  of the Company.  At December  31, 2004,  $3.0 million was
drawn on the facility.

     In April of 2003, KPP entered into a credit agreement with a group of banks
that provides for a $400 million  unsecured  revolving  credit facility  through
April of 2006.  The credit  facility,  which  provides  for an  increase  in the
commitment  up to an aggregate of $450 million by mutual  agreement  between KPP
and the banks,  bears interest at variable  rates and has a variable  commitment
fee on unused amounts.  The credit  facility is without  recourse to the Company
and contains certain financial and operating covenants, including limitations on
investments,  sales of assets and  transactions  with  affiliates and, absent an
event of default,  does not  restrict  distributions  to the Company or to other
partners.  At December  31,  2004,  KPP was in  compliance  with all  covenants.
Initial  borrowings on the credit agreement  ($324.2 million) were used to repay
all amounts  outstanding  under KPP's $275  million  credit  agreement  and $175
million  bridge  loan  agreement.  At  December  31,  2004,  $95.7  million  was
outstanding under the credit agreement.

     On May 19, 2003, KPP issued $250 million of 5.875% senior  unsecured  notes
due June 1, 2013.  The net proceeds from the public  offering,  $247.6  million,
were used to reduce amounts due under KPP's revolving  credit  agreement.  Under
the note indenture,  interest is payable  semi-annually in arrears on June 1 and
December 1 of each year. The notes are redeemable, as a whole or in part, at the
option of KPP, at any time,  at a redemption  price equal to the greater of 100%
of the  principal  amount of the notes,  or the sum of the present  value of the
remaining  scheduled  payments of  principal  and  interest,  discounted  to the
redemption  date  at the  applicable  U.S.  Treasury  rate,  as  defined  in the
indenture,  plus 30 basis points.  The note indenture contains certain financial
and operational covenants,  including certain limitations on investments,  sales
of assets and transactions with affiliates and, absent an event of default, such
covenants do not restrict  distributions to the Company or to other partners. At
December 31, 2004, KPP was in compliance with all covenants.

     In February  of 2002,  KPP issued $250  million of 7.75%  senior  unsecured
notes due February 15, 2012. The net proceeds from the public  offering,  $248.2
million,  were  used to  repay  the  KPP's  revolving  credit  agreement  and to
partially fund the Statia  acquisition  (see Note 3). Under the note  indenture,
interest  is payable  semi-annually  in arrears on  February 15 and August 15 of
each year. The notes, which are without recourse to the Company, are redeemable,
as a whole or in part, at the option of KPP, at any time, at a redemption  price
equal to the greater of 100% of the principal amount of the notes, or the sum of
the present value of the remaining scheduled payments of principal and interest,
discounted to the  redemption  date at the  applicable  U.S.  Treasury  rate, as
defined in the  indenture,  plus 30 basis points.  The note  indenture  contains
certain financial and operational  covenants,  including certain  limitations on
investments,  sales of assets and  transactions  with  affiliates and, absent an
event of default, such covenants do not restrict distributions to the Company or
to  other  partners.  At  December  31,  2004,  KPP was in  compliance  with all
covenants.


7.   RETIREMENT PLANS

     Substantially  all of the  Company's  domestic  employees  are covered by a
defined  contribution  plan,  which  provides  for  varying  levels of  employer
matching. The Company's  contributions under these plans were $1.6 million, $1.6
million and $1.2 million for 2004, 2003 and 2002, respectively.


8.   SHAREHOLDERS' EQUITY

     The changes in the number of issued and  outstanding  common  shares of the
Company are summarized as follows:

<TABLE>
<CAPTION>
                                                                                          Common Shares
                                                                                            Issued and
                                                                                           Outstanding
                                                                                          --------------

<S>                                                                                       <C>
       Balance at January 1, 2002...............................................             11,242,746
       Common shares issued.....................................................                 73,091
                                                                                            -----------
       Balance at December 31, 2002.............................................             11,315,837
       Common shares issued.....................................................                206,628
                                                                                            -----------
       Balance at December 31, 2003.............................................             11,522,465
       Common shares issued.....................................................                169,863
                                                                                            -----------
       Balance at December 31, 2004.............................................             11,692,328
                                                                                            ===========

</TABLE>

     On June 27,  2001,  the  Board  of  Directors  of the  Company  declared  a
distribution  of one right  for each of its  outstanding  common  shares to each
shareholder of record on June 27, 2001. Each right entitles the holder, upon the
occurrence  of certain  events,  to purchase  from the Company one of its common
shares at a purchase  price of $60.00 per common share,  subject to  adjustment.
The rights will not separate from the common shares or become  exercisable until
a person or group  either  acquires  beneficial  ownership of 15% or more of the
Company's  common  shares or  commences  a tender or  exchange  offer that would
result in ownership of 20% or more,  whichever occurs earlier. The rights, which
expire  on June 27,  2011,  are  redeemable  in whole,  but not in part,  at the
Company's  option at any time for a price of $0.01 per  right.  On  October  28,
2004, the rights agreement was amended to generally provide that events referred
to in the Valero L.P.  merger  agreement (see Note 1) would not cause the rights
to become exercisable.

     The Company has various  plans for  officers,  directors  and key employees
under which stock options,  deferred  stock units and  restricted  shares may be
issued.

     Stock Options

     The options granted under the plan generally  expire ten years from date of
grant.  All options were  granted at prices  greater than or equal to the market
price at the date of grant.

     At December  31,  2004,  options on 506,307  shares at prices  ranging from
$5.26 to $28.75 were  outstanding,  of which 137,405 were  exercisable at prices
ranging from $5.26 to $19.73. At December 31, 2003, options on 374,200 shares at
prices  ranging  from $3.27 to $19.73 were  outstanding,  of which  195,332 were
exercisable  at prices  ranging  from $3.27 to $19.73.  At  December  31,  2002,
options  on  701,286  shares  at  prices  ranging  from  $3.27  to  $19.73  were
outstanding,  of which 412,836 were  exercisable at prices ranging from $3.27 to
$14.33.

     Deferred Stock Unit Plans

     In 2002, the Company initiated a Deferred Stock Unit Plan (the "DSU Plan"),
pursuant to which key  employees of the Company  have,  from time to time,  been
given the opportunity to defer a portion of their  compensation  for a specified
period  toward the  purchase of deferred  stock units  ("DSUs"),  an  instrument
designed  to track  the  Company's  common  shares.  Under  the  plan,  DSUs are
purchased at a value equal to the closing price of the  Company's  common shares
on the day by which the employee  must elect (if they so desire) to  participate
in the DSU Plan; which date is established by the Compensation  Committee,  from
time to time (the  "Election  Date").  During a  vesting  period of one to three
years following the Election Date, a  participant's  DSUs vest only in an amount
equal to the lesser of the compensation  actually  deferred to date or the value
(based upon the  then-current  closing price of the Company's  common shares) of
the pro-rata portion (as of such date) of the number of DSUs acquired. After the
expiration  of the vesting  period,  which is  typically  the same length as the
deferral  period,  the DSUs become  fully  vested,  but may only be  distributed
through the issuance of a like number of shares of the  Company's  common shares
on a pre-selected date, which is irrevocably  selected by the participant on the
Election  Date and which is typically at or after the  expiration of the vesting
period and no later than ten years after the Election  Date, or at the time of a
"change of control" of the Company, if earlier. DSU accounts are unfunded by the
Company.  Each  person that  elects to  participate  in the DSU Plan is awarded,
under the  Company's  Share  Incentive  Plan,  an option to purchase a number of
shares  ranging  from  one-half  to one and  one-half  times the  number of DSUs
purchased by such person at 100% of the closing  price of the  Company's  common
shares on the Election Date,  which options become  exercisable over a specified
period after the grant,  according to a schedule  determined by the Compensation
Committee. At December 31, 2004, 3,802 DSUs had vested under the 2002 Plan.

     In 1996,  Kaneb  Services,  Inc.  implemented a DSU plan whereby  officers,
directors and key executives  were permitted to defer  compensation  on a pretax
basis to receive shares of Kaneb Services,  Inc. common stock at a predetermined
date after the end of the compensation  deferral period.  In connection with the
Distribution,  the  Company  agreed  to issue  DSUs  equivalent  in price to the
Company's common shares at that time. For every three Kaneb Services,  Inc. DSUs
held, the Company issued one DSU, such that the intrinsic value of each holder's
deferred   compensation   account   remained   unchanged  as  a  result  of  the
Distribution.  In addition,  upon the payment date of any  distributions  on the
Company's common shares, the Company agreed to credit each deferred account with
the  equivalent  value of the  distribution.  Upon the scheduled  payment of the
deferred  accounts,  the Company  agreed to issue one common  share for each DSU
relative to Company  DSUs  previously  issued and to pay the  equivalent  of the
accumulated deferred  distributions,  plus interest,  to the previously deferred
account holder. All other terms of the DSU plan remained  unchanged.  Similarly,
Kaneb Services,  Inc. agreed to issue to employees of the Company who hold DSUs,
the number of shares of Kaneb  Services,  Inc. (now Xanser) common stock subject
to the Kaneb Services,  Inc. DSUs held by those employees. At December 31, 2004,
approximately  122,000  common  shares of the  Company are  issuable  under this
arrangement.

     Restricted Stock

     In August 2004 and September  2001,  the Company  issued 60,000 and 30,000,
respectively,  of  restricted  common  shares to the  outside  Directors  of the
Company.  All of such shares vest or become transferable in one-third increments
on each  anniversary  date after issuance.  In conjunction will the issuance and
commencement  of vesting of the  restricted  shares,  the Company  recognized an
expense of $0.5 million in 2004, $0.1 million in 2003 and $0.2 million in 2002.


9.   COMMITMENTS AND CONTINGENCIES

     Total rent expense under operating  leases amounted to $9.5 million,  $14.6
million and $13.5 million for the years ended December 31, 2002,  2003 and 2004,
respectively.

     The following is a schedule by years of future minimum lease payments under
the Company's, and KPP's, operating leases as of December 31, 2004:

     Year ending December 31:
          2005..........................................    $   9,822,000
          2006..........................................        8,593,000
          2007..........................................        6,238,000
          2008..........................................        5,338,000
          2009..........................................        4,058,000
          Thereafter....................................       18,140,000
                                                            -------------
     Total minimum lease payments                           $  52,189,000
                                                            =============

     The  operations  of KPP are  subject to  federal,  state and local laws and
regulations  in the United  States and  various  foreign  locations  relating to
protection  of the  environment.  Although KPP believes  its  operations  are in
general  compliance  with  applicable   environmental   regulations,   risks  of
additional   costs  and  liabilities  are  inherent  in  pipeline  and  terminal
operations, and there can be no assurance that significant costs and liabilities
will not be incurred by KPP. Moreover,  it is possible that other  developments,
such as increasingly  stringent  environmental laws, regulations and enforcement
policies  thereunder,  and claims for damages to  property or persons  resulting
from the operations of KPP, could result in substantial costs and liabilities to
KPP. KPP has recorded an undiscounted  reserve for  environmental  claims in the
amount of $23.0 million at December 31, 2004, including $16.9 million related to
acquisitions   of  pipelines  and  terminals.   During  2004,   2003  and  2002,
respectively,  KPP incurred $6.7 million, $2.1 million and $2.4 million of costs
related to such acquisition reserves and reduced the liability accordingly.

     Certain  subsidiaries  of KPP were sued in a Texas  state  court in 1997 by
Grace  Energy  Corporation  ("Grace"),  the entity  from which KPP  acquired  ST
Services in 1993. The lawsuit  involves  environmental  response and remediation
costs  allegedly  resulting  from jet  fuel  leaks in the  early  1970's  from a
pipeline.  The pipeline,  which  connected a former Grace terminal with Otis Air
Force Base in  Massachusetts  (the "Otis  pipeline" or the  "pipeline"),  ceased
operations in 1973 and was abandoned  before 1978, when the connecting  terminal
was sold to an unrelated entity. Grace alleged that subsidiaries of KPP acquired
the  abandoned  pipeline as part of the  acquisition  of ST Services in 1993 and
assumed  responsibility  for  environmental  damages allegedly caused by the jet
fuel leaks.  Grace sought a ruling from the Texas court that these  subsidiaries
are  responsible  for  all   liabilities,   including  all  present  and  future
remediation  expenses,  associated  with  these  leaks  and  that  Grace  has no
obligation to indemnify these  subsidiaries for these expenses.  In the lawsuit,
Grace also sought  indemnification  for expenses of  approximately  $3.5 million
that it had incurred  since 1996 for response  and  remediation  required by the
State of Massachusetts  and for additional  expenses that it expects to incur in
the future. The consistent position of KPP's subsidiaries has been that they did
not acquire the abandoned pipeline 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.  On September 14, 2004, ST Services  petitioned for
reconsideration of the order.

     By letter  dated  January 4, 2002,  the Attorney  General's  Office for the
State of Maryland advised ST Services that it intended to seek penalties from ST
Services  in  connection  with the April 7, 2000  spill.  The State of  Maryland
subsequently asserted that it would seek penalties against ST Services and PEPCO
totaling up to $12 million.  A settlement  of this claim was reached in mid-2002
under  which ST  Services'  insurer  will pay a total of  slightly  more than $1
million  in  installments  over a five year  period.  PEPCO  has also  reached a
settlement of these claims with the State of Maryland. Accordingly, KPP believes
that this  matter  will not have a  material  adverse  effect  on its  financial
condition.

     On  December  13,  2002,  ST  Services  sued PEPCO in the  Superior  Court,
District of Columbia,  seeking, among other things, a declaratory judgment as to
ST Services' legal obligations,  if any, to reimburse PEPCO for costs of the oil
spill.  On  December  16,  2002,  PEPCO sued ST  Services  in the United  States
District Court for the District of Maryland,  seeking  recovery of all its costs
for  remediation  of and  response to the oil spill.  Pursuant  to an  agreement
between ST Services  and PEPCO,  ST  Services'  suit was  dismissed,  subject to
refiling.  ST  Services  has moved to  dismiss  PEPCO's  suit.  ST  Services  is
vigorously   defending   against   PEPCO's   claims  and  is  pursuing  its  own
counterclaims  for  return of  monies  ST  Services  has  advanced  to PEPCO for
settlements and cleanup costs. KPP believes that any costs or damages  resulting
from  these  lawsuits  will be  covered  by  insurance  and  therefore  will not
materially  adversely affect KPP's financial  condition.  The amounts claimed by
PEPCO,  if  recovered,  would  trigger an excess  insurance  policy  which has a
$600,000 retention,  but KPP does not believe that such retention,  if incurred,
would materially adversely affect KPP's financial condition.

     In 2003,  Exxon Mobil filed a lawsuit in a New Jersey  state court  against
GATX  Corporation,   Kinder  Morgan  Liquid  Terminals  ("Kinder  Morgan"),  the
successor in interest to GATX Terminals Corporation  ("GATX"),  and ST Services,
seeking  reimbursement for remediation costs associated with the Paulsboro,  New
Jersey  terminal.  The  terminal  was owned and operated by Exxon Mobil from the
early  1950's  until 1990 when  purchased  by GATX.  ST Services  purchased  the
terminal in 2000 from GATX. GATX was subsequently  acquired by Kinder Morgan. As
a  condition  to the  sale  to GATX  in  1990,  Exxon  Mobil  undertook  certain
remediation obligations with respect to the site. In the lawsuit, Exxon Mobil is
claiming that it has complied with its remediation  and contractual  obligations
and is entitled to reimbursement  from GATX  Corporation,  the parent company of
GATX, Kinder Morgan, and ST Services for costs in the amount of $400,000 that it
claims  are  related  to  releases  at the  site  subsequent  to its sale of the
terminal  to  GATX.  It  is  also   alleging  that  any  remaining   remediation
requirements are the  responsibility of GATX  Corporation,  Kinder Morgan, or ST
Services.  Kinder  Morgan has alleged  that it was  relieved of any  remediation
obligations pursuant to the sale agreement between its predecessor, GATX, and ST
Services. ST Services believes that, except for remediation involving immaterial
amounts,  GATX  Corporation  or Exxon Mobil are  responsible  for the  remaining
remediation of the site. Costs of completing the required  remediation depend on
a number of factors and cannot be determined at the current time.

     A subsidiary of KPP purchased the approximately 2,000-mile ammonia pipeline
system from Koch Pipeline Company, L.P. and Koch Fertilizer Storage and Terminal
Company in 2002. The rates of the ammonia  pipeline are subject to regulation by
the Surface Transportation Board (the "STB"). The STB had issued an order in May
2000,  prescribing  maximum  allowable rates KPP's  predecessor could charge for
transportation  to certain  destination  points on the pipeline system. In 2003,
KPP instituted a 7% general  increase to pipeline  rates.  On August 1, 2003, CF
Industries,  Inc. ("CFI") filed a complaint with the STB challenging  these rate
increases.  On August 11, 2004, STB ordered KPP to pay reparations to CFI and to
return CFI's rates to the levels permitted under the rate prescription.  KPP has
complied with the order. The STB, however,  indicated in the order that it would
lift the rate  prescription  in the  event KPP could  show  "materially  changed
circumstances."    KPP   has   submitted   evidence   of   "materially   changed
circumstances,"  which  specifically  includes  its  capital  investment  in the
pipeline.  CFI has argued that KPP's  acquisition costs should not be considered
by the STB as a measure of KPP's  investment base. The STB is expected to decide
the issue within the second quarter of 2005.

     Also, on June 16, 2003, Dyno Nobel Inc. ("Dyno") filed a complaint with the
STB  challenging  the 2003 rate increase on the basis that (i) the rate increase
constitutes a violation of a contract rate,  (ii) rates are  discriminatory  and
(iii)  the rates  exceed  permitted  levels.  Dyno  also  intervened  in the CFI
proceeding  described above.  Unlike CFI, Dyno's rates are not subject to a rate
prescription.  As of December 31, 2004, Dyno would be entitled to  approximately
$2 million in rate refunds, should it be successful. KPP believes, however, that
Dyno's claims are without merit.

     Pursuant to the  Distribution,  the Company  entered into an agreement (the
"Distribution  Agreement")  with Xanser  whereby the Company is obligated to pay
Xanser amounts equal to certain expenses and tax liabilities  incurred by Xanser
in connection with the Distribution. In January of 2002, the Company paid Xanser
$10  million  in  tax  liabilities  due  in  connection  with  the  Distribution
Agreement. The Distribution Agreement also requires the Company to pay Xanser an
amount  calculated based on any income tax liability of Xanser that, in the sole
judgment of Xanser,  (i) is  attributable  to  increases in income tax from past
years arising out of adjustments  required by federal and state tax authorities,
to the extent that such increases are properly  allocable to the businesses that
became part of the Company,  or (ii) is attributable to the  distribution of the
Company's common shares and the operations of the Company's  businesses prior to
the  distribution  date. In the event of an  examination of Xanser by federal or
state tax authorities, Xanser will have unfettered control over the examination,
administrative   appeal,   settlement  or  litigation   that  may  be  involved,
notwithstanding that the Company has agreed to pay any additional tax.

     The Company, primarily KPP, has other contingent liabilities resulting from
litigation,  claims and commitments incident to the ordinary course of business.
Management believes, after consulting with counsel, that the ultimate resolution
of such contingencies will not have a materially adverse effect on the financial
position, results of operations or liquidity of the Company.


10.  BUSINESS SEGMENT DATA

     The Company  conducts  business  through three  principal  operations:  the
"Pipeline Operations," which consists primarily of the transportation of refined
petroleum  products and fertilizer in the Midwestern states as a common carrier;
the  "Terminaling  Operations,"  which provide  storage for petroleum  products,
specialty chemicals and other liquids;  and the "Product Marketing  Operations,"
which provides  wholesale motor fuel marketing  services  throughout the Midwest
and Rocky Mountain regions and, since KPP's  acquisition of Statia (see Note 4),
delivers bunker fuel to ships in the Caribbean and Nova Scotia, Canada and sells
bulk  petroleum  products to various  commercial  interests.  General  corporate
includes general and administrative costs,  including accounting,  tax, finance,
legal,  investor  relations and employee  benefit  services.  General  corporate
assets include cash and other assets not related to the segments.

     The Company measures segment profit as operating  income.  Total assets are
those assets controlled by each reportable segment.  Business segment data is as
follows:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------  ----------------
<S>                                                             <C>                <C>             <C>
      Business segment revenues:
        Pipeline operations...................................  $    119,803,000   $  119,633,000  $     82,698,000
        Terminaling operations................................       259,352,000      234,958,000       205,971,000
        Product marketing operations..........................       676,093,000      511,200,000       381,159,000
                                                                ----------------   --------------  ----------------
                                                                $  1,055,248,000   $  865,791,000  $    669,828,000
                                                                ================   ==============  ================
      Business segment profit:
        Pipeline operations...................................  $     48,853,000   $   51,860,000  $     38,623,000
        Terminaling operations................................        74,663,000       66,532,000        65,040,000
        Product marketing operations..........................        17,262,000       12,233,000         4,692,000
        General corporate.....................................        (3,999,000)      (2,121,000)       (1,996,000)
                                                                ----------------   --------------  ----------------
           Operating income...................................       136,779,000      128,504,000       106,359,000
        Interest and other income ............................           336,000          365,000         3,664,000
        Interest expense......................................       (43,579,000)     (39,576,000)      (29,171,000)
        Loss on debt extinguishment...........................             -                  -          (3,282,000)
                                                                ----------------   --------------  ----------------
        Income before gain on issuance of units by KPP,
           income taxes, interest of outside non-controlling
           partners in KPP's net income and cumulative effect
           of change in accounting principle..................  $     93,536,000   $   89,293,000  $     77,570,000
                                                                ================   ==============  ================
      Business segment assets:
        Depreciation and amortization:
           Pipeline operations................................  $     14,538,000   $   14,117,000  $      6,408,000
           Terminaling operations.............................        41,232,000       38,089,000        32,368,000
           Product marketing operations.......................           906,000          989,000           695,000
                                                                ----------------   --------------  ----------------
                                                                $     56,676,000   $   53,195,000  $     39,471,000
                                                                ================   ==============  ================
        Capital expenditures (excluding acquisitions):
           Pipeline operations................................  $     10,334,000   $    9,584,000  $      9,469,000
           Terminaling operations.............................        29,511,000       34,572,000        20,953,000
           Product marketing operations.......................         2,369,000          591,000           679,000
                                                                ----------------   --------------  ----------------
                                                                $     42,214,000   $   44,747,000  $     31,101,000
                                                                ================   ==============  ================
</TABLE>

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                ---------------------------------------------------
                                                                      2004              2003              2002
                                                                ----------------  ---------------  ----------------

<S>                                                             <C>               <C>              <C>
        Total assets:
           Pipeline operations................................  $    351,195,000  $   352,901,000  $    352,657,000
           Terminaling operations.............................       917,966,000      874,185,000       844,321,000
           Product marketing operations.......................        83,404,000       58,161,000        41,297,000
           General corporate..................................         4,323,000        6,320,000         5,826,000
                                                                ----------------  ---------------  ----------------
                                                                $  1,356,888,000  $ 1,291,567,000  $  1,244,101,000
                                                                ================  ===============  ================

</TABLE>

     The following geographical area data includes revenues and operating income
based on location of the operating  segment and net property and equipment based
on physical location.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                ---------------------------------------------------
                                                                      2004              2003              2002
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
   Geographical area revenues:
      United States...........................................  $    658,814,000  $   535,895,000  $    485,322,000
      United Kingdom..........................................        29,540,000       26,392,000        23,937,000
      Netherlands Antilles....................................       298,273,000      241,693,000       132,387,000
      Canada..................................................        43,671,000       41,689,000        23,207,000
      Australia and New Zealand...............................        24,950,000       20,122,000         4,975,000
                                                                ----------------  ---------------  ----------------
                                                                $  1,055,248,000  $   865,791,000  $    669,828,000
                                                                ================  ===============  ================
   Geographical area operating income:
      United States...........................................  $     93,954,000  $    87,965,000  $     83,544,000
      United Kingdom..........................................         7,704,000        8,583,000         7,318,000
      Netherlands Antilles....................................        22,629,000       19,223,000         9,616,000
      Canada..................................................         5,248,000        6,777,000         4,398,000
      Australia and New Zealand...............................         7,244,000        5,956,000         1,483,000
                                                                ----------------  ---------------  ----------------
                                                                $    136,779,000  $   128,504,000  $    106,359,000
                                                                ================  ===============  ================

</TABLE>

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                ---------------------------------------------------
                                                                      2004              2003              2002
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
   Geographical area net property and equipment:
      United States...........................................  $    718,257,000  $   693,345,000  $    690,262,000
      United Kingdom..........................................        63,968,000       51,392,000        46,543,000
      Netherlands Antilles....................................       211,382,000      217,143,000       224,810,000
      Canada..................................................        71,374,000       74,995,000        78,789,000
      Australia and New Zealand...............................        83,631,000       76,145,000        51,872,000
                                                                ----------------  ---------------  ----------------
                                                                $  1,148,612,000  $ 1,113,020,000  $  1,092,276,000
                                                                ================  ===============  ================

</TABLE>

11.  FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

     The  estimated  fair value of all debt as of December 31, 2004 and 2003 was
approximately  $745 million and $654 million,  as compared to the carrying value
of $689 million and $636 million, respectively. These fair values were estimated
using discounted cash flow analysis,  based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. These estimates are
not  necessarily  indicative  of the amounts that would be realized in a current
market exchange. See Note 2 regarding derivative instruments.

     The Company markets and sells its services to a broad base of customers and
performs  ongoing  credit  evaluations  of its  customers.  The Company does not
believe it has a significant  concentration of credit risk at December 31, 2004.
No customer constituted 10% of the Company's consolidated revenues in 2004, 2003
or 2002.


12.  QUARTERLY FINANCIAL DATA (unaudited)

     Quarterly operating results for 2004 and 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                            -----------------------------------------------------------------------------
                                                March 31,              June 30,         September 30,       December 31,
                                            ----------------       ----------------    ---------------     --------------
<S>                                         <C>                    <C>                 <C>                 <C>
       2004:
         Revenues........................   $    233,179,000       $    254,202,000    $   272,242,000     $  295,625,000
                                            ================       ================    ===============     ==============
         Operating income................   $     32,915,000       $     36,534,000    $    34,927,000     $   32,403,000
                                            ================       ================    ===============     ==============
         Net income......................   $      5,995,000       $      7,395,000    $     6,811,000     $    4,151,000
                                            ================       ================    ===============     ==============
         Earnings per share:
            Basic........................   $           0.51       $           0.63    $          0.58     $         0.35
                                            ================       ================    ===============     ==============
            Diluted......................   $           0.50       $           0.62    $          0.57     $         0.34
                                            ================       ================    ===============     ==============
       2003:
         Revenues........................   $    218,469,000       $    218,654,000    $   214,592,000     $  214,076,000
                                            ================       ================    ===============     ==============
         Operating income................   $     33,724,000       $     32,705,000    $    32,251,000     $   29,824,000
                                            ================       ================    ===============     ==============
         Net income......................   $     16,559,000(a)(b) $    5,488,000     $     5,862,000      $    5,174,000
                                            ================       ================    ===============     ==============
         Earnings per share:
            Basic........................   $           1.44       $           0.48    $          0.50     $         0.44
                                            ================       ================    ===============     ==============
            Diluted......................   $           1.41       $           0.47    $          0.49     $         0.43
                                            ================       ================    ===============     ==============

</TABLE>

(a)  Includes cumulative effect of change in accounting  principle - adoption of
     new accounting  standard for asset retirement  obligations of approximately
     $0.3 million.

(b)  See Note 3 regarding gains on issuance of units by KPP.




<PAGE>
                                                                      Schedule I

                       KANEB SERVICES LLC (PARENT COMPANY)
                          CONDENSED STATEMENT OF INCOME



<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------    --------------

<S>                                                              <C>               <C>              <C>
General and administrative expenses...........................   $    (3,951,000)  $   (1,983,000)  $    (2,036,000)
Interest expense..............................................          (577,000)        (613,000)         (718,000)
Interest and other income (expense)...........................           (12,000)          10,000            10,000
Equity in earnings of subsidiaries............................        28,892,000       25,084,000        25,090,000
Equity in earnings of subsidiaries - gain on issuance of
   units by KPP...............................................             -           10,898,000        24,882,000
                                                                 ---------------   --------------   ---------------
Income before cumulative effect of change in accounting
   principle..................................................        24,352,000       33,396,000        47,228,000
Cumulative effect of change in accounting principle -
   adoption of new accounting standard for asset retirement
   obligations................................................             -             (313,000)            -
                                                                 ---------------   --------------   ---------------
   Net income.................................................   $    24,352,000   $   33,083,000   $    47,228,000
                                                                 ===============   ==============   ===============
Earnings per share:
   Basic:
      Before cumulative effect of change in accounting
        principle.............................................   $          2.07   $         2.89    $         4.13
      Cumulative effect of change in accounting principle.....             -                 (.03)            -
                                                                 ---------------   --------------    --------------
                                                                 $          2.07   $         2.86    $         4.13
                                                                 ===============   ==============    ==============
   Diluted:
      Before cumulative effect of change in accounting
        principle.............................................   $          2.03   $         2.84    $         4.02
      Cumulative effect of change in accounting principle.....             -                 (.03)            -
                                                                 ---------------   --------------    --------------
                                                                 $         2.03    $         2.81    $         4.02
                                                                 ==============    ==============    ==============

</TABLE>

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

                                     F - 24

<PAGE>

                                                                      Schedule I
                                                                     (Continued)

                       KANEB SERVICES LLC (PARENT COMPANY)
                             CONDENSED BALANCE SHEET


<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                             --------------------------------------
                                                                                   2004                  2003
                                                                             ----------------       ---------------
                                     ASSETS
<S>                                                                          <C>                    <C>
Current assets:
   Cash and cash equivalents...............................................  $      1,504,000       $     1,544,000
   Prepaid expenses and other..............................................           141,000               149,000
                                                                             ----------------       ---------------
      Total current assets.................................................         1,645,000             1,693,000
                                                                             ----------------       ---------------
Investments in and advances to subsidiaries................................       108,112,000           106,068,000

Other assets...............................................................           387,000               498,000
                                                                             ----------------       ---------------
                                                                             $    110,144,000       $   108,259,000
                                                                             ================       ===============



                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accrued expenses......................................................    $      2,039,000       $     1,112,000
   Accrued distributions payable to shareholders.........................           5,801,000             5,567,000
                                                                             ----------------       ---------------
      Total current liabilities..........................................           7,840,000             6,679,000
                                                                             ----------------       ---------------
Long-term debt...........................................................          14,000,000            16,500,000

Long-term payables and other liabilities.................................           7,949,000             7,359,000

Commitments and contingencies

Shareholders' equity:
   Shareholders' investment..............................................          77,136,000            75,291,000
   Accumulated other comprehensive income................................           3,219,000             2,430,000
                                                                             ----------------       ---------------
      Total shareholders' equity.........................................          80,355,000            77,721,000
                                                                             ----------------       ---------------
                                                                             $    110,144,000       $   108,259,000
                                                                             ================       ===============

</TABLE>


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

                                     F - 25


<PAGE>
                                                                      Schedule I
                                                                     (Continued)

                       KANEB SERVICES LLC (PARENT COMPANY)
                        CONDENSED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                 --------------------------------------------------
                                                                      2004              2003              2002
                                                                 ---------------   --------------    --------------
<S>                                                              <C>               <C>               <C>
Operating activities:
   Net income ...............................................    $    24,352,000   $   33,083,000    $   47,228,000
   Adjustments to reconcile net income to net cash
      provided by operating activities:
        Equity in earnings of subsidiaries, net of
           distributions....................................          (1,254,000)     (11,939,000)      (29,958,000)
        Other ...............................................            475,000             -                -
        Cumulative effect of change in accounting principle..               -             313,000             -
        Changes in current assets and liabilities............            935,000          698,000           (38,000)
                                                                 ---------------   --------------   ---------------
           Net cash provided by operating activities.........         24,508,000       22,155,000        17,232,000
                                                                 ---------------   --------------   ---------------
Investing activities:
   Changes in other assets...................................            111,000          110,000           911,000
                                                                 ---------------   --------------   ---------------
           Net cash provided by investing activities.........            111,000          110,000           911,000
                                                                 ---------------   --------------   ---------------
Financing activities:
   Issuance of debt..........................................              -                 -           10,000,000
   Payments of debt..........................................         (2,500,000)      (2,625,000)            -
   Distributions to shareholders.............................        (22,860,000)     (20,473,000)      (18,351,000)
   Changes in long-term payables and other liabilities.......            590,000          518,000       (10,114,000)
   Issuance of common shares upon exercise of options........            111,000          164,000           648,000
                                                                 ---------------   --------------   ---------------
        Net cash used in financing activities................        (24,659,000)     (22,416,000)      (17,817,000)
                                                                 ---------------   --------------   ---------------

Increase (decrease) in cash and cash equivalents.............            (40,000)        (151,000)          326,000

Cash and cash equivalents at beginning of period.............          1,544,000        1,695,000         1,369,000
                                                                 ---------------   --------------   ---------------
Cash and cash equivalents at end of period...................    $     1,504,000   $    1,544,000   $     1,695,000
                                                                 ===============   ==============   ===============

</TABLE>

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

                                     F - 26


<PAGE>
                                                                     Schedule II


                               KANEB SERVICES LLC
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>

                                                                    Additions
                                                          -----------------------------
                                         Balance at       Charged to         Charged to                     Balance at
                                        Beginning of       Costs and           Other                           End of
                                          Period           Expenses           Accounts       Deductions        Period
                                       -------------     ------------     --------------    ----------      -----------
<S>                                    <C>                <C>             <C>               <C>             <C>
ALLOWANCE DEDUCTED FROM
  ASSETS TO WHICH THEY APPLY

Year Ended December 31, 2004:
   For doubtful receivables
     classified as current assets...   $       3,777      $       990     $        -        $  (2,512)(b)   $    2,255
                                       =============      ===========     =============     =========       ==========
Year Ended December 31, 2003:
   For doubtful receivables
     classified as current assets...   $       3,724      $       526     $        -        $    (473)(b)   $    3,777
                                       =============      ===========     =============     =========       ==========
Year Ended December 31, 2002:
   For doubtful receivables
     classified as current assets...   $         653      $     2,509     $         841(a)  $    (279)(b)   $    3,724
                                       =============      ===========     =============     =========       ==========

</TABLE>

Notes:

(a)  Allowance for doubtful receivables from 2002 acquisitions.

(b)  Receivable write-offs and reclassifications, net of recoveries.


<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of Section  13 or 15 (d) of the  Securities
Exchange  Act of 1934,  Kaneb  Services  LLC has duly  caused  this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                    KANEB SERVICES LLC



                                    By:        //s//  JOHN R. BARNES
                                        ---------------------------------------
                                        Chairman of the Board and
                                        Chief Executive Officer
                                        Date: March 16, 2005


     Pursuant to the  requirements  of the  Securities and Exchange Act of 1934,
this report has been signed  below by the  following  persons on behalf of Kaneb
Services  LLC and in the  capacities  with  Kaneb  Services  LLC and on the date
indicated.

<TABLE>
<CAPTION>
      Signature                                                       Title                      Date
---------------------------------------                        -----------------------        ---------------

<S>                                                            <C>                            <C>
Principal Executive Officer
        //s//  JOHN R. BARNES                                  Chairman of the Board         March 16, 2005
----------------------------------------                       and Chief Executive Officer

Principal Accounting Officer
     //s//  HOWARD C. WADSWORTH                                Vice President, Treasurer     March 16, 2005
----------------------------------------                       and Secretary


Directors

         //s//  SANGWOO AHN                                    Director                      March 16, 2005
----------------------------------------


       //s//  MURRAY R. BILES                                  Director                      March 16, 2005
----------------------------------------


        //s//  FRANK M. BURKE                                  Director                      March 16, 2005
----------------------------------------


       //s//  CHARLES R. COX                                   Director                      March 16, 2005
----------------------------------------


         //s//  HANS KESSLER                                   Director                      March 16, 2005
----------------------------------------


       //s//  JAMES R. WHATLEY                                 Director                      March 16, 2005
----------------------------------------

</TABLE>


<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 annual report on Form 10-K of Kaneb Services LLC;

2.   Based on my  knowledge,  this  annual  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 annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual 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 annual 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))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) 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 annual report is being prepared;

     b)   designed such internal  control over  financial  reporting,  or caused
          such internal  control over  financial  reporting to be designed under
          our  supervision,   to  provide  reasonable  assurance  regarding  the
          reliability  of financial  reporting and the  preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

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

     d)   disclosed  in  this  annual  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:  March 16, 2005




                                             //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 annual report on Form 10-K of Kaneb Services LLC;

2.   Based on my  knowledge,  this  annual  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 annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual 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 annual 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))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) 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 annual report is being prepared;

     b)   designed such internal  control over  financial  reporting,  or caused
          such internal  control over  financial  reporting to be designed under
          our  supervision,   to  provide  reasonable  assurance  regarding  the
          reliability  of financial  reporting and the  preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

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

     d)   disclosed  in  this  annual  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: March 16, 2005


                                          //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 Annual
Report on Form 10-K for the year ended December 31, 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 Annual 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-K.  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:    March 16, 2005



                                          //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 Annual
Report on Form 10-K for the year ended December 31, 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 Annual 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-K.  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:    March 16, 2005



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



<PAGE>
                                                                      Exhibit 23



            Consent of Independent Registered Public Accounting Firm




The Board of Directors
Kaneb Services LLC:


     We consent to the incorporation by reference in the registration  statement
(No. 333-65404) on Form S-8 of Kaneb Services LLC of our reports dated March 11,
2005, with respect to the consolidated  balance sheets of Kaneb Services LLC and
subsidiaries  as of  December  31, 2004 and 2003,  and the related  consolidated
statements of income,  shareholders' equity and cash flows for each of the years
in the  three-year  period  ended  December  31,  2004,  the  related  financial
statement  schedules,  management's  assessment of the effectiveness of internal
control over financial  reporting as of December 31, 2004 and the  effectiveness
of internal  control over  financial  reporting  as of December 31, 2004,  which
reports  appear in the  December  31, 2004  annual  report on Form 10-K of Kaneb
Services LLC. Our report on the consolidated  financial  statements  refers to a
change in accounting for asset retirement obligations in 2003.



                                        KPMG LLP


Dallas, Texas
March 16, 2005


