<SUBMISSION>
<ACCESSION-NUMBER>0001137154-05-000010
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>1
<PERIOD>20050331
<FILING-DATE>20050510
<DATE-OF-FILING-DATE-CHANGE>20050510
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>KANEB SERVICES LLC
<CIK>0001137154
<ASSIGNED-SIC>5172
<IRS-NUMBER>752931295
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>001-16405
<FILM-NUMBER>05814657
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
<PHONE>9726994019
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>2435 N CENTRAL EXPWY SUITE 700
<CITY>RICHARDSON
<STATE>TX
<ZIP>75080
</MAIL-ADDRESS>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>ksl1q05form10q.txt
<DESCRIPTION>KSL FORM 10-Q 1QTR 2005
<TEXT>
--------------------------------------------------------------------------------

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

                                    FORM 10-Q

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

                  For the Quarterly Period Ended March 31, 2005

                                       OR

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

                        Commission File Number 001-16405

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

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


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

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

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).

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

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

Class of Common Shares                             Outstanding at April 29, 2005
     No par value                                       11,697,353 shares



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

<PAGE>
KANEB SERVICES LLC  AND SUBSIDIARIES


FORM 10-Q
QUARTER ENDED MARCH 31, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                         Page No.
                         Part I. Financial Information
<S>               <C>                                                                                    <C>
Item 1   (a) (1). Financial Statements (Unaudited)

                  Consolidated Statements of Income - Three Months Ended
                      March 31, 2005 and 2004                                                                1

                  Condensed Consolidated Balance Sheets - March 31, 2005
                      and December 31, 2004                                                                  2

                  Condensed Consolidated Statements of Cash Flows - Three
                      Months Ended March 31, 2005 and 2004                                                   3

                  Notes to Consolidated Financial Statements                                                 4

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

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

                         Statements of Income - Three Months Ended
                              March 31, 2005 and 2004                                                       14

                         Balance Sheets - March 31, 2005 and December 31, 2004                              15

                         Statements of Cash Flows - Three Months Ended
                             March 31, 2005 and 2004                                                        16

Item 2.           Management's Discussion and Analysis of
                      Financial Condition and Results of Operations                                         17

Item 3.           Quantitative and Qualitative Disclosure About Market Risk                                 28

Item 4.           Controls and Procedures                                                                   28


                         Part II.  Other Information

Item 6.           Exhibits                                                                                  29

</TABLE>

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                       ----------------------------
                                                                                           2005           2004
                                                                                       ------------   -------------
<S>                                                                                    <C>            <C>
Revenues:
    Services                                                                           $     99,222   $      90,698
    Products                                                                                191,804         142,481
                                                                                       ------------   -------------
        Total revenues                                                                      291,026         233,179
                                                                                       ------------   -------------
Costs and expenses:
    Cost of products sold                                                                   182,997         136,431
    Operating costs                                                                          46,622          43,424
    Depreciation and amortization                                                            14,838          13,907
    General and administrative                                                               11,398           6,502
                                                                                       ------------   -------------
        Total costs and expenses                                                            255,855         200,264
                                                                                       ------------   -------------
Operating income                                                                             35,171          32,915
Interest and other income                                                                       206              32
Interest expense                                                                            (11,348)        (10,629)
                                                                                       ------------   -------------
Income before income taxes and interest of outside non-controlling
    partners in KPP's net income                                                             24,029          22,318
Income tax expense                                                                           (1,526)         (1,163)
Interest of outside non-controlling partners in KPP's net income                            (15,854)        (15,160)
                                                                                       ------------   -------------
Net income                                                                             $      6,649   $       5,995
                                                                                       ============   =============
Earnings per share:
    Basic                                                                              $       0.56   $        0.51
                                                                                       ============   =============
    Diluted                                                                            $       0.55   $        0.50
                                                                                       ============   =============

</TABLE>

                 See notes to consolidated financial statements.
                                        1

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

<TABLE>
<CAPTION>
                                                                               March 31,           December 31,
                                                                                 2005                  2004
                                                                           ---------------       ----------------
                                                                              (Unaudited)
<S>                                                                        <C>                   <C>
            ASSETS
Current assets:
    Cash and cash equivalents                                              $        42,432       $        38,415
    Accounts receivable                                                             88,900                85,976
    Inventories                                                                     17,172                25,448
    Prepaid expenses and other                                                       9,840                12,614
                                                                           ---------------       ---------------
        Total current assets                                                       158,344               162,453
                                                                           ---------------       ---------------
Property and equipment                                                           1,459,551             1,451,176
Less accumulated depreciation                                                      316,722               302,564
                                                                           ---------------       ---------------
    Net property and equipment                                                   1,142,829             1,148,612
                                                                           ---------------       ---------------
Investment in affiliates                                                            26,751                25,939

Excess of cost over fair value of net assets of
    acquired business and other assets                                              19,043                19,884
                                                                           ---------------       ---------------
                                                                           $     1,346,967       $     1,356,888
                                                                           ===============       ===============

                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                       $        53,102       $        54,280
    Accrued expenses                                                                41,129                46,993
    Accrued interest payable                                                         8,648                 9,374
    Accrued distributions payable to shareholders                                    5,848                 5,801
    Accrued distributions payable to outside non-controlling
        partners in KPP                                                             19,863                19,863
                                                                           ---------------       ---------------
        Total current liabilities                                                  128,590               136,311
                                                                           ---------------       ---------------
Long-term debt                                                                     692,129               688,985

Other liabilities and deferred taxes                                                50,902                53,520

Interest of outside non-controlling partners in KPP                                393,111               397,717

Commitments and contingencies

Shareholders' equity                                                                82,235                80,355
                                                                           ---------------       ---------------
                                                                           $     1,346,967       $     1,356,888
                                                                           ===============       ===============

</TABLE>


                 See notes to consolidated financial statements.
                                        2

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                       ----------------------------
                                                                                           2005           2004
                                                                                       ------------   -------------
<S>                                                                                    <C>            <C>
Operating activities:
    Net income                                                                         $      6,649   $       5,995
    Adjustments to reconcile net income to net cash
        provided by operating activities:
           Depreciation and amortization                                                     14,838          13,907
           Equity in earnings of affiliates, net of distributions                              (812)         (1,638)
           Interest of outside non-controlling partners in
               KPP's net income                                                              15,854          15,160
           Deferred income taxes                                                                558             (53)
           Changes in working capital components                                             (1,931)         (6,520)
                                                                                       ------------   -------------
               Net cash provided by operating activities                                     35,156          26,851
                                                                                       ------------   -------------
Investing activities:
    Capital expenditures                                                                     (8,743)         (7,347)
    Other                                                                                      (887)           (932)
                                                                                       ------------   -------------
               Net cash used in investing activities                                         (9,630)         (8,279)
                                                                                       ------------   -------------
Financing activities:
    Issuance of debt                                                                          4,080           4,196
    Distributions to shareholders                                                            (5,801)         (5,567)
    Distributions to outside non-controlling
        partners in KPP                                                                     (19,863)        (19,507)
    Other                                                                                        75             (52)
                                                                                       ------------   -------------
               Net cash used in financing activities                                        (21,509)        (20,930)
                                                                                       ------------   -------------
Increase (decrease) in cash and cash equivalents                                              4,017          (2,358)
Cash and cash equivalents at beginning of period                                             38,415          43,457
                                                                                       ------------   -------------
Cash and cash equivalents at end of period                                             $     42,432   $      41,099
                                                                                       ============   =============
Supplemental cash flow information - cash paid for interest                            $     11,794   $      10,954
                                                                                       ============   =============

</TABLE>

                 See notes to consolidated financial statements.
                                        3

<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

1.   SIGNIFICANT ACCOUNTING POLICIES

     The consolidated  financial statements reflect the results of operations of
     Kaneb Services LLC (the "Company"), its wholly-owned subsidiaries and Kaneb
     Pipe Line Partners,  L.P.  ("KPP").  The Company controls the operations of
     KPP  through  its 2%  general  partner  interest  and 18%  limited  partner
     interest as of March 31, 2005. All  significant  intercompany  transactions
     and balances have been eliminated.

     The unaudited condensed  consolidated  financial  statements of the Company
     for the  three  month  periods  ended  March 31,  2005 and 2004,  have been
     prepared in accordance with accounting principles generally accepted in the
     United States of America.  Significant  accounting policies followed by the
     Company are disclosed in the notes to the consolidated financial statements
     included  in the  Company's  Annual  Report on Form 10-K for the year ended
     December  31,  2004.  In the  opinion  of  the  Company's  management,  the
     accompanying condensed consolidated financial statements contain all of the
     adjustments,  consisting of normal recurring accruals, necessary to present
     fairly  the  consolidated   financial  position  of  the  Company  and  its
     consolidated  subsidiaries at March 31, 2005, and the consolidated  results
     of their operations and cash flows for the periods ended March 31, 2005 and
     2004.  Operating  results for the three months ended March 31, 2005 are not
     necessarily  indicative  of the results  that may be expected  for the year
     ending December 31, 2005.

     In December of 2004,  the Financial  Accounting  Standards  Board  ("FASB")
     issued  Statement  of  Financial  Accounting  Standards  ("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 first  quarter of
     2006.  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.

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

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
      Reported net income                                                       $       6,649       $      5,995

      Share-based employee compensation expense determined
        under the fair value based method                                                 (63)               (21)
                                                                                -------------       ------------
      Pro forma net income                                                      $       6,586       $      5,974
                                                                                =============       ============
      Earning per share:
        Basic - as reported                                                     $        0.56      $        0.51
                                                                                =============      =============
        Basic - pro forma                                                       $        0.55      $        0.51
                                                                                =============      =============
        Diluted - as reported                                                   $        0.55      $        0.50
                                                                                =============      =============
        Diluted - pro forma                                                     $        0.54      $        0.50
                                                                                =============      =============
</TABLE>


2.   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.


3.   COMPREHENSIVE INCOME

     Comprehensive income for the three months ended March 31, 2005 and 2004, is
     as follows:

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
     Net income                                                                 $       6,649      $        5,995
     Foreign currency translation adjustment                                             (153)                (49)
     KPP interest rate hedging transaction                                                  6                   9
                                                                                -------------      --------------
     Comprehensive income                                                       $       6,502      $        5,955
                                                                                =============      ==============

</TABLE>

     Accumulated  other  comprehensive  income  aggregated $3.1 million and $3.2
     million at March 31, 2005 and December 31, 2004, respectively.


4.   CASH DISTRIBUTIONS

     The Company makes quarterly distributions of 100% of its available cash, as
     defined in its limited liability company agreement,  to common shareholders
     of record on the  applicable  record date,  within 45 days after the end of
     each quarter. Available cash consists generally of all the cash receipts of
     the Company, less all cash disbursements and reserves.  Excess cash flow of
     the  Company's  wholly-owned  marketing  operations is being used to reduce
     working capital  borrowings.  A cash  distribution of $0.495 per share with
     respect to the fourth quarter of 2004 was paid on February 14, 2005. A cash
     distribution  of $0.495 per share with respect to the first quarter of 2005
     was declared to holders of record on April 30, 2005 and will be paid on May
     13, 2005.


5.   EARNINGS PER SHARE

     Earnings per share for the three  months ended March 31, 2005 and 2004,  is
     calculated  using the Company's basic and diluted  weighted  average shares
     outstanding  for the period.  For the three months ended March 31, 2005 and
     2004,  basic  weighted  average  shares  outstanding  were  11,872,000  and
     11,667,000,  respectively,  and diluted weighted average shares outstanding
     were 12,123,000 and 11,921,000, respectively.


6.   CONTINGENCIES

     The  operations  of KPP are  subject to  Federal,  state and local laws and
     regulations in the United States and various foreign locations  relating to
     protection of the environment.  Although KPP believes its operations are in
     general  compliance with  applicable  environmental  regulations,  risks of
     additional  costs and  liabilities  are  inherent in pipeline  and terminal
     operations,  and  there  can be no  assurance  that  significant  costs and
     liabilities  will not be incurred  by KPP.  Moreover,  it is possible  that
     other  developments,  such as increasingly  stringent  environmental  laws,
     regulations and enforcement policies thereunder,  and claims for damages to
     property or persons  resulting  from the operations of KPP, could result in
     substantial costs and liabilities to KPP.

     Certain  subsidiaries  of KPP were sued in a Texas  state  court in 1997 by
     Grace Energy Corporation  ("Grace"),  the entity from which KPP acquired ST
     Services  in  1993.  The  lawsuit  involves   environmental   response  and
     remediation  costs  allegedly  resulting  from jet fuel  leaks in the early
     1970's from a  pipeline.  The  pipeline,  which  connected  a former  Grace
     terminal with Otis Air Force Base in Massachusetts  (the "Otis pipeline" or
     the "pipeline"),  ceased  operations in 1973 and was abandoned before 1978,
     when the connecting terminal was sold to an unrelated entity. Grace alleged
     that  subsidiaries  of KPP acquired the  abandoned  pipeline as part of the
     acquisition  of  ST  Services  in  1993  and  assumed   responsibility  for
     environmental  damages allegedly caused by the jet fuel leaks. Grace sought
     a ruling from the Texas court that these  subsidiaries  are responsible for
     all  liabilities,  including all present and future  remediation  expenses,
     associated  with these leaks and that Grace has no  obligation to indemnify
     these  subsidiaries for these expenses.  In the lawsuit,  Grace also sought
     indemnification  for  expenses of  approximately  $3.5  million that it had
     incurred since 1996 for response and  remediation  required by the State of
     Massachusetts  and for additional  expenses that it expects to incur in the
     future.  The consistent  position of KPP's  subsidiaries has been that they
     did not  acquire  the  abandoned  pipeline  as part of the 1993 ST Services
     transaction,  and  therefore  did not  assume  any  responsibility  for the
     environmental damage nor any liability to Grace for the pipeline.

     At the end of the trial,  the jury  returned a verdict  including  findings
     that (1) Grace had breached a provision of the 1993  acquisition  agreement
     by  failing  to  disclose  matters  related  to the  pipeline,  and (2) the
     pipeline was  abandoned  before 1978 -- 15 years before KPP's  subsidiaries
     acquired ST Services.  On August 30, 2000, the Judge entered final judgment
     in the case that Grace take  nothing  from the  subsidiaries  on its claims
     seeking recovery of remediation costs. Although KPP's subsidiaries have not
     incurred any expenses in connection  with the  remediation,  the court also
     ruled,  in  effect,   that  the  subsidiaries  would  not  be  entitled  to
     indemnification  from  Grace  if any such  expenses  were  incurred  in the
     future.  Moreover, the Judge let stand a prior summary judgment ruling that
     the pipeline  was an asset  acquired by KPP's  subsidiaries  as part of the
     1993 ST Services  transaction and that any liabilities  associated with the
     pipeline would have become  liabilities of the subsidiaries.  Based on that
     ruling, the Massachusetts Department of Environmental Protection and Samson
     Hydrocarbons  Company  (successor to Grace Petroleum Company) wrote letters
     to ST Services  alleging its  responsibility  for the  remediation,  and ST
     Services  responded  denying any liability in connection  with this matter.
     The Judge also awarded  attorney  fees to Grace of more than $1.5  million.
     Both KPP's  subsidiaries  and Grace have  appealed the trial  court's final
     judgment  to the Texas  Court of  Appeals  in Dallas.  In  particular,  the
     subsidiaries  have filed an appeal of the  judgment  finding  that the Otis
     pipeline and any liabilities  associated with the pipeline were transferred
     to them as well as the award of attorney fees to Grace.

     On April 2, 2001,  Grace filed a petition in  bankruptcy,  which created an
     automatic  stay of actions  against  Grace.  This automatic stay covers the
     appeal of the Dallas litigation,  and the Texas Court of Appeals has issued
     an order staying all  proceedings of the appeal because of the  bankruptcy.
     Once that stay is lifted,  KPP's subsidiaries that are party to the lawsuit
     intend to resume vigorous prosecution of the appeal.

     The Otis Air Force Base is a part of the Massachusetts Military Reservation
     ("MMR Site"),  which has been declared a Superfund Site pursuant to CERCLA.
     The MMR Site contains a number of groundwater  contamination plumes, two of
     which are allegedly  associated  with the Otis pipeline,  and various other
     waste  management  areas of concern,  such as landfills.  The United States
     Department of Defense, pursuant to a Federal Facilities Agreement, has been
     responding  to  the   Government   remediation   demand  for  most  of  the
     contamination problems at the MMR Site. Grace and others have also received
     and  responded to formal  inquiries  from the United  States  Government in
     connection with the environmental  damages allegedly resulting from the jet
     fuel leaks. KPP's subsidiaries  voluntarily responded to an invitation from
     the Government to provide  information  indicating that they do not own the
     pipeline.  In connection with a court-ordered  mediation  between Grace and
     KPP's  subsidiaries,  the Government advised the parties in April 1999 that
     it has  identified  two spill  areas that it  believes to be related to the
     pipeline that is the subject of the Grace suit. The Government at that time
     advised the parties that it believed it had incurred costs of approximately
     $34 million, and expected in the future to incur costs of approximately $55
     million,  for  remediation  of one of the spill areas.  This amount was not
     intended to be a final  accounting of costs or to include all categories of
     costs.  The  Government  also advised the parties that it could not at that
     time allocate its costs attributable to the second spill area.

     By letter  dated July 26, 2001,  the United  States  Department  of Justice
     ("DOJ")   advised  ST  Services  that  the   Government   intends  to  seek
     reimbursement  from ST Services under the  Massachusetts  Oil and Hazardous
     Material Release  Prevention and Response Act and the Declaratory  Judgment
     Act for the  Government's  response costs at the two spill areas  discussed
     above.  The DOJ relied in part on the Texas state court judgment,  which in
     the DOJ's view, held that ST Services was the current owner of the pipeline
     and  the  successor-in-interest  of  the  prior  owner  and  operator.  The
     Government  advised ST  Services  that it believes  it has  incurred  costs
     exceeding  $40  million,  and expects to incur  future  costs  exceeding an
     additional  $22  million,  for  remediation  of the two  spill  areas.  KPP
     believes  that its  subsidiaries  have  substantial  defenses.  ST Services
     responded  to the DOJ on  September 6, 2001,  contesting  the  Government's
     positions and declining to reimburse  any response  costs.  The DOJ has not
     filed  a  lawsuit  against  ST  Services  seeking  cost  recovery  for  its
     environmental  investigation  and  response  costs.  Representatives  of ST
     Services  have  met  with  representatives  of the  Government  on  several
     occasions since September 6, 2001 to discuss the Government's claims and to
     exchange  information  related  to such  claims.  Additional  exchanges  of
     information are expected to occur in the future and additional meetings may
     be held to discuss possible  resolution of the Government's  claims without
     litigation. KPP does not believe this matter will have a materially adverse
     effect on its financial  condition,  although there can be no assurances as
     to the ultimate outcome.

     On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac Electric
     Power  Company  ("PEPCO")  ruptured.  Work  performed  with  regard  to the
     pipeline  was  conducted by a  partnership  of which ST Services is general
     partner. PEPCO has reported that it has incurred total cleanup costs of $70
     million to $75 million.  PEPCO probably will continue to incur some cleanup
     related costs for the foreseeable future,  primarily in connection with EPA
     requirements  for monitoring  the condition of some of the impacted  areas.
     Since May 2000, ST Services has provisionally  contributed a minority share
     of the cleanup  expense,  which has been funded by ST  Services'  insurance
     carriers.  ST  Services  and  PEPCO  have  not,  however,  reached  a final
     agreement  regarding ST  Services'  proportionate  responsibility  for this
     cleanup  effort,  if any,  and cannot  predict  the  amount,  if any,  that
     ultimately  may be determined to be ST Services'  share of the  remediation
     expense,  but ST  Services  believes  that such  amount  will be covered by
     insurance  and  therefore  will  not  materially   adversely  affect  KPP's
     financial condition.

     As a result of the rupture,  purported  class  actions  were filed  against
     PEPCO and ST  Services  in federal  and state court in Maryland by property
     and business owners alleging  damages in unspecified  amounts under various
     theories, including under the Oil Pollution Act ("OPA") and Maryland common
     law.  The federal  court  consolidated  all of the federal  cases in a case
     styled as In re Swanson  Creek Oil Spill  Litigation.  A settlement  of the
     consolidated  class action,  and a companion  state-court class action, was
     reached and approved by the federal judge. The settlement involved creation
     and funding by PEPCO and ST Services of a $2,250,000 class settlement fund,
     from  which  all  participating  claimants  would  be paid  according  to a
     court-approved  formula, as well as a court-approved payment to plaintiffs'
     attorneys. The settlement has been consummated and the fund, to which PEPCO
     and  ST  Services   contributed   equal  amounts,   has  been  distributed.
     Participating  claimants'  claims  have been  settled  and  dismissed  with
     prejudice.  A number of class  members  elected not to  participate  in the
     settlement,  i.e., to "opt out," thereby  preserving  their claims  against
     PEPCO and ST  Services.  All  non-participant  claims have been settled for
     immaterial  amounts with ST Services' portion of such settlements  provided
     by its insurance carrier.

     PEPCO and ST Services  agreed with the federal  government and the State of
     Maryland to pay costs of assessing  natural  resource  damages arising from
     the  Swanson  Creek  oil  spill  under  OPA  and of  selecting  restoration
     projects.  This process was completed in mid-2002. ST Services' insurer has
     paid ST Services'  agreed 50 percent share of these  assessment  costs.  In
     late November  2002,  PEPCO and ST Services  entered into a Consent  Decree
     resolving  the federal  and state  trustees'  claims for  natural  resource
     damages.  The decree required  payments by ST Services and PEPCO of a total
     of  approximately  $3  million  to fund the  restoration  projects  and for
     remaining  damage  assessment  costs. The federal court entered the Consent
     Decree as a final judgment on December 31, 2002. PEPCO and ST Services have
     each  paid  their  50%  share  and  thus  fully   performed  their  payment
     obligations under the Consent Decree. ST Services' insurance carrier funded
     ST Services' payment.

     The U.S.  Department  of  Transportation  ("DOT")  has  issued a Notice  of
     Proposed  Violation  to PEPCO  and ST  Services  alleging  violations  over
     several years of pipeline safety  regulations and proposing a civil penalty
     of $647,000  jointly against the two companies.  ST Services and PEPCO have
     contested the DOT allegations and the proposed penalty.  A hearing was held
     before the Office of  Pipeline  Safety at the DOT in late 2001.  In June of
     2004, the DOT issued a final order reducing the penalty to $256,250 jointly
     against ST Services and PEPCO and $74,000 against ST Services. On September
     14, 2004, ST Services petitioned for reconsideration of the order which was
     subsequently denied.

     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 March 31, 2005, Dyno would be
     entitled  to  approximately  $2.7  million  in rate  refunds,  should it be
     successful. KPP believes, however, that Dyno's claims are without merit.

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


7.   BUSINESS SEGMENT DATA

     The Company  conducts  business  through three  principal  operations:  the
     "Pipeline   Operations"   of  KPP,   which   consists   primarily   of  the
     transportation  of  refined  petroleum   products  and  fertilizer  in  the
     Midwestern states as a common carrier; the "Terminaling Operations" of KPP,
     which provide storage for petroleum products, specialty chemicals and other
     liquids;  and the "Product  Marketing  Services," which provides  wholesale
     motor fuel  marketing  services  throughout  the Midwest and Rocky Mountain
     regions,  delivers  bunker fuels to ships in the Caribbean and Nova Scotia,
     Canada, and sells bulk petroleum products to various commercial  interests.
     General  corporate  includes  accounting,  tax,  finance,  legal,  investor
     relations and other corporate expenses not related to the segments. General
     corporate  assets include cash,  receivables from affiliates of the Company
     and other assets not related to the segments.

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

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
     Business segment revenues:
        Pipeline operations                                                     $      30,092      $       27,903
        Terminaling operations                                                         69,130              62,795
        Product marketing operations                                                  191,804             142,481
                                                                                -------------      --------------
                                                                                $     291,026      $      233,179
                                                                                =============      ==============
     Business segment profit:
        Pipeline operations                                                     $      11,737      $       11,210
        Terminaling operations                                                         18,727              18,484
        Product marketing operations                                                    5,567               3,754
        General corporate                                                                (860)               (533)
                                                                                -------------      --------------
            Operating income                                                           35,171              32,915
        Interest and other income                                                         206                  32
        Interest expense                                                              (11,348)            (10,629)
                                                                                -------------      --------------
        Income before income taxes and interest of outside
            non-controlling partners in KPP's net income                        $      24,029      $       22,318
                                                                                =============      ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                                  March 31,         December 31,
                                                                                    2005                2004
                                                                                -------------      -------------
                                                                                         (in thousands)
<S>                                                                             <C>                <C>
     Total assets:
        Pipeline operations                                                     $     353,781      $     351,195
        Terminaling operations                                                        895,500            917,966
        Product marketing operations                                                   93,934             83,404
        General corporate                                                               3,752              4,323
                                                                                -------------      -------------
                                                                                $   1,346,967      $   1,356,888
                                                                                =============      =============

</TABLE>


8.   RECENT ACCOUNTING PRONOUNCEMENT

     In March of 2005, the FASB issued FASB  Interpretation  No. 47, "Accounting
     for  Conditional   Retirement   Obligations"  ("FIN  47"),  which  requires
     companies to recognize a liability for the fair value of a legal obligation
     to perform  asset-retirement  activities  that are  conditional on a future
     event, if the amount can be reasonably estimated. FIN 47 must be adopted by
     the  Company  by the end of fiscal  2005.  The  impact of  adoption  on the
     Company's consolidated financial statements is still being evaluated.


<PAGE>
                                                                      Schedule I

KANEB SERVICES LLC (PARENT COMPANY)

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



<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                      -----------------------------
                                                                                           2005           2004
                                                                                      -------------   -------------
<S>                                                                                   <C>              <C>
General and administrative expenses                                                   $        (822)   $       (441)
Interest expense                                                                               (179)           (137)
Interest and other income                                                                      -                  1
Equity in earnings of subsidiaries                                                            7,650           6,572
                                                                                      -------------    ------------
Net income                                                                            $       6,649    $      5,995
                                                                                      =============    ============

Earnings per share:
    Basic                                                                             $        0.56    $       0.51
                                                                                      =============    ============
    Diluted                                                                           $        0.55    $       0.50
                                                                                      =============    ============

</TABLE>



              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       14
<PAGE>
                                                                      Schedule I
                                                                     (Continued)

KANEB SERVICES LLC (PARENT COMPANY)


CONDENSED BALANCE SHEETS
(In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              March 31,             December 31,
                                                                                2005                    2004
                                                                          ---------------          -------------
                                                                             (Unaudited)
<S>                                                                        <C>                     <C>
            ASSETS
Current assets:
    Cash and cash equivalents                                              $        2,057          $       1,504
    Prepaid expenses and other                                                        115                    141
                                                                           --------------          -------------
        Total current assets                                                        2,172                  1,645
                                                                           --------------          -------------
Investments in and advances to subsidiaries                                       107,678                108,112

Other assets                                                                          359                    387
                                                                           --------------          -------------
                                                                           $      110,209          $     110,144
                                                                           ==============          =============


                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accrued expenses                                                       $        1,573          $       2,039
    Accrued distributions payable to shareholders                                   5,848                  5,801
                                                                           --------------          -------------
        Total current liabilities                                                   7,421                  7,840
                                                                           --------------          -------------

Long-term debt                                                                     14,000                 14,000

Long-term payables and other liabilities                                            6,553                  7,949

Commitments and contingencies

Shareholders' equity                                                               82,235                 80,355
                                                                           --------------          -------------
                                                                           $      110,209          $     110,144
                                                                           ==============          =============

</TABLE>



              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       15
<PAGE>
                                                                      Schedule I
                                                                     (Continued)


KANEB SERVICES LLC (PARENT COMPANY)

CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
(Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                      -----------------------------
                                                                                           2005           2004
                                                                                      ------------     ------------
<S>                                                                                   <C>              <C>
Operating activities:
    Net income                                                                        $      6,649     $      5,995
    Adjustments to reconcile net income to net cash provided
        by operating activities:
           Equity in earnings of subsidiaries, net of distributions                            281             (250)
           Other                                                                               264            -
           Changes in current assets and liabilities                                          (440)            (455)
                                                                                      ------------     ------------
               Net cash provided by operating activities                                     6,754            5,290
                                                                                      ------------     ------------
Investing activities:
    Changes in other assets                                                                     34               27
                                                                                      ------------     ------------
               Net cash provided by investing activities                                        34               27
                                                                                      ------------     ------------
Financing activities:
    Distributions to shareholders                                                           (5,801)          (5,567)
    Changes in long-term payables and other liabilities                                       (509)              53
    Other                                                                                       75              (52)
                                                                                      ------------     ------------
               Net cash used in financing activities                                        (6,235)          (5,566)
                                                                                      ------------     ------------

Increase (decrease) in cash and cash equivalents                                               553             (249)

Cash and cash equivalents at beginning of period                                             1,504            1,544
                                                                                      ------------     ------------
Cash and cash equivalents at end of period                                            $      2,057     $      1,295
                                                                                      ============     ============

</TABLE>

              See "Notes to Consolidated Financial Statements" of
                   Kaneb Services LLC included in this report.
                                       16
<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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


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

     Overview

     In September 1989, Kaneb Pipe Line Company LLC ("KPL"),  now a wholly owned
     subsidiary  of the  Company,  formed  KPP to own and  operate  its  refined
     petroleum  products  pipeline  business.   KPL  manages  and  controls  the
     operations of KPP through its general partner interest and an 18% (at March
     31, 2005) 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. 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 in 2002, 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>
                                                                                       Three Months Ended
                                                                                              March 31,
                                                                                -----------------------------
                                                                                     2005             2004
                                                                                ------------     ------------
                                                                                      (in thousands, except
                                                                                        per share amounts)
<S>                                                                             <C>              <C>
     Consolidated revenues                                                      $   291,026      $    233,179
                                                                                ===========      ============
     Consolidated operating income                                              $    35,171      $     32,915
                                                                                ===========      ============
     Consolidated net income                                                    $     6,649      $      5,995
                                                                                ===========      ============
     Earnings per share:
        Basic                                                                   $      0.56      $       0.51
                                                                                ===========      ============
        Diluted                                                                 $      0.55      $       0.50
                                                                                ===========      ============
     Cash distributions declared per share                                      $     0.495      $      0.475
                                                                                ===========      ============
     Consolidated capital expenditures, excluding acquisitions                  $     8,743      $      7,347
                                                                                ===========      ============
</TABLE>

     For the three months ended March 31, 2005,  consolidated revenues increased
     by $57.8  million,  or 25%, when compared to the first quarter of 2004, due
     to a $49.3  million  increase in product  marketing  revenues (see "Product
     Marketing Services" below), a $6.3 million increase in terminaling business
     revenues (see "Terminaling  Operations" below), and a $2.2 million increase
     in  pipeline  revenues  (see  "Pipeline  Operations"  below).  Consolidated
     operating  income for the three  months  ended March 31, 2005  increased by
     $2.3  million,  or 7%,  when  compared  to the same  period  in  2004,  due
     primarily to a $1.8 million increase in product marketing operating income,
     a $0.5 million increase in pipeline  operating  income,  and a $0.3 million
     increase in terminaling operating income. Consolidated operating income for
     the three  months  ended  March 31,  2005  includes  $2.4  million of costs
     associated with the Valero L.P. merger agreement. Overall, consolidated net
     income for the three months ended March 31, 2005 increased by $0.7 million,
     or 11%, when compared to the three months ended March 31, 2004.

     Pipeline Operations

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
     Revenues                                                                   $      30,092      $       27,903
     Operating costs                                                                   11,499              11,487
     Depreciation and amortization                                                      3,792               3,599
     General and administrative                                                         3,064               1,607
                                                                                -------------      --------------
        Operating income                                                        $      11,737      $       11,210
                                                                                =============      ==============

</TABLE>

     The  Partnership'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 the STB, the  pipelines  compete  primarily on the
     basis of quality of service,  including  delivery of products at convenient
     locations on a timely basis to meet the needs of their  customers.  For the
     three  month  period  ended  March 31,  2005,  revenues  increased  by $2.2
     million,  or 8%,  when  compared  to the  first  quarter  of  2004,  due to
     increases  in barrel  miles of  petroleum  products  shipped  on  petroleum
     pipelines  and  increases  in the average  price  received  per barrel mile
     shipped.  Barrel miles on petroleum  pipelines  totaled 5.2 billion and 5.1
     billion for the three months  ended March 31, 2005 and 2004,  respectively.
     Total volumes  shipped on the anhydrous  ammonia  pipeline  aggregated  297
     thousand  tons for each of the three month periods ended March 31, 2005 and
     2004.

     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, was flat for the three month period
     ended March 31, 2005,  when compared to the first quarter of 2004.  For the
     three months ended March 31, 2005,  depreciation and amortization increased
     by $0.2 million,  when  compared to the same 2004 period,  due primarily to
     routine maintenance capital expenditures. General and administrative costs,
     which include  managerial,  accounting and administrative  personnel costs,
     office  rent  and  expense,   legal  and   professional   costs  and  other
     non-operating  costs,  increased by $1.5 million for the three month period
     ended  March 31,  2005,  when  compared to the first  quarter of 2004,  due
     primarily to costs  associated  with the Valero L.P.  merger  agreement and
     increases in personnel-related costs. Terminaling Operations

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
     Revenues                                                                   $      69,130      $       62,795
     Operating costs                                                                   33,360              30,343
     Depreciation and amortization                                                     10,824              10,084
     General and administrative                                                         6,219               3,884
                                                                                -------------      --------------
        Operating income                                                        $      18,727      $       18,484
                                                                                =============      ==============

</TABLE>

     For the three month  period  ended  March 31,  2005,  terminaling  revenues
     increased by $6.3 million,  or 10%, when compared to the three month period
     ended March 31, 2004, due to increases in both the average tankage utilized
     and the average  price  realized  per barrel of tankage  utilized.  Average
     tankage  utilized  for the three month period ended March 31, 2005 was 50.5
     million  barrels,  compared to 48.2 million barrels for the same prior year
     period. For the three month period ended March 31, 2005, average annualized
     revenues  per barrel of tankage  utilized  increased  to $5.55 per  barrel,
     compared to $5.24 per barrel for the same prior year period,  due primarily
     to favorable domestic and foreign market conditions.

     For the three month period ended March 31, 2005,  operating costs increased
     by $3.0 million, when compared to the same 2004 period, a result of overall
     increases in tank utilization and planned maintenance. For the three months
     ended March 31,  2005,  depreciation  and  amortization  increased  by $0.7
     million,  when compared to the first  quarter of 2004,  due to KPP terminal
     acquisitions in 2004 and routine maintenance capital expenditures.  General
     and  administrative  costs  increased  by $2.3 million for the three months
     ended  March 31,  2005,  when  compared to the first  quarter of 2004,  due
     primarily to costs  associated  with the Valero L.P.  merger  agreement and
     increases in personnel-related costs.


     Product Marketing Services

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                --------------------------------
                                                                                     2005               2004
                                                                                -------------       ------------
                                                                                         (in thousands)
<S>                                                                             <C>                 <C>
     Revenues                                                                   $     191,804      $      142,481
     Cost of products sold                                                            182,997             136,431
                                                                                -------------      --------------
     Gross margin                                                               $       8,807      $        6,050
                                                                                =============      ==============
        Operating income                                                        $       5,567      $        3,754
                                                                                =============      ==============

</TABLE>

     For the three month period  ended March 31, 2005,  revenues for the product
     marketing  services  business  increased  by $49.3  million,  or 35%,  when
     compared to the same 2004  period,  due to increases in volumes sold and an
     overall increase in the average sales price realized.  Gallons sold totaled
     183 million and 162 million,  for the three months ended March 31, 2005 and
     2004,  respectively.  For the three month period ended March 31, 2005,  the
     average  price  realized per gallon of product sold  increased to $1.05 per
     gallon,  compared  to $0.86 per  gallon for the same 2004  period.  For the
     three  months  ended March 31,  2005,  gross  margin and  operating  income
     increased by $2.8 million and $1.8 million, respectively,  when compared to
     the same 2004 period,  due to the  increase in volumes  sold and  favorable
     variations  in prices  resulting  from the timing of  purchases  and sales.
     Product  inventories  are maintained at minimum  levels to meet  customers'
     needs;  however,   market  prices  for  petroleum  products  can  fluctuate
     significantly in short periods of time.

     Interest Expense

     For the three months ended March 31, 2005,  interest  expense  increased by
     $0.7  million  when  compared  to the  same  2004  period,  due to  overall
     increases in KPP debt levels  resulting from KPP terminal  acquisitions  in
     2004 and increases 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 $1.5  million and $1.2 million for
     the three month periods ended March 31, 2005 and 2004, respectively.

     On June 1,  1989,  the  governments  of the  Netherlands  Antilles  and St.
     Eustatius  approved  a Free Zone and Profit Tax  Agreement  retroactive  to
     January 1, 1989,  which  expired  on  December  31,  2000.  This  agreement
     requires a subsidiary  of KPP,  which was acquired  with Statia in 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  provides  that  any  amounts  paid in order to meet the
     minimum annual  payment will be available to offset future tax  liabilities
     under the  agreement  to the  extent  that the  minimum  annual  payment is
     greater than 2% of taxable income.  The subsidiary is currently  engaged in
     discussions with  representatives  appointed by the Island Territory of St.
     Eustatius  regarding the renewal or modification of the agreement,  but the
     ultimate  outcome  cannot be predicted  at this time.  The  subsidiary  has
     accrued amounts assuming a new agreement becomes  effective,  and continues
     to make payments, as required, under the previous agreement.

     Liquidity and Capital Resources

     Cash provided by  operations,  including  the  operations of KPP, was $35.2
     million  and $26.9  million for the three  months  ended March 31, 2005 and
     2004,  respectively.  The first  quarter 2005 increase was due primarily to
     overall increases in consolidated revenues and operating income and changes
     in working  capital  components  resulting from the timing of cash receipts
     and disbursements, when compared to the first quarter of 2004.

     Capital  expenditures  (related primarily to KPP) were $8.7 million for the
     three months ended March 31, 2005, compared to $7.3 million during the same
     2004 period.  Such  expenditures  included $7.3 million and $5.7 million in
     maintenance  and  environmental  expenditures  and  $1.4  million  and $1.6
     million in expansion expenditures for the three months ended March 31, 2005
     and  2004,  respectively.  The  increase  in  first  quarter  2005  capital
     expenditures,  when  compared to the same 2004 period,  was  primarily  the
     result of increases in planned maintenance capital  expenditures related to
     KPP's terminaling business.  During all periods, adequate pipeline capacity
     existed to accommodate  volume growth,  and the  expenditures  required for
     environmental and safety improvements were not, and are not expected to be,
     significant.  KPP anticipates that capital expenditures  (including routine
     maintenance and expansion  expenditures,  but excluding  acquisitions) will
     total approximately $40 to $44 million in 2005. Such future expenditures of
     KPP, however, will depend on many factors beyond KPP's control,  including,
     without  limitation,  demand for refined petroleum products and terminaling
     services  in KPP's  market  areas,  local,  state  and  federal  government
     regulations, fuel conservation efforts and the availability of financing on
     acceptable   terms.  No  assurance  can  be  given  that  required  capital
     expenditures  will not  exceed  anticipated  amounts  during  the year,  or
     thereafter,  or that KPP will have the ability to finance such expenditures
     through borrowings, or will choose to do so.

     The Company makes quarterly distributions of 100% of its available cash, as
     defined in its limited liability company agreement,  to common shareholders
     of record on the  applicable  record date,  within 45 days after the end of
     each quarter. Available cash consists generally of all the cash receipts of
     the Company, less all cash disbursements and reserves.  Excess cash flow of
     the  Company's  wholly-owned  marketing  operations is being used to reduce
     working capital  borrowings.  A cash  distribution of $0.495 per share with
     respect to the fourth quarter of 2004 was paid on February 14, 2005. A cash
     distribution  of $0.495 per share with respect to the first quarter of 2005
     was  declared to holders of record on April 30,  2005,  and will be paid on
     May 13, 2005.

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

     The  Company has a credit  agreement  with a bank that  provides  for a $50
     million  revolving  credit  facility  through  July  1,  2008.  The  credit
     facility,  which  bears  interest at variable  rates,  has a variable  rate
     commitment  fee on  unused  amounts  and  contains  certain  financial  and
     operational  covenants.  At March 31, 2005,  the Company was in  compliance
     with all  covenants.  The credit  facility  is secured by 4.6  million  KPP
     limited  partnership  units. At March 31, 2005,  $14.0 million was drawn on
     the credit facility.

     KPP has 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 March 31, 2005,  KPP was in compliance  with all
     covenants.  At March 31,  2005,  $95.7  million was  outstanding  under the
     credit agreement.

     In May of 2003,  KPP issued $250 million of 5.875% senior  unsecured  notes
     due  June  1,  2013.   Under  the  note  indenture,   interest  is  payable
     semi-annually  in arrears on June 1 and December 1 of each year.  The notes
     are  redeemable,  as a whole or in part, at the option of KPP, at any time,
     at a redemption  price equal to the greater of 100% of the principal amount
     of the notes,  or the sum of the present value of the  remaining  scheduled
     payments of principal and interest,  discounted to the  redemption  date at
     the applicable  U.S.  Treasury  rate, as defined in the indenture,  plus 30
     basis points. The note indenture contains certain financial and operational
     covenants,  including certain  limitations on investments,  sales of assets
     and  transactions  with affiliates  and,  absent an event of default,  such
     covenants do not restrict  distributions to the Company and other partners.
     At March 31, 2005, 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. 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 March 31, 2005, KPP
     was in compliance with all covenants.

     The following is a schedule by period of the  Company's,  including  KPP's,
     debt repayment obligations and material contractual commitments as of March
     31, 2005:

<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                        7,113          -              -              7,113           -
       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                    75,347          -              75,347         -               -
                                          ----------   ------------     -----------  ------------    --------------
          Debt subtotal                      692,129          -             171,016        21,113           500,000
                                          ----------   ------------     -----------  ------------    --------------
     Contractual commitments -
       Operating leases                       66,858         11,482          17,164        13,899            24,313
                                          ----------   ------------     -----------  ------------    --------------
          Total                           $  758,987   $     11,482     $   188,180  $     35,012    $      524,313
                                          ==========   ============     ===========  ============    ==============
</TABLE>

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

     Off-Balance Sheet Transactions

     The Company was not a party to any off-balance sheet  transactions at March
     31, 2005, or for the three month periods ended March 31, 2005 and 2004.

     Critical Accounting Policies and Estimates

     The  preparation of the Company's  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and disclosures of contingent
     assets and  liabilities  at the date of the  financial  statements  and the
     reported  amounts of revenues and  expenses  during the  reporting  period.
     Actual results could differ from those  estimates.  Significant  accounting
     policies  are  presented  in  the  Notes  to  the  Consolidated   Financial
     Statements of the  Company's  Annual Report on Form 10-K for the year ended
     December 31, 2004.

     Critical  accounting  policies  are those  that are most  important  to the
     portrayal of the Company's  financial  position and results of  operations.
     These policies require  management's most difficult,  subjective or complex
     judgments, often employing the use of estimates about the effect of matters
     that are  inherently  uncertain.  The Company's  most  critical  accounting
     policies  pertain  to  impairment  of  KPP's  property  and  equipment  and
     environmental costs.

     The  carrying  value  of  KPP's  property  and  equipment  is  periodically
     evaluated using management's  estimates of undiscounted  future cash flows,
     or, in some cases, third-party appraisals,  as the basis for determining if
     impairment exists under the provisions of Statement of Financial Accounting
     Standards ("SFAS") No. 144,  "Accounting for the Impairment or the Disposal
     of Long-Lived Assets". To the extent that impairment is indicated to exist,
     an  impairment  loss is  recognized by KPP under SFAS No. 144 based on fair
     value.  The  application of SFAS No. 144 did not have a material  impact on
     the results of  operations  of KPP for the three month  periods ended March
     31,  2005 and 2004.  However,  future  evaluations  of  carrying  value are
     dependent  on many  factors,  several  of which  are out of KPP's  control,
     including demand for refined petroleum products and terminaling services in
     KPP's market areas, and local, state and federal governmental  regulations.
     To the extent that such factors or conditions  change,  it is possible that
     future  impairments might occur,  which could have a material effect on the
     results of operations of KPP.

     KPP  environmental  expenditures  that  relate to  current  operations  are
     expensed or  capitalized,  as appropriate.  Expenditures  that relate to an
     existing  condition caused by past operations,  and which do not contribute
     to current or future  revenue  generation,  are expensed.  Liabilities  are
     recorded by KPP when environmental  assessments and/or remedial efforts are
     probable, and the costs can be reasonably estimated.  Generally, the timing
     of these accruals  coincides with the completion of a feasibility  study or
     KPP's  commitment  to a formal  plan of action.  The  application  of KPP's
     environmental  accounting  policies  did not have a material  impact on the
     results of  operations  of KPP for the three month  periods ended March 31,
     2005 and 2004.  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 Pronouncements

     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 first quarter
     of 2006.  The impact of adoption on the  Company's  consolidated  financial
     statements is still being evaluated.

     In March of 2005, the FASB issued FASB  Interpretation  No. 47, "Accounting
     for  Conditional   Retirement   Obligations"  ("FIN  47"),  which  requires
     companies to recognize a liability for the fair value of a legal obligation
     to perform  asset-retirement  activities  that are  conditional on a future
     event, if the amount can be reasonably estimated. FIN 47 must be adopted by
     the  Company  by the end of fiscal  2005.  The  impact of  adoption  on the
     Company's consolidated financial statements is still being evaluated
<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

     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 $151.9 million (including KPP's debt) at March 31, 2005, a
one percent  increase  in interest  rates  would  increase  annual net  interest
expense by approximately $1.5 million.

     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  and KPP do not  engage in  derivative
transactions  to hedge the value of the  inventory,  they are  subject to market
risk from changes in global oil markets.


Item 4. Controls and Procedures

     The Company's  principal executive officer and principal financial officer,
after  evaluating  as of March 31,  2005,  the  effectiveness  of the  Company's
disclosure  controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities  Exchange Act of 1934),  have concluded that, as of such date,
the Company's  disclosure  controls and procedures are adequate and effective to
ensure that material  information  relating to the Company and its  consolidated
subsidiaries would be made known to them by others within those entities.

     During  the  first  quarter  of 2005,  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
over financial reporting subsequent to the date of the evaluation.  As a result,
no corrective actions were required or undertaken.


<PAGE>
KANEB SERVICES LLC AND SUBSIDIARIES


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

                           Part II - Other Information


Item 6. Exhibits

     (a)  Exhibits.

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

          31.1 Certification of Chief Executive Officer, Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.

          31.2 Certification of Chief Financial Officer, Pursuant to Section 302
               of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.

          32.1 Certification  of Chief  Executive  Officer,  Pursuant to Section
               906(a) of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.

          32.2 Certification  of Chief  Financial  Officer,  Pursuant to Section
               906(a) of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.



                                    Signature

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

                                    KANEB SERVICES LLC
                                    (Registrant)


Date:   May 10, 2005                   //s//  HOWARD C. WADSWORTH
                                    --------------------------------------------
                                    Howard C. Wadsworth
                                    Vice President, Treasurer and Secretary
                                    (Principal Financial Officer and
                                    Duly Authorized Officer)




<PAGE>
                                                                    Exhibit 31.1

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


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

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

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

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

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  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 quarterly 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 quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

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

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

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

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

Date:  May 10, 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 quarterly report on Form 10-Q of Kaneb Services LLC;

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

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

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  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 quarterly 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 quarterly  report our conclusions
          about the effectiveness of the disclosure controls and procedures,  as
          of the end of the period  covered by this quarterly  report,  based on
          such evaluation; and

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

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

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

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

Date:  May 10, 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  Quarterly
Report on Form 10-Q for the three months  ended March 31,  2005,  filed with the
United States  Securities and Exchange  Commission  pursuant to Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully
complies  with the  requirements  of  Section  13(a) or 15(d) of the  Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

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

Date:    May 10, 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  Quarterly
Report on Form 10-Q for the three months  ended March 31,  2005,  filed with the
United States  Securities and Exchange  Commission  pursuant to Section 13(a) or
15(d) of the Securities  Exchange Act of 1934 (15 U.S.C.  78m or 78o(d)),  fully
complies  with the  requirements  of  Section  13(a) or 15(d) of the  Securities
Exchange Act of 1934 and that  information  contained in such  Quarterly  Report
fairly presents,  in all material respects,  the financial condition and results
of operations of the Company.

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

Date:    May 10, 2005



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




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